Business Overview and History

XPEL, Inc. (NASDAQ:XPEL) is a global leader in the manufacturing and distribution of protective films and coatings, primarily serving the automotive aftermarket, new car dealerships, and original equipment manufacturers (OEMs). Over the past two decades, the company has successfully navigated the evolving automotive landscape, cementing its position as a premier provider of innovative protective solutions.

Incorporated in 2003 and headquartered in San Antonio, Texas, XPEL began its journey as a software company designing vehicle patterns used to produce cut-to-fit protective film for headlights and painted surfaces of automobiles. In 2007, the company expanded its operations by starting to sell automotive paint protection film products to complement its software business. As paint protection film technology improved and became more durable, awareness and adoption in the market continued to increase, driving significant industry growth over the last several years.

XPEL's initial strategy focused on serving and growing its network of independent installers in the U.S. and Canada, while also selling products internationally through independent distributors. The company's best-in-class service strategy was later extended to new car dealerships and OEMs. Internationally, XPEL's initial market entry was primarily through indirect distribution, with the ultimate goal of selling directly to the majority of the top twenty-five car markets in the world.

The company's growth was initially driven by luxury car enthusiasts in the United States and Canada, served by a growing automotive aftermarket of independent installers. As awareness and adoption increased in these markets, international demand began to build. In recent years, new car dealerships and OEMs have shown increased interest in XPEL's products due to their exposure to the aftermarket installer network.

Today, XPEL's primary product lines include surface and paint protection films, automotive window films, windshield protection films, and architectural window films. The company also offers a range of ancillary products, such as ceramic coatings, tools, and accessories. In addition to its product offerings, XPEL provides installation services, training, and software solutions to support its customers' needs.

Financial Performance and Ratios

XPEL has demonstrated strong financial performance in recent years, with revenue growing from $259.26 million in 2021 to $420.40 million in 2024, representing a compound annual growth rate (CAGR) of 22.0%. Over the same period, the company's net income increased from $31.57 million to $45.49 million, a CAGR of 13.3%.

The company's financial ratios reflect its financial health and growth trajectory. As of December 31, 2024, XPEL had a current ratio of 4.05, indicating a strong ability to meet its short-term obligations. The company's debt-to-equity ratio stood at 0.09, suggesting a conservative capital structure. Additionally, XPEL's return on equity (ROE) was 21.86% in 2024, showcasing its ability to effectively utilize its shareholders' capital.

For the fiscal year 2024, XPEL reported the following results:

• Revenue: $420.40 million
• Net Income: $45.49 million
• Operating Cash Flow: $47.82 million
• Free Cash Flow: $39.23 million

In the most recent quarter (Q4 2024), the company's performance was as follows:

• Revenue: $107.52 million
• Net Income: $8.90 million
• Operating Cash Flow: $6.30 million
• Year-over-year growth in revenue: 1.9%

It's worth noting that excluding the impact from China, total revenue grew 10.5% in Q4 2024. The sequential decline in revenue from Q3 to Q4 was attributed to the seasonality of the window film product line.

Liquidity

XPEL's strong financial position is further evidenced by its liquidity. The company ended 2024 with a debt-free balance sheet, demonstrating its ability to manage its operations and growth without relying on significant external financing. This financial flexibility allows XPEL to pursue strategic initiatives and navigate market challenges from a position of strength.

As of December 31, 2024, XPEL reported:

• Cash & Cash Equivalents: $22.09 million
• Available Credit: $128.10 million
• The company has a $125 million revolving credit facility, which was undrawn as of December 31, 2024.
• Current Ratio: 4.05
• Quick Ratio: 1.38

Product Segments and Geographic Performance

XPEL operates through two main product segments: Product Revenue and Service Revenue.

Product Revenue Segment: 1. Paint Protection Film: This is XPEL's flagship product, representing approximately 54% of total consolidated revenue in 2024. However, this product line saw a 1.4% decrease in revenue in 2024 compared to 2023, primarily due to a decline in sales in China as the distributor sold through excess inventory.

