Letter to Shareholders

Dear Shareholders,

The past year was challenging on many fronts, as education funding shortages in the United States persisted and Europe faced similar austerity measures and contended with debt reduction. These macroeconomic challenges had an impact on our business, resulting in year-over-year revenue decline. Though our revenues were marginally down, we maintained our position as the interactive display category leader both globally and in the United States. Our products remain a high priority purchase for educators worldwide, and we have generated promising momentum in the business segment as an increasing number of organizations integrate SMART products into their meeting rooms and other collaboration workspaces.

Almost two months have passed since the Board of Directors asked me to take on the role of interim President and CEO, and I have pushed forward with a full mandate and the Board’s support. A strategy review is underway, and we are examining all facets of the organization and our market opportunities. A myriad of options are being considered with an emphasis on refining our focus and maximizing our long-term growth potential. I expect to share more detail on the outcome of the strategy review in the third quarter
of fiscal 2013.

Throughout our fiscal year, the economic downturn continued to adversely affect funding for school districts in the United States, resulting in some deterioration in demand for our classroom technology. With our large customer base, which includes many school districts that have standardized on SMART products, and the widespread use of our software and content, we are well positioned to increase classroom penetration and attachment sales when education funding returns to normalized levels. We will also continue to strategically target international markets and businesses to support our growth, where penetration levels are much lower.

While the education market continues to be a key part of our business, we have shifted some of our resources to the development of our opportunities in the business market. We are working closely with our customers to ensure we are maximizing the value our products add to organizations. More than 200 Fortune 1000 companies have trialed our products, and many of these trials are moving to broader adoptions. We continue to fuel this momentum with ongoing investments in our sales and marketing infrastructure, product development and channel relationships. During the year we forged alliances with leading technology companies, including Cisco® and Microsoft®. These alliances will provide SMART with additional avenues to showcase our products in business environments and ensure interoperability between our products and those of unified communications and collaboration (UC&C) market leaders.

Establishing a foothold in our key international education markets has been one of our top priorities over the past year. These efforts have produced successful results in several countries, including Russia and India. In other emerging markets, we have also developed a pipeline of promising opportunities on which we are ready to capitalize. In the second half of our fiscal year, we surpassed 100 SMART Showcase Schools in Europe, the Middle East and Africa (EMEA) with each school acting as a conduit that enables educators to display our brand and demonstrate the value of our products. 

As the year progressed, we began to experience increased pricing pressure in certain education market geographies. We selectively and strategically participated in international tenders where we anticipated large future growth potential, and some margin erosion resulted. To address markets with higher sensitivity to price, we have launched our new LightRaise 40wi interactive projector, which is a more affordable interactive solution for classrooms. 

As we position ourselves for more growth in price-sensitive markets, we continue to employ additional cost-down strategies to augment our new product offerings. In the latter half of the fiscal year, we transitioned our assembly operation in Ottawa to a contract manufacturer in Mexico. We have an internal team focused on continuous cost-down initiatives through product design and manufacturing efficiencies. A contract manufacturing location in China has also been established and production commenced there in August 2011.

New competitors have emerged in our space, and we have also seen the rise of tablets, which have revolutionized many industries and have made their way into the classroom. Though we do not view tablets as a substitute for SMART’s core products, we compete for the same education budget dollars. Currently, our approach is to enhance our education solutions to ensure that they continue to deepen student engagement and improve learning outcomes, so that they remain a priority purchase. Recently we have announced our new SMART Notebook app for iPad, which will enable students to access SMART Notebook lessons individually on the iPad and collaboratively in class on the SMART Board® interactive whiteboard.  We believe SMART products will coexist with other technologies, including tablets, and we are working to ensure our products will interoperate well with them.

In fiscal 2012, SMART generated $746 million in revenue, which was a decrease of 6% over fiscal 2011. North America accounted for 65% of revenue, and EMEA and Rest of World (ROW) comprised 25% and 10%, respectively. North American revenues declined by 13% over the year, partially offset by 5% growth in EMEA and 33% growth in ROW. Gross margin for the year was 45%, a decline of 5 points over last year.

We finished the year with adjusted EBITDA of $128 million and adjusted net income of $71 million, decreases of 31% and 16% respectively. We generated $58 million in cash from operations, ending fiscal 2012 with a cash balance of $96 million.

We continue to take a conservative balance sheet approach and have repaid $48 million in debt over the past year while maintaining a solid cash position. In August 2011, our Board of Directors approved a share repurchase program under which we were authorized to repurchase up to four million Class A Subordinate Voting Shares for cancellation over the following year. Under the plan, we repurchased over 2.3 million shares in fiscal 2012.

We are driven to create products that improve learning and collaboration. We provide educators with tools that facilitate the improvement of student outcomes, and we provide businesses with solutions that generate a tangible return on investment. Our product development team is focused on new products that help increase the efficiency and effectiveness of our customers. This team is continually enhancing our existing portfolio of products, making them easier to use and adding functionality. We have recently announced a number of new products and product upgrades that strengthen our technology and product leadership position.

Freestorm visual collaboration solutions – A set of comprehensive business products that combines industry-leading interactive displays, powerful collaboration software and dispersed collaboration options. They include the new SMART Board 8055i interactive flat panel with presence detection, SMART Meeting Pro 3.0 software with new SMART Ink and Bridgit® 4.5 conferencing software.

LightRaise 40wi interactive projector – A pen-enabled, ultra-short-throw projector that can turn nearly any surface into an interactive learning space. This projector provides a viable option for customers who are more price-sensitive but still desire the quality of SMART education solutions.

SMART Notebook 11 collaborative learning software – Software that has been enhanced with additional features that make collaboration with online resources more interactive and comprehensive. New features include an embedded web browser for integrating online resources into SMART Notebook files and new widgets that enable even more learning resources to be included within SMART Notebook software.

SMART Notebook app for iPad – An app that allows students to use SMART Notebook software on their personal or school-owned iPad. The application enables a seamless transition between whole-class, small-group and personalized learning, allowing students and teachers with iPads to enjoy the engaging lesson materials of SMART Notebook software.

Despite the challenges we faced this year, I believe there is large market potential for our products in both education and business. Interactive display classroom penetration rates are only about 12% globally, and business adoption is accelerating. Even as parts of the world face economic challenges, governments continue to appreciate the importance of investment in education, and businesses continue to seek efficiency and effectiveness. At the heart of our strategy is a vision of innovation that helps our customers achieve these goals.

Through our strategy review process, we will strengthen the foundation that has brought us past success and will make key decisions that shape our future. The upcoming year will be one of transformation, as we reassess our competitive strategy and look to increase our operational effectiveness to ensure we have the right platform for future growth. Through this transformative process, we will remain driven to create products that make a difference to our customers. We are confident that customers will continue to experience the value of our solutions in businesses and classrooms as we change the way the world works and learns.

I would like to express my excitement and optimism regarding the future of SMART. Over my past five years with the company, I have developed confidence in the creativity and capability of my fellow employees. I have experienced firsthand the enthusiasm and commitment of our customers and resellers. As we begin this new chapter, I would like to extend my sincere appreciation to our staff, customers, resellers, suppliers and shareholders for their ongoing support of the company.

 

Sincerely,

Tom Hodson
Interim President and Chief Executive Officer