First Quarter 2016
Earnings Conference Call
Prepared Remarks
May 9, 2016
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Mark McKechnie:
Thank you. Welcome to our first quarter 2016 earnings call. With me on the call today are Mike
Bell, our Chief Executive Officer, and Jim Burns, our Chief Financial Officer.
After the call, we will post to our website at ir.ssni.com our prepared remarks, our presentation
slides and an audio replay of this call.
Our comments today include forward-looking statements regarding future growth, future
investment, future events and the future financial performance of the company, including our
outlook for the second quarter and full year 2016. Actual events and results may differ
materially from our expectations. We refer you to our SEC filings for a discussion of risk factors
that could cause our actual results to differ materially from those discussed today. We make
these statements as of May 9, 2016, and disclaim any duty to update them.
Throughout this call, we will discuss both GAAP and non-GAAP financial measures. Unless
otherwise stated, the financial measures discussed will be non-GAAP. Our earnings release,
which is posted on our website, provides a reconciliation of our GAAP to non-GAAP financial
measures. We encourage investors to consider all measures before making an investment
decision. All comparisons made in the course of this call are against the same period in the prior
year unless otherwise stated.
Now I would like to turn the call over to Mike.
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Mike Bell, President and CEO
Thanks Mark, and good afternoon everyone.
2016 is off to a solid start, with good financial results, some great new wins, and meaningful
progress on our smart city and Starfish initiatives.
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We had another strong deployment quarter, delivering nearly 700,000 endpoints, up 27%
from Q1 of last year. Since inception, we have delivered over 23.6 million endpoints.
We grew our top-line by 9% to $68.9 million, with better than expected contribution from
international.
We earned $0.02 per share, our fourth profitable quarter in a row, and delivered another
quarter of positive cash flow from operations, bringing our cash balance to over $125
million with no debt as of March 31st.
During the past several calls, we have discussed the high level of deal activity in the market.
We have had strong awards to date. In fact so far this year, including today’s announcements,
we have been awarded nearly 6 million devices. This includes approximately 4.5 million electric
endpoints, plus approximately 1.3 million gas, street lights, and other devices.
Now onto today’s announcements:
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First, Pacific Power has chosen Silver Spring Networks to provide the platform and solutions
for a full AMI smart grid deployment. The project is expected to include approximately
600,000 homes and businesses. We expect the initial phase to begin this year, with
deployment planned through mid-2019.
Next, we’d like to welcome our newest international customer, Jamaica Public Service
Company, or JPS. JPS serves over 600,000 homes and businesses as the sole distributor of
electricity on the island. The contract will initially include an AMI deployment to 21,000
homes and businesses, to help ensure revenue realization and drive operational
efficiencies.
We booked over $12 million in Operations Optimizer analytics software and services in the first
quarter. The value of these awards is comparable to the acquisition price of Detectent a little
over a year ago. A major part was a contract renewal at our largest analytics customer,
extending the project for another 6 years of primarily recurring revenue.
We believe the increased deal activity is part of an ongoing industry trend as benefits from
the smart grid are becoming more apparent. These benefits are demonstrated by some recent
successes by our customers:
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For instance, in late March, Pacific Gas and Electric announced record reliability for 2015,
with the average customer experiencing less than one outage during the year. PG&E also
reported a 39% reduction in the average duration of customer power outages over the past
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seven years, and has saved more than 1 million customers from sustained outages since
2012.
ComEd recently published a comprehensive report, “Delivering on the Smart Grid Promise,”
which outlines their ahead-of-schedule efforts to modernize the grid, and the resulting
benefits to their customers and the economy. ComEd estimates its customers have saved
$1.7 billion on their electric bills, and have eliminated 22.3 billion pounds of carbon
emissions from the atmosphere since 2008.
ComEd is a great partner who shares the vision that our platform can be used for
applications beyond the grid.
o During the quarter, American Water, the largest publicly traded U.S. water and
wastewater utility company, announced a water AMI pilot with ComEd. The pilot
will extend the Silver Spring platform used to modernize ComEd’s grid to provide
connectivity for American Water.
o Additionally, ComEd recently announced plans to install smart-ready LED street
lights in more than 50 Illinois municipalities. These lights are equipped to be
connected to a digital smart controller through the same Silver Spring platform.
o While it is still early, these are great examples of the Starfish vision to leverage Silver
Spring’s multi-application network platform to drive additional revenue streams for
us and our customers.
We are seeing continued evidence that utilities and regulators are taking notice of smart grid
benefits:
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In New York, Con Edison received a quick regulatory approval for their initial smart grid
modernization activities for this year. Con Edison is planning to submit their rate case that
covers the full deployment across 3.9 million electric and 1.3 million gas connections later
this year.
In Hawaii, Hawaiian Electric submitted their AMI proposal to the Hawaii Public Utilities
Commission in late March to modernize the grid for approximately 455,000 homes and
businesses on Oahu and Hawaii, and in Maui County. We are honored to be a strategic
partner in this effort to modernize Hawaii’s electric grid, and look forward to a timely
approval.
Now, I’ll provide an update on smart cities and Starfish.
