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Smart Technologies (NASDAQ:SMT)

Q3 2014 Earnings Call

February 06, 2014 4:30 pm ET

Executives

Ken Wetherell

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 - Cowen and Company, LLC, Research Division

Scott Schmitz - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the SMART Technologies Q3 Fiscal 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ken Wetherell, Investor Relations Manager. Sir, you may begin.

Ken Wetherell

Thank you, Sam. Good afternoon, and thank you for joining us today. I'm here with Neil Gaydon, our CEO; and Kelly Schmitt, our CFO. Neil will begin today's call with commentary on our third quarter results and operational highlights. Kelly will then speak in more detail regarding our financial results. And afterwards, we will open the call for questions.

Please note that some of the information you'll hear during our discussion today will consist of forward-looking information within the meaning of applicable U.S. and Canadian securities laws, including, without limitation: statements regarding our wind down of NextWindow; our financial performance, including revenue, gross margin and EBITDA expectations; the state of the markets for our products; our sales outlook; our future products and product mix; and changes to deferred revenue.

All of these the statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results or trends could differ materially from our expectations. We do not undertake any duty to update any forward-looking statement. For information, please refer to the slides accompanying this conference call and to today's earnings press release, as well as the risk factors and assumptions that could cause our actual results or trends to differ materially from our expectations, which are set out in our EDGAR and SEDAR filings, including our management's discussion and analysis for the fiscal quarter ended December 31, 2013, or annual report on Form 20-F for the year ended March 31, 2013.

Before I turn the call over to Neil, I will provide an overview of some key items that impacted our results for the quarter. The first relates to our adjusted metrics, which excludes deferred revenue. As Kelly discussed on our November 7 earnings call, we are changing our software business model to shorten the free service and support period. The impact of this change is an acceleration in the amortization of deferred revenue over the third quarter of fiscal 2013 and the next 5 quarters.

Essentially, we are bringing deferred revenue from our balance sheet into earnings over this 18-month period, which had the effect of adding $17 million to our revenue this quarter. In addition, we are adding back the net change on our remaining deferred revenue in order to make adjusted revenue consistent with adjusted EBITDA and adjusted net income. This had the effect of reducing our revenue by $2 million in the quarter. The net impact of these 2 components of deferred revenue to third quarter revenue and gross margin was approximately $15 million. We expect it to be approximately $60 million per quarter for each of the next 5 quarters.

The second item relates to our decision to wind down our NextWindow components business. Given the material impact components had on our operating results in the quarter, we will focus much of our discussion on our results, excluding NextWindow.

Therefore, and we refer to results for our core business, we are referring to the operating performance of our education and enterprise businesses, excluding both deferred revenue and NextWindow. Given the materiality of these changes, Neil and Kelly will primarily speak to core revenue and core gross margin on this call, in order to provide more clarity around SMART's true ongoing operating performance. Kelly will discuss both of these changes in more detail later in the call.

SMART continues to report adjusted EBITDA and adjusted net income, which are the same non-GAAP profitability metrics that we reported previously. The methodology of calculating this metric has not changed as a result of the changes to deferred revenue and NextWindow. Therefore, the presentation is consistent with prior quarters.

With that, I'll turn the call over to Neil.

Neil Gaydon

Thank you, Ken. Good afternoon, and welcome, everyone. I'll start by saying that I'm pleased with SMART's third quarter results. Our ongoing work to properly align the company's structure, our strategy and culture is bearing fruit. Our new culture of customer centricity, accountability and execution has resulted in objectives that are being completed on time and according to our plans. Sales growth in our enterprise unit is largely offsetting the slowing rate of decline of our education sales.

Revenue from our education business, while still declining, was ahead of expectations due to stronger-than-expected sales of interactive whiteboard product and volumes of interactive flat panels beginning to take hold. As well, sales of interactive projectors were strong in the quarter, as we were able to catch up on our supply and fill existing back orders.

During the quarter, adjusted EBITDA was $19 million, compared to $6 million in the prior year quarter, an increase of over 200%. Core business revenue was $130 million compared to $135 million in the third quarter of fiscal 2013, a 3% decrease. Our core business continued to perform better than our expectations in Q3, driven by growth in our enterprise business unit and excitement around the new SMART Room System for Microsoft Lync. While our education business is still in decline, the decline is slowing, and we have had a good reception to our new product offerings in both education and enterprise.

