Friday, March 22, 2013

Xplore Technologies ( Nasdaq - XPLR ) -- Rugged Tablets

Xplore Technologies (XPLR $3.60) is a leading manufacturer of rugged tablet computers.  The company has been in business since the 1990s.  Success was limited until Apple Computer invented the iPad, which made tablet computers popular.  Xplore makes rugged tablets which compete with rugged laptop computers.  The leading producer of rugged laptops is Panasonic, maker of the ubiquitous Toughbook.  Sales are directed primarily to corporate, government, and military customers that use the computers in the field.  Xplore's current line can withstand drops onto a concrete floor from 6-10 feet.  They also can keep working despite being submerged in water for up to half an hour.  Panasonic has attempted to develop a rugged laptop of its own.  Those efforts, two years old now, have yet to bear fruit.  Other competitors exist.  Xplore has the greatest experience with the technology and replicating that know-how is proving to be difficult.

New products are in the pipeline.  Xplore designs its systems to accommodate a variety of options, depending on customer requirements.  Stripped down versions cost $4,000 compared to $5,500 for a rugged laptop computer.  Most systems include add-ons which lift average pricing to the $4,500-$5,000 range.  The current technology runs on the Windows operating system.  A new lower cost line will be unveiled in April.  Volume production is scheduled for the summer.  The new unit will survive drops from 3-4 feet and last for a minute or two underwater.  It also will cost $1,500.  Googles's zero royalty Android operating system will be included, helping to keep the cost down.

A second new product is slated for early calendar 2014.  That unit will be Windows based, which will facilitate sales to organizations that use Windows exclusively.  Current plans include a somewhat more rugged design and a $2,500 price tag.  But if the low cost line rolling out this summer creates an industry standard the next system might replicate that from a hardware perspective, and just run on Windows instead.

December quarter performance was a negative surprise.  Xplore sold 2 million shares during the period at $5.00 a share to raise capital in support of its growth initiatives.  During the roadshow the underwriter told investors its estimate for Q3 (Dec.) sales was $9.2 million.  The actual figure came in at $5.9 million.  That didn't bother us.  We bought the stock after the deal.  The shortfall did raise concern among investors, though, driving the stock price substantially lower.

March quarter performance is likely to improve sequentially.  Xplore's largest customer, ATT, scaled back orders in Q3 after a court ruling forced it to pay a $4 billion break-up fee when its proposed acquisition of T-Mobile was thwarted by the Obama Administration.  That caused ATT's operating budgets to decline across the board.  ATT remains happy with the product and is likely to resume purchases later in 2013.  But Xplore will continue to suffer in the meantime from that spending freeze.  Even so, the company recently landed a big military order.  By itself that deal could produce Q4 (March) revenues of $4-$5 million.  The oil and gas industry is getting more involved with the technology, too.  Other telecom companies are testing the systems, moreover, now that ATT has proven the benefits.  And Xplore has developed a growing third party distribution system to reach a widening number of additional niche applications.

We estimate fully year (March) sales will reach $31-$33 million to provide fully taxed income of $.15-$.20 a share.  Next year $50-$60 million and $.30-$.60 a share represent realistic targets.  In 2-3 years sales could attain $100 million to support fully taxed earnings of  $1.00 a share.  That assumes the sale of an additional 2 million shares to support growth.  Applying a P/E Multiple of 15x suggests a target price of $15 a share, potential appreciation of 315% from the current quote.  Limits are advised when placing orders.

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Wednesday, March 20, 2013

Ansys ( Nasdaq - ANSS ) -- War Chest Expands

Ansys (ANSS $80.00) reported excellent on target Q4 results.  Performance was affected by the slowing worldwide economy.  The company is the leading provider of engineering simulation software used in a wide range of industries and applications.  Poor conditions In Europe constrained results.  Sales climbed 15% to $808 million for the year.  In the quarter they rose 11%.  Earnings advanced 15% to $2.91 a share for all of 2012.  In the December period they improved 16% to $.79 a share.  Part of the favorable comparison resulted from share repurchases.  Cash increased $105 million during the year despite the buybacks.  Ansys also paid off $75 million in debt, leaving just $53 million to go.  Pretax margins remained around the 50% level. 

Organic growth is likely to remain below average in 2013.  But the build up in cash could lay the groundwork for another acquisition.  The company has a proven record of identifying key technologies and folding them in to its industry dominant platform.  Per share income could be amplified by further buybacks, as well.  The long term outlook remains positive.  Engineering simulation remains in an early stage of development.  Today's technology is likely to demonstrate incremental improvement over the next few years.  But it promises to reach a wider audience as hardware costs come down and emerging market customers make greater use of it.  The mathematics are likely to take several leaps forward before the industry achieves a long term plateau.  Presented with little direct competition, Ansys should capitalize on those breakthroughs and keep income rising at a fast pace well into the future.

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Tuesday, March 19, 2013

Cyanotech ( Nasdaq - CYAN ) -- Demand Accelerates

Cyanotech (CYAN $4.70) appears on track to produce reasonably good Q4 (March) results.  The company is the leading producer of algae used in natural supplements used by high endurance athletes and other health conscious consumers.  Over the years Cyanotech was scientifically focused.  Resources were devoted to enhancing quality and production.  Marketing was given short shrift.  Until the current management arrived on the scene most output was sold in bulk quantities to other nutrition companies that combined it with additional ingredients, and resold it at a big mark-up.  The new management team took the scientific side of the business and put their efforts into developing Cyanotech's own direct sales channels.  That project is working.  The company's branded products have gained the leading market share in the independent health store channel.  That percentage is over 33% and it's continuing to rise.  New products are being developed to expand that penetration.  New brand names are in the works to allow the company to move into the high volume chain store segment without disrupting the specialty business.

Last year the scientists let the company down.  Production snafus curtailed production.  That in turn affected margins.  And it all took place at a time when marketing costs were accelerating.  That was a dangerous combination that sliced the stock price in half.  The damage was contained because a rising percentage of sales were shifting from low margin bulk customers to higher priced retail channels.  The retail initiative remains in an early stage of development, though.  Only 33% of the company's physical output is sold at those higher prices currently.  The rest is still sold to bulk customers.  But the future was uncertain because of the production problems.  They had to be resolved before Cyanotech could put the pedal to the metal on the marketing front.

It looks like the setback has been fixed.  Output has blossomed over the past month.  And there appears to be a logical explanation for the problem, and the solution.  Fourth quarter performance will be impacted by the temporary slowdown in production.  It takes several months to turn around an algae crop.  But output promises to rise in upcoming months as the changes are implemented and more sunshine lifts output further. 

The long term outlook remains bright.  Cyanotech has two products with leading market shares in high growth segments.  The natural products industry continues to expand overall.  The areas targeted by the company are growing 10%-20% a year.  And pricing to the retail channel brings Cyanotech 2x-3x the revenue it garners from bulk sales.  As the 67% of output now devoted to bulk converts to retail pricing both revenue and margins promise to expand.  Production capacity might be expanded, as well. 

We estimate sales will improve 10%-20% in the coming fiscal year to $30-$33 million.  Demand already is outstripping supply.  Cyanotech's high octane marketing program is poised to deliver further impetus.  Production probably will be the limiting factor.  That's a complete reversal from past years.  Our single point estimate assumes some lingering effects.  Earnings should climb nonetheless on the strength of expanding gross margins.  Overhead costs are likely to be constrained, moreover, until the rebound in output demonstrates greater certainty.  Income could reach $.50 a share.  In 2-3 years sales could attain $50 million to provide income of $.75 a share.  That figure assumes the sale of an additional 2 million shares to support growth.

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