SMART Technologies' (SMT) CEO Neil Gaydon on F4Q 2014 Results - Earnings Call Transcript

| About: SMART Technologies (SMT)

SMART Technologies (NASDAQ:SMT)

Q4 2014 Earnings Conference Call

May 15, 2014 16:30 ET


Ken Wetherell - IR

Neil Gaydon - CEO

Kelly Schmitt - CFO


Katy Huberty - Morgan Stanley

Todd Coupland - CIBC

Paul Treiber - RBC Capital Markets

James Medvedeff - Cowen and Company


Good day ladies and gentlemen. Welcome to SMART Technologies Fourth Quarter Fiscal 2014 Earnings Conference Call. (Operator Instructions). I would now like to introduce your host for today's conference, Ken Wetherell, Investor Relations Manager. Please begin.

Ken Wetherell

Thank you, Operator. 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 fourth quarter and full year results and our operational highlights. Kelly will then speak in more detail regarding our financial results and then Neil will update you on our three year strategy. 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 statements within the meaning of applicable U.S. and Canadian Securities Laws. These statements which are further discussed in the important cautionary statements on slides 3 and 26 of our presentation include, without limitation, statements regarding our sales and performance outlook for fiscal year 2015 including with respect to core revenue, gross margin, adjusted EBITDA, operating expenses, sales growth, our market expectations, our business plans and strategies, future sales of our new and existing products and our future business product and other strategies.

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 annual information form, management's discussion and analysis and on Form 40-F for the year ended March 31, 2014.

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 last two 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 of the amortization of deferred revenue over six quarters beginning in the third quarter of fiscal 2014 and ending in the fourth quarter of fiscal 2015.

Essentially, we are bringing deferred revenue from our balance sheet into earnings over this 18-month period, we were adding back the net change on the (technical difficulty) in order to make adjusted revenue and adjusted gross margin consistent with adjusted EBITDA and adjusted net income. With that effect, it was an increase in revenue of $15 million in the quarter. We expect it to be approximately $60 million per quarter for each of the next four quarters.

The second item relates to our decision to wind down our NextWindow components business which we expect to complete by the end of fiscal year 2015, because of this business is not part of our core operations and soon will not be part of our business. We will focus much of our discussion on our results, excluding NextWindow.

Therefore, when 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 all 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. Before I get into the financial and operational results I would like to take a few minutes to discuss some recent announcements. First I will comment on some recent changes to our Board of Directors. On April 21st, we announced the resignations of our founders David Martin and Nancy Knowlton from our Board of Directors effective April 17th.

After 27 years of involvement with SMART, Mr. Martin and Ms. Knowlton decided to move on to other pursuits. We thank them for their contributions over the many years of service to SMART. Mr. Robert Hagerty and member of the Board since 2010 was appointed as Acting Chairman of the Board and today we announce the appointment of Mr. Michael Mueller as Board Chairman effective immediately taking over from Mr. Hagerty who will continue to serve as an Independent Director. Mr. Mueller has been on the Board of the Company since July 2010 and currently serves as the Chair of the Audit Committee. As well as the Board we will begin a formal search for additional independent directors.

We currently have five Board members including three independent members. In accordance with the provisions of SMART’s articles and shared provisions, the resignation of the founders has caused all of the issued and outstanding multi-voting class B shares of the company to automatically convert into single vote class A subordinate voting shares. After accounting for these conversions the share held by the founders, Apax Partners and Intel account for about 69% of the class A subordinate voting shares and the remaining 31% are widely held. The recently converted shares are currently unlisted. Overall we see this as a positive development for SMART since dual-share structures are often viewed as an impediment to certain investors.

The last item that I will mention is the exit of our Ottawa location which we announced in early March. This action was a progression of events that began in 2011 when SMART transferred it's Ottawa manufacturing operations to third party contract manufacturers. We continue to hold a long term lease on a large facility there so we used a portion of it as office space. We recently negotiated the early termination of the lease and decided not to maintain a location in Ottawa going forward.

This reduces our facilities footprint while we’re expanding our new location in Seattle, a market that is rich with technology talent. The exit of Ottawa affected our 10% of workforce, some employees were offered alternate work arrangements and some are leaving the company. For those who are leaving we are grateful for their past contributions and wish them all them well in their future endeavors. Kelly will speak more about this later in the presentation.

Now turning to the financial results, I will start by saying that I’m pleased with SMART’s annual and fourth quarter results. We continue to make progress in aligning the company’s structure, strategy and culture built on our foundations of customer centricity, execution and accountability. This time last year we expected our revenue in fiscal ’14 to be down 20% year-over-year. We ended the year with revenue from our core business down 12% with adjusted EBITDA up 53% and adjusted net income of 27 million which is more than double the 12 million we reported in fiscal year 2013.

There were four reasons for this strong results, number one we controlled our operating expenses averaging less than 40 million per quarter a 25% reduction from fiscal year 2013. Secondly, sales of new products will be launched in fiscal 2014 exceeded $200 million. Number three, the market for our higher market interactive whiteboard products did not decline as quickly as we expected and fourth favorable foreign exchange movement benefited our annual EBITDA by approximately 8 million.

In 2015 we plan to continue to maintain our operating expenses at approximately $40 million per quarter and we expect sales of our newest product SMART Room Systems for Microsoft Lync, SMART amp software, SMART interactive flat panels and SMART kapp digital capture boards to grow in the second half of the year.

However we’re running into headwinds in the first half of the year as our education business remains in decline due to the weakening of the interactive whiteboard category and but it's spent primarily going into infrastructure for WiFi and tablets. Education revenues were down almost 20% in 2014 and signs of stabilization are still not at hand. At the same time interactive display sales are transitioning to lower margin interactive plat panels. As well we can’t depend on favorable foreign exchange movements to help us in fiscal 2015 so we’re not expecting this year to be strong as fiscal 2014.

We’re investing in new products and technologies to transform our business over the next two to three years. This means 2015 will be a year of transition as revenues continue to decline in interactive whiteboards that have been the main stay of SMART’s business. And we move to new products destined for healthier markets and opportunities.

Therefore we’re unlikely to repeat our fiscal year 2014 performance in 2015. I will speak to this further and later in the presentation.

Looking to fourth quarter results revenue from our core business was up 4%. Q4 adjusted EBITDA was 3 million, a $12 million increase over the prior fourth quarter and our adjusted net loss improved by 50% to 6 million or $0.05 per share. Now I will turn to some operational highlights for the year.

