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SMART Technologies Inc (NASDAQ:SMT)

Q1 2015 Earnings Conference Call

August 7, 2014 4:30 PM ET

Executives

Ken Wetherell – Investor Relations Manager

Neil Gaydon – President and Chief Executive Officer

Kelly Schmitt – Vice President, Finance and Chief Financial Officer

Analysts

Katy Huberty – Morgan Stanley

Todd Coupland – CIBC

Paul Treiber – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the SMART Technologies' First Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to turn the call over to Ken Wetherell.

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 some commentary on key operational highlights. Kelly will then review our financial results, before turning it back to Neil, to provide an update on our financial guidance. Following our prepared remarks, we’ll 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 the applicable U.S. and Canadian Securities Laws. These statements which are further discussed in the important cautionary statement filed on Page 3 of our presentation include, without limitation, statements regarding our sales and performance outlook for the second quarter and full year fiscal 2015 including on a core and consolidated basis, our operating expenses, revenue, gross margin, cash, operating expense and adjusted EBITDA.

The progress of our multi year strategy, our market expectations, future sales of our new and existing products, the addressable market for certain of our products and our future business product and other plans and strategies. All of these 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 more 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 and management's discussion and analysis, for the fiscal year ended March 31, 2014.

Before I turn the call over to Neil, I will provide you 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 we discussed on previous earnings calls, 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 and we are adding back the net change on the remaining deferred revenue in order to make adjusted revenue and adjusted gross margin consistent with adjusted EBITDA and adjusted net income. With net effect, it was an increase in revenue of $15 million in the quarter. We expect it to be approximately $16 million per quarter for each of the next four quarters.

This adjustment is non-cash and it will temporarily increase GAAP revenue, gross margin and GAAP net income. We have provided the reconciliation of this impact in our MD&A. 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 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 business, excluding both deferred revenue and NextWindow. NextWindow cease shipments in July, so going forward our core business will be described by our adjusted metrics.

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. 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 metrics has not changed as a result of the changes to deferred revenue in NextWindow. Therefore, the presentation is consistent with prior quarters.

As stated on prior calls, this is the first quarter that we are providing segmented information for our education enterprise and NextWindow business units. A breakdown of revenue and adjusted EBITDA for these segments can be found in our financial statements and MD&A.

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

Neil Gaydon

Thank you, Ken. Good afternoon and welcome everyone. Our Q1 financial results where within our guidance as we continue to execute against our strategy to move the company into markets with higher growth potential.

Our enterprise business grew 45% year-over-year driven by our interactive flat panels using SMART Meeting Pro software as well as our SMART Room System from Microsoft Lync. However, our education business declined 19% over the same period as the increasing interactive flat panel sales was not yet adequate to offset declining interactive whiteboard sales.

Despite making positive progress with our new products and services strategy, we are continuing to experience headwinds in the form of interactive whiteboard sales declining at a faster rate than anticipated and the inherent lack of visibility in our education business.

We believe this decline is being driven by high penetration rates in our core markets as well as schools in the United States prioritizing the 2014 budget funds to upgrade the Internet networks and personal device inventory in order to comply with up and coming Common Core Curriculum requirements. Although our enterprise business showed significant year-over-year growth sales of our SMART Room System from Microsoft Lync are continuing to progress more slowly than expected.

However despite these near-term challenges, we remain confident in our strategy and as such we are continuing to invest in the four strategic priorities which we believe will provide excellent growth opportunities for the future: The SMART kapp digital capture board, our SMART Room System from Microsoft Lync, our education software suite including the newly launched SMART amp and our new interactive flat panels for both the education and enterprise markets. I’ll spend a few minutes touching on each of these in more detail.

First, we are very excited about SMART kapp, our revolutionary and unique replacement for the old fashion dry erase board and flip chart. We officially unveiled SMART kapp in June at InfoComm in 2014 in Las Vegas, where it was awarded the best overall new product of the entire show.

We believe the total addressable market for this product is very large and right for disruption. For example, there are over 25 million enterprise and government meeting rooms and higher education classrooms in North America and EMEA that could potentially benefit from SMART kapp.

In addition, kapp could potentially be utilized in over 250 million individual workspaces as well as public open spaces like halls, cafeterias and libraries and production factory floors in the same geography. And this is before we address the many consumer applications for this product. We are obviously applying conservatism to our internal projections of the kapp, but it’s clear that the potential is vast. SMART kapp users write, draw, diagram and brainstorm using a regular ink marker just as they would with a traditional dry-erase board.

