SMT

SMART Technologies Inc. (SMT)

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Smart Technologies (SMT)

Q3 2014 Earnings Call

February 06, 2014 4:30 pm ET

Executives

Ken Wetherell

Neil Gaydon - Chief Executive Officer, President and Director

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

Analysts

Todd Coupland - CIBC World Markets Inc., Research Division

Paul Treiber - RBC Capital Markets, LLC, Research Division

James Medvedeff - Cowen and Company, LLC, Research Division

Scott Schmitz - Morgan Stanley, Research Division

Presentation

Operator

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

Ken Wetherell

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

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

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

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

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

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

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

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

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

Neil Gaydon

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

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

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

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