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Executives

Kim Klein

Neil Gaydon - Chief Executive Officer, President and Director

Kelly Lee Schmitt - Chief Financial Officer and Vice President of Finance

Analysts

Todd Coupland - CIBC World Markets Inc., Research Division

Paul Treiber - RBC Capital Markets, LLC, Research Division

James Medvedeff

Smart Technologies (SMT) Q4 2013 Earnings Call May 16, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the SMART Technologies' Fourth Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Kim Klein, Investor Relations Manager. Please go ahead.

Kim Klein

Thank you, operator. Welcome to SMART's fourth quarter and full year fiscal 2013 earnings conference call. With me on the call today are Neil Gaydon, our President and CEO; and Kelly Schmitt, our Vice President of Finance and CFO. Neil will begin with an overview of our fourth quarter and full year performance. Kelly will then discuss our financial results in more detail. Neil will conclude the call by discussing our 3 year strategy, and the call will be open for questions afterward.

Please note that during today's presentation, we may make forward-looking statements within the meaning of U.S. Federal and Canadian securities laws, including, without limitation, statements concerning our performance outlook, including specifically our 3 year revenue growth outlook, our view of industry trends, expected cost savings associated with our restructuring, our ability to leverage our existing market position and effectively introduce and monetize new products, growth expectations for our enterprise and education products, and our ability to effectively execute on our 3 year strategy. All such forward-looking statements are subject to known and unknown risks and uncertainties the could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our securities filings available on EDGAR and SEDAR, including our Management's Discussion and Analysis for the fiscal year ended March 31, 2013. Any forward-looking statements made are based on information currently available to us, and we do not intend and undertake no duty to update these statements for many reason. Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP equivalent is included in the appendix to our earnings release, which is available on our EDGAR, SEDAR and our website. As a reminder, there are supplemental slides for this call, which are available on the webcast posted on the investor portion of our webpage. With that, I will turn the call over to Neil.

Neil Gaydon

Thank you, Kim. Thank you all of us for joining us on today's call. I'll begin by reviewing a few of the organization's areas of focus over the past quarter. We continue to implement the final components of the restructuring that was announced in December 2012, and with our business units now established, we continue to work on transforming the culture of the organization. Over the past several months, we put a great deal of time and effort into the development of our 3 year strategy, which I will share our high level view with you later in the call. I'm pleased to say that SMART entered fiscal 2014 in a position to execute its long-term growth strategy, as we continue to focus on driving innovation and building on our leadership position in the global interactive display category. In regard to our results, we continue to face challenges in our core markets, and we are experiencing the effects of macroeconomic conditions across all of our geographic segments. In addition, tablets and other technologies are competing with SMART for budgets in schools, and this is affecting demand for our products. This led to the company generating revenues of $589 million, an adjusted EBITDAR of $49 million in fiscal 2013, down 21% and 62% respectively, year-over-year. Whilst we continue to expect the trends in education to persist in the near-term, I am pleased with the progress we've made in the enterprise market, where we experienced growth during fiscal 2013. With our newly announced products, we believe we are well-positioned to build on the traction we are gaining in the enterprise market.

