TASER International's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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TASER International, Inc. (TASR) Q4 2011 Earnings Call February 23, 2012 10:00 AM ET


Rick Smith – Chief Executive Officer, Director and Cofounder

Dan Behrendt – Chief Financial Officer


Steven Dyer – Craig-Hallum Capital

Paul Coster – JPMorgan


Good day ladies and gentlemen, and welcome to the Fourth Quarter 2011 TASER International, Inc. Earnings Conference Call. My name is Stacey, and I’ll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instruction)

As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today to Mr. Rick Smith, CEO of TASER International, please proceed.

Rick Smith

Thank you, and welcome everyone to our 2011 earnings call. Before we get started let me – I just got Dan read the Safer Harbor statement and we’re good to go.

Dan Behrendt

Hey, great thanks Rick. Certain statements contain in this presentation may be deemed to be forward looking statements as defined by the Private Security Litigation Reform Act of 1995. And TASER International intends such forward looking statements to be subject to the safe harbor created thereby such forward looking statements relate to expected revenue and earnings growth at the nation regarded as size of our target markets. Successful penetrations of all force in the market expansion of product sales through private security, military and sell (inaudible) consumer stop the test markets. Growth expectation for doing 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 direct and indirect distribution channel, 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.

Rick Smith

Thanks Dan. All right. So let’s talk about the results. Fourth quarter revenues came in at $21.3 million plus we had $1.6 million in backlog that will shift in the first quarter of 2012 recognize.

Revenues for the quarter was down sequentially and year-over-year. The decrease was primarily driven by lower international sales, which were down 65% from $6.6 million last year being 2010 to $2.3 million in the fourth quarter of 2011.

We see two primary factors that led to the softness in international sales. First was the general weakness in Europe and maybe economic confusion, austerity measures et cetera. And second, many international customers due require the use of a TASER CAM with their ECDs, electronic control devices, of course. TASER CAM HD that we developed for the X2 was not ready to ship until the first quarter 2012, we believe this did delay international adoption and even evaluation be it two platform as customers waited for the TASER CAM HD.

Two important bright spots in fourth quarter revenues we should highlight. U.S. law enforcement sales were up approximately 25% over the same quarter last year, primarily driven by the X2. Also AXON and Evidence.com gained some significant traction in the marketplace, fourth quarter bookings increased by over 140% sequentially from a small base of $220,000 in the third quarter to $537,000 in the fourth quarter. We attribute the increased traction to the fact that we began selectively showing the AXON Flex unit, which we announced earlier this week and integrating upgrades into our fourth quarter AXON deals.

I’ll be back to talk more about video and the cloud business after Dan covers the numbers in detail. but before we do that, I do want to talk a little bit about the large balance sheet adjustments. So following the successful launch and strong demand for the new X2 and the AXON Flex we announced earlier this week, we are writing down the inventory and tooling where the previous generation TASER X3 and the first generation TASER AXON, both the X2 and AXON Flex have shown strong demand right from their launch. And the adoption of these products from both new and existing customers has been impressive. Therefore the demand for legacy products has diminished as our newer products are showing much higher volume potential.

With the TASER X2, it became very clear that the X2 will be the primary volume driver for agencies looking to upgrade from the older X26. It’s still early days it became clear that the AXON Flex is making our first generation AXON (inaudible).

What we’re seeing is parallel phenomena in both product categories, when you face a challenging situation like this, I do think it’s important we take a few moments and doing analysis of how we got here and where we’re going. I think the best way to look at this is to compare and contrast where the company is today versus in 2008 when these previous products were in development.

I strongly believe that the new X2 and the AXON Flex are actually quite solid indicators that the company had successfully transitioned from an entrepreneurial and in formal product development process to a more rigorous, scalable and customer driven product development process. So I’m not going to take a step back even further to sort of look at the time line here, if we go back to 2003, when we introduced our flagship X26.

TASER at that point was a small company with only two full-time engineers, one electrical engineering and one mechanical, the small team collaborating closely to rapidly develop the TASER X26. Fast forward to 2007, and the company had grown to $100 million in revenue from I believe in 2002 to 2003 we were less than a quarter of that level.

And by 2007, we significantly expanded our engineering team. Our – the processes to effectively manage and develop with the much larger engineering team will not yet fully developed. The informal mechanisms of gaining customer feedback that worked well for the small entrepreneurial TASER of 2003 well those seemed in formal mechanisms did not work as effectively to connect the market needs to a larger engineering team, with less direct customer experience. As a result, both the TASER X3 and the first generation AXON were driven more by internal and engineering priorities than by effectively organized customer requirements. So both the extra in AXON first generation shares some similar trades. Both products were significant technology breakthroughs, but the level of complexity and physical size and the cost of both products were out of sink with customer needs. In other words, while they were impressive engineering accomplishments both products were too large too complex and too expensive to appeal to the majority of the marketplace.

Over the past two and half years we’ve been very focused on overhauling and refining our entire product development process to better match customer need. We now focused product management team with dedicated product managers responsible for defining customer requirements through a rigorous voice in the customer process that has engaged 100’s and in fact even thousands of law enforcement officers in the definition in design of our products.

This process drives close direct engagement between our engineers and end users throughout the entire design process. So all design decisions are being wedded with customers.

As a result, both X2 and AXON Flex are being extremely well received by customer. TASER instructors that we surveyed showed that 96% of respondents shows the X2 as their preferred ECD platform, even over the volunteered TASER X26. While we don’t have formal date yet for the AXON Flex, since we just introduced that product. The pre-ordered demand and qualitative customer feedback leds us to believe that number is even closer to unanimous preference of the new flex over the first generation AXON.