Revenue from our education business despite declining year-over-year was ahead of our expectations largely due to stronger than expected sales of traditional projector based interactive whiteboard products. Sales of our new interactive flat panels showed growth particularly in Europe and revenues from our interactive projectors were also strong. We recently announced our new next generation 65 inch education interactive flat panel. This product has many features unavailable on any other flat panel in the market such as the ability for two students to simultaneously collaborate using different colors and pens or fingers all in the latest 4k resolution which allows incredible viewing from anywhere in the classroom and it begin shipping in June. We remain cautiously optimistic about our ability to ultimately stabilize the education business given our brand, commitment to product innovation and our strong challenge. Much attention has been directed toward our new cloud based SMART amp collaborative learning software which became commercially available in mid-April and took the past 18 months to develop. While it has only begun shipping in the past few weeks, initial interest in the product is encouraging.

SMART amp is education’s first fully collaborative software that is at the forefront of pedagogy requirements and seamlessly joins together any laptop, tablet or phone regardless of operating system. It allows teachers and students to work together regardless of classroom, home or country. Smart amp works on all types of devices, students and teachers do not require a SMART board to use SMART amp.

Last week we officially launched SMART amp to the media, education commentators and members of the investment community from our executive briefing center in New York, with individuals from 24 countries joining by webcast. The event involved to remote multi-classroom lesson demonstration with a classroom of children in New York and another classroom of children right across the other side of the United States in San Diego. The audience witnessed live collaboration between two classrooms on opposite sides of the United States with children using amp to successfully solve problems regardless of device with each other.

This software is the first of it's kind and is part of our long term strategy to create a SaaS based recurring revenue stream. Also in 2014 financial year we developed the strategy, new systems and product features required to begin licensing and charging for our SMART notebook software. For the first time SMART is monetizing it's software assets. We recently launched our new version of SMART software called Notebook 14 with many new premium features.

Growth in our enterprise business has been partly offsetting the decline in education driven by our interactive flat panel technology, Meeting Pro Software and our new SMART Room System for Microsoft Lync. On our last call we reported over 400 companies have been testing early proof of concept quantities.

As it is often the case with the new product category various system issues are causing the trials of these products to continue longer the anticipated while being resolved. Enthusiasm for the solution remains high but conversion to large scale roll out is likely to be pushed out into the second half of fiscal year 2015 while testing continues. We are pleased to announce in February that we have successfully added our world leading inking and whiteboarding experience to our SMART Room System for Microsoft Lync allowing data sharing in virtually any format including PDF, Word and Excel opening up the opportunity for recurring revenues as the software not only sits on the SMART Room System but also on personal devices such as laptops and tablets. This upgrade will start shipping in June this year.

Also in the enterprise business unit we continue to perfect our SMART interactive displays paired with our proprietary Meeting Pro Software which was recently updated. In addition, we increased our go to market capabilities with the Westcon Group as our global distributor for our enterprise solution.

On Monday we were delighted to announce a brand-new innovation and innovative product and category for SMART with a new category called digital capture board. It's called SMART kapp and we expect it to completely revolutionize the traditional dry erase board market. This relatively low cost and potentially high-volume product has a very large addressable market and workplaces, conference centers, hotels, home offices and other applications all around the world. It allows you to write, draw and capture ideas, while enabling you to instantly save your work images without the need to take the photo, easily convert them to PDFs and send to anyone, anywhere instantly.

Notes appear real time on your device, as well as remote participants, computers, tablets or smartphones avoiding the current situation where people who dial-in to a meeting cannot see what’s been written. I'll discuss more about this incredible new product in the strategy session. In summary over the past year, we've made significant progress in delivering on our strategy explained last year. I will get into more detail in our strategy update later, but I will first turn it over to Kelly who will give you a close look at our financial performance.

Kelly Schmitt

I thought I would start with a high-level view of our revenue trend over the past four years. So for those of you following along with the slides the graph on the left shows the percentage year-over-year change in our quarterly core revenue beginning in the first quarter of our 2011 financial year and ending in Q4 of fiscal 2014. You can see that our new strategy in the 2014 financial year helped to put the brakes on our revenue decline and in Q4 we actually achieved 4% growth although our education sales were still declining.

However fiscal year ’15 is a transition year for SMART so we’re not expecting this growth trend to continue over the coming 12 months. Neil will speak to this in more detail later in the call.

Now expanding on some of Ken’s opening comments, while our reported fourth quarter GAAP revenue and $124 million compared to a $105 million in the fourth quarter last year, quarterly revenue for our core business it increased by modest 4% year-over-year to a $101 million. Momentum in our enterprise business is building slowly as the transition from proof of concept sales to full deployment begins. To help you bridge the 101 million of revenue for our core business to the $124 million of GAAP revenue. Our NextWindow components business contributed approximately 8 million of additional revenue and the change in deferred revenue added another 15 million of revenue.

Sales of our attachment hardware products consisting of document cameras, interactive response systems, SMART board accessories and other revenue continued to decline from $19 million in Q4 last year to $12 million in Q4 this year.

This was as expected as the end of life of many of these products. Excluding these attachment products interactive display revenue actually grew by 13% in the quarter to $89 million up from $79 million in Q4 last year. Although unit volumes are down, sales of higher priced products and bundles drove the increase. So looking at units and average selling prices, in the fourth quarter we sold about 54,000 interactive displays at an average adjusted sales price of $1659 compared to 60,000 units at an ASP of $1303 in the same quarter last year.

Our adjusted sales prices exclude deferred revenue. The increase in average ASP reflected a higher proportion of revenue generated from our higher priced products including our interactive flat panels and our SMART Room System for Microsoft Lync. From a geographic perspective core revenue for the fourth quarter decreased by 15% in North America and increased by 48% in EMEA and 13% in the rest of the world. The overall decline in the North American education market continued, growth in our core revenue in EMEA was driven largely by increased sales in our focus markets of Great Britain, Germany and the Nordics countries.

Now moving to our full year results, for financial year 2014 our reported GAAP revenue was $589 million which is the same as the prior fiscal year but annual revenue for our core business decreased by 12% year-over-year to $503 million. Annual revenue for our education business was down about 18% while revenue for our enterprise business grew by approximately 25% year-over-year.

Sales of new products that we launched in fiscal ’14 exceeded $200 million. Our non-core NextWindow components business contributed approximately 55 million of additional revenue and the change in deferred revenue added another 31 million of revenue. Sales of our attachment hardware products and other revenues declined by $40 million or 38% from a 106 million in fiscal ’13 to 66 million in fiscal ’14. Again excluding these attachment products annual interactive display revenue declined by only 6% to $437 million from $465 million in the prior year.

With regard to units and average selling prices in our fiscal year ’14 we sold about 290,000 interactive displays at an average ASP of $1505 compared to 339,000 units at an average ASP of $1372 last year. From a geographic perspective core revenues for the year decreased by 17% in North America and 5% in EMEA. Annual revenue grew by 6% in the rest of the world. The annual decline in core revenue in EMEA was driven largely by reduced sales into Russia and rest of world annual growth was driven primarily by sales to India and Panama.