I believe that Silver Spring’s industry-leading platform, deployed at massive scale in the most
demanding utility environments, is the right launching pad to win in the broader Internet-ofThings space.
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With a decade of success at some of the world’s leading utilities and most iconic cities, with
over 23.6 million IoT devices delivered, we have proven our ability to connect “important”
things. Our platform is designed to deliver 99.9+% reliability in the harshest environments,
with iron-clad security and better cost-of-ownership than the alternatives.
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For example, when a city or utility worker installs a smart meter, traffic light controller, EV
charger or any other device, it must automatically connect to our canopy network. The
device must remain reliably-connected and highly-secure for the next 10 to 15 years,
without a return visit.
I am confident that our performance across the key IoT attributes - coverage, security,
bandwidth, reliability and cost - sets us apart from the lower-end “Low-Power, Wide Area”,
or LPWA, competitors.
o Our platform delivers megabits per second of bandwidth, with superior coverage and
security, but at a similar overall cost to these Low-Power, Wide Area alternatives.
To reliably connect millions, if not billions, of devices, we strongly believe our RF-mesh
solution is the architecture of choice. Our mesh technology enables nearly 100% ubiquitous
geographic coverage, connecting devices wherever they may be, from dense urban
environments to remote rural areas. All with consistent levels of reliability, security, and
longevity, and a business model suited for deployment of IoT at scale.
o We view cellular as an important, complementary building block of our system design.
We actively employ cellular for backhaul in our meshing architecture to aggregate
thousands of endpoints or connections to the grid.
These advantages and proven performance have led to a new Starfish award in London which
we announced today, and solid interest from major players in the broader industry:
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We have been selected to deploy Starfish services in the iconic Westminster borough,
the home of Buckingham Palace, Big Ben, and Westminster Abbey, through our go-tomarket partner urbancontrol, part of the DW Windsor Group.
o The deployment will create a wireless IPv6 mesh canopy, beginning in
Westminster, that can be used for a broad range of IoT applications.
o The Westminster City Council has immediate plans to connect lighted signs and
traffic poles to reduce operational costs and improve public safety.
During the quarter, we further expanded our international channel with the addition of
two new go-to-market resellers.
o Rongwen, one of the largest smart LED street light providers and operators in
China, will integrate Silver Spring’s platform to deliver smart city applications in
China, and emerging markets across Asia and South America.
o urbancontrol, part of the DW Windsor Group, will resell our platform to cities,
local authorities and contractors in the UK. Our Westminster, London award
demonstrates good initial results from this new relationship.
o These add to our relationships with Acuity and LightSmart here in the U.S., LED
Roadway in Canada, and others.
We also announced collaborations with both Samsung Electronics and Philips Lighting, a
Royal Philips company, to develop networked LED street lighting solutions. These
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projects will help lower costs, simplify connected lighting, and accelerate the path to
smart city deployments.
We intend to make solid progress for Starfish in 2016, with a concentrated effort across
numerous fronts:
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We are in active discussions with many of our customers to open their deployed platforms
to a broader IoT offering. We are encouraged by early signs of traction with customers who
have plans to connect additional devices to the Silver Spring canopy. These devices include
water meters, such as the ComEd project with American Water, connected traffic lights,
image sensors, parking systems, environmental sensors, EV charging stations, and even
solar panel monitoring.
We have begun a developer program to enable a broader ecosystem of devices and
solutions around our IoT router and Milli platforms. Our program will feature updated
hardware and software development kits, and a series of developer events beginning in the
second quarter.
We continue to invest in our market-leading platform. We are expanding our offering to
support additional devices and services with a versatile IoT data platform. We are
streamlining our products to simplify integration of our communications modules by thirdparty device makers. We envision a longer-term roadmap with tiered module offerings to
enable devices across a broader range of price versus performance capabilities.
We believe that our Starfish effort will be highly synergistic with our core businesses, as our
investments for Starfish will expand the business opportunities and drive further scale for
our smart grid and smart city customers.
In closing, I remain fully confident in Silver Spring’s opportunity in the smart grid and smart city
space. Moreover, I see tremendous potential to leverage Silver Spring’s platform into the
broader IoT space through Starfish.
Let me now turn it over to Jim to provide details on the results and our outlook.
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Jim Burns, Executive Vice President and CFO
Thank you Mike, and good afternoon everyone.
I’m pleased with our first quarter results, a solid start to the year.
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We grew our top-line, improved our profitability, and added some great new customers.
In addition, strong gross margins, disciplined spending, and favorable tax and currency
items resulted in $0.02 earnings per share for the quarter, $0.05 above the upper-end of
the range.
Now on to our first quarter results:
Revenue was $68.9 million, up 9% year-over-year. We saw particular strength from
international, with some revenue originally planned for Q2 driving Q1 revenue higher than
expected.
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Product revenue was $45.7 million, up 12%.
Services revenue was $23.2 million, up 5%.
o Professional services revenue was $10.3 million, up 8%.
o Managed services and SaaS revenue was $12.9 million, up 3%.
 We delivered approximately 698,000 network endpoints in the quarter, up
27%.
 Through Q1, we have delivered over 23.6 million cumulative network
endpoints, up 14%.