SMART kapp then uniquely allows co-workers and clients to follow anything written on the SMART kapp in real-time on their digital device. The work can then be saved and shared instantly with anyone, anywhere as a PDF or JPEG installing SMART kapp is as easy as hanging a dry erase board and the only wiring needed is a standard outlet to plug it in. SMART kapp comes with an app for mobile devices that will eventually include recurring revenue opportunities for compelling premium features.

SMART kapp builds on over a decade of SMART’s research and innovation in proprietary DViT optical touch systems and digital ink technology. This includes many US patents, issued patents relating to kapp technology and a portfolio of families with over 50 issued patents in 12 countries worldwide. And we’ve filed even more as we have developed the product.

Our patent portfolio in this area is large and diverse. We expect to begin shipping kapp in our third fiscal quarter and we are starting with a soft launch of the product via 13 of our channel partners who have a 90-day sole right to sell SMART kapp in North America. At the end of the three month period, SMART kapp will be made available to all of our enterprise and education channel partners adding new countries in an organized and methodical path.

This will be the first time we have authorized a SMART product to be sold online. This is because the product is so simple to install and use. Our excitement for this product is only increased based on the positive reaction we’ve had from potential customers who have seen or touched the kapp board.

We’ve therefore made a decision to accelerate our investments in kapp by approximately $8 million in fiscal 2015. This previously unbudgeted investment will encompass additional sales and go-to-market activities as well as incremental R&D spend.

While we expect to see some benefit from the investment in our fiscal Q4 most of the return will come into fiscal 2016 and beyond. I’ll speak more about this later in the guidance section of the call.

Now, moving on to SMART Room System from Microsoft Lync. On our last call, we reported that the trials of many of our proof-of-concept customers were continuing longer than anticipated as product issues are being resolved.

Product improvements including firmware, hardware and software updates have since improved stability of the product. Interest in the solution has not abated and conversion to wider rollouts is expected to gradually gain traction in the second half of fiscal year 2015 as customers incrementally deploy additional Room Systems.

There is no doubt this has been a slower process than originally anticipated. But we continue to believe that corporate meeting rooms with traditional video conferencing systems are right for disruption and this product coupled with Microsoft groundbreaking Lync Room System software has a good future growth potential.

Turning next to education software, in the quarter we launched our new cloud based SMART amp collaborative learning software, which works on any large format display, tablet, laptop or PC as well as our Notebook advantage maintenance and upgrade package for all front of class displays regardless of make or brand. While both of these products are gaining momentum and we’re gradually building a high margin recurring software revenue stream it’s too early to gauge uptake at this stage and we expect to have a better handle on this on our next earnings call in November when school is back in session in North America where our largest focus is.

In the quarter we also simplified our software pricing by introducing a new bundled license package called unlimited which allows schools and districts to purchase SMART amp and Notebook licenses with various volume and pricing tiers. This helps schools and districts with budgeting and dramatically simplify SMART software purchase and support.

In June we announced an agreement that enables more than 450 New York state school districts encompassing over 4,000 schools to purchase the full suite of SMART educational software at a pre-negotiated rate. The agreement will help New York state teachers and students take full advantage of all educational possibilities in their technology enabled 21st century classrooms. We’re making positive progress with our software strategy but it is early days.

I’ll finish off with our fourth strategic initiatives, interactive flat panels. In education the front of room display remains a crucial part of teaching and learning and replacement cycle of interactive whiteboards to interactive flat panels is expected to accelerate over time.

We’re already seeing the start of this trend in Europe. Per the latest report from Futuresource Consulting which tracks the interactive display space, SMART recently became the leading provider of interactive flat panels to education in North America and Western Europe with only one model that we launched last year. With our interactive flat panel suite now growing coupled with our world leading Notebook software and specialized market channel we’re well positioned to benefit from this transition.

The transition to interactive flat panels is a consequence of the improved user experience picture quality and the fact that the total cost of ownership is less than that of an interactive whiteboard and projector combination. Our latest flat panel, the new SMART Board 6065 exemplifies all of these qualities and is the first interactive flat panel designed specifically for education.

At the end of June, we launched this product at ISTE 2014 in Atlanta where it won the Best of Show award; the 6065 IFP is unique in that it establishes a new benchmark for education interactive displays with improved education specific usability, sharper image quality all for all of class viewing and features that make our technology easier than ever for teachers and students to use, and all backed by SMART patent portfolio. On the enterprise side, users already have a strong preference for interactive flat panels over interactive whiteboards. And we therefore primarily sell IFPs in this market.