Our core business gross margin for the fourth quarter was 38% compared to 42% during the same quarter last year. The year-over-year decrease in core margin was driven primarily by shift in our product mix to lower margin interactive flat panel. To bridge from our GAAP gross margin of 43% removing the deferred revenue adjustment has a negative eight point impact bringing margin down to 35% but then when you remove NextWindow from our results that gives us a positive three point impact bringing margins to 38% for our core business. NextWindow had breakeven gross margin in the quarter.

Looking now at our annual gross margin our core business gross margin for the 2014 fiscal year was 43% compared to 45% in fiscal ’13. The annual decrease in core gross margin was largely due to the same product mix shift to interactive flat panels that impacted Q4. When we compare our core annual gross margin of 43% to our GAAP gross margin which was also 43%, the impact of NextWindow offset the deferred revenue adjustment. So starting with GAAP gross margin of 43% removing the deferred revenue adjustment has a negative three point impact bringing margin down to 40% but then when you removed NextWindow from our results that gives us a positive three point impact bringing margin back up to 43% for our core business for the year.

NextWindow had an 11% gross margin for the full year, we expect margins for our core business to trend near 40% as our product mix transitions to lower margin interactive flat panels. Total cash operating expenses for fiscal year 2014 were a $158 million compared to 213 million during the same period last year. Cash operating expenses for the core business excluding NextWindow were down 25% year-over-year at a $154 million compared to $205 million during the same period last year. We’re continuing to carefully control costs, in addition foreign exchange primarily related to the weakening of the Canadian dollar compared to the U.S. dollar positively impacted operating expense in fiscal ’14 by about $5 million.

Total cash operating expenses in the fourth quarter were $37 million compared to $50 million during the same period last year. Operating expenses for NextWindow in Q4 were relatively minor and got lost in the rounding, so cash operating expense for the core business was also 37 million compared to 49 million during the same period last year. Foreign exchange positively impacted operating expense in the quarter by about $2 million.

Cash operating expenses include selling, marketing and administration and research and development expenses. Adjusted EBITDA increased by $25 million to $74 million in our 2014 fiscal year compared to 49 million in fiscal ’13 primarily due to lower cash operating expenses and new product introduction. Our adjusted EBITDA margin improved to 13% from 8% last year approximately $8 million of the increase in our annual adjusted EBITDA was due to favorable foreign exchange movements.

Our NextWindow components business contributed about $5 million to our total adjusted EBITDA for the year meaning that adjusted EBITDA for the core business was $69 million for the year compared to 52 million last year. When you remove both NextWindow and foreign exchange from our results adjusted EBITDA for the year was $61 million and actually it would have been below 60 million had the shift from interactive whiteboard to interactive flat panel progressed more quickly as our gross margin is highly sensitive to our product mix.

Fourth Quarter adjusted EBITDA increased by $12 million from negative 9 million last year to positive 3 million this year. Approximately 3 million of the increase in the quarter was due to favorable foreign exchange movements and our NextWindow components business generated adjusted EBITDA close to zero for the quarter. So adjusted EBITDA for the core business was 3 million compared to negative seven in Q4 last year.

We reported an adjusted net loss of $6 million or $0.05 per share for the fourth quarter. Our adjusted net income for fiscal year 2014 more than doubled to $27 million or $0.22 per share compared to $12 million or $0.10 per share in fiscal ’13. As a reminder we adjust GAAP net income for foreign exchange gains and losses as well as the net change in deferred revenue, amortization of intangible assets, stock based comp, restructuring cost and gains and losses on the sale along these assets.

Looking at our capital structure, we ended the quarter with $58 million of cash and cash equivalents and a $114 million of debt outstanding excluding our capital lease which was 64 million. With the total of 56 million in net debt our trailing 12 month net debt to adjusted EBITDA is about 0.7 times. I will take a few minutes now to further expand on Ken’s opening comments and recap the explanation I delivered on the last two earnings call regarding a recent change we have made to an accounting estimate that has had a significant effect on our results these past two quarters and we will continue to do so throughout fiscal ’15. The implementation of Notebook Advantage has moved us to an annual software licensing model.

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 one year, all revenue from new sales of our notebook software will be deferred over a one year period following April 1st, 2014 when Notebook Advantage was launched. As a result of this change and accounting estimate you can expect deferred revenue to add approximately $16 million per quarter or $64 million total for fiscal ‘15. This adjustment is non-cash but it will temporarily increase GAAP revenue and gross margin and GAAP net income throughout this period.

Adjusted EBITDA and adjusted net income are not affected by this additional revenues as our calculation already removed the full impact of deferred revenue. Moving forward we will continue to communicate the effect of this change in accounting estimate and the true profitability of the business is clearly as possible. We provided a reconciliation of this impact in our MD&A.

I will now provide an update on the wind-down of NextWindow’s business operations. The wind-down is proceeding a bit more slowly than planned as we agreed to continue to meet customer commitments by shipping small amounts of product in Q1 and Q2 of fiscal ’15 in exchange for early contract terminations. The estimated one time earnings impact of the wind-down is currently about $25 million which is down from the estimate we provided on our last earnings call of 30 million to 35 million.

The reduction relates primarily to a deal we struck with the competitor to purchase a portion of NextWindow’s inventory as well as the transfer of some of NextWindow’s fixed assets to SMART for use in the production of our own products. Of this total impact of 25 million, 24 million was incurred in fiscal ’14, 9 million of which was in the fourth quarter. The earnings impact is driven primarily by non-cash asset write-downs and the impact of the wind-down on SMART’s cash resources is expected to be immaterial. The last item I wanted to discuss today is the closing of our Ottawa business location effective August 31, 2014 which we announced on March 4. This restructuring effects both 10% of our workforce and in the fourth quarter we accrued approximately 3 million in employee severance cost and an additional 3 million of lease exit cost.

With that I will turn the call back to Neil.

Neil Gaydon

Thank you Kelly. I will provide a few comments before we move on to our strategy discussion. In terms of our outlook SMART is still in the process of turnaround from bringing an interactive whiteboard education company in decline to a growing business with a new broader and innovative product line, including recurring software revenues and a growing presence in the enterprise space.

Our transition not only involves building a new enterprise business but also developing new technologies, products, markets and customers all of which are at early phases of introduction or execution. We expect Q1 fiscal 2015 core revenue to be between 115 million to 125 million as we continue to see declines in our education business and we do not yet expect sales from our enterprise business to fully offset this decrease.