2. Window Film: Including both automotive and architectural films, this segment grew 14.3% in 2024 and represented 18.5% of total revenue. The automotive window film portion grew 12.5% to $65.8 million, driven by increased product adoption and demand in multiple regions. Architectural window film grew 9.4% to $10.4 million.

3. Other Products: This category, which includes items like ceramic coating, plotters, chemicals, and installation tools/accessories, grew 6.6% to $14.5 million and made up 3.4% of total revenue.

Service Revenue Segment: This segment consists of revenue from the company's software platform, cutbank credits, installation labor, and training/other services. Software revenue grew 23.7% as more customers subscribed to the platform. Cutbank credit revenue decreased 3.5%. Installation labor revenue increased 27.4% due to strong demand. Training and other service revenue grew 11.9%. In total, Service Revenue made up 24.2% of XPEL's consolidated revenue in 2024.

Geographic Performance:

XPEL generates revenue across multiple geographic markets, with the majority coming from the United States and Canada. In 2024, the breakdown was:

• United States: $240.57 million (57.2% of total revenue, growing 7% year-over-year)
• Canada: $52.14 million (12.4% of total revenue, growing 19.8% year-over-year)
• China: $24.15 million (5.7% of total revenue, declining 41.9% year-over-year)
• Other international markets: $103.54 million (24.7% of total revenue)

Other regions like Continental Europe, Middle East/Africa, the UK, Asia Pacific, and Latin America saw growth ranging from 8.7% to 40.9%.

Recent Developments and Outlook

In 2024, XPEL continued to execute on its strategic initiatives, including the acquisition of several distributors in key international markets, such as Japan, Thailand, and India. These acquisitions have allowed the company to enhance its global reach and further integrate its operations, positioning it for accelerated revenue growth in these regions.

The company also made progress in its efforts to expand its presence in the new car dealership and OEM channels. XPEL has been actively collaborating with Rivian, a leading electric vehicle manufacturer, to offer a customized program that allows Rivian owners to directly order and install XPEL's protective films and coatings.

Looking ahead, XPEL's management has identified the further development of its services business, particularly in the new car dealership space, as a key priority for 2025 and beyond. The company believes that a larger presence in this segment can drive growth opportunities for its existing products and enable the introduction of additional products and services.

For 2025, XPEL's outlook is described as "mixed and more uncertain than normal":

• Positives include improved sentiment in the aftermarket and the potential for lower regulatory burden in the US.
• Challenges include inflation and interest rates not moving as expected, the aftermarket remaining subdued, and global trade uncertainty due to tariffs and a strong US dollar.

The company's focus for 2025 is to "redouble our efforts to ensure we're always providing amazing service" to customers. XPEL plans to continue developing their services business, mainly in the new car dealership space, as a key priority for deploying capital in 2025.

Risks and Challenges

While XPEL has demonstrated impressive growth and financial performance, the company faces several risks and challenges that investors should be aware of. The highly competitive nature of the aftermarket automotive product supply business, potential disruptions in the global supply chain, and the cyclical nature of the automotive industry can all impact the company's operations and financial results.

Additionally, XPEL's international expansion and reliance on global trade expose it to currency fluctuations, trade policy changes, and geopolitical tensions, which could affect the company's cost structure and access to key markets.

In 2024, XPEL faced macro headwinds, particularly in the aftermarket, that impacted revenue growth. The company also had to navigate a sell-in, sell-through dynamic in China. Despite these challenges, XPEL was able to maintain a strong financial position, ending the year with a debt-free balance sheet.

Industry Trends

The automotive aftermarket industry, particularly the paint protection film and window tint segments, have seen consistent growth in recent years, with a compound annual growth rate of around 10-15%. However, the industry has faced some macroeconomic headwinds in 2024 that have impacted XPEL's performance. Overall, the long-term growth outlook for the industry remains positive.

Conclusion

XPEL, Inc. has established itself as a leading player in the protective films and coatings industry, leveraging its innovative products, services, and strategic partnerships to capitalize on the growing demand in the automotive aftermarket and new car dealership segments. The company's strong financial performance, conservative capital structure, and strategic initiatives position it well for continued growth and expansion. However, investors should carefully consider the risks and challenges facing the company as they evaluate the investment opportunities presented by XPEL.