Good day, ladies and gentlemen, and welcome to the Quarter Three 2013 TASER International, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to be given at that time. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Rick Smith, Chief Executive Officer of TASER International. Sir, you may begin.

Thank you and good morning to everyone. Welcome to our third quarter 2013 earnings conference call. Of course before we get started, I am going to turn the call over to Dan Behrendt, our Chief Financial Officer, to read the Safe Harbor statement.

Thank you. Statements made on today's call will include forward-looking statements including statements regarding our expectations, beliefs, intentions, and strategies regarding the future, including statements around projected spending. We intend that such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based upon current information and expectations regarding TASER International, Incorporated. These estimates and statements speak only as to the date in which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to the risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2012, under the caption Risk Factors. You may find both of these filings as well as our other SEC filings on our website at www.taser.com. And with that, I'll turn it back over to Rick Smith, our CEO.

Thanks, Dan. As a reminder we are going to be accepting some questions via twitter during the Q&A portion of the call, and you can submit those using the hash tag #TASR_EARNINGS. To follow our updates on Twitter during the call follow the account at TASR -- I'm sorry, @TASER_IR. So again our accounts to follow would be @ sign @TASER_IR. We will be posting graphics and commentary during the call. And for those you without Twitter all updates and graphics will stream directly to our Investor Relations website at investor.taser.com. I'm so excited to share with you, with our investors the results of our hard work and many exciting new announcements from the past three months on today's call. First off, we hit a historical record in our revenues this quarter recognizing $35.2 million on a consolidated basis. This marks the seventh consecutive quarter of year-over-year top-line double-digit growth. I'm truly proud of our team and I think that we continue to be positioned for strong growth moving forward due to the continued upgrade cycle and the exciting momentum in the EVIDENCE.com and Video segment. Specifically, our TASER Weapons business delivered revenues were up 16.8% to $31.6 million year-over-year. In our EVIDENCE.com and Video segments, the revenues there grew a 111.5% to $3.6 million compared to last year's third quarter. Our international business made up approximately 11% sales in the quarter. Asides from the phenomenal top-line growth, we've been very busy launching several new initiatives that we previously announced. These initiatives were all very customer focused and in an effort to continue to grow the EVIDENCE.com and Video business. We're hearing immensely positive feedback from customers who fit these market segments. Perhaps even more impressive is that we were reentered into several bid processes that we've previously been shut…

Thank you. So in the third quarter consolidated sales were $35.2 million or 22.3% increase from the third quarter of 2012. The increase was primarily driven by the continuation of the upgrade cycle with agencies upgrade to the new X26P and X2 Smart Weapons, combined this contributed $13.2 million in the third quarter. TASER CAM also had a strong quarter growing $1 million over the same period last year and the AXON cameras and EVIDENCE.com sales also grew by $0.8 million to $1.7 million in third quarter of 2013. Sales of our cartridges declined $1.5 million in the third quarter resulting in some sales promotion this year versus last year, and our X26, the legacy X26 unit declined approximately $0.2 million in the third quarter representing agencies moving to the Smart Weapon platform versus the legacy products. We still have some international and federal customers that continue to buy the legacy X26 product because it's the only conducted electrical weapon that they have proved in their market or application. But we're working with these customers to get them on the new Smart Weapon platform by having them review and approve the new weapons for their purchases. As of September 30, 2013, we have upgraded approximately 14% of our installed base of units over five years old and we clearly -- we still have a large opportunity in front of us with roughly $400 million of future upgrades still to be gone after from the company's perspective. Gross margin for the third quarter was $22.1 million or 62.8% of revenue, which is up from $16.8 million or 58.4% in the prior year. As sales have increased, we've also continued to benefit from higher operating leverage from our fixed manufacturing costs, and also due to price increases that we put in place…

(Operator Instructions) Our first question comes from the line of Steve Dyer of Craig Hallum Capital. Your line is open. Please go ahead.

I'm just wondering if we could dig into the Video business a little bit. It certainly seems to have kind of blossomed here a lot quicker than anybody expected. Could you give us a little bit of the lay of the land just in terms of your competitive position, how do you sort of see yourself, have you lost any particularly meaningful deals? And if so why would you lose that sort of thing? I think it’s - investors are now sort to a point of believing and now it's just a question of how much of that can you capture.