Now, I'll turn to some fourth quarter highlights. We completed the major components of our restructuring announced in December 2012, which primarily involves some changes to our international infrastructure. We expect to realize a total of approximately $40 million in annual cost savings beginning in fiscal 2014, as a result of the cost-reduction measures implemented over our third and fourth quarter of fiscal 2013. I'd also like to provide you with an update on how we're doing in terms of transforming our internal organization and the way we conduct business as a company. This will hopefully set a backdrop that explains what is changing within the organization, to gear us properly for the execution of our strategy, and ultimately, to drive improvement in our results. Since the last quarter, our executive team has been reshaped and improved to lead the business. As part of these changes, we now have 2 Presidents, who are directly responsible for results in each of our education and enterprise units. This new senior management structure is already improving our ability to sharpen focus on each of our customer groups in education and enterprise, and drive innovation. Through our new customer-centric culture, we are reprogramming the company to think differently, from product design across our channel and through to our customer service, all elements of how we conduct our business must lead to customers and channel partners that are delighted by the experience they have with SMART. Accountability is an essential attribute of successful companies, and we are now placing a much greater emphasis on accountability at all levels in the organization. We have a system of clear and focused initiatives, with concrete deliverables that are now attached to teams and individuals. Compensation will be more appropriately aligned with key metrics and the accomplishment of these strategic objectives. In addition, we are transitioning the company -- the culture of the organization to one of continually driving for greater efficiency, and looking for optimal ways to invest our resources. We have enabled a more efficient and cost-effective product development and launch process that has improved our ability to introduce products on time, at the budgeted margin and meeting our new heightened quality standards. The speed and efficiency of getting products to market has a significant effect on our results, and the changes already made in this area have reflected through the success of our latest products. We recently announced launch of several new and exciting solutions under the new development methodology were delivered according to plan. I'll highlight a few of them. For education customers, we announced our new SMART Table, which is the most advanced education table in the market, with the most comprehensive set of learning resources that are growing in number. We will -- launched our new table in mid-April, and was on time and to schedule. During the fourth quarter, we began shipping our LightRaise 60wi projector, which is the world's first fully integrated touch enabled interactive projector. Order volume to date is already exceeding our expectations, and it, again, was a product delivered to schedule. The last of the education products I will highlight is related to the beginnings of our new software solution for education, that glue the disparate devices together in a classroom. One of the products launched was a beta version of the SMART Notebook Web, which enables teaching and learning with SMART Notebook software anywhere, using any mobile device with an Internet connection. In March, we also announced our SMART Room System for Microsoft Lync, which is already gathering lots of interest from potential enterprise customers. SMART worked with Microsoft to develop a solution that improves the efficiency of meetings by simplifying the process of sharing real-time video, voice and data. The SMART Room System is a complete complement of SMART designed and manufactured products. It includes 1 or more interactive displays, an ultra wide high-definition camera, speakers, microphones and a room control console display that work together seamlessly. The systems are also exceptionally easy and quick to install, which significantly drives down installation cost. The system was unveiled at Enterprise Connect Orlando in March, and since then, they have been appearing on stages around the world either with Microsoft presenting Lync 13, or at other events. SMART has been introducing world-class education and enterprise solutions to market, and the reaction of the channel and our customers has been so far, extremely positive. We are committed to innovation and I'll speak more about the future direction of our products as part of the strategy portion of the call, where we will provide a high-level overview. With that, let me turn the call over to our CFO, Kelly.

Kelly Lee Schmitt

Thank you, Neil. I'll provide some details on the company's financial results for the fourth quarter and full year ended March 31, 2013. I'll then pass the call back to Neil to conclude by discussing the company strategy. During the fourth quarter, total revenue decreased by 29% year-over-year to $105 million. Competition for education budgets from other technologies and high penetration levels in our developed markets put continued pressure on demand for our products. Sales of interactive displays were $82 million, down 24% compared to the same quarter last year. In the fourth quarter, we shipped about 60,000 units at an ASP of $1,360 compared to 82,000 units at an average selling price of about $1,300 in the same quarter last year. Sales to enterprise constituted approximately 10% to 15% of our revenue for the full fiscal year, and exhibited growth in absolute dollars on a year-over-year basis. This percentage is based on our new method of allocating sales to each of our 2 main customer groups, in education and enterprise. As of Q4, we have changed the method of allocation to one that is based on the software that is sold in conjunction with the interactive display. Under this new classification system, the majority of our government sales would now be categorized under the education category. From a geographic perspective, revenue for the quarter decreased by 25% in North America, 31% in EMEA, and 43% in the Rest of the World. The macroeconomic effect that we experienced in North America initially, are now also being felt across several geographies in EMEA and Rest of World. For the full fiscal year 2013, total revenue was $589 million, which is a decrease of 21% compared to last year. The decrease was primarily driven by a decline in sales of our interactive displays, which account for about 80% of our revenue and were down 18% year-over-year. A shift to a higher proportion of lower-cost products being sold into emerging markets has caused ASPs to decline marginally over last year. During the year, we shipped 339,000 units, at an ASP of $1,370, compared to 395,000 units at an ASP of $1,430 last year. Sales of attachment products declined by 32% year-over-year, accounting for 21% of our total revenue. This decline is primarily due to overall declining demand, with budgets being directed to other hardware like tablets, and also due to the fact that our sales to enterprise are growing and attachment products are typically sold to education. On a geographic basis, for fiscal 2013, revenue in North America decreased by 23% year-over-year, EMEA by 10%, and Rest of World by 33% year-over-year. As I mentioned, the macroeconomic challenges that first have an effect on our North American business are now making their way through EMEA and Rest of World. We are experiencing continued success in certain emerging market countries like India and Russia, but these revenues are not offsetting the declines that we're seeing in some of the developed entries in Western Europe and Australia.