I would also tell you, we’ve slowed down to speed up. Instead of validating key design elements at the end of the design process with finished prototypes as we used to do in a less formal development process, we now force rigorous characterization in validation of all key design changes at the beginning of the design project.

So they are all identified technical risks or quantified and understood before the integrated design process begins. This added about three months to front end of our design process, but dramatically accelerated the entire project and the transition into manufacturing.

As a result, these new products are far more stable and reliable, and to-date with over 10,000 X2s shipped to field, we have a return rate of just about 1%. And given the abusive environment, which these devices operate, we’re very proud of that result. We’ve also implemented far more robust inventory management and product life cycle planning to mitigate inventory risks throughout the launch process.

(Inaudible) if we look at the inventory levels of the X3, it may look like we bought too much inventory in retrospect. However, if we take a look back and how those inventory levels were calibrated, let’s go back to the previous major weapon system launch of the TASER X26 in 2003. Now in 2003, when we announced the X26, the M26 sales plummeted immediately upon launch of the X26. We saw the market immediately migrate over to the new platform.

So as we are preparing the launch of the X3, our first multi-shot capable device. We thought we had to mitigate the risks that the market might stop buying the X26 to make that same and immediate transition over to the X3 just as we’ve seen in our last major product instruction from M26 to X26.

So with sales in the range of 15,000 to 20,000 X26 as each quarter we felt that it was prudent to have at least six weeks supply on hand or roughly 10,000 X3 units on hand when we made the product launch to ensure there was no revenue disruption.

And on retrospect, the X3 did not hit the mark as well as we’d hoped and we still have a significant amount of that inventory on hand, which we are now writing down to the quantity we expect to sell over the next two years. Now the great news here is that we have identified and rectified the issues encountered with the X3 with the new X2, which has sold over 10,000 units in its first six months.

But this is feel the fate of the X3 as more of a niche product for high-end tactical teams that who will want the extra capability and will tolerate the larger size, the higher price and the greater product complexity. We will continue to market and sell the X3 as our high-performance high-end product, but we’ve concluded it will not be a volume leader.

As an organization, we also developed a more rigorous approach to partnering rather than engineering these entire systems when from the ground up, we’ve looked to partner with industry leaders with complimentary capabilities that help us to deliver a better product at lower cost and faster time to market.

Let’s talk about AXON Flex. From mounting options, we teamed with Oakley, the clear market leader in safety and sunglasses for law enforcement. Rather than developing the camera system itself from the ground up, we partnered with (inaudible), a Silicon Valley company that is the technology leader in miniaturized cameras with wireless video streaming capability.

So we took (inaudible) technology platform and created a hardened system with law enforcement centric capabilities such as extreme low light performance, advanced weather proofing, secure file management systems, and over 12 hours of video buffering capability. We also took as to overlook at whether it made sense for us to be building our own [wearable] computers, for example the ATC, which is the touch screen element of the AXON first generation.

We quickly determined that this was not an area where TASER could be best in the world, so we chose instead to lever the existing universe of smart and fast evolving mobile devices available using the Android and Apple iOS platforms. So we’ve now use apps on those operating systems to connect our cameras to these mobile devices for viewing and data entry in the field.

To be noted, we retained all evident data securely in a secure file system on the AXON Flex. These mobile devices are merely being used as viewing and data entry systems, a data did not transfer over to these consumer grade devices.

And finally, we evaluated whether it made sense for us to continue to build and operate and maintain our own data center for Evidence.com. Again, we identified there were potential partners with enormous scale and technical capabilities beyond what TASER could achieve on its own. After a rigorous analysis we chose to partner with Amazon using their S3 system. They’ve got a massively scalable infrastructure to host our back end storage and application. This avails our customers of best-in-class technology as Amazon clearly has one of the best engineering and security teams for delivering massive data center operations.

Collectively these partnerships have allowed us to focus our resources on those areas where TASER can be best-in-class and maximize the value add for our customers speeding our time to market in delivering world class solution.

We’re not going to make excuses. We’ve made some mistakes and as we’re seeing today, some significant and expensive mistakes. But we’ve learned from those mistakes as an organization and these have been growing pains, but we have grown from and proven. and I firmly believe our company is better positioned than ever to begin scaling and achieving sustainable growth in the future.

Well, next item I’d like to discuss before handing over to Dan is, the timing why write-down the inventory and tooling now, and why the both of these write-offs hit in the same quarter? Let me start with the X3. there maybe initial adoption of the X3 was below our expectations. however, we were seeing some indications of fractions in the marketplace and as we ended 2010, we sold over a 1,000 units in the fourth quarter alone, it did appear the product was starting to gain some traction.

however as we move forward in 2011, and we introduced the X2, the X2s are significantly better market traction and accordingly with the X2 now available, we saw sales of the X3 dropped significantly from over 1,000 units per quarter to under a 100 units per quarter, and we thought it prudent to give the markets sometime to demonstrate repeatably, which product would be preferred as well as time for our sale team to try to close some of the X3 deals in the pipeline. However by the end of the fourth quarter, we now had two consecutive quarters of data and our year-end inventory analysis was undeniable, the X2 was a hit, and that relegated the X3 to a niche product.