We expect core gross margin to be near the 40% level as our product mix shifts from interactive whiteboards where the category is weakening to interactive flat panels, which are growing for which carry a lower gross margin. We plan to maintain operating expenses around the $40 million per quarter level as we continue to drive greater efficiency and invest in the new potential growth areas. Thus, we expect first quarter adjusted EBITDA to be in the range of 7 million to 10 million.

Visibility in our business continues to be extremely limited, but based on what we know today we expect our 2015 fiscal year core revenue to be similar to fiscal year 2014 at around 500 million. With core gross margins remaining near the 40% level and cash operating expenses of approximately 40 million per quarter. We expect our typical seasonality where Q1 and Q2 are our strongest quarters due to the education buying cycle to change.

Our first half will be weaker than last year and we expect revenue in the second half to be similar to the first half as sales from our SMART Room System for Microsoft Lync, new interactive flat panels, the recently introduced SMART amp software SMART kapp products start to grow.

To reiterate visibility is limited, our sales are difficult to predict and our annual outlook is subject to a number of variables such as how quickly the transition to interactive flat panels occurs that can impact our forecast. So from where we sit today we expect annual adjusted EBITDA to be in the 40 million to 50 million range. We will provide our next update for fiscal 2015 on our first quarter conference call in August.

Fiscal year 2015 is an important transition year as SMART’s new business model, a new product platforms begin to gain traction. We have spent the past year carefully managing our costs due to the decline in our core interactive whiteboard education sales, while investing in a new range of technologies and products to reinvent SMART over the next two to three years into a leading software and interactive flat panel provider for the education and enterprise sectors delivering recurring software revenues and solid hardware sales.

In our education business we have purpose built interactive flat panels, interactive whiteboards and interactive projectors to maintain our share of the interactive display market and industry-leading software that we’re monetizing to improve our sales and maintain our margins.

In our enterprise business we have developed two possibly highly disruptive technology. SMART’s new groundbreaking kapp product that has the capability to displace the dry erase whiteboard and our SMART Room System that with Microsoft as a sales and technology partner has the potential to disrupt the traditional business meeting room.

In addition our Meeting Pro Software and interactive flat panels continue to be used by a wide variety of design intensive businesses. Over the next two to three years these key initiatives should enable us to complete our strategic transition into a growing and diversified business. We expect these initiatives to positively impact our financial performance, while we remain cautious in our outlook we continue to move forward with discipline strategy execution and we’re making progress.

Now I will spend a few minutes updating you on our three year strategy for growth. Further to Ken’s statement earlier we again remind you that some of the information you will here during the strategy discussion consists a forward-looking statements. We will start with a review of the progress we made against our strategic objectives in our 2014 financial year. We will then discuss at a high level of our strategy for the next three financial years including five strategic initiatives we’re focusing on that we expect will drive SMART’s transition from an interactive whiteboard education company to a full diversified business in both education and enterprise with a strong component of recurring software based revenue. In our 2014 financial year we completed the stabilization phase of our three year plan which outlined on last year’s earnings call.

To remind you of where SMART was a year ago, the call product upon which the company had been built the interactive whiteboard was in steep decline and we were searching for new products to replace it. Although we have made significant progress in our turnaround plan in fiscal 2014 this was only the first step. We’re still moving through a period of massive change as we rebuild SMART and I don’t want anyone to under estimate the enormity of the task ahead of us. We have a plan in place to overcome our challenges but there is significant risk involved.

Our financial year ’14 strategy was focused on building a more efficient company and pointing SMART to growth areas that have promised of the future. We have made significant progress launching more new products than ever before while growing our profitability inspite a further declines in revenue. We improved our financial position by reducing our leverage, we also made significant progress in transforming our corporate culture to one of accountability innovative and collaboration but consistently execute well and celebrate success. Our education hardware business begun to stabilize as the rate of decline in our sales slowed, at the same time our enterprise business is showing growth.

The planning and execution at this stage was led by a new and revitalized senior management team. Our rebuilt executive team is a good mix of smart veterans, our new members with plenty of tech experience from the likes of Microsoft, Hewlett Packard and Motorola. Prior to joining SMART in October 2012 I was Chief Executive of Pace, a technology developer for Pay TV and broadband service providers. During my tenure there I led the company through a major turnaround resulting in a 10 fold increase in revenues to become the world leader in that product category.

Warren Barkley, our Chief Technology Officer and Scott Brown, President of our Enterprise Group came to us from Microsoft. Most recently Warren served as General Manager in the Unified Communications Division and was instrumental in the development of Microsoft Lync and the establishment of WiFi as a worldwide standard.

Scott held numerous executive roles and most recently oversaw the Microsoft Lync Global Sales and Partner Strategy. Greg is still the President of our Education Segment, has nearly 30 years of global technology experience including executive positions at Hewlett Packard and Motorola.

Kelly Schmitt, our CFO, Jeff Lowe, Legal, Nicholas Svensson, Operations and Pam Ramotowski, People Services all have several years of experience at SMART providing a solid base of direct company experience in our team.

The latest addition to the team is Leslie Dance, our Vice President of Marketing. Leslie brings an exceptional marketing leadership background to SMART having spent the last 20 years in a variety of senior positions at Motorola, Burberry and Kodak. All members of the team have a significant portion of their compensation aligned with corporate objectives and performance. In the form of performance based cash bonuses and anticipation in our equity incentive plan. So how did we do in fiscal 2014 compared to what we said we would do last year? Education is an integral part of the SMART DNA, last year at this time we anticipated that schools would begin to transition away from traditional interactive whiteboards to interactive flat panels and we aim to be a leader in this product category. Thus we designed and launched our E70 product the world’s first interactive flat panel designed specifically for the education market and we just announced our 60-65 interactive flat panel which I will talk more about later in the presentation.

We also said that we would create the glue for the collaborative classroom by building a software product that would allow all the disparate devices in the classroom whether they be SMART, Android, Apple or Microsoft, to work together in a very simple, cost-effective way. As a result we developed SMART amp software building it from the ground up over the past year and we began taking orders for this product in April.

Rather than integrating with all the different operating systems it simply works by a HTML through any major browser thus solving the bring your own device incompatibility issue within education. Our SMART amp software allows the child or the teacher to access content on any and any of the project work that they have done from any device anywhere. We already have orders representing 14,000 teachers and students some using on a trial basis, the 90 days and some representing firm orders.

We’re encouraged by this early activity. We also said that we would monetize our software and generate recurring revenues via cloud based software as a service and licensing models, so we introduced site and maintenance license in SMART Notebook and our SaaS model with SMART amp.

