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.

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.

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.

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.

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. Gross margins for Q3 on a consolidated basis were $16.8 million or 58.4% of revenue, which is up 470 basis points from the 53.7% in the prior year. We continue to benefit from higher operating leverage in the business. We also had a higher percentage of drop shipments in the quarter, which increases our average selling price. The offset to this is in SG&A, as we see variable selling expenses due to paying distributors a commission on their sales versus having to buy and then resell out of their stock. The gross margin percentage was especially strong this quarter when we consider that we had 34% of our sales coming from cartridges this quarter, which are normally – that mix differential is the cartridge margins are slightly lower than the ECD margins. So it was good to see strong gross margin performance even with 34% coming from cartridges. SG&A expenses for the quarter were $9.5 million; that was basically 33% of net sales compared to 38.9% of net sales in 2011. Sequentially, SG&A increased 13.5% from the $8.4 million in the…

Thanks Dan. As we’ve talked about on, I believe, every conference call this year, we have three primary areas of focus at the company and I’m going to talk about each of those briefly. First is upgrading our installed base of users that have devices that are more than five years old, and our primary effort there is with the X2 ECD. And as of the end of the quarter, we’ve upgraded 6.1% of the devices – the ECDs in the field that are more than five years old. So, we’re continuing to make progress there, that’s helping to drive the strong top line results. But we’ve still got 94% of the market to go, so a lot of opportunity for us to continue to grow the business through our upgrade program. This is really good business couple of the major orders we announced; Pima County for 600 X2 ECDs, and Colorado Springs for 525 X2 ECDs. Now, one thing that’s interesting about those, which were two of our largest deals this quarter, those were both results of our new TPP program, the TASER Protection Plan, which we talked briefly in the last call. That’s a program where we now partnered with a municipal leasing partner and we’re able to offer our customers the ability to pay over the five-year expected useful life of the device in equal annual installments. We’re finding that it makes it much easier, particularly for some of the larger agencies to be able to fund this out of their operating budget rather than having to go back to a special capital equipment budget. And we actually believe that having agencies on the TPP deals will make a really big difference over the long-term as we get to year five, year six, since they already have…

Thank you. (Operator Instructions) And your first question comes from the line of Steve Dyer from Craig-Hallum. Please proceed. Steve Dyer – Craig-Hallum Capital Group: Thanks. Good morning.

Good morning.

Good morning. Steve Dyer – Craig-Hallum Capital Group: Could you remind me a little bit about the rebate program? I think that is scheduled to sunset here at the end of the year. What the amount was right now and then, Dan, how that’s accounted for?

Yes. Sure, Steve. So, in the third quarter, we still had a rebate in place. It was $210 per unit, and that goes down to $160 in the fourth quarter. We haven’t announced a 2013 program yet, but there will be some program in place. We’ve seen that having -those trade-in programs has made a difference. Our customers have a hard time, I’d say, disposing a unit that’s still operational. So, giving them some value for that unit has made a difference. We saw that in the first quarter, where we sort of went without a program for the first two months of the quarter and we had lower unit sales in X2 as a result. So, we definitely see a correlation there. The accounting for it is, we basically just take a full reserve for the trade-in credit at the time of the sales. So, we basically reduce the total sale value by that trade-in credit. So, it’s already reflected in the results, in the lower sales value. And as those units come back, we’ll just offset that accrual. But there is no – basically at that time of the sell-in, we fully account for that trade-in value. Steve Dyer – Craig-Hallum Capital Group: Okay. That’s helpful. And then is there any fear, I think you alluded to it a little bit, but is there any thought that you’re pulling sales forward or you’re essentially paying people who are going to upgrade anyway or is your sense more that you need the trade-in credit in order to spur action?

