Welcome to the Q2 2010 TASER International Incorporated Earnings Conference Call. My name is Don and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that the conference is being recorded. I will now turn the call over to Rick Smith. Mr. Smith, you may begin.

Thank you. Welcome everyone. Appreciate you joining us this morning. Before we get started I'm going to ask Dan to read the Safe Harbor Statement.

Thanks 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 law enforcement markets, 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 in 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 risk of new technology, new product introduction risks, 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 in 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 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 law enforcement markets, 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 in 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 risk of new technology, new product introduction risks, 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 in 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 everybody has seen by now this morning we reported Q2 sales were up $7 million or 33% year-over-year coming into $28.2 million. Perhaps even more importantly, if you look at the cash generation of the business we generated $9.7 million in cash from operations. Of course if you do the math on that we were generating cash at an annualized rate in the second quarter of $0.73 per share. Operating income came in at $6.1 million. To go back and touch on the cash as well, we can point out the obvious, that was inclusive across the entire business, if you look at the core ECD business, which has been funding our investments in the new video business, obviously that number is significantly higher in the core business if look at on a standalone basis. Margins improved year-over-year although they declined slightly sequentially, came in at 58.5% compared to 57.8% last year and course if you look in our ECD business 63.7% gross margin, a number we're very proud of. Again we break this out so that it helps us as a management team to use investors to monitor how well we're managing our core business so (inaudible) by the investments that we're making in the new business. Revenues in the ECD business increased 8% sequentially from $24.8 million to $26.9 million and in the core ECD business operating income was $8.6 million. So we're running at 32% operating income in the core ECD business. Revenues in the video business increased 47% sequentially albeit from a small base of $884,000 in the first quarter to $1.3 million in the second quarter. That growth is really driven primarily by TASER CAM and the new TASER CAM HD as the AXON Flex didn’t ship until late…

Thank you Rick. So as Rick says revenues for Q2 was $28.2 million. This is up approximately $7 million or 33% over the prior year. The increase in sales versus prior years is driven by the continuous option extension of the upgraded program for the X2 Electronic Control Device as well as a significant order I guess during the quarter from Brazil. One of the bright spots for the quarter is the North American law enforcement market, continues to be strong, mostly driven by the upgrade cycle to the new X2 device. North American law enforcement sales are actually up 39% year-over-year. This follows a 25% year-over-year improvement in the fourth quarter of last year and the first quarter this year. So we've got three quarters in a row of significant growth, almost completely driven by the adoption cycle of the new X2 device. Gross margin for the quarter was $16.5 million or 58.5% of revenue. That's up 70 basis points from 57.8% of the prior year. This is actually the fifth consecutive quarter of gross margin improvement. We continue to see a benefit from the higher operating leverage in the business as well as a favorable product mix. The SG&A expenses of $8.4 million in the second quarter versus $9.1 million in the prior year, the reduction in SG&A expenses were driven by the continuing cost controls in the business. SG&A as a percentage of sales was actually 29.8% of net sales in Q2 of 2012 that compares to 42.8% in the same quarter of last year. If you sort of look at our history over the last four quarters we've sort of ranged from this sort of low water market of $8.4 million all the way up to $10.3 million over the last four quarters and we are…

Thank you Rick. So as Rick says revenues for Q2 was $28.2 million. This is up approximately $7 million or 33% over the prior year. The increase in sales versus prior years is driven by the continuous option extension of the upgraded program for the X2 Electronic Control Device as well as a significant order I guess during the quarter from Brazil. One of the bright spots for the quarter is the North American law enforcement market, continues to be strong, mostly driven by the upgrade cycle to the new X2 device. North American law enforcement sales are actually up 39% year-over-year. This follows a 25% year-over-year improvement in the fourth quarter of last year and the first quarter this year. So we've got three quarters in a row of significant growth, almost completely driven by the adoption cycle of the new X2 device. Gross margin for the quarter was $16.5 million or 58.5% of revenue. That's up 70 basis points from 57.8% of the prior year. This is actually the fifth consecutive quarter of gross margin improvement. We continue to see a benefit from the higher operating leverage in the business as well as a favorable product mix. The SG&A expenses of $8.4 million in the second quarter versus $9.1 million in the prior year, the reduction in SG&A expenses were driven by the continuing cost controls in the business. SG&A as a percentage of sales was actually 29.8% of net sales in Q2 of 2012 that compares to 42.8% in the same quarter of last year. If you sort of look at our history over the last four quarters we've sort of ranged from this sort of low water market of $8.4 million all the way up to $10.3 million over the last four quarters and we are…