Turning to cost and profitability. I'll discuss our results on both a GAAP and non-GAAP basis. Please see our press release for a reconciliation of adjusted EBITDA and adjusted net income. Gross margin for the fourth quarter increased to 43%, compared to 40% last year. The gross margin improvement was primarily due to an increase in the proportion of higher-margin products sold and lower quarter-over-quarter warranty cost. For the full year, gross margin as a percentage of revenue, was 44% compared to 45% last year. The decline can be attributed to the impact of absorbing fixed cost over a lower revenue base, and also some inventory write-downs related to a rationalization of our product line. Total cash operating expenses in the fourth quarter, which exclude stock-based comps, depreciation, amortization, restructuring charges and bad debt expense, were $50 million, compared to $58 million during the same quarter last year. During the quarter, we incurred an additional $3 million in restructuring costs related to some of our international operations. Because these changes occurred late in the quarter, we realized only a small portion of the international cost savings in Q4. In addition, we have some seasonality in our margin and events cost that impacted our quarterly operating expenses. For the full year, cash operating expense was $213 million, down from $222 million in fiscal 2012. Adjusted EBITDA was a loss of $9 million during the fourth quarter, compared to positive $2 million in the year ago period. The year-over-year decline is primarily due to the decline in revenues I mentioned previously.

For the full year fiscal 2013, adjusted EBITDA was $49 million, a decrease of 62% compared to last year and represented an adjusted EBITDA margin of 8% as compared to a margin of 17% in fiscal 2012. We reported a GAAP net loss of $19 million, or $0.15 a share for the fourth quarter. Our adjusted net loss was $12 million or $0.10 a share, compared to an adjusted net loss of $5 million or $0.04 per share in Q4 last year. For the full year, we had adjusted net income of $12 million or $0.10 per share, compared to adjusted net income of $71 million or $0.57 per share last year. As a reminder, we adjust GAAP net income for foreign exchange gains and losses, as well as for the net change in deferred revenue, amortization of intangible assets, stock-based comp, restructuring costs, impairment of goodwill and the impairment of property and equipment, as these are all non-core to our ongoing operation.

Turning now to our balance sheet. We ended the quarter with $141 million of cash and equivalents and $288 million of debt outstanding, resulting in $147 million of net debt or about 3x our trailing 12 month EBITDA. Earlier this week, we announced the closing of our transaction to sell and lease back our global headquarters building, located in Calgary, Canada. The transaction generated proceeds of $77 million in cash, net of fees, and will be reflected in SMART's Q1 fiscal 2014 results. As part of the agreement, SMART has entered into a 20 year lease with the purchaser of the building, HOOPP Realty Inc., a real estate company related to the Healthcare of Ontario Pension Plan. In March, we opportunistically sought to refinance our debt through a proposed bond offering. The offering was subsequently withdrawn, and we're currently reviewing other options and deal structures that will be more appropriately suited to the financing needs of the company. Our existing debt matures in August 2014. As of March 31, the company's net trade receivables of $65 million resulted in DSOs of about 57 days, compared to 53 days at the end of Q3. Annualized inventory turns at the end of the fourth quarter were about 5 turns. And I'll now turn the call back over to Neil to walk you through an overview of our 3 year strategy.

Neil Gaydon

Thank you, Kelly. To begin the discussion of our 3 year strategy, I'd like to first outline our strategic vision that will deliver revenue and EBITDA growth beyond our fiscal 2014. First, we're going to transform classrooms into collaborative learning environments. Secondly, we will transform meeting rooms into collaborative workspaces. And finally, we will transform SMART's operational and financial performance. Let start by talking about education and how SMART will transform this market. About the market: U.S. education technology spending is projected to grow at 4% CAGR from 2012 to 2015. The macro market revenue and growth opportunities in K-12 education technology confirm this direction for the company. SMART areas of focus are aligned with growth opportunities in education technology. Interactive displays, made up of interactive whiteboards, flat panels and interactive projectors, is projected to grow at 10% in aggregate, led by interactive flat panels with an outlook of nearly 100% growth from 2012 to 2016 and followed closely by interactive projectors which are predicted to grow at around 40%. The outlook for software relating to education technology, another area of focus for the company, is also positive, with growth of 9% and highly profitable. With a focus on growing profitable categories where SMART is well positioned for success, we will drive the growth engine of SMART in education over the coming years.