Yes, well, this is Rick. So the first thing I would tell you is actually the long-term view of this is it's really not a Video business. It's a cloud services business that's being driven with our first major application being on-officer video. So I would say where we -- this past quarter we actually picked up a lot of deals that we were at risk of losing previously and the major thing there was there is just a segment of the market that wants an inexpensive camera, very price sensitive or they just -- they want something to just clip on their uniform and go they don't want to have to run a wire somewhere or wear a camera up on their glasses. It's also quite interesting actually that by introducing the body camera we're able to pull several deals back but actually one of them, a fairly good size one had already gone to bid and specified a competing camera in the bid. And that bid was then kind of pulled back and reworked once they knew that there was now our camera in the market that had the same advantages frankly at a much lower price and would give them the ability to integrate with our back end over the long-term. But the other thing very interesting is of the agencies that wanted - that were looking at the AXON flex previously the vast majority of them stayed with the flex with the perspective view. And so it seems like once the customer understands the advantages of the officer perspective they stick with it. It seems more like agencies that are sort of newer to the concept of video that are likely to be more sensitive around cost or convenience, and then a little less performance sensitive.…

You mentioned the stickiness of the business. What can you give us in terms of metrics now, it's been period of times since some of the early adapters have been on the network. Any metrics you can share with us as to the stickiness of it?

This is Dan. I think it's probably similar to the sort of our comments last quarter. I think we're satisfied with renewals we're seeing. Customers that are heavy users of the system are renewing in rates that we're satisfied with. The tough thing is a lot of the sales that we've made over the last year are sort of pay trials. Some of those customers have bought just a handful of units and they may not be ready to deploy video. So I don't want to overly read into just the renewal rates an agency level so we’re trying to develop the right metrics that just sort of share with the market. It's also pretty early, this - I think, as we get into -- into next year I think it's probably more appropriate for us to share [inaudible] we’ll have a little bit more data, but we're satisfied with where we sit today. The people who are utilizing the system regularly are renewing. I think they see the value. I think people that bought a couple of cameras and really aren't utilizing the system much, are probably less likely to renew, but they just may not be quite ready to move to video, but I think we're seeing even some of those customers come back into the fold just due to the momentum and the video market in general.

I'm wondering if you can draw on any parallels with the video business with your early ECD business, which was obviously a pretty controversial idea at the time and then it sort of started to hit a tipping point, any parallels you can draw that can help us sort to see how this plays out.

This is a very insightful question. We're actually talking in the booth at IACP this year it was very reminiscent of the 2002 IACP, which was the year that TASER, the weapons business hit the tipping point. Prior to that, early on there was a lot of skepticism about, we can't use electricity to incapacitate people and these weapons are controversial, not sure this is for us and then 2002 was when I remember just stay in the booth talking with people, it went from sort of explaining why they should even consider TASER devices to all of a sudden every conversation was about, oh yeah we're doing this, we're planning on this, it’s coming next year, we felt a very similar sentiment shift around both on-officer video and cloud which by several years we've been proselytizing it in the booth basically talking to skeptics, talking them through their concerns. Last year, having an agency come up and say they were considering buying a couple of hundred cameras, would have been something that was very noteworthy, we would have been, everybody in the booth would have been talking about that one customer at the end of the day. This year we had probably dozens of conversations with agencies talking about hundreds of cameras within the next year. So obviously there's still a lot of work to be done and I would caution that with big order like Albuquerque made the big difference last quarter so I don't know that we're going to see a smooth and continuous upward sloping adoption curve, there is probably going to be fits and starts along the way. But I think we've now passed –we’re now past the point of no return that on-officer video has been accepted, it's coming. There is very few people that are saying it's not coming. I think the way we look at it now is this who is going to win, what business model will prevail and how fast does this going to happen that's why as we talked about our strategy, it is about accelerating both the market and accelerating our market share.

And last question, I'll hop back in the queue. Some of the other cloud services, I think it would be helpful if you could kind of paint a picture of what those may look like? Police department I think aren't often thought of as cutting edge technologically. So help us kind of think over without giving away too much competitive information, how we should think about other offerings there and how that might look in a couple of years?