Now let's talk about AXON Flex. we were seeing some sales and adoption in the first generation AXON as well as some significant deals that were in the pipeline, however while we’re seeing significant hurdles based on size, wires and comfort with the first generation it was not exactly clear what the market reaction would be to AXON Flex nor how long would it take until the Flex system is validated and ready for market entry and to face this uncertainty, it was unclear how long we would continue to sell and support the first generation AXON hardware.

we first begin to show Flex to limited customers at the international association of TASER Police Conference in October. customer reactions were overwhelmingly positive to the new product. further, our experience supporting first generation AXON in the field was proving to be an expensive endeavor. Our analysis indicated it would be less expensive and create greater long-term market traction to transition even our existing customers half of the first generation and on to the second generation AXON Flex as soon as it will be ready.

Accordingly, as Flex near designed completion and entered validation, it became clear our existing inventory and tooling for the first generation AXON will also need to be written down significantly as we have now done. I hope this provides some helpful context into the situation or analysis behind it and the timing.

and with that, I’ll turn it over to Dan to review the numbers in more detail.

Dan Behrendt

Thanks, Rick. As Rick indicated, revenue for the fourth quarter was $21.3 million, which is down approximately $1.5 million or 6.7% for the prior year. however, demand for the company’s products remain strong, having received orders totaling $1.6 million in the fourth quarter 2011, which we’ll recognize in the first quarter of 2012. Revenue for the full year was $90 million, which is up approximately $3.1 million from the prior year. The increase is driven primarily by the growing demand and successful adoption in the TASER X2, electronic control device which generated $8.1 million of revenue in the full year of 2011 with $3 million of that coming in the fourth quarter.

So we definitely feel encouraged with the ramp on the X2. Gross margins for Q4 were $6.9 million or 32.4% of revenues, which is down 19.3% from the 51.7% in the prior year. the decline is driven primarily by the one-time $5.7 million charge in the fourth quarter reflect some write-off of production tooling and excess inventory for the TASER X3 and AXON video product lines.

with the success of the new TASER X2, electronic control device, the company has included, when I tell through the current level X3 inventory even that will continue to sell and support the product line. The results in charges are a charge to excess inventory which is in the gross margin of $1.7 million as well as a impairment of the tooling assets to manufacture the X3, which were $558,000.

Similarly with the AXON Flex video system, which we now service, we’ve concluded that the sell through the existing inventory of the first generation AXON product that resulted in a write-off of the excess inventory of $2 million, which is in the sales as well as a impairment of the tooling to manufacture that product of $1.4 million. So the total $3.7 million ends up running through cost of sales the other $2 million is down below and the write-off the production tooling for the discontinued product line.

The SG&A expense for the quarter was $10.1 million versus $9.3 million in the prior year. As a percentage of net sales, SG&A was 47.1% in net sales in Q4 of 2011 compared to 40.7% in 2010. The increase in SG&A expenses is primarily to two things. One is we had legal expresses over is up year-over-year. Needed some timing of some cases and the work for some of the legal cases and professional fees were up $116,000 over the prior year.

The research and development costs for the fourth quarter were $2.1 million. This is a favorable $500,000 adjustment from the 2010 level. The decrease is a result of decline in our consulting costs about $335,000 along with reduction and head count in the research and development area.

The –and the results for the quarter you can also see that we had and some litigation judgment expense again relates to the Turner case we thought some on additional legal expansion seen at the fourth quarter, as a result of (inaudible) motion work that was done in the Turner case and those builds came in at the fourth quarter. So that’s then recorded as part of that litigation judge right that lie on the P&L and we’ve got $3.8 million in total and that line of P&L .in the 2011 results.

The adjusted operating account which excludes impact of CapEx compensation, depreciation, amortization and the vast write down the pulse of property equipment was $1.1 million for the fourth quarter of 2011. We also took out some of the one time expenses for the litigation judgment expense to write down the excess inventory and as I said, write down proper equivalent.

For the full year 2011 we had adjusted operating income of $11.5 million which is a $5.6 million increase over 2010. The GAAP laws from operations was $7.7 million for the fourth quarter, compared to a basically break even in the fourth quarter of 2010. The net loss for the fourth quarter of 2011 was $6.2 million or $0.11 per share on both the basic and deluded basis this compares to a loss of roughly $200,000 last year, for the fourth quarter which is basically zero of that per share on basic and diluted basis. The net loss for the full year 2011 was a loss of $7.3 million or $0.12 per share. Basic and diluted basis compared to loss of $4.4 million or $0.7 per share in the prior year.

I want to know that the tax position which is reflected in the current result here could still be impacted by our evaluation of deferred tax asset on the balance sheet. As you know the evaluation of deferred tax asset is very complex and evolved detailed models, which could go out well over a decade. The company has started to review, but this time, it’s not done all the way through audit this time. so any change in that line will be reflected in the Form 10-K when we file.

As you see the results in the press release in this time, we’re actually starting to breakout segment reporting. We’ve basically broken our business into two distinct segments, the video business, which includes the sales of the TASER Cam, AXON and video products and accessories as well as Evidence.com and the other segment of the business is our electronic control device segment or ECD. This includes the TASER ECDs including the X26, the M26, the X3, the X2, C2, the cartridges, XREP and Shockwave. So basically any product, which is not a video product is included in the ECD segment.

We allocated cost between the two business segments. Costs, which are directly attributable to the video segment are included in that segment with the remainder of the costs remaining in ECD segment. We do not split roles for people not directly involved in the video segment. These example as we have a reception here at TASER headquarters does a great job for us, but because we have that role even if we didn’t have the video business, we have left our cost in the ECD segment. But we do have separate sales force, a separate product managers, separate software development teams et cetera, all those costs and others directly attributable to the video segment are in their results.