Okay, thanks Dan. Okay, before we wrap up I want to revisit our three core strategic (inaudible) that we talked about in the last several conference calls and those areas of focus are number one upgrading our installed base of ECDs that was greater than five years old, number two, accelerating the penetration of our video and cloud business and number three expanding international sales. So first let's talk about the X2 and expanding our installed base. I saw a number of significant orders this quarter. One of the more important ones was in Australia 775 X@ ECDs. The international markets tend to take a longer time to improve new products. So we're delighted to see Australia being the first country to move in a significant way to the X2 and also 475 TASER CAM HDs. It is also a strong quarter for state patrols, Oregon State Petrol went full deployment with 454 X2s, North Carolina Highway Petrol with 422 X2s, how state petrol upgraded from M26s to X26's 485 units. We also saw in the municipal area some strong X2 purchases, 250 units going to Manchester, 162 units going to Las Vegas beginning their transition. Obviously that's a very large department I believe, over 3000 officers so this hopefully the start of a larger transition. We also had another large agency purchase 2,500 X2 units. That agency for operational security reasons asked us not to disclose who it was so we're not going to. In terms of the upgrades themselves, obviously some of these were new purchases. We like to keep tabs on how much of the installed base is actually upgrading. At the end of Q1 we had upgraded approximately 3.3% of the installed base of ECDs that are greater than five years old and at the end…

(Operator Instructions). Our first question comes from Steve Dyer from Craig Hallum. Please go ahead. Steve Dyer – Craig Hallum: Congratulations on the good results. A question just generally on the phase out of the X26. I shouldn’t say phase out but it's my understanding that departments have been made aware that essentially five years is the useful life for an X26. I'm just wondering in general anecdotal reaction to that. Do you see that driving upgrade cycles, other people just sort of deciding they are going to roll the dice, what's the general reaction to that?

We are seeing that it is helping our customer to sort of get focused on upgrade technology. The X26 is a 10 year old platform. Now in the current budgetary environment we have seen many agencies have been putting out their capital equipment purchases, vehicles that they normally replace every three or four years, they are getting several X2 out of them. So we're certainly not seeing across the board that people are immediately moving to upgrade a repressed unit that are getting past their useful life but it's starting to make a different. We believe the most important and compelling aspect are the improved safety features of the newer product which helps giving them a more compelling reason to upgrade and we're certainly hoping that this new TASER Payment Plan helps them to do that off operating budgets and accelerate the upgrade. So it is making a difference if not 100% across the board, certainly that the people are immediately to upgrade units outside their useful life. Steve Dyer – Craig Hallum: Have you noticed any difference and maybe this is too early to say but in cartridge usage with the X2 versus the 26?

Yes, this is Dan. Nothing significant so far. Because you've got ability to display the wearing art we are hearing from the CO that they are getting compliance from people, just displaying that Warning Arc which they're more likely to do with the X2 because with the X26 you have to basically unload the weapon to display the Warning Arc, where the X2, one of the key features and the key benefits is the fact you can do that while it's loaded so you don’t create an officer safety issue. So and certainly we are hearing that they're getting a lot of compliance from that. We haven’t really seen that translate into a difference in the cartridge usage so far.

Yes, this is Dan. Nothing significant so far. Because you've got ability to display the wearing art we are hearing from the CO that they are getting compliance from people, just displaying that Warning Arc which they're more likely to do with the X2 because with the X26 you have to basically unload the weapon to display the Warning Arc, where the X2, one of the key features and the key benefits is the fact you can do that while it's loaded so you don’t create an officer safety issue. So and certainly we are hearing that they're getting a lot of compliance from that. We haven’t really seen that translate into a difference in the cartridge usage so far.

Yes, I think the dynamics that we would look at in general, if we had to estimate it between 10% and 20% of our cartridges that are sold or actually used in the field, 80% to 90% are used in training. So because of the multi shot capability of the X2 we actually see greater number of the cartridges being fired in training but we may see less cartridges being fired in the field due to the surrenders but the net effect, it is too early to say, which direction it went [ph] down. Steve Dyer – Craig Hallum: And then Dan, how will the revenue be recognized under the new TPP program? Is that going to be a deferred revenue scenario or is that all upfront and just the cash flows are deferred.