 Recurring revenue per cumulative network endpoint on a trailing twelvemonth basis was $2.23, similar to last year.
Advanced Metering Infrastructure revenue was $57.5 million, up 20%.
New Solutions revenue was $11.4 million, down 24%. The decline from a year ago was
primarily due to a tough comparison. We anticipate a return to year-over-year growth next
quarter and for the year.
International revenue was $15.2 million, more than double from a year ago, and
represented 22% of Q1 revenue.
Gross margin was 43.7%, up 3 points from last year on favorable product mix and
manufacturing efficiencies.
By reporting segment:
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Product gross margin was 47%, up 5 points from last year.
Services gross margin was 37%, up slightly from last year.
o Professional services gross margin was 38%, and
o Managed services & SaaS gross margin was 36%.
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Operating expense was $29.6 million, down 5% from last year. We ended the quarter with
headcount of 673 employees.
We reported a net benefit of $409,000 in tax and other items below the operating line. This
was a favorable result versus our expectations for a net expense of approximately $700,000.
Net income was $1 million, or $0.02 per share based on a fully-diluted share count of 52.2
million. This compares to a $5.6 million loss a year ago.
On the balance sheet:
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We ended the quarter with over $125 million of net cash on the balance sheet, up $14
million from a year ago, and up about a million dollars from last quarter, driven by
positive cash flow from operations.
Before I move onto guidance, I want to say a few words about the recent earthquake in
Japan, and its potential impact to our supply chain:
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First, our deepest sympathies to the people impacted by this natural disaster.
Next, one of our key suppliers has a facility in the region, and was impacted by the
quake. We have policies in place to mitigate effects from these types of events and had
pre-built some buffer inventory.
Based on what we know at this point, we believe we can manage through the disruption
with minimal impact to Q2, with a return to full capacity in Q3 and beyond.
Now onto non-GAAP guidance.
For Q2, we expect:
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Revenue of approximately $65 million to $69 million;
Gross margin of approximately 40% to 42%;
Operating expense of approximately $30 million to $31 million;
Tax and other expense of approximately $800,000;
Loss per share of approximately five to nine cents, and
Share count of approximately 52 million shares.
For the full-year 2016, our guidance remains unchanged from last quarter’s call:
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Revenue of approximately $290 million to $310 million;
Gross margin of approximately 42% to 45%;
Operating expense of approximately $120 to $125 million;
Approximately $3 million in taxes and other expense;
Earnings per share of a nickel to twenty cents;
Fully-diluted share count of approximately 52 million to 54 million shares;
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Positive cash flow from operations for 2016.
We expect approximately $15 million to $20 million of capex for 2016, with the increase
from last year primarily due to spend on our new San Jose headquarters.
In closing, 2016 is off to a solid start. The year is progressing as expected, with some good new
wins, a solid pipeline, and good traction on our growth initiatives.
Mark McKechnie:
Thanks gentlemen. Operator, we will take our first question.
Forward-Looking Statements
This document contains forward-looking statements that involve risks and uncertainties. These
forward-looking statements include statements regarding the momentum in Silver Spring
Networks’ business; customer and industry activity; future deployments; future innovation;
future product availability; future growth and market opportunity; and future financial results,
including outlook for the second quarter and full year 2016. Statements including words such as
"anticipate", "believe", "estimate" or "expect" and statements in the future tense are forwardlooking statements. These forward-looking statements are preliminary estimates and
expectations based on current information and are subject to business and economic risks and
uncertainties that could cause actual events or actual future results to differ materially from the
expectations set forth in the forward-looking statements. Important factors that could cause
results to differ materially from the statements herein include: timing around customer
decisions and deployment pace; receipt by our customers of required regulatory approvals;
dependence on a limited number of customers and key suppliers; general economic risks;
specific economic risks in different geographies and among different industries; failure to
maintain or increase renewals and increase business from existing customers; uncertainties
around continued success in sales growth and market share gains; the expansion of our target
markets, including the IoT market; lengthy sales cycles with no assurances that a prospective
customer will select Silver Spring’s products and services; amounts included in backlog may not
result in billings or revenue; adverse publicity about, or consumer or political opposition to, the
smart grid; security breaches involving smart grid products or services; the ability to integrate
technology into third-party devices and Silver Spring’s relationship with third-party
manufacturers; execution and customer adoption risks related to new product introductions
and innovation, including our new fifth generation networking platform and products; the
ability to attract and retain personnel, including members of Silver Spring’s management team;
changes in strategy; technological changes that make Silver Spring’s products and services less
competitive; competition, particularly from larger companies with more resources than Silver
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Spring; international business uncertainties; the ability to acquire and integrate other
businesses; and other risk factors set forth from time to time in Silver Spring’s filings with the
SEC, copies of which are available free of charge at the SEC’s website at www.sec.gov. All
forward-looking statements in this document reflect Silver Spring’s expectations as of May 9,
2016. Silver Spring undertakes no obligation, and expressly disclaims any obligation, to update
any forward-looking statements in this document in light of new information or future
events. In addition, the preliminary financial results set forth in this document are estimates
based on information currently available to Silver Spring.
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