Now, let's talk about our fundamental principles in education and how we design our products and the DNA that goes into them. The first is the pedagogy in learning. Pedagogy is at the core of successful long-term technologies, products and services in education. For 20 years, we've designed products specifically for teaching and learning environments. We understand the unique requirements for education. It's rare that consumer electronic products succeed over the long-term, as this is an extremely specialized area, and they haven't been designed for this purpose. The second is the conviction that the combination of a teacher, at the front of the class, using a large interactive display, coupled with tablets and/or small group learning environments around, for example, an interactive table, or secondary display, displays the best learning outcomes for our children. And thirdly, a teaching and learning software platform that enables and connects any device in, around or outside the classroom is crucial to minimize complexity and costs for education districts, teachers and students. It is based on these principles that SMART's education strategy is to transform classrooms into collaborative learning environments. So what is a collaborative classroom? What are the pieces that make it up, and where will SMART play? Before we answer those questions, let's address the disruption and proliferation of tablets in education. Whilst providing students with engaging personal devices, tablets have created problems for teachers and IT departments, as they try to connect and support these disparate devices. We view this as our opportunity to address these pain points by providing and monetizing cloud-based software for our existing and new customers. Software is the foundation of our solution, evolving from the desktop into the cloud. Our education software will be the glue that brings all of the classroom technology pieces together, in a very simple, cost-effective way, rather than integrating with all the different operating systems. It simply works by HTML through any major browser. The complication that's growing within education of Bring Your Own Device, whether it's Android-based, Apple or Microsoft, means that trying to have software working on all of the different devices, with all the different ways in which those operating systems are going to develop, puts a heavy burden on the school, driving significant costs. Our software will allow the child or teacher to access content, and any of project work that they've done from any device, meaning, that it's device agnostic. This is where SMART's positioned and potential is extremely strong. SMART's built an enviable position by having the world's most used education software, used by more people than any other software, with 12 million activations, 30,000 lessons downloaded every day, and over 65,000 K-12 digital lessons already available. Many school districts have built their entire curriculum around SMART Notebook. We are therefore moving our software in the cloud, and have already taken the first step, having launched our software in the web with SMART Notebook for Web, which is currently available in beta trials. The next phase is to monetize our software and generate recurring revenues via cloud-based SaaS and licensing models. So let's have a look at some collaborative learnings scenarios. Firstly, the interactive display coupled to tablets. SMART will continue to lead the interactive display market, providing customers with a full suite of interactive whiteboards, flat panels and/or projectors. Combining our interactive displays with tablets, through our software, is a potent combination, allowing teachers and students to share content, pass information to 1 another and deliver and/or receive instruction and assessment. Cloud-based notebook software will unify disparate devices, facilitating whole class, small-group and individual learning. All 3 learning environments occur in classrooms every day. Tablets alone are not enough, and we do not believe they will replace the front of room display. There is no question that when a teacher teaches from the front of class, the dynamic behavior of their movement, writing and the interaction with content, engages the students. In addition, when students join the teacher, or work independently, as a group, collaborating around the interactive display, we see children's engagement and deep learning improve. Small-group learning is enhanced through our leading multi-touch collaboration capabilities, combined with content in the cloud. We view interactive flat panels through a unique lens, an education first lens, as we discussed with education being an integral part of the SMART DNA. Interactive TVs are now being promoted to consumer markets, but these panels are designed for the consumer market, are not the right solution for education. And education interactive displays are professional tools, in use by teachers or students for 8 or 9 consecutive hours a day, teachers requiring a screen quality that he or she can touch, write and draw on comfortably, and an overall design that is durable and robust. We design our products with education users and learning environments in mind, and we'll continue to add new distinguishing features that are centered around learning and pedagogy.

Small-group collaboration is particularly important in early education. A very powerful way by which young students learn. The SMART Table, designed for small-group work in primary classrooms, puts children learning together, solving problems, collaborating, paving the way for adult life and their ability to debate, discuss, problem solve and work together. We believe the combination of interactive displays, tables and tablets is the model of the future, providing the right tools to support each of whole class, small-group and individual learning, creating the collaborative classroom. Our software will be the glue to bring together the disparate hardware, coupled with content, collaborative tools, thinking, and remote learning in, around and outside the classroom. Self-study outside the classroom is an increasingly important and necessary part of the learning today. In traditional environments, students do homework based on the daily lesson. In other environments, such as the flipped classroom, students prepare for classroom activities through self-study in advance. In both environments, students need to be able to pull down lesson content and review in-class notes anytime, anywhere, on any device. You can see here a child going home on the bus, doing his homework, able to pull down the lesson, see the notes from the class and be reminded of what he needs to do to get his homework right. To further this experience, our software applications and cloud-based software enable the learning to continue on mobile devices outside the classroom. And when he or she gets home, they can share, collaborate and work together from different locations. With their friends as they do project work together, deepening their understanding of concepts and solidifying that learning process outside the walls of the classroom. The slides we've just looked at demonstrate the market opportunity and need for a teaching and learning platform that works seamlessly in a variety of learning environments, locations and with disparate personal student devices.

SMART is well positioned with significant assets to build our vision on. There are currently about 2.5 million classrooms equipped with SMART interactive displays. The SMART brand is amongst the strongest in education. We're the global leader in interactive displays, with over 2x the market share of our nearest competitor. And we're used by over 50 million teachers and students. We have a complete line of leading hardware, ranging from multi-touch to low-cost single touch displays through to our forty touch table. We have leading software, with over 3 million downloads of our latest Notebook 11 software, and as I mentioned, our new web-based version of SMART Notebook is now available in beta, and where our inking and collaborative tools are amongst the finest in the world. We have a leading ecosystem, with third-party development of content, both free and fee-based. The SMART Exchange provides access to over 65,000 digital lessons, and about 30,000 downloads daily, and not forgetting that this is a highly specialized market. We know how budgets and contracts are awarded. How installations are carried out and what supports and maintenance is required. To this end, SMART has spent over 20 years building one of the most highly developed education channels in the world.