Yeah. I think our view is that we do need that sort of trade-in credit; some kind of program, how big it needs to be, I think we can – it will continue to iterate on. But I think having – especially when you’re sighing about somebody with an operational unit disposing of it, I think emotionally it’s just a lot easier for them to get some value there. I think the good news is the higher selling price of the X2 allows us, the economics still work for us, and you’ve seen that in the results all year. Even with this trade-in program in place, we’ve been able to put up high results. It’s not like we’ve had to sacrifice profitability to offer that, and we do believe there’s a big market. As far as pulling things forward, yeah, there is probably – we definitely want to spur action here. Would those both people eventually upgrade? Yeah, potentially, but we want to sort of spur action here. And we do think there’s sort of a momentum effect here. I think our customers tend to look to each other to see how to operate their individual agencies. So, the more agencies we can have upgrading, and that sort of drumbeat I think will create more momentum in that upgrade and drive that point home. Steve Dyer – Craig-Hallum Capital Group: Okay, great. And then cartridge sales look to me like it’s the biggest number maybe on record. Maybe there was one quarter in 2007 that was close. Is there anything in particular that you attribute that to or how do we think about that going forward?

Actually in the cartridge sales, we did – basically, we did have a special on cartridges this quarter for our distributors that allowed them to stock up. So, I expect the cartridge sales to probably tail-off a little bit in Q4 as a result. But we basically – we went through a program where we increased the price of cartridges for distribution to reflect the fact that they don’t have to put in as much effort to sell a cartridge. But we basically what we did as part of that is we told the distributors that twice a year we’ll run some specials on cartridges to allow them to stock up, if they need to. So I do expect we’ll probably see a little bit of a degradation in those cartridge unit sales in Q4. But I think it’s sort of a good balance with the distribution, and I think it’s been pretty popular with our distributors to give them opportunity to – twice a year they can stock up and recognize a little higher margin on those cartridges. Steve Dyer – Craig-Hallum Capital Group: And those are – you recognize those on sell into the distributor, right?

That’s right. Steve Dyer – Craig-Hallum Capital Group: Okay.

And the reality is, although we have 18 or so distributors, there’s only a handful that stock in large quantities. So, there is a few of them that really took advantage of the program. A lot of the – maybe smaller distributors are the ones that don’t tend to stock as much, didn’t take as much. So, like I said, I think we’ll be back to more normal levels in Q4. But it certainly it helped this quarter. The third quarter is seasonally a little slower for us. So it made sense for us to run that cartridge special this quarter, and we certainly saw the benefit of that special. And like I said, the economics are still good for us on that sale. Basically, we increased their prices at the beginning of this year; and basically, when we run the special, it’s kind of going back to the prices maybe they had back in 2011. So, the economics still work. Steve Dyer – Craig-Hallum Capital Group: Is this the first time you’ve done that? I guess I haven’t heard of that before. Have you done that before?

This is the second time we’ve done it. Steve Dyer – Craig-Hallum Capital Group: And when was the last one, was it Q3 also last year?

No, we did it – well, we did it in Q1. Steve Dyer – Craig-Hallum Capital Group: Okay.

So we did it again in Q3. Steve Dyer – Craig-Hallum Capital Group: Got you.

Well, Q1 was really when we introduced the change in the price structure.

Yeah. We gave them basically an opportunity, even with the -to sort of have the old prices for Q1 and then it started in Q2 basically. Steve Dyer – Craig-Hallum Capital Group: Got you, got you. Okay. And then one last question and I’ll hop back into the queue. Any sense for when video may break-even going forward? It seems to be getting some nice momentum on the top line. How should we think about that from a profitability standpoint?

Yeah. I think it really is driven by that sort of the top line growth. We need – we’re continuing to focus on and we do want to – we do see a situation where we want to sort of grab as much of that market as we can. You do have sort of the long tail of the EVIDENCE.com. So getting as many customers in that system as possible is really the primary focus. Obviously, we want to be profitable as quickly as possible. But it’s – we want to make sure that the product is right. Want to make sure those customers, those early adopters, are well served. That’s why we’re looking at some account management and some other functions. So it’s a – we’re absolutely committed to getting that to profitability, but we also want to make sure that – like a lot of SaaS businesses, there is a large fixed component cost. We want to make sure that we get as many people using that system as possible and that will pay off in the years to come. Steve Dyer – Craig-Hallum Capital Group: Got you. Okay, I’ll hop back in the queue. Thank you.

Thanks Steve.

Thank you for your question. Your next question comes from the line of Paul Coster from JPMorgan. Please proceed. Mark Strouse – JPMorgan Securities: Hi, good morning. It’s actually Mark Strouse on for Paul. Can we just start with your cash? So, you’ve been able to generate a lot of cash year-to-date and you’ve put a lot of that into buying back shares. Now, as that program is over, I know you’re talking about investing some in the business. But are you still targeting to grow that cash balance in the near-term and what are the plans for that? Should we expect more buybacks or M&A opportunity?