In an analysis, you can see the video business had an operating loss of $6.9 million in the fourth quarter of 2011 and $16.1 million for the full year. This was [impacted] by a number of one-time items like the write-off for the first generation AXON inventory and was on a write-down production tooling for the first generation AXON as well as write-offs associated with the second data center, which is not opened as well as billing software, which is no longer being used for the video product lines.

In addition to these items, we held back stock based compensation deprecation, amortization get to the adjusted operating loss of $2.7 million for Q4 and $8.9 million for the total year.

You may know this is the product gross margin for the video segment is negative that’s really result of some heavy discounting we did for the first generation AXON device in order to gain traction on the market. The product gross margins on the AXON Flex would be much better than the first generation product, which will improve the result of that segment of business as we move forward.

We also deferred to revenue in the fourth quarter relating to the upgrade rights we gave to those customers. As Rick mentioned, the customers we’re started showing the product to the fourth quarter had a great reaction to AXON Flex and bought the AXON with the understanding and that it will be upgraded to Flex when it hit the markets. So we’ve deferred some of those sales relating to the upgrade rights to move to the AXON Flex product.

The ECD product businesses been more profitable than the video business because of the scale that we already enjoyed cost of fact as a more mature business, there is less investment needed to grow. When we look at 2011, the fourth quarter results for the ECD segments saw an operating loss of $790,000 for the total year of 2011 total operating income of $4.7 million.

This was impacted by a number of one-time items like write-off of the X3 inventory, loss on the write-down production tooling for the X3 product. Write-off of the company’s investment and protected product line as well as the accrual for the judgment not yet entered for the turnaround for that case. In addition of these items, we added back stock-based compensation, depreciation and amortization to get an adjusted operating income of $3.7 million for the fourth quarter and $20.4 million for the year.

We feel that the adjusted operating account number gives investors a better measure of the cash generation ability of the company. Even though the company had an operating loss for the year on a GAAP basis, $11.4 million, the company still generates $17.3 million of cash from operations due to the fact that many of the one-time expenses for 2011 are non-cash.

When we normalize results, we see that the company has a profitable core business in the ECD segment, which is funding our investment and the video segment.

We still feel very good about the long-term prospects of the video business, but in the near-term the video segment has been a drag on earnings, because we’re still in the heavy investment phase. We feel about breaking out of these segments, we can assure that we continue to focus on growing the profitability of the ECD business without having its results secured by the investment we are making in the video segment.

We also want to drive the video business to profitability in a reasonable timeframe, so it can contribute to the consolidated results. By breaking out the results, we could make better investment and resource decisions and drive to the right conclusion going forward.

If we move on to the balance sheet, we finished the quarter with the $26.4 million of cash, cash equivalents and short-term investments. this is a decrease of $16.3 million from the prior year imbalance due to the $32.5 million of cash used for the buyback program during the year, offset by the $17.3 million of cash provided by operations.

During the buyback repurchase, 7.5 million shares representing approximately 12% of outstanding shares, we had outstanding on 12/31/2010 and the average prices started in the buyback, which is $4.35.

Accounts receivable $11.8 million they’re down at $0.8 million from the prior year end due to some timing and collections and inventory is $11.5 million, this is down $6.3 million in the prior year balances due to the write-off of the excess inventory as well as just general reduction in inventory balances with the increased sales.

Investment of property equipment is $26.7 million, down $9.2 million when compared to the prior year. Big driver there is that we had depreciation expense $7.8 million for the year as well as some of the write-downs if they protect our X3 and AXON product lines, bringing down these balances along with a little bit lower CapEx during the year, mostly CapEx this year was a computer equipment as well as some of the tooling for the new TASER X2, electronic control device and AXON Flex product lines. Total assets at December 31, 2011 were at $105.1 million.

Moving on to the liability side of the balance sheet, we had cash payable at $4.5 million, this is basically flat from the prior year. Accrued liabilities of $8.1 million increased $4.3 million, primarily due to litigation judgment expense reserve of $3.8 million recorded for the Turner case with the expenses hitting in the second and fourth quarters of the year.

Total deferred revenue of $7.9 million has increased to [$96,000] from the prior year balances due to the X2 – packages we’re selling to the X2 with the trading program included and extended warranties, so we’re differing some of that revenue and recognizing over the five year warranty period.

Total liabilities are $23 million and the company finished the quarter with $82.2 million at stockholders’ equity, which has decreased $35.4 million primarily due to the stock repurchase program executed in 2011. Company continues to have no long-term debt and continue to have plenty of liquidities that operate the business.

As we move to the cash flow information, we did have as I said earlier cash provided from operations of $17.3 million for the year, $2.7 million of that came in the fourth quarter. This compares to cash from operations for the full year last year of $0.7 million, so we were up over $16 million year-over-year, which we’re certainly encouraged by that. Cash flow from operations was really driven by the adjusted operating income of $11.5 million along with some working capital changes.

Net cash used for investing activities for the year were $7.6 million compared to $4.5 million at the same period of 2010. The use of cash is mostly driven by the net purchasing activity of short-term investments. Cash used in financing activities was $31.1 million again that was driven by the two buyback programs improved by the Board of Directors in both March and July of 2011.