Adjusted net income for the quarter was $9 million, or $0.07 a share, compared to an adjusted net loss of $3 million in the fiscal third quarter of last year. We delivered another strong quarter of disciplined operating costs while investing in growth areas, as per our strategic plan.

I'd like to briefly discuss NextWindow, our New Zealand-based subsidiary, that produces optical sensor components primarily for all-in-one desktop PCs.

SMART acquired this business in 2010, and we are now taking action to exit the optical touch sensor business for desktop displays. We've stated on prior calls the business is not part of our core operations as the components are used primarily for all-in-one desktop PCs, and profitability is not meeting our expectations.

The exit aligns with our strategy of focusing on large format displays and innovative software for education and enterprise customers. Our market departure will necessitate the winding down of NextWindow's operations. NextWindow will work closely with employees, customers and suppliers to manage its commitment during this wind down period. NextWindow generated approximately $13 million in revenue over the quarter and contributed negative adjusted EBITDA of about $1 million to SMART's overall results. And Kelly will discuss this in more detail later in the call.

Now I'll turn to some operational highlights for the quarter. We remain optimistic about our ability to continue to stabilize the education business given our commitment to product innovation and strong product release pipeline. Specifically, much attention has been directed toward our new SMART amp collaborative learning software product, which will be commercially available on April 1. SMART amp is our universal software solution for education that connects any interactive display, PC, laptop, tablet or smartphone, while enabling teachers and students to collaborate in real-time, do in-class assessment, connect to shared digital workspaces and interact with web-based learning materials regardless of location or device.

The hosting of the software in the cloud eliminates costs associated with supporting numerous proprietary operating systems and applications. As well, we are extending the functionality of Google services in education to ensure simple, seamless, cost-effective deployment for teachers and students with Google IDs. SMART amp is currently in alpha trials with several schools and was recently demonstrated at the British Education Training and Technology Conference in London. Feedback has been positive. We are still at an early stage, and we expect the sales of the product will be initially modest and gradually increase over several quarters.

We also announced 20 digital education content providers that have signed agreements to develop content for SMART amp software. For example, just a few weeks ago, we announced that HMH has entered into a comprehensive working relationship with us to bring together their research-based, globally recognized digital curriculum and SMART amp software.

HMH is amongst the world's largest providers of pre-K12 education solutions, and one of its longest-established publishing houses utilized by $15 million students in over 150 countries. Digital content from these partners, including HMH, covers all core school subjects for grades from pre-kindergarten to 12. Strong responses from so many content developers provide some indication of the anticipated adoption of SMART amp software in schools around the world.

Another recent innovation is our SMART flex solution. This hardware and software solution makes control of multiple interactive displays easier and more economic. Up to 10 displays can be controlled with one computer, lowering the cost of ownership through hardware, electricity and support savings. SMART flex simplifies the school's technology infrastructure while maximizing the impact of classroom technology.

Now turning to our enterprise business. Proof-of-concept sales of our SMART Room Systems for Microsoft Lync began to gain traction in the quarter. These systems include: SMART's industry-leading touch displays; a conference-grade, high-definition, wide-angle camera; conference-grade speakers; an integrated computer; a control console; and omni-directional table-top microphones. We've aligned our sales teams with Microsoft to communicate the benefits of purchasing or upgrading to Lync 2013 and utilizing SMART's Room Systems solution.

The systems run Microsoft Lync and Windows, and are targeted at Microsoft's broad group of Lync customers, which include 90% of the Fortune 100 companies.

Over 400 companies have already ordered proof-of-concept quantities. And while it's still early in the process, we expect some of these customers will follow with large orders over the coming quarters as they deploy the systems to their board rooms and meeting rooms.

The second part of our strategic approach in enterprise is pairing our interactive display hardware with our proprietary Meeting Pro software. We're targeting the architecture, engineering and construction, or better known as AEC markets, which place a high value on whiteboarding and data sharing to enable visual collaboration for building information modeling.

As part of our strategy, we have integrated our software with leading AEC industry design programs. The integration enables users to control and edit files direct on SMART Board interactive displays, which can help identify design issues, improve workflow and reduce overall costs.