Yeah. Mark, this is Dan. Obviously, we’ve been very happy with the cash generation of the business. Even with the buyback, we’ve actually grown our cash balances this year with the – even with the $20 million buyback. We’ll continue to look at buybacks over time as a way to return excess cash to shareholders. We do see value in those programs. So, that’s something we’ll continue to evaluate. As far as M&A, obviously, if we do that, we’ll announce that to the broader market when it happens. But right now, we’re really just focused on operating the business as efficiently and effectively as possible, and I think the cash generation is a product of that. And it’s something we’ll continue to focus on. Mark Strouse – JPMorgan Securities: Right, okay. Okay. And now we’ve got a few months of the Protection Plan under our belt. Are you able to share any quantifiable metrics as far as the number of new agencies that have purchased throughout the quarter, the percentage of those that are utilizing the Protection Plan and any new financial impacts that you’ve seen, now that you’ve got some actual evidence there?

Yeah. Mark, this is Dan again. I think it’s been – it’s early. So, we’ve had a couple deals already. In the first quarter we’ve announced this. I think there’s sort of some other sort of tangential benefits to the program. I think it allows us to keep the conversation going with our customers; customers that say, hey, this is a tough budget environment, we can’t, we just don’t know if we can upgrade our units this year or maybe increase the number of TASERs we have. I think it keeps the conversation going instead of saying, hey, let’s not stop it; you’ve got a tough budget; let’s talk about things that TASER can do to spread those payments over time. Maybe allow an agency to upgrade all at once versus having to do it over a several year period. So I think it’s been good; it’s been well received by customers. It is a little bit early. I think we’ll continue to talk about on the calls as we have deals. And certainly this quarter we had $1.1 million of our business this quarter was directly associated with these TASER Protection Plan deals. So, I think that’s a good start for the first quarter, and there’s definitely a pipeline of interest there. We’ll see how many deals we do, like I said. I think even regardless of whether – the amount of deals, I think the sales folks find it valuable, because it gives them another arrow there in their quiver to – as they have conversations with agencies and make sure that the budget conversation doesn’t stop the sale process.

Yeah. We’ve seen a number of those, where the agency says, well, we don’t have the budget for it. We go down the TPP route, where they start moving in towards approving that. And then they end up coming back and saying, well, we found the money we’ll just buy it. And we estimate that those deals may have gone cold on us had we not had the ability to make the offer. Mark Strouse – JPMorgan Securities: Got it, perfect. Okay, that’s it for us. Thank you very much.

All right, thanks Mark.

Thank you. Your next question comes from the line of Greg McKinley from Dougherty & Company. Please proceed. Greg McKinley – Dougherty & Company: Yeah, thank you. I wonder if you can just talk a little bit about – first of all, it seems like a higher volume of lower value orders which are driving a fair amount of revenue upside relative to maybe your announced orders during the quarter. My sense is that’s related to development of this telesales group you’ve referred to. But I’m wondering if you can just talk a little bit about what you’re seeing in terms of order size and order volume, and if it is this telesales group, then maybe just help us better understand that sales effort?

Yeah. Greg, this is Dan. I think that’s exactly what we’re seeing. I think the theory was that those smaller agencies were under-served both by TASER and distribution. And having a dedicated telesales department to take leads generated mostly through our web programs and follow-up with those customers that maybe are tough to – maybe not super-convenient locations or just not easy to get to and wouldn’t normally warrant a face-to-face visit, I think it’s been successful for us. That market is under-served, we think. And I think the fact that we’ve sold over $2 million through the telesales; and as Rick alluded to, these average sale is about $3,200 to $3,300. So it’s a lot of small ticket sales, but clearly it’s made a difference to our business. And we feel that’s been a successful program. We’ve invested in it throughout the year. We’ve made a pretty strong investment in Q3. We added a fair amount; I think we’ve close to double the head count in the third quarter. But it’s been – so far, it’s been very successful and we expect that that will continue. Greg McKinley – Dougherty & Company: So just as a framework, you did $2 million of revenue this quarter, what was that from this effort a year ago? And you said you doubled your head count. What kind of – what size of a sales force are we talking about there?