Well, your average police department in the United States has about 50 officers. They may or may not have an IT department. They are maybe subject to working with an IT department, it's over the reports within City somewhere else but there is very little direct relationship or control between the agency and their IT department. What we've generally seen is the systems that our customers are deploying tend to be fairly outdated in terms of the user experience, in terms of the efficiency, I was at a conference in at the IACP where Chief Tom Streicher from Cincinnati talked about a program that based on over $10 million deploying a digital record management system in Cincinnati that ended up being 15 years approximately late in its deployment. They have spent well over their budget, they are -- well between $10 million and $20 million before the thing ever went live and the days went live, there assessment was that the technology was already at least a decade out of date. We hear stories like that all the time. So our customers give you a number of different things. There is electronic ticketing system, there is automated license plate reader systems, there is record management systems with their tax based records, there is jail intake systems, there is booking photos, interview rules, in-car video systems the associated backends, which we're already going after with EVIDENCE.com. There is Computer-Aided Dispatch Systems where you got to be able to locate the vehicles massive to the calls that are coming in. So there is a lot of different systems that our customers buy and we believe that there will be enormous opportunities and we're looking at this from a buy, build or partner perspective that in some cases it's going to make sense…

Thank you. Our next question comes from the line of Paul Coster of JPMorgan. Your line is open. Please go ahead.

Good morning. This is Mark Strauss on for Paul Coster, congratulations on the quarter.

Thanks, Mark.

So obviously the investments on the EVIDENCE.com side are starting to bear fruit. I just want to go so earlier this year when you're talking about the -- I think it was a 10% OpEx improvement or increase. You kind of broke that down into different buckets. I think there was telesales and building out the international footprint of it. Can you just give an update as far as the payoff on some of those investments and how we should think about that spend going forward or is there a reason to invest more in those areas or should we think about or you kind of pulling back on some of those things in favor of the increased EVIDENCE.com spend?

Yes, Mark this is Dan. Yes, absolutely we're seeing, certain investments we're definitely seeing an immediate return for. I think telesales is one of those areas where those are sell funding positions. We continue to see our telesales each quarter increase and we have a disappointed diminishing returns at this point. So we've added significant of those resources and paying off. Some of the other things we're investing in have longer terms payoffs. Things like the investment in international, we're definitely making those investments as we indicated. We haven't seen that translate into sales yet. But we knew going in it's probably 18 months to 24 months cycle before those investments start paying off. So we'll continue to make those investments -- just the investments we're making on customer facing roles in the video segment, things like account management as well as additional outside sales resources as well as implementation services. Those are investments we've made, and in fact we're accelerating some of those investments. As Rick said, we basically doubled our outside sales headcount for the video segment and we'll continue to make those investments to grow that business. As Rick said, its bit of a land grab right now we want to make sure that we don't under resource our investments, especially those customer taking roles. We want to make sure we're in front of every customers that's got an interest in purchasing video products or digital EVIDENCE management solutions and we want to make sure that our ability to win or lose, we don't want that to be dependent on -- under resourcing that. So yes, we do expect we will continue to increase our investments in those areas. I stated the one thing that it's been higher than may be originally planned some of the cost around litigation. But as we indicated, I think we're going to sort of stay at these high levels for a few more quarters and then we expect those to tail off. And some of it it's just due to the timing of cases. It's tough to predict exactly when cases are going to come to trail and when the -- there is just a lot of workflow around that. So I think so far we're satisfied with our ROI and those incremental investments. And I think we will continue to increase them over time to make sure that we can grow that video business as quickly as possible.

And then lastly, and completely understand and agree with the investment on the EVIDENCE.com side but just for simple modeling purposes, is there a certain revenue run rate or a date and time that you're expecting that to sort of flip profitable on our operating margin anyway?

I think our focus right now is really to -- in growing the top-line more than just sort of the near-term profitability. One of the great things about -- sort of a cloud business is that recurring revenue stream so that -- for us, the focus is to get as many people on that system right now and the profitability will come with scale but we don't want to run it for the sort of the near term profit, it's really more of a long-term play at this point.

Thank you. Our next question comes from the line of Peter Mahon of Dougherty. Your line is open. Please go ahead.

Just want to touch on a topic that we really haven't hit on yet and that is the core handle business. That definitely outperformed our expectations. Can you attribute that to a larger volume of smaller sales or have you seen healthy stream of kind of those mid-to-large scale orders?