The positive financial impact of these initiatives have just begun to be realized and we will benefit as going forward. Now let’s discuss how we get on the enterprise side. We said we would partner with Microsoft to grow sales of Lync based room systems. Last fall we launched SMART Room System for Microsoft Lync and we are now Microsoft’s number one partner for this product category. We also said we would target specific industry verticals with SMART Meeting Pro Solutions, we have prioritized the design intensive architecture, engineering and construction industry and have integrated our software with leading AEC software products. Finally we said we will grow our enterprise channel so we signed up Westcon as our enterprise global distributor.

To summarize of the enterprise side, we made progress but it is still early. So that’s enough about where we have been. Now let’s talk about where we’re going. We have now rolled our three year plan forward to include fiscal year 2017. We expect fiscal 2015 to be our turn around year and in fiscal 2016 we expect SMART to be a transformed company with a stable education base, recurring software revenue and a growing enterprise business. In fiscal 2017 we plan to be excelling with modest growth and education, an established brand in education software and a powerful enterprise growth engine.

Let’s take a look at the strategy that will guide our progress. Five key initiatives will be driving our strategy, the first two are intended to create a stable and profitable education business. First is our software initiative, we have positioned our education software to be a source of high margin recurring revenue going forward. It is currently a minor part of our revenue because in the past we have provided free software with our hardware. As of April 2014 that all changed and our display has continued with a perpetual license to SMART Notebook but now the software maintenance entitlement is limited to a year. After the first year all software updates, upgrades and support must be purchased incrementally as part of our Notebook Advantage software maintenance offering. As well in April we have begun taking orders for SMART amp our cloud based software designed for uniting classroom devices on a common platform.

From a hardware perspective our interactive whiteboards are still the category leader while fit for purpose interactive flat panels and interactive projectors are positioned to meet growing demand, a new installations and replacement of aging interactive whiteboards and projectors.

Turning now to the enterprise side, we have three initiatives that are intended to kick start our growth engine. First our SMART Room System for Microsoft Lync is gaining traction with a broad group of customers. Second, we will continue to develop the best in class visual collaboration solutions with our SMART interactive displays coupled with our proprietary Meeting Pro Software targeting design intensive verticals such as architecture, engineering and construction. Finally SMART kapp, is a new product with a large potential addressable market that we’re very excited about.

Let’s now take a look at these initiatives in a little more detail. The first strategic initiative was developing our high margin recurring revenue software and services offering. SMART is addressing the multi-device education market with made for purpose software solutions that connect the collaborative classroom. What has been missing is a common platform that allows any device to operate in sync with the teacher’s lesson in real time. SMART amp does just that, it enables the collaborative classroom built around Google’s Education platform it allows teachers and students to teach and learn collaboratively. All they need is an internet connected device such as SMART board, laptop, tablet or smartphone and a Google ID.

Currently more than 20 million students use Google Apps and this number is growing rapidly. We currently have over 20 digital education content providers signed up to SMART amp including Houghton Mifflin Harcourt, one of the world’s largest providers of pre-kindergarten to grade 12 education solutions and one of it's longest establishing publishing houses. SMART Notebook is the leading education specific software package with more than 3.5 million downloads since Notebook 11. Many school districts have built their entire curriculum around SMART Notebook. SMART Notebook software can be downloaded on various devices including those that are not manufactured by SMART. And SMART’s Notebook Advantage licensing program ensures that customers have access to the latest updates and technical support.

For example Notebook Advantage provides subscribers with access to our recently introduced SMART Notebook 14 with significantly expanded capabilities and functionalities that creates a much better teaching and learning experience. The illustration on this slide demonstrates the value proposition of SMART Notebook combined with SMART amp. Moving clockwise from the top you can see two students collaborating remotely on a lesson from their homes; a student working on a lesson while going home on a bus, a small group of students collaborating around the SMART Table, three students collaborating around an interactive display; and a teacher using a SMART board coupled with tablet. SMART amp connects all of these devices simultaneously allowing the teacher to control her lesson and receive real time feedback from all of her students regardless of their location or device.

We have invested in meaningful resources and education software because it is a strong foundation for future high margin growth and recurring revenue. Our primary near term target market for recurring software revenues North America were 3.8 million kindergarten to grade 12 classrooms and assuming annual software fees of around a $115 per classroom or $5 a student and this is for SMART amp alone, this addressable market has an opportunity of $440 million per year.

Globally we estimate the maximum addressable market for amp to be around $4 billion of revenues a year, even if assume only 50% of global classrooms who have the infrastructure for digital learning and if we assume that fees need to be discounted by say anywhere from 0% to 40%, the global addressable market is still larger than over a 1 billion. While we’re not implying that this will be our revenue going forward it does demonstrate the massive potential of a market that we all know very well. Targeting these large addressable markets for future software revenue is a key part of our strategy.

Now turning to our second strategy initiative, education hardware we recognize that the market is beginning to transition away from interactive whiteboards to interactive flat panels and interactive projectors. Both of these product categories have been showing double digit growth rate. Europe is on the leading edge of this trend and we expect North America to follow as this product replacement cycle matures. As a result we have been protecting our revenue and market share by transitioning our business to interactive flat panels and high end interactive projectors while maintaining our leadership in interactive whiteboards.

We recently introduced the first in the new line of SMART board interactive flat panels for the education market. The 65 inch interactive flat panels establishes a new benchmark for interactive displays with improved image quality, the latest SMART Notebook software and features that make the technology easier than ever to use. This product is designed around learning and pedagogy and is not your typical interactive television.

In education interactive displays are professional tools, and used by teachers and/or students for up to 8 or 9 consecutive hours a day. A teacher requires a screen quality that he or she can touch, write, and draw comfortably and an overall design that is durable and robust. We design our products with education uses and learning environments in mind and we will continue to add new distinguishing features that are centered around how students learn and how teachers teach.

We also recently introduced a second generation of the LightRaise interactive projector, featuring an improved image and greater functionality. This product is a wall-mounted ultra-short-throw projector that creates an interactive surface on any wall or flat space without the need for additional hardware. As well we have maintained our share of interactive whiteboards with industry leading features and competitive pricing. There is still over 3 million SMART interactive displays in store globally and the SMART brand is amongst the strongest in education. We are the global leader in interactive displays, excluding China we have over two times the product category share of our nearest competitor. And not forgetting this is the highly specialized market, we know how budgets and contracts are awarded, how installations are carried out and what support and maintenance is required.

SMART has spent over 20 years building one of the most highly developed and respected education channels in the world.

I would like now to change subjects and talk about our enterprise market. Our first strategic initiative in enterprise is to build on Microsoft’s leadership position in the Unified Communications and Collaboration Sector to market our SMART Room System for Microsoft Lync. Microsoft Lync currently has a 20% share of global internet protocol telephony lines, with over 40 million users. And these numbers are on a double digit growth trajectory as Microsoft pursues an aggressive expansion strategy and in the unified communications and collaboration market.