As well, in December, we signed Westcon group as our North American distributor for our enterprise solutions. Westcon is a global company headquartered in the United States with over $4 billion in annual revenues. With over 100 offices, they ship to over 20,000 customers in more than 100 countries through a global network of speciality resellers. The Westcon distribution relationship allows for increased revenue opportunities to SMART through an expanded and experienced reseller channel, a better customer experience due to implementation of a streamlined logistic platform for customers with multiple locations and increase speed-to-market for our enterprise solutions.

In summary, over the past quarter, we have continued to make significant progress in delivering our 3-year strategy and plan. We will continue to further develop and enhance our products to create customer-driven solutions.

Now, I'll turn it over to Kelly, who will give you a closer look at our financial performance in the quarter.

Kelly Lee Schmitt

Thank you Neil. Expanding on some of Ken's opening comments, while our reported third quarter consolidated revenue was $158 million, revenue for our core business for the quarter decreased by 3% year-over-year to $130 million. We are pleased with this result as it represents a much lower rate of decline than recent periods. Results in our education business were ahead of internal expectation, and momentum in our enterprise business is building as customers transition from proof-of-concept sales to full deployment.

To help you bridge the $130 million of revenue for our core business to the $158 million of GAAP revenue, our NextWindow components business contributed approximately $13 million of additional revenue, and the deferred revenue adjustments added another $15 million of revenue.

Sales of our attachment hardware products, consisting of document cameras, interactive responses systems, SMART Board accessories and other revenue, continued to decline, from $25 million in Q3 of last year to $16 million this quarter. This is as expected as we end-of-life many of these products. Excluding these attachments, interactive display revenue actually grew by 4% in the quarter to $114 million from $110 million in the prior year period. We are pleased to see that sales of our core display products are beginning to stabilize.

Looking at units and average selling prices, in the third quarter, we sold about 64,000 interactive displays at an average adjusted sales price of $1,780 compared to 72,000 units at an average adjusted price of $1,522 in the same quarter last year. Our adjusted sales prices exclude the deferred revenue adjustments.

The increase in average ASPs reflects a higher proportion of revenue generated from our higher-priced products, including our interactive flat panels and our new SMART Room Systems for Microsoft Lync.

From a geographic perspective, core revenue for the quarter decreased by 8% in North America and 6% in EMEA and increased by over 80% in the rest of the world. Growth in our core revenue in the rest of the world was driven by sales growth in several countries, including Australia.

Our core business gross margin for the third quarter is 43% compared to 42% during the same quarter last year. The year-over-year increase in core gross margin was largely a result of foreign exchange movement, which provided approximately an 80-basis-point or almost 1% boost to margin. Without the FX movement, margin was essentially flat year-over-year.

When we compare our core gross margin of 43% to our reported GAAP gross margin of 44%, the impact of the deferred revenue adjustment and NextWindow pretty much offset each other. So if you start with our GAAP gross margin of 44%, removing the deferred revenue adjustment has a negative 6-point impact, bringing margin down to 38%. Then when you remove NextWindow from our results, it gives us a positive 5-point impact, which brings margin back up to 43% for our core business.

NextWindow had negative gross margin in the quarter, primarily due to $4 million of inventory write down. Total cash operating expenses in the third quarter were $39 million compared to $49 million during the same period last year. Excluding NextWindow, cash OpEx for the core business was $38 million compared to $48 million during the same period last year.

As a percent of core business revenue, our cash operating expenses were 29% during the most recent quarter compared to 35% in Q3 of last year. We are continuing to carefully control costs and, in addition, foreign exchange, primarily related to the weakening of the Canadian dollar compared to the U.S. dollar, positively impacted operating expense in the quarter by about $1.5 million.

Cash operating expense includes selling, market and admin and research and development expense. It excludes stock-based comp and bad debt expense. Adjusted EBITDA increased by $13 million to $19 million during the third quarter compared to $6 million in the same period last year, primarily due to lower cash operating expenses, but also new product introductions. As well, our adjusted EBITDA margin improved to 13% of revenue from 4% in the prior year period.

As Neil mentioned earlier, our NextWindow components business contributed an EBITDA loss of about $1 million in the quarter, meaning that adjusted EBITDA for the core business was actually $20 million in the quarter compared to $7 million last year.