Given the importance of interactive flat panels to our business going forward, we are therefore accelerating the investment into both our current and future interactive flat panel technogy. And this is in order to stay ahead of our competition and maintain our margins. We spent $2 million of operating expense on this initiative in Q1, I’m trying to spend an additional $3 million to $4 million in the reminder of fiscal 2015, that was previously unbudgeted on new technologies pertaining to IFPs. I will discuss how this impacts our guidance for the year later in the call.

In summary, as outlined on our last call the first quarter has been difficult and we expect this softness to continue in the near-term. We believe revenue in the second half of fiscal 2015 will benefit somewhat from improving traction of our new strategic priorities such as our SMART kaap product, SMART Room System from Microsoft Lync, and our education software products and interactive flat panels. The sales of these new products are unlikely to offset lower sales of our interactive whiteboards in the education segment.

In response to these near-term challenges, we took action quickly, and have cut costs across the company targeted in areas that have little opportunity to drive future growth. However, as outlined we are reallocating this spend in order to accelerate our strategic priorities with SMART kaap and interactive flat panels.

I’ll now turn over to Kelly, who will provide a detailed analysis of our first quarter financial performance.

Kelly Schmitt

Thank you, Neil. Starting with revenue, we reported first quarter GAAP revenue of $138 million compared to $156 million in the first quarter last year. Quarterly revenue for our core business decreased 12% year-over-year from $135 million to $119 million, which was near the mid point of the guidance range we provided on our last call.

Momentum in our enterprise business is building as year-over-year quarterly sales grew by 45% from $15 million to $22 million. But this was not enough to offset the 19% decline in our education segment sales. To help you bridge the $119 million of revenue for our core business to the $138 million of GAAP revenue we recorded, our NextWindow components businesses contributed approximately $4 million of additional revenue and deferred revenue added another $15 million.

From a geographic perspective, core revenue for the first quarter decreased by $19 million or 19% in North America and $3 million or 10% in EMEA. Core revenue increased by $6 million or 80% in the rest of the world.

As Neil mentioned earlier, the overall decline in the North American education market was partly driven by high Classroom penetration rates, and the ambition of many US schools to meet Common Core Curriculum requirement, resulting in many schools spending more of their budgets on Internet infrastructure and personal devices.

Growth in the rest of the world was driven largely by $3 million order to provide displays for 1,500 class rooms in Peru.

Our core business gross margin for the first quarter was 39% compared to 45% during the same quarter last year. The year-over-year decrease in margin was driven primarily by shift in our product mix to lower margin interactive flat panel, as well as lower pricing on some products that we’ve recently discontinued to move them out of inventory. To bridge from our GAAP gross margin of 46%, removing the deferred revenue adjustment has a negative seven point impact bringing core gross margin down to 39%. NextWindow had no material impact on our gross margin in the quarter. So core gross margin was essentially the same as adjusted margin at 39%.

Total cash operating expenses in the first quarter were $39 million, which is flat compared to $39 million during the same period last year. As part of our investments in the future, operating expenses in the quarter included a $2 million investment in our interactive flat panel technology, which Neil mentioned earlier.

First quarter adjusted EBITDA decreased by $17 million year-over-year from $27 million to $10 million, which was at the top of the guidance range we provided on our last call. Our NextWindow components business generated EBITDA of about $1 million in the quarter compared to $5 million in the prior year quarter, which means that adjusted EBITDA for the core business was $9 million for Q1 compared to $22 million in Q1 of last year.

We reported an adjusted net loss of $300,000 for the first quarter compared to adjusted net income of $17 million or $0.13 per share in the comparable quarter of 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, amortization of intangibles assets, stock based comp, restructuring cost and gains and losses on the sale of long-lived assets.

As Neil mentioned, as a result of the continued decline in sales for education hardware business, we took action in the first quarter and implemented cost reduction measures in areas with lower potential growth opportunities. Much of this cost saving will be reapplied to our strategic priorities including SMART kaap and interactive flat panels. Approximately $2 million of restructuring costs were accrued in the quarter in connection with these cost reduction. We are also deferring approximately $4 million of previously planned capital expenditures.