So basically a year ago, it would have been zero. This is a brand-new function, so. Greg McKinley – Dougherty & Company: Okay, okay.

And we’ve got about eight to nine people dedicated to this effort right now. They’re doing both telesales, and also as part of that, they’re doing some health and wellness checks with our customers. So, there’s some other benefits we’re getting; I think some good situational awareness as far as what’s happening in the agencies. In some cases, it doesn’t result in a sale, but it results in a lead that we can follow-up on later. And telesales is starting to create their own pipeline of future deals, just like our regional sales managers are doing for the larger transactions. Greg McKinley – Dougherty & Company: Okay. And looking at the numbers a little bit closely – more closely; if I look at the units that you gave us and extend those into revenues based off of what are normal ASPs for these devices in the past, there is a bigger gap between your reported revenues and what I can come up with and what is historically the case. I think that other bucket typically is maybe service and training. Was that a much larger portion of your revenue base this quarter than normal or why am I maybe a couple million dollars off there?

The service revenue will continue to grow. The amount of – as I mentioned on the balance sheet, the deferred revenue is the line of the balance sheet that’s growing. So that... Greg McKinley – Dougherty & Company: Okay.

So, that service component. And the – we’re starting to see the E.COM service revenues come through from deals we’ve done earlier in the year. That’s you’ll see – every quarter, you’ll see more of that previously deferred revenue recognized. So we are seeing that. I don’t think it would be to the extent of a couple million dollars. I think... Greg McKinley – Dougherty & Company: Okay.

I think probably what you’re seeing a little bit, Greg, is that because we had more of these drop shipment sales that we see a higher selling price, because we sell at the full MSRP and then pay a distributor selling commission. I think that’s part of what’s driving it. I think ASPs are a little higher than normal this quarter because of that. Greg McKinley – Dougherty & Company: Okay, okay. So your realized price per unit is higher then?

That’s right. Greg McKinley – Dougherty & Company: Okay.

And what happens is that offset ends up down in the SG&A line, because then we pay a sales commission... Greg McKinley – Dougherty & Company: I got it.

To the distributor instead of them selling out of their stock, where we sell in at a low price and then they sell at the full. Greg McKinley – Dougherty & Company: Yeah. Okay. That makes sense. Now, you talked about you had 15% increase in law enforcement revenues year-over-year, and your Q4 North American law enforcement market pipeline is quite strong. And this is now the third quarter in a row I guess where we’ve seen some generally positive traction in that market. Does that just mean your customers are sort of slowly coming out of what might be sort of a four or five-year perfect storm in terms of pressures on their budgets or how would you categorize any changes in the ability of your customers to spend some money?

I think it’s – the budget climate remains tough. It’s certainly, I think, it’s better than it was a few years ago, but it’s still a tough environment. I think what our sales team is focused, Jeff Kukowski and his team, is really focused on being a funded priority. Even though municipalities are spending less in capital equipment than they were in the heyday, that number is not zero. So we just need to make sure that we’re a funded priority. And if we’re a funded priority, we think we’ll – those are deals we’ll continue to get even in a tough climate. We just need to make sure we’re showing enough value in our product offering to just be high in that list of priorities. And we believe that maybe at the heyday, the top 10 items got funded, and now it’s the top three. We just need to be in that top two or three priorities, then we think we can have success there. Greg McKinley – Dougherty & Company: Okay. And then on – just two last questions. The ECD gross margins, again, remained quite healthy 64%. Is that a good – represent a good base line for us to think about that business going forward?

I think that’s – we feel very happy with that. Again, a mix of all this have an impact on that. Again, we saw those higher average selling prices this quarter because of the drop shipment. So, you’ll see there is the ability you’ll have some mix. So as you model the business, you have to just be cognizant of that’s the amount of direct business; either we take ourselves or we drop-ship and then pay a distributor a sales commission. That will definitely increase the gross margins, and then you’ll see that offset somewhere else. Greg McKinley – Dougherty & Company: So you saw that drop-ship in essence offset the higher mix we would have seen from cartridges from a margin standpoint?