And the company ended the quarter with $21.3 million in cash and another $5.1 million in short term investment. So, $26.4 million of cash in investment, so we’re confident that we’ve got strong liquidity as we entered 2012 as feels good about that.

Last one, I’d like to cover just the units sales for fourth quarter for the analysts, so they can model it, we had 10,098 X26 units sold in the fourth quarter. We sold 4,136 X2 units. We sold 961 of the M26, X3 we sold 40 X3s. 3,405 C2s. We sold 1,036 TASER Cam and 289,451 cartridges.

And with I’ll turn it back over to Rick Smith.

Rick Smith

All right, thanks Dan. One thing just to point out the Turner case from last year that Dan was referring to, we’re still awaiting the response from the court, on the post trial motions, so the judgment the jury verdict has still not been entered. This is pretty non typical for it to go this long, we do see that there is that could be interpreted as an indicator that the court is carefully considering the situation.

Okay, so as Dan talked about, and you saw on the earnings release we’ve begun to breakout P&L by business unit. As you can see the profits and cash flow from our core business have been funding a major development effort in AXON and EVIDENCE.COM. We believe we are well positioned, it’s the first major mover in cloud

computing for law enforcement, and we stand and what we see as an inflection point for the rapid adoption of officer based video, so while we had expensive lessons along the way that is part of building a new business as we know from even building our TASER business over the past two decades. we're confident that these investments have been the right move for TASER and position us to be a dominant player in a major new market. So even while funding this new business opportunity, the company generated $17 million in positive cash flow over the last year. So keep our eye on what will happen if the cloud and video business unit shifts from cash, consumption to cash generation.

One note is well, most of the revenue I think as Dan pointed out in the video business unit, it was associated with our legacy TASER Cam product. So we actually saw a decline year-over-year in recognized revenue in the video business unit from 2010 to ‘11. And there’s two real reasons we see for that, number one is the AXON and EVIDENCE.COM get sort of lost at this point in the numbers, because it’s outweighed by the legacy TASER Cam until obviously we hope to see the on-officer cameras begin to scale or the officer [worn] cameras be AXON Flex and other piece is revenue deferrals associated with upgrades and associated services, but the indicators, I think it’s more telling at this point was the more than doubling of bookings for AXON and EVIDENCE.COM from Q3 to Q4 and will continue to track that overtime.

So the reported 2012, we are very focused on rigorous execution, we’ve pinned down our focus 2011, I’d say was a focusing year, we decided to exit the protector business, it focus on three key goals. first is driving an upgraded cycle in our existing electronic control device business in North America. Second is driving international sales adoption of ECDs globally, whether those will primarily be new adoptions, because our penetration globally is far less than it is the U.S. where the upgrade is the more meaningful segment in North America.

And then the third goal is the adoption of AXON and EVIDENCE.COM really building out our video and cloud business units. Progress on any one of these three initiatives can drive significant growth and profitability for the entire company in 2012. Therefore we’re limiting the scope of our efforts to focus on doing these three things.

The upgrade opportunity alone will represent around 327,000 units by the end of 2012. That will be more than five years old, so half their expected life. This represents roughly $315 million potential market. So one of the things that we learn in 2011 was that many agencies could not react in the short six month time period when we introduced the X2 to the end of the year to take advantage of our trading program, which expired at year-end.

So to evaluate a new weapon make a decision to upgrade and execute that upgrade within their budget cycles will simply not achievable for many agencies. We also look from customers that because of our reputation for excellent customer service they did not believe that it is simply cut off trading program overnight.

So based on these concerns and to better serve our customers, we are announcing a new training program expanding into 2012 with gradually phases down the trading credit over time. So this does provide incentives for agencies to move expeditiously, but also acknowledged that some agencies are constrained and do need more time.

We also believe that it will have a greater degree of creditability in the marketplace rather than a clip and to an upgraded program one that phases out overtime. So whereas the 2011 trading credit was $300 trading credit in 2012, trades will receive $250 per unit and the first part of the year decline to $160 by year end. So, we believe this new program will help agencies continue to transition to the newer platform over the course of 2012.

In the international sales arena, we’re focused on integrating our sales and marketing capabilities for scalability and repeatability. As we’ve announced, my brother Tom Smith has retired from both his [bond] duties and his sales duties although, he was still serving in a consulting capacity to help get some deals across the goal line where he has been very personally involved.

We are focused on transitioning from the founder driven culture to a more rigorous metric driven culture, and you’ll see that as a theme throughout our business. As part of this, I should also point out we would like to have our first non-founder an Independent Chairman, Mike Garnreiter, a financial expert and former auditor. We believe that its best practice from a corporate governance perspective and an important milestone for TASER.

Internationally we’ve launched our first localized website in France with TASER.fr and we have several more local language websites coming later this year and we’re already seeing sales traction and greater market visibility with TASER.fr.

We’re integrating our sales pipeline management with our international consultant’s distribution partners and employees to drive more visibility and repeatability in international sales. I will talk more about specific mobile sales plans in our next conference call.

And the third area of focus is driving adoption of our video and cloud services. The first and most obvious effort here is the dramatic product improvements with AXON Flex. I’m actually wearing one here today. I’m sitting onsite at a customer and the amazing thing about AXON Flex is I keep forgetting I’m wearing it. It is just a dramatic improvement from the first generation. So, the primary barrier of sales with the first generation AXON was sized wires and comfort. It was just too big, too complicated, too heavy, and with 19 wire cable connectors to wire themselves were pretty significant. We’ve reduced the size and weight by over 85% to new AXON Flex. We have fixed the computation with multiple new mounting options including integration with Oakley.