Now looking at our capital structure we ended the quarter with $43 million of cash and cash equivalents and a $112 million of debt outstanding excluding our capital lease which was $66 million. With the total of $69 million in net debt our trailing 12 months debt to adjusted EBITDA is about 1.2 times.

As of June 30, SMART’s total liquidity was approximately $85 million consisting of $43 million of cash and cash equivalents and a $50 million ABL facility of which $42 million was available to be drawn after $8 million of usage for letters of credit. Therefore, we don’t expect any liquidity challenges in the foreseeable future.

I’ll now turn the call back to Neil.

Neil Gaydon

Thank you, Kelly. Although we achieved the mid to high end of our guidance range for the first quarter, we are lowering our outlook for the full fiscal year which was previously $40 million to $50 million of adjusted EBITDA.

The way of explanation when we built our three year strategy we expected to see some stabilization in our education interactive display sales by this point in the plan. Education revenues were down almost 20% in fiscal 2014 and with education sales down 19% in the latest quarter, signs of stabilization are not yet at hand. Despite the conversion from projector based interactive whiteboards to new interactive flat panels which has already began overall unit volumes of interactive displays into education are declining in our core markets.

In addition sales of our SMART Room System from Microsoft Lync are progressing more slowly than expected due to extended product testing. In response to this continued headwind we took swift action in the quarter and cut both our operating expenses and capital expenditures. In order to hold EBITDA near the low end of the range we provided previously and also to preserve cash. Subsequently, we made the decision to accelerate our investment in our strategic priorities for the reasons I outlined earlier in the call.

While that $11 million to $12 million investment will drive some marginal upside revenue in Q4 of this year, most of the benefit is expected to come in fiscal year 2016 and beyond. Therefore we’re lowering our adjusted EBITDA guidance to $25 million to $30 million for the year.

To summarize for the second quarter we expect core revenue between $110 million and $120 million as we continue to see declines in our education business and sales growth from our enterprise business were not yet fully offset those declines.

We expect core gross margin to be in the high 30s on a percentage of revenue basis as our product mix continues to shift from interactive whiteboards to interactive flat panels, which inherently carry a lower gross margin and as we reduced inventory of discontinued products, we’ve taken action to reduce operating expenses to approximately $37 million per quarter which includes the investments in our strategic priorities. Thus we expect second quarter adjusted EBITDA to be in the region of $7 million to $10 million. We expect revenue in the second half of fiscal 2015 to be lower, sales from our SMART Room System from Microsoft Lync, new interactive flat panels; the recently introduced SMART Kapp.

SMART amp software and SMART Kapp products start to demonstrate growth but not yet enough to offset declining education hardware sales. Visibility in our business continues to be extremely limited but based on what we know today, we expect 2015 fiscal year core revenue to be in the range of $420 million to $440 million with gross margin in the high 30’s on a percentage of revenue basis and the annual cash operating expenses of around $150 million.

Based on this outlook, we anticipate annual adjusted EBITDA to be in the range of $25 million to $30 million inclusive of the additional investment in our strategic properties. Although fiscal 2015, will be a year of transition we anticipate that these investments will drive incremental adjusted EBITDA improvement in fiscal year 2016. We acknowledge that our annual EBITDA guidance implies the free cash flow will be negative for the year but the combination of our cash balance availability on our revolver and our continuing efforts to drive further operational efficiencies will help to ensure sufficient liquidity for the foreseeable future.

We’ll provide our next update for fiscal 2015 on our second quarter conference call in November. SMART remains in the process of a difficult turnaround from being an interactive whiteboard education company that was in decline to becoming a growing business with a new, broad and innovative product line including new recurring software revenues and a growing presence in the enterprise space.

This transition not only involves building an entire new enterprise business but also developing brand new technologies, products, markets and customers all of which are at early phases of introduction or execution. Management acknowledges the transition is taking longer than anticipated but at the same time, it’s pleased with a new innovative products that SMART is bringing to the market that are expected to transform our business over the next two to three years.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Katy Huberty from Morgan Stanley.

Katy Huberty – Morgan Stanley

How do you get any confidence that once education is done addressing the common core that the spend will come back to interactive whiteboards or other technology from SMART? And then other companies have talked about common core penetration about 50% at this point. Is that in line with your view?

Neil Gaydon

So, the second, latter part of that question, I don’t know whether - we hear it’s quite that high at 50% that it’s certainly making ground. And I think it’s that urgency that the schools have where they have to make a move to have Wi-Fi infrastructure in place for assessment tools et cetera. So the – in our conversations with CIOs that is their priority and they have to get it done. And I think with the pricing on some of the display, the personal devices coming down, particularly Chromebooks, has certainly got a lot of interest in the schools so they can afford to roll out a wider proliferation of those devices.