We report GAAP net -- we reported GAAP net income of $4 million, or $0.03 a share, for the quarter. Our adjusted net income was $9 million, or $0.07 a share, compared to an adjusted net loss of $3 million, or $0.02 a share, in the same quarter last year.

As a reminder, we adjust GAAP net income for foreign exchange gains and losses, as well as the net change in deferred revenue and the amortization of intangible assets, stock-based comp and restructuring costs.

Now looking at our balance sheet. We ended the quarter with $46 million of cash and cash equivalents and $116 million of debt outstanding, excluding our capital lease, which was $67 million. With a total of $70 million of net debt, our trailing 12-month net debt to adjusted EBITDA sits at about 1.1x.

I'll take a few minutes now to further expand on Ken's opening comments and recap the explanation that I delivered last quarter regarding a recent change we've made to an accounting estimate that has had a significant effect on our result this quarter and will continue to do so for another 5 consecutive quarters through to March 31, 2015.

The recent announcement of Notebook Advantage has moved us through an annual software licensing model, which is a significant business change as we previously gave away our software for free for the life of the corresponding hardware products. This has resulted in a change to our software revenue deferral period from 7 years to 1 year.

As a result, we're accelerating the amortization of deferred revenue from our balance sheet and bringing it into earnings over 18 months on a straight-line basis. To align with our new service and support period of 1 year, all revenue from new sales of our Notebook software will be deferred over a 1-year period following April 1, 2014, when Notebook Advantage is launched.

As a result of this change in accounting estimate, you can expect deferred revenue to add approximately $16 million per quarter for another 5 quarters. Last quarter, I discussed a $10 million per quarter deferred revenue impact, which dealt with one piece of the adjustment. $16 million includes the full quarterly impact of both the change in accounting estimate, but also the fact that we now defer less revenue on new sales of our bundled hardware and software products, as well as standalone software. The net change in deferred revenue will fluctuate from quarter-to-quarter based on our actual sales volume, but we expect that fluctuation to be immaterial. I want to stress that this adjustment is entirely noncash, but the additional revenue will temporarily increase not only revenue, but also gross margins and GAAP net income over the corresponding periods.

Adjusted EBITDA and adjusted net income will not be affected by this additional revenue as our calculation already removes the full impact of deferred revenue. Moving forward, we will continue to communicate the effects of this change and the true profitability of the business as clearly as possible. We've provided a reconciliation of this impact in our MD&A.

The last issue that I want to mention today is a decision to exit the optical touch sensor business for desktop displays. As Neil mentioned earlier, the small format components business is not core to our corporate strategy, and profit margins are not meeting our expectations.

As a result, we are taking a proactive approach and winding down NextWindow's business operation. The estimated one-time earnings impact of the wind down is currently $30 million to $35 million, $14 million of which was incurred in our third quarter and the balance of which is expected to be recorded in the fourth quarter. The earnings impact is driven primarily by noncash asset write downs, and SMART's current expectation is that the wind down will not have a material impact on its cash resources. The wind down is expected to be completed by the end of our fiscal 2015.

With that, I'll turn the call back to Neil.

Neil Gaydon

Thank you, Kelly. I'll provide a few concluding comments before we advance to the Q&A. In terms of our outlook, we've exceeded our initial forecast for the first 9 months of our 2014 fiscal year. We believe the decline in our sales to the education sector is starting to slow, and sales from our enterprise unit are beginning to offset that decline. As well, our efforts to monetize our software investments are at an early stage of development, with Notebook Advantage and SMART amp being prepared for launch in April.

Our fourth quarter is always our seasonally slow quarter with relatively low visibility. As a result, we expect fourth quarter adjusted revenue to be slightly down compared to revenue from our fourth quarter of last year. We expect adjusted EBITDA to be approximately breakeven, which is a material improvement over our adjusted EBITDA in the fourth quarter of fiscal 2013.

Going forward, we expect our product mix to evolve to more interactive flat panels and interactive projectors, which have lower margins than our interactive whiteboards. As the profit mix shifts, we anticipate gross margin for our core business will transition to the low 40% range.

