TASR

TASER International, Inc. (TASR)

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TASER International, Inc. (TASR)

Q3 2012 Earnings Call

October 26, 2012 11:00 am ET

Executives

Patrick W. Smith – Chief Executive Officer

Daniel M. Behrendt – Chief Financial Officer

Analysts

Steve Dyer – Craig-Hallum Capital Group

Mark Strouse – JPMorgan Securities

Greg McKinley – Dougherty & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 TASER International, Inc. Earnings Conference Call. My name is Matthew, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I’d now like to turn the call over to Mr. Rick Smith, CEO. Please proceed, sir.

Patrick W. Smith

Thank you. Good morning, everyone, and thanks for joining today. Before we get started, I’m going to hand over to Dan Behrendt to read the Safe Harbor statement.

Daniel M. Behrendt

Thank you, Rick. Certain statements contained in this presentation may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995; and TASER International intends that such forward-looking statements be subject to the Safe Harbor created thereby. Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of the law enforcement market, expansion of product sales through the private security, military and consumer self-defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, product safety, and our business model. We caution these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein.

Such factors include, but are not limited to, market acceptance of our products, establishment and expansion of our direct and indirect distribution channels, 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 in the markets which we compete and accompanying demand for our products, potential delays in international and domestic orders, implementation risk of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risks, ramping manufacturing production to meet demand, litigation resulting from alleged product related to injuries and deaths, media publicity concerning product uses and risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects and customers, dependence on sole and limited source suppliers, fluctuations in component pricing, risk of government investigations and regulations, TASER product tests and reports, dependence on key employees, employee retention risks and other factors as detailed in company’s filing with the Securities and Exchange Commission.

Now, I’ll turn it back over to Rick Smith.

Patrick W. Smith

Thanks Dan. As you all can imagine, once again, I’m in a very nice position of being able to be so proud of the team of people here at TASER that have worked so hard for you over the past several years to turn in a result like this; our third consecutive quarter of strong operating results. As you’ve probably seen in the press release, net sales of $28.8 million were an increase of 18% over the prior year, and the business generated $9.9 million in cash from operations.

Our ECD business segment, as you know, we’ve broken them amount now, so that our shareholders and investors can see how we’re running the core ECD business versus the video business. It’s obviously on two different phases. The ECD is a very strong and growing cash-generation segment business; and we’ve been investing in video, although you’re starting to see some traction take hold there.

In the ECD business segment, revenues were flat in the second quarter, although the second quarter is sequential – is typically a seasonally stronger quarter. So, it was a good season for our sales group to get the same mark in the third quarter, with revenues growing 15.9% over the prior year. Our ECD margins, gross margins came in over 64%. So, operations and manufacturing teams are doing a great job there, controlling the costs and driving margin.

In the video business, we saw a 30% sequential increase on a GAAP basis from $1.3 million to $1.7 million in recognized revenue, growing 65% year-over-year. But if we look at the sales bookings, they doubled sequentially from the second quarter to the third quarter. Obviously, there’s a difference between GAAP and bookings, in that a proportion of the revenues are ascribed to services; in some cases, services being delivered over a five-year time horizon. And as such, we defer those revenues and recognize them as the service is delivered.

And with that, I’m going to turn over to Dan to go into more detail on the financial aspects, and I’ll come back to talk more qualitatively about the business.

Daniel M. Behrendt

Thank you, Rick. As Rick indicated, revenue for Q3 was $28.8 million, which is up approximately $4.4 million or 18% from the prior year. The increase in sales versus the prior year is driven by the continued adoption of the X2 Electronic Control Device.

The North American law enforcement business continues to be strong, mostly driven by the upgrade cycle to the new X2 Electronic Control Device. North American law enforcement sales are actually up 50% in the third quarter over the same quarter of 2011. This follows a 39% and 25% year-over-year improvements in Q2 and Q1, respectively. We view the pipeline of our ECD segment as continuing to be strong as we go into the fourth quarter.

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