And we’ve replaced the multiple large and flexible cables with a thin light weight connector that we gave our engineers to go. They had to match the attributes of an Apple iPhone headset, thin flexible comfortable cables and (inaudible). That is just simply to connect the battery pack controller unit up to the camera.

So the new flex systems compares with mobile devices, so it is live streaming ready. We already stream video to a local smart device over proprietary bluetooth over video link. Taking event from that mobile device remotely over selling our networks or the newly approved D-Block that is wireless initiative for a dedicated public safety wireless network, but we’re able to use D-Block as well. Of course D-Block will take many years to implement.

So the great thing about our system is that it does not require a dedicated infrastructure we can do it over commercial secure cellular networks. We can do it over D-Block as that comes on line. So you will see us moving towards launching a live video streaming service, at a later date.

We’d dramatically improved low light performance, dramatically improved simplicity and reliability of the product, and the entire ecosystem. The product is operated by a single large tactile button. My eight year old daughter can operate this thing seamlessly. The user simply double clicks to start recording and you press and hold for five seconds to stop recording that’s it, one button. Double click to start, press and hold to stop, officers love the simplicity. All the equipment needed to deploy this system in a police agency now fit conveniently in a FedEx box. So our prior evidence transfer machine was an 8 foot tall rack mount, that required special shipping and handling required on-site assembly service and repair and maintenance. our new evidence transfer machine sits on its desktop, it can be easily shipped be a FedEx, so if there's a problem, we can have it, we can just ship out of replacement module and have it mailed back for service far less expensive than setting fields for people on-site.

The co-branding with (inaudible) significantly improved the officers’ emotional reaction to the equipment. previously, we were told that our year did not convey a professional cosmetic look. Now we have a world-class industrial design, it fits seamless to be the most widely used fashion brand in law enforcement hopefully.

Finally, we’ve significantly reduced the price point with $700 of the camera module and under $1000 very typical configuration with the extended controller unit amounting option. Of the competitive market spaces comprised that of primarily of systems between $750 and $1000 and our office shows that Flex has the most robust feature set at a competitive price.

We also refilled our business model with our first generation AXON, the system only work with Evidence.com back-end. We found that this was perceived as to restrict it by our customers. they were reluctant to buy the hardware with concern that if they decided not to use Evidence.Com, the hardware would be unusable.

With AXON Flex, the system can be configured to download files into local servers or with Evidence.Com, it removes this risk from the customer and allows them to use Evidence.Com (inaudible) risk free fashion, they don't have to make an indefinite financial commitment. Knowing that we always have the option to download files locally if they decide to change course.

Further, we've included a three-year of Evidence.Com for all AXON Flex customers. So for obvious reasons, we’re confident that the cloud business model provides break through capabilities, faster time to new features at a fraction of the cost of building and maintaining local systems.

So one of the key advantages of the cloud business model in the consumer and enterprise business space is the ability for customers to try these fully operational systems before they buy. So we’re emulating that now in law enforcement, free try before they buy. And removing the commitment and proceed financial risks we believe we can show customers the value of the technology and drive greater overall adoption.

We also changed our pricing model. When we first launched, we use the subscription pricing model. We found us did not fit the way law enforcement agencies budget foreign purchase IT systems. So we have now developed a flexible business model and enable our sales people to price and sell our systems the way our customers want to buy that.

We can sell a software license plus maintenance, and storage to fit existing budget line items, or agencies many times they want to buy new capabilities with federal grant funds or drug asset forfeitures, where this sort of have a pile of one-time found money, and they don’t want to have to think about recurring budgets.

We can accommodate that with the single upfront payment for a multi-year contract. Or we have other agencies that want to spread out payments evenly in a lease style payment overtime. As at any business what we have found is that it’s most important for us to have the flexibility to meet our customers’ needs rather than asking our customers to confirm to our business model.

And finally, we’re continuing to refine our sales team. Our sales processes, our support systems, even our test and evaluation programs, all of these have gone through major overhaul in refinement over the past two years. We’ve added several experienced solution sales people towards team in the last two quarters augmenting a team of somewhere a younger talent as well and we’re continuing to build out our team in 2012. Company wide, we’ve introduced our first metric-driven compensation plan for all employees where quarterly and annual goals will be based on meeting company metrics and objectives. We believe this plan is creating greater alignment around our goals and helping continue this transition from an informal entrepreneurial culture to a metrics-driven culture of operational excellence.

And as we wrap this column, I’m going to leave you with the thought on a few key performance indicators that we believe are key to the growth in 2012.
So as at the end of 2011, we had upgraded approximately 3.3% of the ECDs that are greater than five years old. We’ll continue to share this metric on each conference call and driving an increase in that upgrade metric is obviously one of our core corporate goals. International sales, which were $2.3 million in the fourth quarter will be reported each quarter, so you can continue to see our progress in growing our international sales pipeline.

And then finally, we’ll report on the sales bookings for AXON Flex and Evidence.com in the quarter, again up 140% from Q3 $220,000 to $537,000 of bookings in the fourth quarter and I mind you that includes services in some cases that will extend that over multi-year time period, but we believe the bookings are probably the best indication of overall traction, and of course, we’ll continue to now provide profit and loss breakouts, so we can see how the video and cloud business unit is performing as well as how our core ECD business unit. We believe 2012 year is the year where AXON and Evidence.com begin to retain significant revenues and become additive to the overall business.