So, we’re not hearing that there is a reduction in appetite for fronts of room displays, certainly penetration is having its effect, which you’d expect with over 50% of the schools in the United States for example, now having interactive displays. The UK is even higher, it’s around 90%, but what’s happening in Europe and in the UK that the replacement cycle is – has just recently started.

The thing that we’ve just started to hear and see in a number of trade shows I’ve been to and in talking to educators is there is a growing frustration with the projector based whiteboards, the cost of life. Projectors give up after four or five years, and there is a constant replacement of bulbs. And the fact that a flat panel now, if you look at our new 6065, which has 4K resolution, which means that size of screen actually offers a better display than a say 77-inch whiteboard.

And the price now where it’s coming to is starting to look interesting, when you map the whole cost of life of replacing a projector two or three times in the life and light bulbs of a whiteboards whereas the flat panel doesn’t need any of those things. So, there is two prongs going on there; we’re not hearing the appetite for front of room displays is diminishing, it’s just spend is going elsewhere, which has paused that rollout.

And secondly, with the current installed base, over time of which we don’t know quite how long that’s going to be of course because visibility is so poor. But there is certainly a growing appetite to want to replace these interactive whiteboards with flat panels.

Katy Huberty – Morgan Stanley

Okay. And then just shifting the discussion a little bit longer term. And I appreciate the sensitivity of this question, given the heritage of the Company. But we are in the fourth year of meaningful declines in education, which is limiting interest in the equity. And obviously limiting investors' ability to see what's going on in the enterprise part of the business. Is there ever a point where you would consider divesting part of the education business? Or some other strategic action that would allow you to accelerate the time to revenue growth? Or do we need to just wait that two to three years for the crossover point when enterprise becomes the bigger piece of the business and will drive the top and bottom line trends?

Neil Gaydon

I think that’s a great question and truthfully I’m just not able to answer that. We’re not thinking of divesting of the education business because of the products that we got, the recurring software opportunity with SMART amp. We’re seeing good traction with our Notebook software sales and even into other countries like China, and places like that. So I think education eventually will become a good business for us again.

And I think you will be ashamed to miss the conversion from the interactive whiteboards the millions of those that we put in that we miss out on the move back to interactive flat panels. I’m so pleased with - I know it doesn’t look like great given the numbers but the fact the company didn’t have an interactive flat panel for the education market at all when I arrived in the company, we got a product out last summer, well, autumn, and with that one product because of market channel and because of our software we’re the number one in Europe and the number one in America it’s pretty good going that’s before we got all the new range which we’ll have out by January next year, so that transition in terms of how quickly that happens to your point when we start to see that stabilize.

And then of course the recurring software piece which could be very profitable and very good for the company in the longer term. And don’t forget SMART kapp works both in education primarily we think higher ed which is a big gap for the company, we don’t do a lot of business in higher ed. So that’s a great growth opportunity where we got great channel and brand to deal to with that. And of course the huge opportunity into enterprise for that. So I think your word wait whether it’s two to three years I don’t know, again because of visibility; I would love to think it’s sooner but I think the strategy is right we’re just going to execute; we are just dealing with a greater headwind than we anticipated in education.

Katy Huberty – Morgan Stanley

Okay. And then finally, the enterprise business, which you now break out, it's slightly profitable. But far less than education. I understand that there's a higher mix of interactive flat panels with lower margin there. But with scale, should we expect the enterprise EBITDA margin to improve meaningfully?

Kelly Schmitt

Yes, it would, I wouldn’t expect a big improvement in the product margins necessarily because over time as we start to get larger and larger deals, we get a bit more price pressure than we’re seeing today. However, when you look at that portion of our cost of goods that isn’t related to the product that’s the cost for operations team and procurement and getting the product out to market with scale that will help to improve the margins.

Katy Huberty – Morgan Stanley

Okay. Thank you very much.

Neil Gaydon

Thank you.

Operator

(Operator Instructions) The next question comes from Todd Coupland from CIBC.

Todd Coupland – CIBC

Hi, good evening everyone. I was just wondering if maybe you could give us a little bit more detail on the operational changes that you had made to the SMART Room System. And maybe some examples on how that is, in fact, working. And the path to greater take-up by the market. A little bit more color on that would be appreciated. Thanks.