So, we are confident in our strategy, and we have a strong foundation to build on. As evidence of our ability to execute, I'd like to comment further on some of our existing and new software and hardware products that are the building blocks paving the way to our vision. Progressing towards our account-based software strategy we spoke earlier about, SMART Notebook Web, already available in beta, and in addition, we have the SMART Exchange, our cloud-based repository for free and fee-based digital content. SMART Response VE, a cloud-based assessment software, an offering being sold in the market today. SMART Notebook iPad app, providing teachers and students with the ability to learn with notebook content and iPads, available on the App Store. These things together, creating a strong cloud-based software basis offering learning anywhere, any time and on any device. And our new hardware releases are delivering an entirely new level. I've already discussed some of our newest hardware products, namely the SMART LightRaise interactive projector, the world's first with human touch and the SMART Table. We remain the world leader in interactive whiteboards, and also offer a line of SMART interactive flat panels for education that come with notebook and recently announced education pricing. We continue to offer an extensive range of education accessories and products, including the recently released next-generation SMART Document Camera.

Next, our products are aligned with our strategy, and new products are being introduced on time, to the quality and to the margin. So therefore, we are confident in our ability to execute. So in summary, education is a specialized market, requiring specific products and solutions that are designed for today's educators, students and learning experiences. We're creating new products and solutions that will transform technology-burdened classrooms into rich collaboration environments. Our strategic priorities are: Disrupt the market and lead the transition to interactive flat panels for front of room displays; create the glue, device agnostic cloud-based software that enables collaboration in, around and outside the classroom; and monetize our software with existing and new customers through Software-as-a-Service business model and licensing applications and software maintenance.

I'd like now to change subjects and talk about the enterprise market. Enterprise will be a significant growth engine for SMART over the next few years. This market has tremendous potential for the company. We've already seen over 20% growth year-per-year over the past 3 years, and we expect to continue to see growth in the years ahead. The enterprise collaboration market is changing quickly. UC&C is a $20 billion market, with solid growth forecasts. Within that, however, segments are performing differently. There's been a decrease in videoconferencing sales. The reason for that is because there needs to be a change. There needs to be a much lower cost and ease of installing a system, and there needs to be much greater ease-of-use. Many videoconferencing systems today are unused, most of the time, due to the complexity of use. Meeting members don't have the time, knowledge or patience to use this expensive and often cumbersome technology. There needs to be a reasonable return on investment, and the collaboration capability that easily achieves greater efficiency and output for meetings. On the growth side, Microsoft Lync is winning, with expected enterprise use doubling in 2012, and with you need for and value of, effective collaboration increasingly important among C-level decision-makers. There is a large opportunity for the players that can bring the right solutions to market. So let's have a look at a typical meeting room today. A typically meeting room looks like the picture on the left, where we've got a traditional phone, a screen, a projector of some description, that somebody will plug their PC into, a flip chart that was invented in 1890, and a manual whiteboard. None of these things work together, and if you are a remote participant, you won't see what's written on the charts or the whiteboard. You may struggle to know what dial-in number to use, you may have the wrong presentation material to follow along with, and there where there are problems trying to figure out what page people are on, as you try to listen in. Or, if you're lucky enough to have video running, you might be able to remotely see what's going, on but at no point can you collaborate or interact with the presentation, send in data or write on the whiteboard. The next phase of this is technology that brings all of this together, that changes the manual whiteboard to a digital one, so that when people are writing on it, both remote and internal participants can not only see it, but they can interact with it. They can save what is written, rather than taking a photograph, and can easily distribute and easily share. This will be the next phase of what the market will want. So SMART is taking a two-pronged approach to address things the market needs. First, through our partnership with Microsoft Lync 2013. Second, through our own Meeting Pro software-based displays and room systems. So let me go into each one of these in more detail. Closely, talking about our partnership with Microsoft. Microsoft's new Lync 2013 is a game changer in how the meeting room will work. Instead of people all trying to dial in with complex pin codes, local and remote users join the meeting through a simple touch of one button. All participants have high-definition voice and video, in addition to the meetings presentation and notes. Microsoft estimates there is anywhere between an 8 to 12 minute delay in starting meetings as people try to figure out what version of a presentation is being used, and also what dial-in number to call. The new system dramatically changes how the meeting works. You can have multiple video streams so the remote participants can all be seen as present in the room. Teams can collaborate around the interactive display with any business software, for example, PowerPoint, and a two-way content sharing is not just for those in the room, but for any remote participants as well. The system that SMART designed to integrate with the Lync software is the SMART Room System for Microsoft Lync. The speakers and microphone replace the traditional spider phone. Camera and whiteboards provide remote participant video streams, and two-way data collaboration, all connected through the Lync software. You can select either a single 70-inch or 84-inch interactive display by SMART, or a 70-inch interactive display, depending on the size and use of the space. The speakers, the camera, all of the components have been designed by SMART around the Lync system, for a rich collaborative experience. Our years of research and interactivity have helped us design cameras that capture the action in the room, whether the person are sitting or at the display. Touch displays that deliver a true whiteboard experience, and an audio system that enables users to work from anywhere in the room. Unlike any of the systems on the market, it requires no additional complex back-end infrastructure, and no expensive remodifications. The system start from around $20,000 and are a joy to use. It will drive recurring revenue for SMART through extended warranty and support offerings. This new system will dramatically change the way a meeting room runs forever.