Yes. So it's going to depend on whether we actually sell the paper. This first deal with Colorado Springs are actually partner with a leasing company. So we will get paid up front. So we'll recognize the revenue upfront. If we hold the paper we will likely end up recognizing over time that for the most part our goal here will be depending on the deal structure, mostly the deals we expected, we want to hold the papers. So we recognize the sales upfront.

Yes. So it's going to depend on whether we actually sell the paper. This first deal with Colorado Springs are actually partner with a leasing company. So we will get paid up front. So we'll recognize the revenue upfront. If we hold the paper we will likely end up recognizing over time that for the most part our goal here will be depending on the deal structure, mostly the deals we expected, we want to hold the papers. So we recognize the sales upfront. Steve Dyer – Craig Hallum: And is that the full normal ASP or does the leasing company shave anything off for themselves?

Yes, there is a little bit of a discount. As Rick said we think we can do that and still maintain our normal operating profit because just the fact that this driving higher sales than just some of the other considerations as part of the sale. So even though there is a little bit of a haircut we'd say the overall profitability of the deal still be strong.

Yes, there is a little bit of a discount. As Rick said we think we can do that and still maintain our normal operating profit because just the fact that this driving higher sales than just some of the other considerations as part of the sale. So even though there is a little bit of a haircut we'd say the overall profitability of the deal still be strong. Steve Dyer – Craig Hallum: Okay, and then my last question and I'll jump back in the queue. Gross margins have been really very good the last couple of quarters and I'm trying to figure out kind of going forward if that's a sustainable level, how much of that is just attributable to the higher revenue run rate versus do we have with the X2 and the AXON maybe a kind of a permanent shift in mix that's going to take those up some.

Yes, that's a good question. I think that overall certainly the higher operating leverage we have is helping. There is a lot of indirect manufacturing cost that are relatively fixed. So having higher sales levels certainly help in that regard. I think the X2 has certainly helped in that regard because of the higher ASP versus the X26. As we see more adoption of Flex I think that will be in the near term will be a little bit of a drag just because of the deferred revenue. We're not recognizing, we're only recognizing half of that sale upfront and then the other half overtime. It will become normalized over time but in the beginning because of the deferred revenue component of the Flex sales as the AXON Flex takes off and because that they are part of the business; those margins won't be quite as strong as the ECD margins.

Yes, that's a good question. I think that overall certainly the higher operating leverage we have is helping. There is a lot of indirect manufacturing cost that are relatively fixed. So having higher sales levels certainly help in that regard. I think the X2 has certainly helped in that regard because of the higher ASP versus the X26. As we see more adoption of Flex I think that will be in the near term will be a little bit of a drag just because of the deferred revenue. We're not recognizing, we're only recognizing half of that sale upfront and then the other half overtime. It will become normalized over time but in the beginning because of the deferred revenue component of the Flex sales as the AXON Flex takes off and because that they are part of the business; those margins won't be quite as strong as the ECD margins.

Thank you. Your last question comes from Greg Mckinley from Dougherty. Please go ahead. Greg Mckinley – Dougherty: First of all Dan, I missed the number you gave on cartridge units. Could you repeat that please?

Yes, sure thing. So we sold $364,104 cartridges in the quarter.

Yes, sure thing. So we sold $364,104 cartridges in the quarter. Greg Mckinley – Dougherty: And then can you remind me of the X2 rebate rate currently in effect, what reductions if any have occurred and then how you expect that rebate to sort of bleed out later this year?

Yes so it was, for the second quarter it was $250 a unit. In the third quarter it will come down to $210 a unit. So basically we want to, a sort of difference from where we were at year end, we kind of announced the rebates throughout the year. So we want to encourage customers to move as quickly as they can and their budgets allow because the rebate is coming down over the year. So it’s $250 in Q2, come down to $210 in Q3 and certainly it dipped but it helped us a little bit in Q2. Its great emphasis for certain customers that want to move a little quicker to make sure they take advantage of a higher trade in value.

Yes so it was, for the second quarter it was $250 a unit. In the third quarter it will come down to $210 a unit. So basically we want to, a sort of difference from where we were at year end, we kind of announced the rebates throughout the year. So we want to encourage customers to move as quickly as they can and their budgets allow because the rebate is coming down over the year. So it’s $250 in Q2, come down to $210 in Q3 and certainly it dipped but it helped us a little bit in Q2. Its great emphasis for certain customers that want to move a little quicker to make sure they take advantage of a higher trade in value. Greg Mckinley – Dougherty: Great. It was also $250 in Q1? Is that correct?

