XPEL Inc. is a global provider of protective films and coatings, serving a diverse range of industries and customers worldwide. The company has established itself as a market leader, offering innovative solutions that cater to the evolving needs of its clients. With a rich history spanning over two decades, XPEL has navigated the industry's landscape, adapting to changing market dynamics and emerging trends to maintain its competitive edge.
Business Overview and History XPEL was founded in 2003 and is headquartered in San Antonio, Texas. The company began as a software company, designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, XPEL expanded its business, venturing into the sale of automotive surface and paint protection film products to complement its software offerings.
In 2011, the company introduced its ULTIMATE protective film product line, which revolutionized the industry with its self-healing properties. This innovative technology allowed the film to better absorb the impacts from rocks and other road debris, providing superior protection for vehicle exteriors. The launch of the ULTIMATE product line catapulted XPEL into a period of strong revenue growth, solidifying its position as a leading provider of high-quality protective solutions.
Over the years, XPEL has continued to diversify its product portfolio, expanding into architectural window films, surface protection films, and ceramic coatings. The company's strategic focus on being closer to the end-customer has enabled it to efficiently introduce new products and deliver exceptional value, driving sustained growth.
In 2020, XPEL faced challenges due to the COVID-19 pandemic, which disrupted the automotive industry. However, the company successfully adapted by enhancing its digital capabilities and expanding its product offerings beyond automotive applications. Despite these obstacles, XPEL has continued to grow and evolve, establishing a presence in key international markets and making strategic acquisitions to enhance its distribution capabilities and product portfolio.
Financial Performance and Metrics XPEL's financial performance has been robust, with the company consistently reporting strong revenue and profitability. In the fiscal year 2023, the company generated revenue of $396.29 million, representing a year-over-year increase of 22.2%. Net income for the same period stood at $52.80 million, with a net profit margin of 13.3%.
The company's cash flow generation has also been impressive, with operating cash flow of $37.38 million and free cash flow of $29.74 million in fiscal year 2023. XPEL's balance sheet remains healthy, with a current ratio of 4.35 and a debt-to-equity ratio of 0.0014 as of September 30, 2024, indicating a strong liquidity position and prudent financial management.
Regarding the company's third quarter of 2024, XPEL reported record revenue of $112.9 million, a 9.9% increase compared to the same period in the previous year. Net income for the quarter grew 9.1% to $14.9 million, with earnings per share of $0.54. The company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) increased by 10.0% to $21.7 million, reflecting strong operational performance. Operating cash flow for Q3 2024 was $19.56 million, with free cash flow of $19.14 million.
Liquidity XPEL's liquidity position remains strong, as evidenced by its healthy balance sheet metrics. The current ratio of 4.35 and quick ratio of 1.56 indicate that the company has more than sufficient current assets to cover its short-term liabilities. Additionally, the low debt-to-equity ratio of 0.0014 suggests that XPEL maintains a conservative capital structure with minimal leverage. As of September 30, 2024, the company had $20.99 million in cash and $128.3 million in total credit facilities with no outstanding balance. This strong liquidity position provides the company with financial flexibility to pursue growth opportunities and weather potential economic downturns.
Geographical Diversification and Product Offerings XPEL's global footprint extends across North America, Europe, Asia-Pacific, and Latin America, with a presence in over 100 countries. The company's revenue is diversified across its core product categories, including paint protection film, window film, and other protective solutions.
In the third quarter of 2024, XPEL's paint protection film revenue accounted for 53.6% of total revenue, while window film revenue contributed 20.1%. The company's other product lines, such as its FUSION line, have also seen consistent growth, demonstrating the breadth and strength of XPEL's portfolio.
The majority of XPEL's revenue comes from the United States, which accounted for 57.2% of total revenue in Q3 2024, up from 57.5% in Q3 2023. Canada was the next largest market at 12.8% of revenue, up from 11.2% year-over-year. China accounted for 8.0% of revenue, down from 10.0% year-over-year due to inventory management challenges. Other key international markets include Continental Europe (8.0%), United Kingdom (3.2%), Middle East/Africa (4.7%), and Asia Pacific (3.6%).