Our strong partnership with Microsoft is demonstrated by the fact that the SMART Room Systems are in Microsoft’s Top 30 global briefing centers. We’re their leading room systems partner and we engage in joint sales and marketing with Microsoft sales representatives. Corporate meeting rooms are ripe for disruption, and Microsoft’s new Lync 13 really is a game changer.

Traditional video conference solutions are expensive and difficult to deploy and lack the features required to enable collaboration among meeting participants. The SMART Room System for Microsoft Lync is an all-in-one out of the box solution that allows you to start a complex video conference meeting in seconds instead of people trying to dial-in with complex pin codes, local and remote users join the meeting for a simple touch of a button. Full two-way data collaboration allows all participants, local and remote to contribute equally to the meeting.

Multiple video streams allow remote participants to been seen as present in the room. Teams can collaborate around the interactive display and two-way content sharing is not just for those in the room but for any remote participants as well. The speakers and microphones replace the traditional spider phone. Camera and whiteboards, provide remote participant video streams and two-way data collaboration all connected through Lync software. The speakers, the camera, all of the components are been designed by SMART around the Lync system for a rich collaborative experience.

Our years of research and interactivity has helped us design cameras that capture the action in the entire room whether the people are sitting or at the display, and it's also light-sensitive, avoiding complex lighting systems. Touch displays that deliver a true whiteboard experience and an audio system that enables users to work from anywhere in the room. Unlike competing systems it requires no additional complex backend infrastructure and no expensive remodification.

The cost of the system is less than half of that competing solutions and it can be installed in less than a day. We view the system as a large opportunity for SMART and we’re very focused on growing it's deployment going forward. If we’re successful it will dramatically change the way a meeting room runs, and give SMART a major presence in the enterprise space.

The second strategic initiative in enterprise is our utra-high-definition, fourth generative interactive flat panel displays coupled with our Meeting Pro Software. This is a new product with features that address the meet for active collaboration in design intensive industries. One of our initial targets for this power solution is the architecture engineering construction vertical. This solution integrates with industry leading design applications created by such as Autodesk, Tekla, Adobe, et cetera is ideal for AEC. To demonstrate this point at Stanford University white paper concluded -- following a survey of 54 industry and academic users of SMART boards and software for design and construction that the SMART collaboration solution dramatically improved efficiency. For example a general contractor with revenues of $300 million per year realized their investment payback in just one week.

The most recent initiative in our enterprise strategy is our new SMART kapp, digital capture board which we just announced on Monday. With the tremendous potential market this product is the dry erase white board of the 21st century. Like magic, SMART kapp enables the instant capture and transfer of ideas converting dry erase ink back onto PDFs, and then being able to send them to anyone, anywhere, anytime.

It eliminates the need for note taking or taking photographs of your work, the image on the SMART kapp board instantly shows up on remote devices as it is created and can be saved digitally for later. SMART kapp diversifies our product offering and represents our entry into the lower cost of individual of this market. It is as literally as easy to use as a dry erase board. Just pick up a dry erase marker and begin drawing or writing. It comes in 42 inch and 84 inch sizes and will be officially launched in June.

So now we have covered the building blocks of our strategy, let’s summarize where we expect to take SMART over the next years. We’re beginning to monetize our education software offering initially targeting our install base of hardware product in over 2.8 million classrooms. We have started on the road to establish SMART amp as the glue for the collaborative classroom. Part of our strategy is to stimulate demand for SMART amp by recruiting additional content providers. The uptake from content providers has been good partly because there are no initial or ongoing fees involved.

SMART amp provides them with free digital access to a huge contingent of educators and students. We are still see challenges in education, revenues continue to decline in fiscal ’14 but we’re building a new business model for education by meeting and cultivating demand for our large format displays with new interactive flat panels and high end interactive projectors as well as introducing new and monetizing existing high margin software solutions. Interactive flat panels in education were rare but we’re announcing the transition from interactive whiteboards to interactive flat panels happening and we have planned for it. We used to be a one trick pony, offering only interactive whiteboards. Now we offer a full suite of hardware products, interactive flat panels, interactive projectors and interactive whiteboards.

SMART is a new brand in the enterprise market. We started on the path to establishing a global presence in meeting room product largely through working with Microsoft. We will also advance our entry into the design intensive verticals with SMART interactive displays coupled with Meeting Pro Software. Finally we will be pursue the disruption of the office dry erase whiteboard market with our new SMART kapp digital capture boards and we’re excited about our creation of a new and vast marketplace.

In financial year ’16 we expect to grow our recurring revenue from software to represent 10% to 15% of our business. In our enterprise business we expect to establish our SMART Room System as a substantial and profitable contributor to our results. We also intend to gain a recurring revenue stream from our SMART Room System with connectors that allow the use of our Meeting Pro Software with our SMART Room System.

As well we intend to become a recognized collaboration solution provider to design intensive applications with our large format interactive flat panels coupled with SMART Meeting Pro Software, also by financial year ’16 we should be well on our way to disrupting the dry erase whiteboard market with our SMART kapp products that we will be looking to extend our success into new market.

Fiscal year 2017 is when we expect SMART to begin to excel, at that time we plan to be showing growth in our education sales. We also plan to establish our software and services as the gold standard for collaboration learning as well our enterprise business should be over 40% of our revenue and EBITDA due to contributions from our SRS, Meeting Pro and SMART kapp products.

We will also continue our strong focus on innovation through research and development, we expect that our new product pipeline will continue to be replenished with innovative new collaboration products. Our pipeline over the next 12 months includes next generation interactive flat panels of various sizes for education and enterprise, increased capabilities for SMART Room Systems and upgrades and additional enhancements for our software including SMART amp and SMART kapp products.

In summary we believe our strategy will lay a solid foundation for SMART’s success with a global leading brand in education, recurring software revenue, accelerating growth in enterprise, a relentless focus on cost management and efficiency and strong planning and execution from an industry leading management team.

With that I will turn the call over to the operator to begin the Q&A session. Operator?

Question-and-Answer Session


(Operator Instructions). Our first question comes from the line of Katy Huberty of Morgan Stanley. Your line is now open.

Katy Huberty - Morgan Stanley

Is your view that the weakness in the first half of ’15 in education is a function of schools adopting the common core standards? And somewhat transient or is this a longer term trend towards tablets in your view?

Neil Gaydon

I think there is two parts to that question, the first one is the use of a front of room [ph] display is not going away. What is true is that the majority of budget is going into enabling schools with the right infrastructure for WiFi and money is being spent on tablets. So in the short term that causes on the budget is going in that way means that there is a decrease of spend in towards the products that we use. I think we’re about number five on the list now, not us but the interactive whiteboard category and display in terms of priorities about number five. So it means that there is less money going into that but it doesn’t mean that the interactive display from the classroom is going away.

