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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