Looking to our 2015 fiscal year, we expect to see our revenue stabilize as a slowing decline in revenue from education is offset by growth in enterprise. However, we are in the early stages of our budget process, and we will provide a clearer review of our expectations on our next earnings call in May.

Overall, we had a solid quarter, but we remain cautious in our outlook. We're pleased to be delivering steady profitability with successful new products and a firm grip on costs while ensuring we invest in long -- key long-term growth areas such as software in both education and enterprise. Whilst we continue to face a challenging education market, we have improved how we manage the business, and the effects are becoming more visible through our operational and financial results.

Our exciting new Microsoft Lync SMART Room System product is beginning to gain traction in the form of proof-of-concept sales, and our Meeting Pro software paired with our industry-leading interactive flat panels is showing early promise in the design-intensive architecture, engineering and construction sector.

In the first 9 months of fiscal 2014, we have materially improved profitability and operating efficiency. We launched more new products than SMART has ever launched in this time scale, and we are investing in new innovative solutions that we will introduce in fiscal 2015. We are also implementing our strategy, culture and vision we communicated in May last year as we continue to make solid progress in the stabilization phase of SMART's 3-year plan.

I'll now turn the call over to the operator to begin the Q&A session. Operator?

Question-and-Answer Session

Operator

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

Todd Coupland - CIBC World Markets Inc., Research Division

Just on OpEx, I'll start there if I could. So it's obviously nicely below $40 million with the lower C dollar. What actually is the impact of a $0.01 change in the dollar? And should we expect it to remain below $40 million given where we're at?

Kelly Lee Schmitt

Yes. So the impact of a $0.01 change in the dollar is about $600,000 on adjusted EBITDA. And so in the quarter, obviously, we had a bigger change than that. So on OpEx, specifically, it did -- it lowered our OpEx by about $1.5 million. So, yes, with the C dollar, where it is today, all else being equal, we would expect to stay a little bit below that $40 million run rate that we've been seeing in prior quarters.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And then just in terms of material impact over the next couple of quarters, which products will you get the biggest impact from? I know -- you've obviously got the projector and the panels and the SMART Rooms, but maybe if you could just, I don't know, qualitatively or quantify rank order, the impact from those 3 areas?

Neil Gaydon

I think you've hit on them. The pace that we're sort of less clear on is to move from the proof-of-concept Microsoft Room Systems to full deployment. And some of these companies are extremely large blue chip companies with tantalizingly interesting rollout plans and scale. But the testing of the product, as they're incredibly rigorous and thorough, and all have different times scales as to when they'll complete that, and then start to plan their rollout amongst the meeting rooms. So in theory, and potentially, the Microsoft Lync Room System is the one that has a lot of potential, especially given that we're in over 400 companies. And as I say, many of those are very large blue chip companies. We will have to see as and when they finish those proof-of-concept and start to convert those into orders. But otherwise, the ones that you list, it's in that mix where we see it. And as we state, software is the longer-term proposition as schools and office business get used to using it, and that's going to be over quarters into the future.

Todd Coupland - CIBC World Markets Inc., Research Division

With those 400 companies, are they -- are there SMART Rooms out for tender? And if so, who are you typically having to bid against? I guess Cisco probably has an offering and the other guys.

Neil Gaydon

Well -- so what it is, these companies are already Microsoft Lync users. They know already how to use Lync 2010 and are now moving to Lync 2013. So it's not just the testing of our Lync Room System. They're also testing Lync 2013 before they go into full deployment of that. So they're not Cisco companies i.e. using Cisco equipment. These are Microsoft houses already. And so the -- so we've already won those tenders to get the product in. It's a case of going through the testing process before they move to full deployment.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. One last question, if I could. So from a seasonal point a view, June and September tend to be better. So with what you're hearing from your customers now on the educational side, should we see some fairly robust pickup in both panels, the new panels and the overhead projectors?

Neil Gaydon

So in the fourth quarter, the thing that has always been the challenge for the company for many, many years is that we're not in any buying cycle in education anywhere in the world.

Todd Coupland - CIBC World Markets Inc., Research Division

Well, I was thinking is that your June and your September quarter.

Neil Gaydon

Okay. We'll talk more about that on our May call.

Operator

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

Paul Treiber - RBC Capital Markets, LLC, Research Division

Board ASP looks like a record, going as far back as our model goes. What drove the mix shift to higher ASP boards and panels? And could you reconcile your comment on mix going forward versus the current ASPs?