In addition to the Room System, we are leveraging our relationship with Microsoft to accelerate our enterprise marketing sales in channel capabilities and execution. The combination of the new product and enhanced go to market plans provide scale, reach and credibility beyond what SMART could achieve on our own. SMART's own enterprise collaboration software, called SMART Meeting Pro, delivers a powerful collaboration solution when used in combination with our interactive displays. This is the second prong to our enterprise approach. To date, our SMART Meeting Pro solutions have been very successful in areas such as design, construction and lean manufacturing. Our success has been driven from our SMART software capabilities and tools used in rich visual information environments, where the value of collaboration is high. To increase the depth of our offering, we will partner with industry-leading third-party software application providers to create touch and ink ware applications that suits the specific needs of specialized vertical markets. Their software will effectively be layered into our own, creating a powerful collaboration experience that will become integral for users' day-to-day operations in specific industries such as architecture, engineering and construction. To demonstrate this point, a Stanford University paper completed, following a survey of 54 industry and academic users of SMART Boards and software for design in construction, that the SMART collaboration solutions dramatically improved efficiency. For example, a general contractor with revenues of $300 million a year, increased net term income by nearly 20%, which provided an investment payback of just 1 week. Coupled with Meeting Pro, our lead display will be our interactive panel line, with best in class touch and ink experience. We will also offer Meeting Pro-based solutions on our premium interactive whiteboard and world's first interactive projector with touch, to expand our market coverage into lower budget opportunities. At the high-end, we will leverage our Room System components, an experience to create all-in-one SMART Room Systems with meeting Pro. All our Meeting Pro-based interactive displays and room systems include annual software maintenance fees, generating recurring revenue that will contribute to the overall growth of our enterprise model. In addition, we are very focused on building our enterprise channel, both in breadth and depth of capability. We are signing new channel partners and have introduced a new accreditation program to ensure our customers receive high-quality support from our resellers. This effort is already underway, and our channel will continue to grow to meet customer and market needs. In enterprise, our strategy and efforts are built upon a solid foundation. Our knowledge and understanding of true collaboration requirements in enterprise is unsurpassed. Enterprise is already a significant part of our business, representing 10% to 15% of revenues in financial year '13 as previously discussed, and with growth of about 20% annually. Our touch, ink and interactive displays are world leading and deliver superior collaboration experiences. And our partnership with Microsoft provides the credibility, scale and products to accelerate our growth.

In summary, in enterprise, we are well-positioned and will capitalize on the growth of the unified communications and collaboration market to transform workspaces. We have a strong alliance with Microsoft, disrupting the market with a game-changing meeting room solution and leveraging their marketing sales and channel, scale and reach. In addition, we will target specific verticals, where rich visual collaboration value is high, with our SMART Meeting Pro-based displays and room systems. This two-pronged approach will accelerate our growth in revenues over the next 3 years.

So we've talked about our approaches in both education and enterprise. Now, let's look at our internal operations, and how is that evolving to ensure we execute with excellence and achieve our financial objectives. First, the culture of the company. We've been changing the way the company works to being customer-centric, accountable and team-based for the focus on execution that's on-time, that's on margin and that's on quality. Decisions are made based on financial metrics, and we are managing our costs tightly, and we've made good progress in all areas. Our focus comes around our customers in the markets that we work with. SMART has ended up with very thinly spread across markets and countries, and lots of resellers where they weren't making the return on investment. We have now focused the company into 2 business units, supported by a central enabling team and brought in strong financial metrics. In terms of product development, we've streamlining how we're developing products, our test, our quality, our innovation are all moving to a different level. And that's already been seen by the fact that new products are coming out on time, and we are meeting our customers' requirements, which is having a positive effect on the company's performance. We have a strong 3 year roadmap, and we will be first to market with innovative solutions. These actions will set the base for continued improvement in all performance areas over the coming years.