That’s right. That’s exactly right. Because normally if we had sort of the normal complement of direct deals, we would have seen that margin maybe at a 62% range instead. Greg McKinley – Dougherty & Company: Yeah. What – how big of a mix was drop-ship versus where it historically has been?

It’s definitely higher. We had, like I said, we had almost $300,000 of variable selling expenses. So, that would say that several million dollars more of direct business this quarter versus the prior quarters. Greg McKinley – Dougherty & Company: Okay.

So it was a pretty big swing. It’d be about 10% more sales direct versus what we had maybe in the second quarter as far as direct business. Greg McKinley – Dougherty & Company: Okay. And so direct overall is roughly?

About a third. Greg McKinley – Dougherty & Company: A third, okay. And so that was up from, call it, 20% and went to the 30%.

Well, actually it’s normally about a third. So it probably went from about a third to about 40%. Greg McKinley – Dougherty & Company: Okay, okay. And then finally, Rick, you had mentioned that TAP program, and I got a little bit sidetracked and I wasn’t quite sure what that was referring to.

Yeah. So the TAP program is, let’s say you buy a TASER today for round numbers for $1,000. You can go – you could either buy an extended warranty which is basically around $300. It’s no-questions-asked five-year warranty, or we can put you on this new TASER Assurance Plan. And what you do there is you pay – it’s included for the first year if you sign up for it. There’s no additional payment upfront. Then, at year one, you pay $195 and you get on that and basically every year it’s $195. Greg McKinley – Dougherty & Company: Okay.

What we do with that is we include the no-questions-asked warranty; we give you some on-site spares. So if you ever have a unit go down, instead of waiting, having an officer without a TASER, while it’s being shipped back for repair or replacement, you can pull one from your spare parts inventory to keep your operators live. That’s been a really well-received benefit from the people we’re talking to. Greg McKinley – Dougherty & Company: Okay.

And then at the end of the year five, we replace that unit with a like unit, a brand-new unit every five years. Basically the way to think about it, you get the – for a $1,000 that you’re paying almost like a pre-paid basis, we bundle in warranty... Greg McKinley – Dougherty & Company: Yeah.

And other value-added services. So we can position it as fundamentally they get about a 33% discount over what they would get if they bought all the components separately. But by getting us on this cadence, they basically have free warranty and services and they pay to that unit. And as soon as they’ve paid up the next unit, we’ll swap out their whole fleet. Greg McKinley – Dougherty & Company: Okay. Is it just to get to that sort of a recurring budget line item and you’re no longer dealing with one-off purchase authorizations, you make it more part of the annual expense structure?

Yes. Greg McKinley – Dougherty & Company: Yeah.

Absolutely. That’s what we heard from our customers. They don’t like spending their political capital... Greg McKinley – Dougherty & Company: Yeah.

To go back and make special requests. It’s kind of a pain for them to do that, where they prefer putting it on operating budget, autopilot, so to speak. Once they’ve accepted the TASER’s capability, they’re going to need – it’s an interesting dynamic. New agencies tend to wanted to sort of buy new capabilities and test them out using like drug asset forfeiture funds, et cetera, sort of one-time money. Once they’re convinced they need it, then it’s going to be an ongoing part of the operation. The feedback we’ve gotten is they prefer to just put this in their operating budget, so it doesn’t become something they have to deal with on a sporadic basis. Greg McKinley – Dougherty & Company: Yeah, okay. All right. Thank you, guys.

Thanks Greg.

Thank you.

Thank you for your question. I would now like to turn the call over to Rick Smith for the closing remarks.

Okay. Well, like many of you, I was watching the stock this morning and I think we all had a light heart, feeling good. Again, I know there’s been some pain to get here, both operationally for the company and for our shareholders; it’s been a hard road. We’ve been investing significantly. We appreciate the patience. You’ve stuck with us. We’re seeing some of those rewards now. And you can rest assured that our investment management team here remain very focused on continuing to run a profitable business, generating strong operating results and leveraging the investment we’ve made in some of these new business segments to start bringing them to the same state of being that we’ve achieved with our core ECD business, which is solid growth, strong profit, lots of cash generation. So, look forward to talking to you all after the first year. Have a great holiday season and thank you one more time for being a shareholder in TASER.

Thank you for participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.