Xplore Technologies ( Nasdaq - XPLR ) -- Gets Tough

Xplore Technologies (XPLR $6.00) is a leading provider of rugged tablet computers used in industrial, commercial, and military applications.  The company's systems are used in challenging environments that conventional tablets are unable to withstand.  Many customers employ them in less hostile conditions.  Rugged units are less likely to break down.  Xplore got its start in the high end of the market.  The company recently expanded its product line with less expensive units, as well.  The first of its next generation systems was introduced in the December quarter.  That was an Android machine.  A new low cost Windows system is slated for introduction this month.  Demand for Xplore's high end (Windows) systems remains robust, providing a sound foundation for the company to build on.  As the new systems gain adoption results promise to accelerate.

Financial performance was impacted by two external events over the last year.  Xplore had a major supply agreement with ATT that was starting to take off when the telecom failed in its attempt to acquire T-Mobile.  A $4.0 billion break-up fee caused it to postpone a number of capital investments, including its deal with Xplore.  That relationship is expected to resume in late 2014.  Xplore also had cultivated a third party distribution arrangement with Dell Computer.  The computer maker planned to purchase rugged tablets and sell them under its own name.  That relationship was squelched when Dell went private.  Despite the setbacks Xplore continued to spend aggressively on product development and marketing.  A substantial contract for its Android system was signed with a different telecom provider.  Penetration of the military market gained momentum with the company's high end technology.  And more than a dozen high potential trials were initiated for its Android line, spanning several industries.  Xplore additionally expanded third party sales relationships both in North America (vertical markets) and internationally.

Introduction of the low cost Windows system could drive sales substantially higher.  Most companies still rely on Windows to run their information technology systems.  A minority are willing to integrate Android units with their central Windows operation.  Those are customers Xplore currently is conducting field trials with.  But most organizations prefer a full Windows coordination.  Xplore's upcoming low cost Windows tablet is slated for release this month.  Volume production will be achieved by the summer.  Prospective customers likely will test the machines in field trials that could last 3-12 months.  A decent off the shelf business could materialize right away.  As the core high end business is leveraged by the two new lines financial results could surge over the next 2-3 years.

We estimate income will rise 400% next fiscal year to $.25 a share on sales of $45 million (+29%).  A stronger showing is possible.  Organic growth could improve in subsequent years.  Margins promise to expand, also, as volume builds.  A third party relationship similar to the Dell plan could emerge, providing further ammunition.  Hewlett Packard represents a likely target.  In 2-3 years sales could achieve $80-$100 million to yield fully taxed earnings of $.75-$1.05 a share.  The high end of the range assumes the sale of 2.0 million additional shares to finance growth.  Applying a P/E multiple of 20x to the midpoint suggests a target price of $18 a share, potential appreciation of 200% from the current quote.

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