Regarding operational efficiency, we are focused on improving our procurement processes, our product cost reduction, our quality, our inventory and working capital management, and optimizing our cash to cash cycle. Across all areas, we are taking a very strong, hard look at how we improve operational efficiency at SMART, and acting on it. So in close, I'll bring all of this up to a higher level by illustrating our planned 3 year path. Financial year '14 is about stabilizing revenue, getting education onto a stable platform and growing enterprise. Financial '15, we're moving to turnaround, and by that, we expect to see small single-digit growth in education, continue our growth in enterprise as we grow with the Lync system, and our own Meeting Pro-based, sector-specific solutions and start to realize the benefits of our recurring revenue initiatives. About financial '16, we expect to transform the company back into a profitable growth position, generating cash and keeping SMART on a strong financial footing throughout. We have our strategy set, and plan to execute. But we are in the very early stages, although still not in a position to provide guidance. I would like to reaffirm our comments from last quarter, stating that we have planned our fiscal 2014 cost structure based upon a 20% year-over-year revenue decline over the prior period. Although it is still early, our efforts appear to be gaining traction, and our initial fiscal 2014 results appear promising. Whilst it's been a challenging year for SMART, we believe that the actions we have taken to restructure the company, reset our cost base and refocus our efforts will position the company on a solid foundation for successful strategy execution. I'm confident in our plans and look forward to updating you on our progress. And with that, I'll turn the call over to the operator to then begin the Q&A session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Todd Coupland from CIBC.

Todd Coupland - CIBC World Markets Inc., Research Division

Couple of questions on cost and then, I want to talk about your presentation. So I think in the past, you had talked about OpEx getting to about $40 million a quarter. We're still a fair bit away from that. Is that still an objective?

Neil Gaydon

Yes, very much so. And the way we started off the new year, we look to be around that area.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay, good. And from a gross margin perspective, do you think that's stabilized now, in the 43% range?

Kelly Lee Schmitt

It definitely -- the low to mid-40s, it's still what we're thinking in terms of gross margin, Todd. As Next Window ramps up their sales of winning products, they do have a lower margin than SMART's, and that will bring that margin down slightly.

Todd Coupland - CIBC World Markets Inc., Research Division

On the enterprise plan, in terms of the shift you're talking about for a, easy-to-use videoconferencing system at an attractive price. When you look out over the next 3 years, you're talking about $20k, I guess is the starting price. From a unit sales perspective, what would you consider a successful product effort over those 3 years in this area?

Neil Gaydon

It's interesting because the reaction to that sort of price for a system has actually been greeted very positively by customers and people who have seen it. And because that's just part of the cost. Today, to have an interactive room system put in place, whether it's something extremely high-end like TelePresence, or whether it's even just the complexities of all these different, disparate devices in the more advanced conference room, very often the installation cost equals the cost of the equipment, or isn't far off it. The beauty of the SMART system means that installation cost is dramatically lower, because even down to, on the drywall, the weight of a big panel, we avoid that by a special bracket that we've designed that puts all the weight straight to the floor. So simple installation pieces that we've learnt over many years, in education and installing these devices, means that the cost of the system overall is incredibly low. And also, on the back end, plugging into Lync 2013, once that back end has been upgraded again, is a very simple change. So this is a game-changing product, not just for the fact of the ease-of-use, but from installation and the overall cost. So we'll have to see how the cost goes on the system, because some will want to use Jewel [ph] 70-inch. Some will want to move to more 84-inch, and then, we can imagine things moving to perhaps higher-quality screens, using quad HD, and things like that. So we're sort of thinking that it actually becomes more feature-rich over time, than just starts with this 1 price, and begins to reduce from there.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. At this point, are you prepared to talk about what you would hope to see in terms of units sold over the next 3 years in this effort?

Neil Gaydon

No. I'm not ready.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. Fair enough. And then, on your interactive whiteboard. Last night, Cisco talked about how they had seen an increase in state and local spending. You said you're not seeing a turn yet in the states. Is it still the cannibalization issue that you're fighting, in terms of any kind of recovery in those markets?

Neil Gaydon

Yes. That's exactly right. So this is what speaks to the strategy, which we think that the move will start to happen. And you can see that on the decline of interactive whiteboards in 20 constructive flat panels. And this is where we are -- will be partnering with one of the big panel manufacturers with a range and design of products as we go out. And so we want to catch that wave as that technology shift happens. And obviously, our software, so I think for now, we face the cannibalization issue of tablets, of budgets, but we're confident that we will start to come out of that.