Neil Gaydon

Sure. On our side of the fence with the hardware we – there is a couple of pieces of technology that we’ve improved in the performance of the system, one is changing from the traditional hard drive to a solid state drive. And also a firmware improvement and those two things have had a very big effect on the stability of the system.

And so Microsoft continue to provide enhancements and improvements as well and that combination is performing pretty well. So, but as you can imagine that only happened during the quarter. And then the latter part of the quarter. And now we are getting into holiday season and all the rest of it, which is delaying things more than we would’ve liked in terms of those. So in terms of performance of the system we are pretty happy and in fact we’ve just launched which we didn’t say in our announcement but we launched a few days ago the ability now to put SMART software into the system as well, which gives an even better inking experience and being able to share on any – ink on any type of format. So now with our software, now with improvements in firmware, improvement with the SSD which we’ve upgraded now all the systems that are out there to and with the further enhancements that we’ve seen from Microsoft the product looks in pretty good shape.

Todd Coupland – CIBC

Is there any color that you are able to provide at this point in terms of the backlog or the funnel on this business?

Neil Gaydon

No, we’re not. It’s the – some of these of our organizations are very large. Their testing is very extensive and even after testing it’s a gradual rollout. So, which is why we use in the script the expression gradual rollout its slightly different profile then we’d first envisaged, but that looks to be the way in which these systems get introduced into companies.

Todd Coupland – CIBC

And then just lastly, there's been quite a few organizational changes at Microsoft. Do you – just from what you know now, does this change at all where SMART Room System fits in terms of Microsoft's plans?

Neil Gaydon

Obviously, I can’t speak on behalf of Microsoft, but we haven’t seen a change in their enthusiasm for the product and support and what they’re doing. And we understand again, but I am not speaking on behalf of Microsoft, but we understand that the meeting room in general globally for them as an important part of their strategy. And so we feel confident that Microsoft remain serious about Lync. And remains serious about the meeting room.

Todd Coupland – CIBC

Great, thanks very much.

Neil Gaydon

Thank you. Todd.

Operator

The next question comes from Paul Treiber from RBC Capital Markets

Paul Treiber – RBC Capital Markets

Thanks very much. Just in regards to enterprise, have you seen any customers cancel the Microsoft Lync trials? Or do the majority continue with the trials?

Neil Gaydon

No one has canceled, I mean, I honestly thought they would’ve done. I thought we’d have had some. There is certainly some who have – the patients perhaps was tried a little. So the extension to the trials goes on a little bit longer, but no we haven’t seen anybody cancel.

Paul Treiber – RBC Capital Markets

And then in terms of – I understand that trials themselves are taking longer. But have you seen the absolute number of companies that are trialing it or intend to trial continue to increase? Or has the pace of that slowed?

Neil Gaydon

It’s slowed. And I think a lot of these CIO’s talk to each other. And so I think there is a – I think once there is a common view that the system is stable and good and solid, which will again take the time that will take in the trials to get there. Then we should expect to see that start to increase, but that first initial burst that we had, which was to be expected to be frank, because these are companies who are looking at changing their meeting room or changing their video conferencing or whatever that initial sort of burst that we got, it is increasing, but certainly not at that initial burst that we had.

Paul Treiber – RBC Capital Markets

Okay. That's good to understand. And then just lastly, just moving onto the software business. I think it was on April 1st that you moved to charge for software maintenance on some of the prior generation of whiteboards. What's been the uptake to date? And how's that been in line with your expectations?

Neil Gaydon

So far the notebook piece, although without breaking our absolute number is tracking ahead of our internal forecast. And it so far it’s going pretty well and we also secured a fairly small in terms of absolute revenues, but for our software in China and where that’s a more of a difficult market for us in terms of hardware. But we are seeing a little bit of interest from that. But, in our core markets, where we’ve launched at the notebook advantage program so far so good.

Paul Treiber – RBC Capital Markets

Okay. That's good. I'll pass the line.

Neil Gaydon

Thank you.

Operator

And I’m showing no further questions. I would now like to turn call back over to the presenters for closing remarks.

Neil Gaydon

Thank you, operator. So thanks everyone for joining the call today. I acknowledge that our short-term outlook remains disappointing, but we are well positioned to transition SMART over the next two to three years into a healthy company with the recurring software revenue component and a powerful enterprise growth engine. Thank you everybody.

Operator

Ladies and gentlemen that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a good day.

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