So with that, we’ll end the formal portion of the call and we will take a few questions. Dan and I are on office (inaudible). so if it sounds like we’re not in the same room and there may be a little hesitation as who’s going to answer, because we’re not in the same room, so we’re going to have to coordinate live with you guys on the call. So with that, Dan I’ll turn it over to you to coordinate the questions.

Dan Behrendt

Yes, so go ahead and – in the case you’re willing to or like to ask a question and the operator will get you in the queue.

Question-and-Answer Session


Thank you, (Operator Instructions) Your first question comes from the line of Steve Dyer with Craig-Hallum. Please proceed.

Steven Dyer – Craig-Hallum Capital

Thanks. Good morning.

Rick Smith

Good morning

Dan Behrendt

Good morning, Steve.

Steven Dyer – Craig-Hallum Capital

If I could drill in a little bit to the AXON, I think we’re four years into this whole bunch of money, a bunch was written down. It seems like a very promising product, but it has all along. What concrete evidence do you have at this point in time, this is something that you’re going to be able to overcome all the roadblocks and actually get people to do.

Rick Smith

Well, at this point having a pre-release orders for almost 600 units, basically what you’re seeing is virtually everybody that had the previous unit is going to be converting over and having the Bay Area Rapid Transit Police placing an order for all of their options full deployment right out of the gate, we see is real helpful indicators.

In terms of other specific quantifiable indicators I think you’re just going to have to keep an eye on order flow over the coming weeks as we continue to now go out and market and sell the product. So, I think the pre-orders were helpful.

Most of what we have at this point is unfortunately qualitative in nature. I met with 50 or so chiefs at the ISCP where we showed Flex. I would characterize it, 48 out of 50 really reacted positively that they thought this was “the right product now” they felt our first-generation didn’t look like it was ready for prime time that they thought it was looked a bit prototypy and that the technology wasn’t quite there. But again, that's obviously just a qualitative metric where you’re just going to have to watch order flow as it develops in the bookings over the coming quarters.

Steven Dyer – Craig-Hallum Capital

Okay. and then with respect to the X2, still being outsold pretty handily by the X26. by the end of the year, we’ll have, I guess 350,000 that are older than five years old, but we’re selling four, 5000 a quarter. so what are the people doing that are over five years old, but we're not seeing, is that they're just choosing to roll the dice and go with older equipment or I guess on an annualized basis, you’re selling 20,000 X2s, which is 7% or 8% of what you considered to be a really life addressable market at this point?

Rick Smith

Yeah. Let me also, I want to add one more insight to the last answer on Flex, I mean the market when you said that even with the first generation, it seemed promising, I would say that was true in the marketplace conceptually, it was promising and well received the stumbling blocks were the execution that’s the first generation hardware just wasn't fully baked and that was really what was holding us back. So I think what hasn't changed is that it makes sense is just the implementation now is something that officers are reacting very positively to rather than the old hardware.

Now shifting gears to the X2, we do have a number of things we’ll be announcing over the course of the year to continue to drive the upgrades one of course, that we’re talking about today was extending a phased approach to trade in credits. What we are seeing customers do that have units at more than five years old. These are the same agencies that have cut back on all older capital purchasing. They’re driving cars that are beyond their typical useful life. They’re not replenishing many of their supplies just given the budgetary environment. So what we’ve seen so far is they’re just continuing to use their existing inventory.

And part of that is also that the training in transition costs to transition over to the new weapon platform. It’s just sometime for example that’s what I’m talking about with the customer here in Florida and that one of the first agencies that went full deployment with the X2. So I’m down here to learn about what their transition is look like.

We’re streamlining online training components, so that they don’t spend it much time with officers, coming office, [reading] classrooms where we’re training, and this was logistical issue. So I mean the budget availability and the logistics of making a change have been sort of a two things that have slow the adoption to the level that we’re at now and obviously we’re looking everything we can do to help remove those obstacles and accelerate adoption over the course of the year.

Steven Dyer – Craig-Hallum Capital

Okay. And then finally any insight on the cartridge number that seems relatively light this quarter versus previous quarters certainly previous Q4s where you normally see some budget money? Anything you can take from that?

Dan Behrendt

This is Dan, I can take that one Rick. Yeah, I think the kind of a typical evident flow with the cartridges I can tell you that a large part of that $1.6 million of orders are received in the fourth quarter that will be recognized in the first quarter are for cartridges. And if we’d included those in a numbers then it would have been closer to this kind of levels you’d expect. So it’s just a little bit of a timing difference both which is sort of ebb and flow through the year and also this is the fact and we get some of those in late in the year and that will recognized in 2012.

Steven Dyer – Craig-Hallum Capital

Okay. That’s it from me. Thanks.

Dan Behrendt

Thanks, Steve.


Your next question comes from the line of Paul Coster with JPMorgan. Please proceed.

Paul Coster – JPMorgan

Yes, thank you. Dan, I apologize if you already said this, I got the unit volumes, I haven't seen the revenue by product. It’s not disclosed somewhere, so I'll just take outline and go to the source?

Dan Behrendt

We'll disclose out with the filing in the case. so the only thing after this one will be the unit volume now.

Paul Coster – JPMorgan

Okay, got it. Looking forward, any comments on the buyback plan or the tax rate?