There is few things there, so firstly not only is the display is staying there but there is a change from interactive whiteboards towards interactive flat panels and we obviously got ready for that by the products that we make. We started building SMART amp 18 months specifically to target tablets. You don’t need a SMART board, it doesn’t require a SMART amp it will run in any classroom. It will run in any competitors classroom, on any of their tablets and devices regardless.

So that’s what we’re talking about in our strategy. We’re pointing the company towards where the growth is and where there is a real requirement to join the tablets together. What’s happening in classrooms is many, many hours are being wasted while teachers try and start a lesson. When people have got you know products with -- this could be three different operating systems running in the classroom simultaneously whether that’s an Apple device or Android Chromebook, Microsoft whatever, not that there is anything wrong with those products but it's just extremely difficult to start a lesson when everyone is on different software with different applications and different ways of working.

SMART amp joins all of those together so that a teacher can start with one platform, one lesson plan and where children can collaborate in an entirely different way than these consumer electronic products allow for.

Katy Huberty - Morgan Stanley

And at the end of fiscal ’15 where would you expect to exit in terms of mix of interactive flat panel versus interactive whiteboard?

Neil Gaydon

Too early to call.

Katy Huberty - Morgan Stanley

I don’t think I heard, did you give a mix that you’re at today?

Kelly Schmitt

No we didn’t. So I’m using rough numbers here Katy but about 15% of our revenue in fiscal ’14 which are from interactive flat panel we’re expecting that to double in fiscal ’15 but again we’re making assumptions on quick this transition happens and we will have to see how it plays out.

Katy Huberty - Morgan Stanley

And you mentioned an issue or issues that have popped up in the proof of concept trials for the enterprise products, is that a SMART technology issue or a partner interoperability issue and how quickly can it be addressed?

Neil Gaydon

It's a mixture. It's a whole mixture of either customer premises, their infrastructure isn't quite ready so they are having to do upgrades which then they have to go through the testing and then restart testing the product or it's partners and I got to say off late the SMART products are performing pretty well.

Katy Huberty - Morgan Stanley

Okay and how do you think those issues they are impacting the customers view on how widely they would want to ultimately roll the product out?

Neil Gaydon

Well the good news is that so far the customers that we have been testing with remain very enthusiastic for the solution and the product. So we’re not seeing customers walk away or who want to change, they want to perform in the way it should. So we’re working our way through the issues.

Katy Huberty - Morgan Stanley

Okay and then finally how should we think about free cash flow for fiscal ’15 relative to the adjusted EBITDA guidance?

Kelly Schmitt

With the outlook range that we gave we would expect free cash flow to be pretty close to breakeven possibly slightly negative if we are at the low end of that outlook. Just as a reminder we do have an undrawn ABL facility so we’re quite comfortable with our working capital.


Thank you. Our next question comes from the line of Todd Coupland of CIBC. Your line is now open.

Todd Coupland - CIBC

I’m not sure I understand the issue of deployment of the SMART Room Systems, so could you just roll that back and specifically say what are the infrastructure impediments or barriers and what are the partner barriers to deployment?

Neil Gaydon

So with any new technology it takes a lot of people and a lot of work to make sure that they are performing the way they should. So it's not like plugging in a DVD player or whatever and it just works, our system -- at network there is, a whole network throughout facility that has to be stabilized so this is not uncommon and those on the call will know that it's not uncommon when new network systems are introduced. So everybody is working very hard and including the customers to move these proof of concept into full roll out. But these are taking longer than expected which is why we’re saying that we’re expecting volume roll outs start to move into the second half then where we had perhaps anticipated where they would be in the first half of this year.

Todd Coupland - CIBC

So all the trials are being pushed out and you’re hoping the orders will stick and roll out in the second half of the year?

Neil Gaydon

That’s correct.

Todd Coupland - CIBC

And secondly on the education market, normally it picks up in June and September quarter and you’re basically saying the fundamental decline in that market is not going to allow that to happen this year?

Neil Gaydon

That’s how it looks at the moment. Now again we have such little visibility in education as to when budgets release and when things happen, this is from where we can see it today with the knowledge that we have and the first quarter has an education primarily being disappointing and not where we expected it to be, but because the lack of visibility we don’t know whether that’s the bump in the road or whether that’s an indication of things to come for the year. So, hence we’re taking a prudent view for the overall year because we just don’t know.

Kelly Schmitt

I would add to that as well and say part of the reason that seasonality is shifting is because enterprise is growing and so two years ago for instance we were 60:40 from the first half of the year and the second half. This last year we were 55:45 and now we’re expecting that to be closer to 50:50. Two things are happening, at enterprise growing and we are expecting a lot of growth particularly in the second half but it's also that the decline in education has been primarily North America and the summer was their traditional strong buying season.

Todd Coupland - CIBC

My last question is on amp, would you expect any school districts or Boards or any sort of group in terms of the way you want to categorize it? Would you expect any of those types of decisions and deployments for the next school year so those decisions take place this summer, should we expect to see that?

Neil Gaydon

It's too early to call Todd and it's only been out for three weeks, shipping. So again it's not too dissimilar to the room system we were talking about just earlier. People have got to go through trials and testing. The product is working absolutely flawlessly. I mean it's looking great. Teachers have to think how they are going to build that into their lessons and how they are going to teach with that. So we have to go through those sort of tests and trials because it's such a new product and it hits right where pedagogy is going which is in the ability for children to collaborate seamlessly because one thing, I’m just going to go a little bit to the side for one second. Don’t just think about tablets in the classroom for amp, think about the child at school, very often they have to hand their tablet back or if they want to bring their own device but what invariably happens is then on the way home they work on their smartphone, well they can pick up amp on their smartphone. Then when they walk in the door at home, if they have to have hand their tablet back in because the school owns them they then can carry on working on amp from their PC.

So that colossal change for children in pedagogy and by the way while they are working on their PC at home they can collaborate in real time with the teacher, with any students as if they are working on one piece of paper in effect. It's such a breakthrough product. It's going to just take a little while for the education community to think how they are going to use it. So we are working very closely with leading educators and thought leaders on this as to how to get that through and so got to give them a little bit of time. So it's a great question but it's just a little bit early for us to call on. I will give you further update on the next quarter.

Todd Coupland - CIBC

One follow-up on amp and then that’s it for me. So if those decisions can happen over the course of the summer, is it fair for us to assume that schools will or Boards will try this but are unlikely to rule it out in the middle of the year so this perhaps gets pushed into the next school year?