That’s correct.

That’s correct. Greg Mckinley – Dougherty: Yes, okay. Just getting back to the TASER Protection Plan for a moment, so you would envision if most transactions occur, such as the one that you are doing with Colorado Springs in my sense is that is how you expect most of these to be handled. On the P&L, where it's just going to see revenue and cost of sales, and then the leasing company in essence is your direct customer and maybe just a slightly lower gross margin rate but you will make up for operating margin just with operating expense leverage on higher volume. Is that how you're thinking about it?

Yes, that's exactly right. Greg Mckinley – Dougherty: Okay. And then you wouldn’t anticipate holding like long term deferred receivables, that you think most of the receivable will be with the leasing company rather than yourself?

Yes. That's the current intent. Obviously we'll have to sort of see how this plays out over time. We've got a strong cash generation in the business but for right now we think we'll let the leasing company do what they're good at and we'll do what we are good at, as long as the economics work. Obviously if that discount the leasing company wants to take becomes (inaudible) if the economics work, we certainly reserve rights to take that paper sell but for right now what we're seeing is that we can do this and have them be responsible, both take a credit risk and also do the sort of recurring billings, everything like that and I think that's the model intend on going forward and I think it should work. We're talking to a number of different leasing companies and that should help us keep it competitive so the rates we sell the paper at remains attractive for us. Greg Mckinley – Dougherty: Any ballpark guidance on what kind of discount you are going to be seeing on those sales?

Not that I can really say. It's going to depend on each deal. A part of it will depend through the inferred interest rate that's based into the lease. Obviously the lower the rate the bigger the discount that well face. So nothing I can really talk to. I think overall like I said, I won't change our operating margins for the business but we still feel that even if we do more of these deals over time we don’t think it will be net accretive to earnings. Greg Mckinley – Dougherty: Okay, thank you. And then on the video business, I wonder if you could just talk a little bit about how you guys are assessing the performance of the business from a higher level perspective in terms of what do we to see out of it in order to continue justifying heavy investment back into it, maybe also give us a framework for what type of annual revenue run rate might be need to be achieved before it's no longer dilutive to operating income. So what kind of milestones do you need to be seeing in the next six to nine months where you say yes, this is something we want to continue to pursue?

Those are great questions. I think one thing we they are going to look at is really just the traction. I think for us if you look at the first quarter results we actually had a net investment in the video business of about $3 million. That's been reduced down to about $2.5 million. Obviously we want to continue to see that work into a short break even and start contributing. So I think that we're going to monitor closely both for the net investment but we are encouraged by the traction we are seeing, we are encouraged by the feedback we're getting from some of the early customers and we still remain convinced that this can be a very interesting and material part of our business. So I think as long as we continue to feel that way we think the investment is warranted. But I think, same as you guys will be doing from an investors perspective, we are going to monitor the performance of that and really want to see this continue to gain traction in both the sales and profitability of that business. Greg Mckinley – Dougherty: Any feel on required revenues in the video segment to sort of have that segment be a breakeven proposition?

It's tough to answer that because it will sort of depend on how quickly we get there. The good thing about the video business, because we're deferring some of the Flex sales, that will actually help in the future because the cost of running sort of the infrastructure, they are sort of a variable part of that. So as those deferred revenues start being recognized that will actually help the profitability. So it's a tough thing to model but certainly I think that sort of the best way to look at it will be to sort of see the trend and be able to sort of predict kind of when we kind of cross that breakeven threshold.

It's tough to answer that because it will sort of depend on how quickly we get there. The good thing about the video business, because we're deferring some of the Flex sales, that will actually help in the future because the cost of running sort of the infrastructure, they are sort of a variable part of that. So as those deferred revenues start being recognized that will actually help the profitability. So it's a tough thing to model but certainly I think that sort of the best way to look at it will be to sort of see the trend and be able to sort of predict kind of when we kind of cross that breakeven threshold.

At this time we have no further questions. Do you have any concluding remarks?

Well just again, thanks everybody. Obviously we really enjoy days like today. You know it's been a long, long road the last several years to get here. I think we've really tuned up the organization. Any shareholders that would like to come take a visit to your company please feel free to contact our IR department by e-mail at ir@taser.com. I would be happy to show you around your company and we look forward to hopefully continued strong performance in the back half of the year and as we move into 2013 and look forward to joining you all again in late October for our next conference call. So thanks and have a great day.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.