Product Segments and Performance XPEL operates in two primary product segments: Product Revenue and Service Revenue.
Product Revenue consists of XPEL's core offerings, including paint protection film, window film, and other ancillary products. Paint protection film is the largest product category, representing 53.6% of total revenue in Q3 2024, down from 57.4% in Q3 2023. Revenue from paint protection film grew 2.7% year-over-year in Q3 2024, driven by increased demand across multiple regions, though sales into China remained lower due to distributors working through excess inventory. Window film revenue grew 20.6% in Q3 2024 compared to the prior year period, as the company saw continued adoption of its window film products globally. Within window film, architectural window film revenue increased 6.2% year-over-year and now makes up 12.6% of total window film revenue. Other product revenue, which includes XPEL's FUSION line of products, grew 11.6% in Q3 2024.
Service Revenue encompasses XPEL's software, cut-bank credit, installation labor, training, and other service offerings. Software revenue, which represents fees for the company's DAP software access, grew 23.5% in Q3 2024 as the total number of subscribers increased. Cut-bank credit revenue, which is tied to paint protection film sales, was relatively flat year-over-year. Installation labor revenue, which includes the labor component of installations performed at XPEL's company-owned facilities, grew 27.4% in Q3 2024 due to increased demand across the dealership services and OEM networks.
Gross margin for the Product segment was 37.9% in Q3 2024, up from 36.1% in the prior year period, driven by decreases in product costs and improved operating leverage. Service segment gross margin was 57.7% in Q3 2024, up from 57.0% in Q3 2023, due to operating efficiencies across the installation network.
Strategic Initiatives and Acquisitions XPEL has been proactive in its strategic initiatives to drive growth and expand its global reach. The company has pursued a targeted acquisition strategy, acquiring international distributors to enhance its distribution capabilities and ensure tighter control over the customer experience.
One such acquisition was the company's purchase of its distributor in India in August 2024, which aligned with XPEL's strategy of owning its distribution in key markets. The company also recently acquired its distributor in Japan, a move that is expected to unlock significant growth opportunities in a market that has historically underperformed relative to XPEL's other operations.
In addition to acquisitions, XPEL has been focused on introducing new products to its portfolio, such as its Windshield Protection Film, which was launched at the annual SEMA trade show in 2024. This product is designed to appeal to a broader customer base, potentially serving as a gateway for XPEL to reach new consumers.
Risks and Challenges While XPEL has demonstrated impressive growth and resilience, the company is not without its risks and challenges. The automotive industry, which is a significant driver of XPEL's business, can be subject to cyclical fluctuations and changing consumer preferences. The company's reliance on a limited number of large customers in certain markets, such as China, also presents potential concentration risks.
Additionally, XPEL operates in a highly competitive environment, with the potential for new entrants and technological advancements that could disrupt the company's market position. The company's ability to effectively manage its supply chain, inventory, and distribution channels will be crucial in maintaining its competitive edge.
Outlook and Guidance For the fourth quarter of 2024, XPEL has provided revenue guidance in the range of $105 million to $107 million. This outlook reflects the company's expectation of continued solid growth in the United States and other international markets, offset by a planned reduction in sales in China as the company implements strategic changes to its distribution and product portfolio in the region.
XPEL expects gross margin for Q4 2024 to be around 42.5%, which they stated is likely a good run rate as they close out the year, potentially with a slight nominal decrease. For China specifically, XPEL expects a current run rate of approximately $8 million to $9 million per quarter, with Q1 2025 being nominally lower at $7 million to $8 million due to Chinese New Year.
Looking ahead, XPEL remains focused on executing its strategic initiatives, including the expansion of its distribution network, the introduction of new products, and the optimization of its operations. The company's strong financial position and proven track record of innovation position it well to navigate the evolving industry landscape and capitalize on future growth opportunities.
Conclusion XPEL Inc. has established itself as a global leader in the protective films and coatings industry, driven by its commitment to innovation, customer-centric approach, and strategic execution. With a robust financial profile, a diversified product portfolio, and a growing international footprint, the company is well-positioned to continue its trajectory of sustainable growth and value creation for its shareholders.