Kelly Lee Schmitt

So it's really the growth that we're seeing in enterprise that's driving ASP higher. So if you look at the product portfolio, today, education is still selling, primarily interactive whiteboards, much slower ASP. Enterprise is selling our newest generation of interactive flat planes, as well as the Lync Room Systems, which have higher ASPs. So we still expect ASP to fluctuate from quarter-to-quarter. But assuming enterprise continues to grow, the ASP is going to trend higher.

Paul Treiber - RBC Capital Markets, LLC, Research Division

Okay. And then could you provide -- I think in the past you gave a breakdown between enterprise and education in terms of board shipments. Could you provide that for this quarter?

Kelly Lee Schmitt

I don't think we've ever broken down the units between that 2. But I think in the past, we said enterprise had grown to about 15% of our revenue. If you just look at what we're now defining as revenue for core business, this quarter, enterprise is between 20% and 25%. So it is growing as we expect in terms of its proportion of our total.

Paul Treiber - RBC Capital Markets, LLC, Research Division

Okay. And then in regards to Microsoft Lyncs, one of your competitors, a hardware competitor, did announce a rooms system. How do you see the hardware ecosystem for Microsoft Lyncs evolving? And then what do you see as your competitive advantage in that ecosystem?

Neil Gaydon

So it's a great question. The -- today, there is one other competitor, and there maybe -- we expect a third. We are the only one with a purpose design system that is being designed from the ground up, that meets all of Microsoft Lync's specifications. So really, the way I see this is that we are a hardware company supporting Microsoft's software, and this is a type of business I understand very, very well from previous lives. So it's up to us to provide the right next-generation when we move to the next generation and continue to cost produce. There is some degree of innovation for sure in hardware and keep ahead of our competition. And that was an important announcement regarding Westcon because this is a dramatic change in our distribution strategy, which means that when we deal with a multinational company, we can handle installation across any country pretty much. And that gives us more access. And there's Westcon, a world leader in UC&C. We've upgraded a lot of our sales channel. We brought in Scott Brown, who was the commercial head of Microsoft Lync, a number of months ago. So as long as we keep doing those things, innovating, our route to market is right, our channel is right with high-caliber salespeople and, of course, the quality of engineering here, we could believe that we can keep ahead.

Operator

Our next question comes from James Medvedeff of Cowen and Company.

James Medvedeff - Cowen and Company, LLC, Research Division

I want to go just a little deeper into the enterprise business. It sounds like it's really starting to get some traction. You said you have 400 proof-of-concept customers in the quarter?

Neil Gaydon

Just over that.

James Medvedeff - Cowen and Company, LLC, Research Division

Now what does that entail? Does that entail the shipment of a board?

Neil Gaydon

What it entails is a shipment of the complete SMART Room System, which can comprise of the camera, the microphones, the installation kit and 1 or 2 panels, depending on which system they're going for, for that particular meeting room. And so what's happened is those companies will order one of those systems and put them in, and then when they move to proof-of-concept, they order a number of those systems and install them. Because obviously, they're sharing video and sharing data, and they need to practice doing that. So it depends on which customer we're talking about. But it's anywhere between 3 and 4 to 10 or 12, that sort of range that they're currently trialing.

James Medvedeff - Cowen and Company, LLC, Research Division

And what would be the -- so that first full system that one of these customers buys is about -- maybe what sort of revenue does that generate? One system?

Neil Gaydon

Yes. So it depends what -- if they buy the dual panel or the single. But it's anywhere from $10,000 up to...

Kelly Lee Schmitt

Over $20,000.

Neil Gaydon

Over $20,000. Yes.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. And then is there a volume discount when they come back to do the next phase?

Neil Gaydon

In many cases, we've agreed pricing. So when they do the full rollout. And in other cases, the negotiation is yet to happen.

James Medvedeff - Cowen and Company, LLC, Research Division

What do you think the long term possibility is, or potential is, for the enterprise business as a percentage of sales?

Neil Gaydon

The way that we view it in our 3-year plan is that we see it splitting around 60%, education; 40%, enterprise. But it could be 50-50.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. I do have -- on the accounting side, for Kelly, I guess, could you break down the $14 million of noncash wind down expenses or costs this quarter? Is the $3.7 million restructuring charge part of that or no?