Neil Gaydon

That could happen, I don’t want to say anything until we get some definitive. So I’m not trying to lure anybody with that comment. It's just saying that it's so near you. We don’t know how quick it could get taken out. What schools appetite to launch new technology like this during this school year we will have to see. We have seen them do that with other technologies, so I’m not sure it means that if we miss the summer we miss the whole financial year, I’m not sure that’s quite right. But what we have seen is that children within an hour are given this product are using it and finding it so interesting and simple to use.

It's normally the teacher that takes a little bit longer and I’m not trying to insult teachers in that but the children pick it up really, really fast. So I’m not sure that it doesn’t preclude that. We just have to see because it's such a radical new product.


Thank you. Our next question comes from the line of Paul Treiber of RBC Capital Markets. Your line is now open.

Paul Treiber - RBC Capital Markets

Just wondering what’s the gap between the gross margins in your newer interactive displays and the older legacy whiteboards and then what’s the strategy going forward to close those gaps?

Kelly Schmitt

So the older legacy whiteboards when we sold them on their own without a projector they were kind in the high 60s for margin. Now when we sold the bundle with the projector that brought it down into kind of the mid to high-50s depending on the exact product sold and margins on interactive flat panels are in the low-40s. So there is no way interactive flat panels are ever going to be a 60% gross margin product, this is why we have been signaling this shift on the last few quarterly earnings call but of course the longer term plan to close that gap is through increasing our software sales.

Paul Treiber - RBC Capital Markets

And I might have missed it but did you disclose the enterprise contribution this quarter as a percent of revenue?

Kelly Schmitt

We did not, it was about 25% so it has been growing over the last few quarters.

Paul Treiber - RBC Capital Markets

And then just in regards to Microsoft Lync the Room System opportunity, what should we think about in terms of beyond the trials but the broader sort of gating factors of potential accelerants? Is Microsoft Lync -- does it need to be widely deployed in the organization for them to deploy the room system or could they deploy the room systems independently and then secondly what are they looking to do with the legacy video conferencing solutions? Are they typically looking to rip them out as part of the upgrade?

Neil Gaydon

So the way to think about Microsoft Lync is for the meeting room system to work it requires what’s called Microsoft Lync 2013, because it was launched last year and so that is a server that runs the Lync throughout the organization. So it would seem unlikely that somebody who haven't deployed Lync widely in their organization would put it in a meeting room because it works on the client device, the laptop and tablet as much as it does in the meeting room as well and so it's a consistent way to do UC&C and video telephony calls throughout the whole company. So the way we have been targeting, we have been targeting the companies who operate like that or who want to operate like that and so it's consistent and what we’re seeing is that where a new building is going up or where the existing video telephony systems are really old and they are due for upgrading and change is where we’re seeing the opportunities.


Thank you. Our next question comes from the line of James Medvedeff of Cowen and Company. Your line is now open.

James Medvedeff - Cowen and Company

I just wanted to make sure I’m clear on the guidance, so the $40 million per quarter of OpEx is that cash or GAAP OpEx?

Kelly Schmitt

That’s cash.

James Medvedeff - Cowen and Company

Thanks for the detail on enterprise being 25% of sales in Q4, I assume that’s core sales?

Kelly Schmitt

That’s correct.

James Medvedeff - Cowen and Company

And you expect that to grow or you hope for that to grow to I believe you said 40% by 2017, is that right?

Neil Gaydon

That’s correct.

James Medvedeff - Cowen and Company

Do you envision that as being sort of 25, 30, 35, 40 kind of straight line through the years or will there be a steeper part of the curve?

Neil Gaydon

I couldn’t be as accurate as that but it's going to be a line like that but I don’t know the exact numbers.

James Medvedeff - Cowen and Company

And then what is the difference in ASP between -- if you are just thinking about the panels or the boards, the ASP that you provided of $1659, how does that number spread between enterprise and education?

Kelly Schmitt

There is a lot of products that go into so it's hard to give you an exact answer but the ASPs in enterprise are significantly higher, the reason that ASP overall has been increasing is primarily the SMART Room System where an average ASP is $15 to $20. So if you throw those at the mix and then you contrast it with the lowest end interactive whiteboard we saw it could be $200 or $300, you could see the ASP number is not really that meaningful. As we have talked about on past calls we do plan to start doing segmented reporting’s for our business units in the first quarter so you will see that when we report Q1 in August and you will be able to get a bit more detail.

James Medvedeff - Cowen and Company

Let me just throw in the hope and expectation that you would be giving us some backward looking quarters to compare to when you start to provide the additional detail?

Kelly Schmitt

I think the current plan is to do comparative to fiscal ’14.

James Medvedeff - Cowen and Company

Final question on that topic is what is the difference in gross margin if the overall core gross margin is 40%? I assume that that’s core gross margin is 40%, right?

Kelly Schmitt

That’s correct. So education is a little bit higher than that and enterprise is a little bit lower and the reason for the difference is primarily that enterprise sells interactive flat panel which carry a lower margin than interactive whiteboards.

James Medvedeff - Cowen and Company

Okay. And to be clear the 40% more or less 40% gross margin that you’re trending towards that’s core correct? So it doesn’t include the software deferred revenue?

Kelly Schmitt

That’s correct.

James Medvedeff - Cowen and Company

Right so when we move into 2016 the gross margin would presumably actually -- as we’re in 2015 we still will be getting a benefit, margin benefit from the deferred revenue change, right?

Kelly Schmitt

That’s right. So, margins will look more like in the mid-40s but really we’re trying to get everybody to focus on core to look at our true performance and that will be in the 40% range.

James Medvedeff - Cowen and Company

Yes I understand, I just want to make sure that I’m understanding that I’ve got the right moving parts, moving in the direction?

Kelly Schmitt

Sounds like you do, yes.

James Medvedeff - Cowen and Company

And then, if 2015 -- this is my final question, if 2015 is more or less flat on core revenue how does 2016 look just -- it sounds like you will be accelerating into the second half of 2015 in the enterprise side and so what’s your initial thought about how 2016 might look?

Kelly Schmitt

I would say it's much too early to comment at this point and at this stage we’re not prepared to give any kind of guidance for fiscal ’16.


Thank you. And I’m showing no further questions at this time. I would like to hand the call back over to Mr. Gaydon for any closing remarks.

Neil Gaydon

So thanks everyone for joining us on the call today. I acknowledge that our short term outlook is disappointing and there will be bumps along the road as we transition SMART over the next two to three years to a healthy company with a recurring software revenue component, stable education, hardware sales and a strong enterprise growth engine. We appreciate your patience as we continue this transformation. Thank you.


Ladies and gentlemen thanks for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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