This is Dan again. I think we're seeing across all segments -- strata of the market. We're seeing the sort of the small agencies; they are served by power efficacies to grow. I think that's has been a underserved part of the market. So I think that is -- certainly help to grow the sales to sort of that part of market better than what they're served before through us or through distribution. The large agencies, you've a deal like Houston this quarter for 2200 units, that's a big order for us. And I think the fact they went to City Counsel and requested to upgrade their entire install base over the next several years, with that first purchase being made this quarter. I think it's just indicative of the fact that I think agencies understand the need to upgrade to the new platform. And I think it's -- we certainly it's a big opportunity there, but we're really seeing it across all segments of the market and that upgrade remains a big opportunity. I think now the other thing is we're continuing to see further penetration to market as well where we've agencies that may be didn't have TASERS before or only had a small part of their police force carrying the TASERS are now carrying either buying for the first time or more going to full deployment from partial deployment. So I think we can still have wide space in North America as well even though there national businesses was just supporting this quarter that remains to be an opportunity that's 10 times bigger than U.S. market so it's one we can continue to invest to grow.

I'd add one other thing to that. Just as getting into booth at IACP talking to Chiefs the one other dynamics that's happening is the financial environment is improving and I talked to lot of chiefs who basically said, we spent quite three or four years going through cut after cut after cut and they're now coming out of that and they're saying our patrol cars are worn out -- basically, they are coming into a situation where they realize they're going to have to upgrade a lot of their capital equipment to include TASERs. So I think this market tends to lag as much of the economy. And so while things have recovered the last couple of years I think they're finally starting to come out and we're seeing just some strength there that they're able, they've got the budget availability now to going to upgrade some -- those units that are getting older. So hopefully that will continue and may be even accelerate into next year.

Sure. And what were telesales in the quarter?

Yes, I haven't disclosed but it was over 10% of our sales again this quarter.

And then, Dan, I know you talked about a couple of items that impacted taxes on the quarter. Would you mind relisting those and may be quantifying how much of an impact those did have?

Yeah, the two main items were the return provision. We estimate our taxes each year, and then when you follow return, the return can differ from the estimate. We actually had a $425,000 benefit this quarter where our actual tax return had lower taxes than we'd accrued for in the result last year. Putting the domestic production activities deduction, which is a mouthful - by starting to take that that's going to lower effective tax rate roughly by 1%. So because we just put that in place or sort of a year to-date catch up that's worth about $200,000 in the quarter. And then the last thing is with disqualifying dispositions of incentive stock options, the company can deduct incentive stock option expense for tax purposes until the employee had taxable income. So unlike non-bond like stock options, which we deduct over the service period incentive stock options you don’t deduct the expense around that until deploy actually has a disqualifying disposition and paid taxes. So we had some tax relief from that this quarter as well.

Okay, now let's go and take a question that came in from Twitter. The question was how much of a threat does Google Glass pose in the short term and long term future to take this AXON Flex and the body cameras? It's a great question. I have got a Google Glass, we're early explorers, it is a great product, I really enjoy it and we see really our strategy is to enable these consumer devices to be deployed by law enforcement through our fine infrastructure. So Google Glass will be a great option for customers down the road. I would say that I have shown Glass to a number of law enforcement officers. The current iteration of Glass is probably not going to really fit the needs of patrol police officers for a couple of reasons. Probably the biggest one is officers really are very particular about keeping their visual fields distraction free. If they are going into an environment they want to keep their peripheral vision they want to keep their hearing free on both sides and really be able to focus on the threat environment around them. And as again Google Glass is a fantastic product, but having the screen in your visual field can be quite distracting and the vast majority of officers I showed it to said for patrol use or for detective use they would not wear that while doing a sizable job. They would prefer to have a camera that unobtrusive that it does not really come into their visual fields, Frank. They do not want to think about the camera or their computer screens when they are actually in an incident. I would say we are also keeping an eye on what's happening in the smart watch space, the wearable computing. Based on early customer feedback we take that for alerting purposes something on the rest is probably more amendable to law enforcement use case that way they can choose to look at it or not with the vibration type of alert, but not have things popping up in their visual field that could be distracting at critical moments. So we remain excited to see what happens in the consumers space and again actually part of the EVIDENCE.com plan is to enable our customers to use these great consumer technologies seen what they're having to buy and build a bunch of IT infrastructure on site. We look forward to updating on our fourth quarter progress on our next call in February. And for those if you are interested, I will be appearing on CNBC's Fast Money tonight at 05:30 pm Eastern. So tune in and I will get to chance to talk to more about the great things happening with TASER and EVIDENCE.com. So everyone have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may now disconnect. Have a great rest of your day.