XZERES (XPWR) reported results for the second fiscal quarter ending August 31, 2011. Quarterly revenues sequentially increased 34.5% to $1.367 million from $1.017 million, representing the fifth consecutive quarter of 30%+ sequential revenue growth. The company has aggressively expanded sales and marketing efforts, targeting end-users, dealers and distributors. The gross profit margin sequentially contracted 123 basis points to 23.5% due to the expansion of sales and marketing support with sales expense increasing 13.9% and marketing expense increasing 11.4% sequentially. However, management expects the gross margin to rise substantially over the next two fiscal years as new products, services and business models are developed and deployed. XZERES reported a quarterly loss of $1.763 million or $0.09 per diluted share. During the first fiscal half, the company raised $3,678,461 through stock and warrant offerings.
The company’s sales network has been expanded in Europe, particularly in the United Kingdom with the establishment of a subsidiary, office and sales team in the UK, along with achieving the critical MCS Certification to qualify for feed-in-tariffs. In addition, XZERES signed an exclusive dealer arrangement with VG Energy, Ltd., the largest distributed wind energy dealer in the U.K. with a dominant market share (roughly 36%) in the 15 kW-to-100 kW segment. The agreement includes a requirement for a minimum of $5.0 million in turbines to be purchased from XZERES over the next 15 months. Within three weeks of the agreement’s announcement, VG Energy placed its first order for $360,000, in part due to a third-party (Hutchinson Engineering) having designed an adapter plate that allows the XZERES 442SR wind turbine to be installed on towers designed for the Proven P-35/2 turbine, including existing towers. Last month, Proven Energy, which has since been bought by Kingspan Renewables, announced that its Proven P-35/2 turbines are subject to a potential metal-fatigue shaft defects. This unfortunate turn of events for Proven Energy may prove to be an opportunity for XZERES, since the P35-2 model may lose MCS Certification. Demand for small wind turbine systems in the UK remains high due to the attractive feed-in-tariff program, which offers a 15%+ annual ROI for 20 years when MCS-compliant wind systems are installed and operated.
In addition, there are significant opportunities in Asia for micro-grid island electrification applications. XZERES successfully completed an XZERES 442SR pilot project, which resulted in a $3.2 million turbine order in the Republic of Vietnam during the second fiscal quarter. XZERES is expected to continue to generate higher levels of sales in the coming quarters, with the VG Energy and Vietnam agreements alone expected to produce sales of more than $8 million over the next 12 months.
Management believes that the company will achieve profitability within the next three quarters, primarily due to the expectation of stable fixed costs since the necessary infrastructure is in place to drive the sales growth plan. Sequential G&A and R&D expenses actually declined in the second fiscal quarter. Management’s internal goal (not guidance) is to generate over $5.9 million in revenues during fiscal 2012. In addition, management expects that ultimately, the majority of sales will be through the direct channel, leading to a higher gross margin.
XZERES has once again reported 30%+ sequential top-line growth. Due to the many initiatives recently implemented and also planned for fiscal 2012, we continue to expect that the company’s sequential quarterly sales growth rate will remain above 34% during the second half of fiscal 2012. We reiterate our Outperform rating on XZERES and our price target of $1.50.
Steven Ralston, CFA
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