Dan Behrendt

This is, yes, regarding the buyback, we’ve completed the fully executed the buyback and is approved from the board above the $12.5 million in March and $20 million in July. So we fully executed that, we’ll continuously obviously look at that as we go forward, but there's nothing approved at this point. On a deferred tax asset, we will continue to evaluate those as you know I’m sure that's it's a very complex calculation just to see exactly when those tax assets to be utilized, we’ve done our analysis, we just have to get through the audit on that and any changes will reflect in the 10-K when we file it?

Paul Coster – JPMorgan

Great. Rick you talked about strategic objectives for 2012 rigorous execution, one of them was to drive international sales adoption, if you recall that now that sounds like a little bit of an evangelical sale, are you going to be phasing out your sales force to create that effect?

Rick Smith

Yes, we are. We’ll provide more detail on the next conference call, but I can tell you dramatically one of the things that we’re doing is actually going to be sending, I love the term to used missionary (inaudible) the Founder and CEO of sales force used that same term with sales force expanded internationally, one of the things that they found was sending teams of people that really were trusted lieutenants within the existing organization over to help to bring up overseas capabilities was an important element of their business expansion. and that’s a play that Jeff Kukowski, our Chief Marketing Officer who is actually poising that independently of some of the reasons which I will do in that space.

So part of the plan, we’ll involve taking some of our thought leaders that are part of our North American team and relocating teams of folks into key international markets to work with local agents, distributors, consultants, et cetera. and making sure that the approach to global sales is more integrated into the DNA of the company and we have teams of smart dedicated people who know the technology and have TASER in their bloodstream are end market focused and in understanding those markets and growing [them for us]. But it’s not going to be a huge budgetary, I’ll tell you the thing that we’re not planning on doing is going out and hiring a whole raft of new international sales people called – we don’t think that that’s the right approach.

We do see, again, TASER is a bit of missionary, so it’s – our distributors that we’ve analyzed bit of done very well, tend to be focus distributors, small teams of people that don’t carry a lot of product lines, but they live and breath TASER and that’s the model we need to replicate, this isn’t something we’re going to big full line international sales import, export companies is very successful. we need people that are willing to break eggs to make me omlette so to speak and overcome the obstacles of introducing new technologies and of course, that team will also be focused on AXON Flex and eventually Evidence.com. Although Evidence.com will not as focused internationally, the Patriot Act executes quite a hurdle to selling cloud services internationally, because most international police departments don’t want to have their data in the U.S. because of the Patriot Act.

So our initial [query] internationally will be focused on selling the camera hardware and then as we see opportunities for Evidence.com that is one of the advantages of working with the Amazon Web Services. They do have a number of international data centers that we can spin up with the relatively light lift compared to going out and building out our own infrastructure internationally. But that that will be the latter half of the year certainly before we need to get our focus on Evidence.com traction here in North America first.

Paul Coster – JPMorgan

Yeah. I heard you say that the TASER Cam HD product will come to market in the second quarter and anticipation of that product kind of slowed. so that category in the fourth quarter, will it do the same in the first quarter do you think? And then, we’ll see a big [step-up] for that in 2Q?

Dan Behrendt

We are – the TASER Cam HD is now shipping. So it is out in the marketplace. We do have some agencies that have significant TASER Cam deployment that are testing the TASER Cam HD right now. Obviously, we’re hoping that we can get them through that testing and evaluation process in the first quarter, if not then we could see that [bumps slightly] in the second quarter, but it is now shipping.

Paul Coster – JPMorgan

And last question, Dan, with this inventory now written down and the X3 will be sold through. can you just talk us through the accounting implications at the subsequent sales, you’re not rising back the previously written down inventory presumably it’s sort of different, talk us through the mechanics there if you would please.

Dan Behrendt

Yeah, sure. So basically we’ve written down the inventory to the quality that we take we can sell through in the next two years. So to the extent that what we sell is sort of add or under that quantity there is – it will be just sort of a normal sale. For some reason the demand for that product is greater than we expected we’d actually have a higher profit, because we’d have – you’d think put back in inventories and sold that we were previously written off. But right now, our expectation is though this flow through this P&L in a normal way so we basically just written down to the number of units we expect to sell through.

Paul Coster – JPMorgan

Okay, got it. Thank you, it helps. Thank you.

Dan Behrendt

Thank you.


And at this time, I’d like to turn the call back over to Mr. Smith for closing remark.

Rick Smith

Great, thank you. Well, it’s not a [secret] obviously calls like today are not the most fund conference calls, but when you are running a business and doing somethings that are potentially transformed even building out the new businesses we are. These are the things that as management team you have to work through – so we appreciate everybody participating in the call. We appreciate having your shareholders. I do think that if TASER has gone through a number of growth basis in its history. I’d invite you all to come out to our shareholder meeting and meet some of the management team. A lot of those folks who would I rely on is independent sounding boards who’ve remarked on the changes in the company and in the culture that they believe are really reflective that we are doing the right things to be able to position ourselves to really break through that $100 million revenue mark, and have an infrastructure and a team that they can scalably grow this business both in the core ECD business and in the new video and cloud space of which we are pioneering. so we look forward to so much more fun and rewarding conference calls later this year, as some of these efforts begin to take root and show their results in our financial statements.

So thanks everyone. we look forward to talking to you in a few months on our next conference call. And Dan, do you have the date for our shareholder meeting?

Dan Behrendt

It will be on May 24th, Rick.

Rick Smith

May 24th. So again, we’d invite everybody to come out to see, touch and feel some of the new products and I’ll join (inaudible) on the 24th of May. So thanks, and everybody have a great day.


We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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