Operator

Our next question comes from the line of Paul Treiber from RBC Capital Markets.

Paul Treiber - RBC Capital Markets, LLC, Research Division

Regarding your vision in -- about the software as a glue, do you see your software coexisting with learning management systems out there? And then, would you consider entering the learning management system market?

Neil Gaydon

So it's a good question. And the learning management systems that we've looked at, aren't so applicable to K-12, and so this is really a K-12 solution, and so over time perhaps, being first instance, is creating this portal that allows content users to access it, and we'll do that as an open, free way in for those to use that, and that we would be more monetizing on a SaaS basis as a service. And then as management learning tools or other pieces that are needed, then perhaps over time, we could see that happening.

Paul Treiber - RBC Capital Markets, LLC, Research Division

That's helpful. Regarding the recent restructuring, has all the employee departures happened already?

Neil Gaydon

Yes.

Paul Treiber - RBC Capital Markets, LLC, Research Division

And then, the $40 million OpEx per quarter, does that include the rent expense related to the sale on leaseback to your headquarters?

Kelly Lee Schmitt

No, it does not.

Paul Treiber - RBC Capital Markets, LLC, Research Division

And how much should we expect for the rent expense?

Kelly Lee Schmitt

It's about $5.9 million a year. And it's a capital lease, so it's closed through depreciation and interest of the post-operating cost.

Paul Treiber - RBC Capital Markets, LLC, Research Division

And then, have you seen any impact from sequestration, and how much of whiteboard funding in the U.S. is related to the federal government?

Kelly Lee Schmitt

In the U.S., it's about 10% of funding. That's federal, so it's a fairly small piece. And then the other 90% is state and local.

Operator

[Operator Instructions] Our next question comes from the line of James Medvedeff from Cowen and Company.

James Medvedeff

I wanted to ask a couple more questions about gross margin. It has been sort of grinding lower for the last couple of years, and now below 44%. Is there anything particular going on there, in terms of cost, or is it a pricing issue that's causing this?

Neil Gaydon

It's a mixture. So we speak to that in operational performance in the company, and improving our procurement and inventory turns and other things that, all that add up to improved gross margins. The other piece has been in -- well, the emerging markets has been more put downward pressure on gross margins, and 1 or 2 competitive pieces as well.

James Medvedeff

So, on the emerging markets piece, is that due to less attached products or it's simply a lower end offering? In the board, lower end take on the board?

Neil Gaydon

Yes. So we do design products specifically for those emerging markets. So we're not taking high end product from North America and trying to sell it into emerging markets at a lower price. We do have, but even still with that, there is generically, a lower margin in, particularly countries like India.

James Medvedeff

And then, the enterprise, $20,000 entry-level and growing up from there, seems like a fairly high-priced package. What would be involved in that package? If an ordinary whiteboard is $1,300, what do you get to get you up to $20,000, and then what's the margin implication of that sale?

Neil Gaydon

Yes, so I think you just picked on 1 product. You're replacing the panel that you would buy, ordinarily, albeit this would be a touch panel, rather than a, just a screen. You're replacing, perhaps a projector as well, manual whiteboard, flip charts, spider phone and an inability to collaborate with any those pieces. So you're replacing -- it's apples and pears, really, to what you're comparing to. People are mentioning staff and lost hours, sitting in meetings, waiting for meetings to start, getting things underway, the inefficiency, the inefficiency of not being able to see what's written on the manual whiteboard and collaborate, so calculating in that. So on the pure hardware, the way, actually, to compare it to, is these very high-end conference rooms, where you'll see different, disparate devices from multiple vendors and where somebody's tried to create some tailor-made software, to make all of those different pieces come together, where the ongoing costs of running that system, upgrades to software that they have to pay for, and then you're into many tens of thousands for those type of installations. So it's -- you got to compare it more with that, than just looking at a simple manual whiteboard or a screen.

James Medvedeff

Okay, great. And then finally, on the post-fiscal '14 growth opportunity. Is the -- I assume the corporate or the enterprise sales profit is a long one. Do you have -- is part of your forecast for growth after June of next year, involve things that you can visibly see in the pipeline today, in the enterprise market? Or what other drivers are there that make you confident that, that's going to happen, the growth?

Neil Gaydon

Okay. So when we look at our business year-over-year that's gone, this is without Microsoft Lync, and that system. So we were seeing sort of steady growth, based on the fact that the software's very good in the specialized verticals. So we believe that Microsoft Lync and the interest that's already being generated by it, will certainly help accelerate that growth path.

Operator

[Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to turn the program back for any further remarks.

Neil Gaydon

So thank you, everybody, for your questions and for joining the call today. And for that, we conclude the call. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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