Kelly Lee Schmitt

It is. And unfortunately, it's not as cut and dry as it ending up in one line on the income statement. It's in a few lines. So there's a few pieces of it. The largest one is accelerating the amortization on the intangible assets. And so there's a separate line on the income statement for that. That was about a $6 million to $7 million impact in the quarter. It's accelerating. Depreciation on some fixed assets. That's part of COGS. That was another $1.5 million. The severance is included in the restructuring line that you see. And then the last piece is actually the inventory write downs, which again hit COGS. And it was about $4 million in the quarter.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. And so these accelerated intangible depreciation would continue at that level going forward until those accounts are completely wound down?

Kelly Lee Schmitt

Which will be March 31. So essentially, we determined this quarter that the end-of-life for the operations of the business would be March 31, and about half the cost were booked this quarter. And we expect the rest to be booked in Q4.

James Medvedeff - Cowen and Company, LLC, Research Division

Okay. And then we revert to the run -- to the previous run rate on those line items. Right?

Kelly Lee Schmitt

Well, some of them will just go away. That intangibles line item will just, in fact, go away. But yes on the other line items.

Operator

[Operator Instructions] Our next question comes from Scott Schmitz of Morgan Stanley.

Scott Schmitz - Morgan Stanley, Research Division

I just wanted to go back to the education side of things actually. And so can you just run through in a little bit more detail what drove the strength in the education side in the quarter? Was it budget related, product related or other things? And then I guess as a follow-on to that, how sustainable is that improvement going forward?

Neil Gaydon

So what we had was very strong delivery against our orders so that we cleared any backlog that we had, so that we had -- as we said in the announcement, that -- the interactive projector, we have got a bit of a backlog on that and we caught up with those. Education is still challenging. It's still soft for us. And so we're predicting in the fourth quarter that it will be down over last year. So we're certainly not out of the woods yet with education, but we see over the coming year more stabilization, that we've seen absolutely a slowing decline that we had in previous quarters, which were much, much higher. So we're pleased that we're starting to level off and would like to think that in financial year '15, we get to the point of stability.

Scott Schmitz - Morgan Stanley, Research Division

Got it. Okay. And then just on the software subscription change, can you talk about what -- I think you said minimal, but can you talk about what your pipeline looks like? Or just update us on the response to that change and from your customers.

Neil Gaydon

So the first part of it was, the change in software, was -- our notebook software that sits on one of our panels, was to make that available for sale. And so we have been selling that. We also did a deal with Epson. We're on their interactive projectors they offer, a notebook that has been selling through, albeit in modest numbers. And so then, the move to SMART amp and to Notebook Advantage, which is notebook available for an entire school, that doesn't launch until April 1. So that -- it's premature to give any sort of pipeline or view. SMART amp is such a brand-new concept and a game-changing piece of software. It's going to take a while to, pardon the pun, educate the education market as to how it works, what it does and the benefits to pedagogy and to schools and the teachers, which you obviously -- the most important thing, and also for the IT guys to just understand what savings that would produce in terms of knitting together the bring-your-own devices, which can be a Microsoft-based operating system or Android or Apple. It unifies all of those. So it will take us a while. And the reaction at the show that we -- the conference that we referred to in the -- the things I was saying earlier, that show was a very well-attended show. There was over 25,000 people there. And FutureSource put SMART amp as the most talked about product at the show. And there was a lot of interest for ministers and heads of IT and other people, and we carried out a demonstration, where we had a primary school in London, some miles away from the event, and we had children solving a problem. And all of us could see the work that was going on, on the screen. And at the end of it, the school was delighted. And they had Jaguar/Land Rover there helping them solve the problem. And interestingly, that school had only just received that software an hour before. And an hour later, they had it up and running on multiple devices, including a major competitor's interactive display. It wasn't even on a SMART Board, and it was all running perfectly. So there was a lot of interest, but we've got a ways to go yet to get it to market and generate revenues.

Operator

At this time, I'd like to turn the call back to management for any further remarks.

Neil Gaydon

Thank you, everybody, for taking the time to dial in. And we look forward to our call in May. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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