Is Buying Smart Technologies Inc. Smart?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My company uses SMART Boards that are produced by Smart Technologies Inc. (NASDAQ: SMT). We have these boards on every floor of the building and I’m guessing we have at least 100 of these boards of various models throughout the company. They are used for meeting presentations, but mostly the projection capability is the only feature used to present PowerPoint slides to the audience. However, when I saw SMT go public almost two years ago on July 15, 2010, I immediately saw this as a questionable stock at best and very overpriced with an opening price of $17.50 per share. That price is over 10x the price it is today which is in the $1.50-$1.75 range. What I predicted then has all but come true now. However, I’m no genius or fortune teller.
SMART 101
For the unaware, SMT, which was formed in 1991, produces a line of interactive white boards that basically include speakers, a projector, and a white board, that can be used to write on similar to a touch screen, or be used to simply project an image like any other projector screen. Most boards come with four special pens which use digital ink and this entire package is set up to be sold as one unit. Connecting a computer such as a laptop to be the video source completes the package. There are also options for various software suites to improve interaction with the boards. Overall, the Smart Board is marketed to be used for teaching, training, conducting meetings, and delivering presentations. Seems simple enough and for the most part, it is.
Post 2010 IPO
Since going public in 2010, this stock has lost nearly 90% of its original value. At $17 per share which was approximately its IPO day closing price, the company was valued at around $2.065 billion in market cap. It was significantly overpriced then, and it may still be overpriced today. In fact, this past quarter earnings report of March 2012, the company generated an earnings-per-share loss of $0.04 per share versus an estimate of $0.02 per share in the positive. The table below highlights the annual income statement bottom line for shareholders the past three years:
|
Year Ending March 30th |
Net Income Applicable to Common Shares |
|
2010 |
$142,032,000 |
|
2011 |
$69,355,000 |
|
2012 |
$31,780,000 |
Smarter Questions
If you are like me, when this company went public two years ago, you should have a lot of questions after reading this far.
First, let’s really get down to basics. SMT produces a great product that can be used in schools and offices around the country and even the world. However, is it really a need? Can schools get away with using a considerably cheaper and arguably equal teaching tool like the traditional blackboard or a basic whiteboard? Also, is using an interactive smart board necessary at all in many school classes and all grade levels? I’m not sure about you but in many of my courses at the university level, we didn’t have time for people walking up to the front of the class in packed lecture halls and auditoriums to interact with a white board, let alone an interactive white board, while the other several hundred students watched. The same can be said for businesses. Not all businesses require the need to project anything on the board at all and interact with it. Sometimes discussions are held the traditional way, face to face with words, or on desks with pen and paper, and not on walls.
Second, where is the revenue stream? What need does a customer have to come back after they made their original purchase? Even the special pens are digital and they don’t need to be replaced. Without a razor-and-blades business model that Gillette help make famous, and now owned by Procter & Gamble (NYSE: PG), there is no legit reoccurring revenue stream for SMT! This is supported by their decreasing annual income and consequently, their consistently falling stock price.
Third, where are the new customers going to come from? The company says that they have sold over two million interactive whiteboards worldwide since 1991. That is over 20 years ago and equates to about 100,000 whiteboards annually. The company says that 85% of their sales are to customers in the education market and the other 15% to customers in the business and government markets. If SMT is indeed placing that much in expectations on the educational customer, then they will have to compete for all the other necessities that burden schools – both public and private – already that include: infrastructure improvements and upgrades, books, desks, teacher salaries, facilities, supplies, buses, and school programs like after-school clubs, athletics, social events like dances and graduation. Around the country, schools are already on tight budgets given the economy and I doubt that those involved in distributing what funds that do exist, will be likely to invest the money required for interactive smart boards.
Smart Competition
The stock itself is in a very niche industry and SMT doesn’t have any direct competition. However, it is easy to list all the potential competitors that do exist and could exist in the future. Schools and universities already place some of their limited budget on online tools like Blackboard, which was traded publicly until being bought in 2011 by Providence Equity for $1.64 billion. Universities and businesses alike are also utilizing more mobile tools in technology like the iPads from Apple (NASDAQ: AAPL) or using live meeting capabilities by utilizing software from companies like Microsoft (NASDAQ: MSFT) or Skype.
The iCloud from Apple is making its way into education with abilities to create virtual calendars for assignments and homework. iCloud has the potential to store textbooks on a cloud that are to be used by the class. Instead of everyone needing to purchase a physical book, it may be possible in the near future for the books to be licensed for the class and be stored on a cloud for student use. Lastly, iCloud could eliminate the use of all paper significantly. Instead of doing homework on paper, you could possible do assignments through assessments given over the cloud. These possibilities could eat a significant portion of what schools would or could invest in SMART board technologies.
Microsoft recently made an alliance with SMT in March of 2012. However, Microsoft needs SMT a lot less than SMT needs Microsoft. SMT is now one of the 11 Global Technology Partners within the Microsoft Technology Centers (MTC) Alliance Program. What this means is that thousands of business customers of Microsoft can learn about and experience the benefits of SMART business solutions. Microsoft is like the successful brother Vincent Chase from Entourage and using his name (Microsoft) to get his brother Johnny ‘Drama’ (SMT) an acting job. Despite the boost from Microsoft, SMT still lists Microsoft as one of dozens of competitors overall in their latest earnings release simply due to Microsoft’s ability to create computer technologies, tablets, and software that could make SMT’s products obsolete or unnecessary.
SMT is also facing some internal struggles as it is trying to grow the business into foreign markets, improve or create technologies outside of the interactive smart board product model, overcome market saturation of their own products as well as product combos that nearly meet their own (laptop connected to projector with an actual white board and actual white board markers), sustain future growth, protect their brand, and beat third-party claims of infringement with intellectual property rights. SMT is trying to do all this while at the same time prevent more declines in revenue and slow down the falling stock price.
Future
The big problem that weighs down SMT’s future is their need to ride on one product that is largely not a technological everyday consumer design for the masses like an iPhone or a video game system. SMT reminds me a lot of Zagg Inc (NASDAQ: ZAGG). Zagg is a niche technology related company built around one product which is the invisibleSHIELD line that is used to protect screens on cell phones, laptops, and other gadgets that have a user interfaced screen. SMT is built around their one product - the SMART board. However, Zagg has a much larger customer base with repeat customers (unlike SMT) given how frequent products are upgraded. This is what SMT is lacking and will always lack until they find a way to create something that a typical customer can use. A home customer would rather buy a projector by itself than an entire SMART board.
SMT is a very niche company that provides an item of luxury. It went public during tough economic times and their revenue results show that buying a SMART board is just not the smart thing to do given all the other necessities that take priority.
August 2, 2012 is the next Fiscal Earnings Call. The real question is will anything smarter be introduced over the next year.
mikecart1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple, Microsoft, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
