Silver Spring Networks, the smart grid networking company that broke the industry’s IPO drought on Wednesday, was still trading at about $22 per share on the New York Stock Exchange during its second day of trading, up nearly 30 percent from its debut.
With $81 million raised in its IPO and a market valuation of some $750 million, it’s a good start for a company that saw its share of skeptics over its nearly two-year wait for an IPO -- though it’s far from the $150 million IPO and market valuation of as much as $1.5 billion the company was flirting with back at the turn of the decade. It’s also far too soon to say how investors such as Foundation Capital, Kleiner Perkins, Northgate Capital Partners and Google Ventures will fare in the weeks and months to come.
By the measure of the industry it’s competing in, Silver Spring has done some remarkable things. The Redwood City, Calif.-based startup built up a leading share in the U.S. smart meter networking market as of last year, outpacing such industry stalwarts as Itron and Sensus in terms of its radios and software deployed in meters built by other vendors. Along with a few small deployments in Australia and Canada, that’s 15.8 million Silver Spring-enabled devices as of the end of 2012, with another 11 million or so under contract, and a total backlog of $745 million.
But that’s just the beginning, really. Now comes the hard work of building a business that can turn losses into profits, keep up with the competition, and meet its promises to investors, which include not only getting more utilities to buy its technology, but to do more things with it. In that context, let’s take a look at some of Silver Spring’s challenges to come, with an eye on overlying market and technology trends, and some big question marks:
Living in Today’s Economy. Erfan Ibrahim, CEO of The Big Bazaar and energy practice sector lead consultant at military and government IT integrator Scitor Corp., noted that Silver Spring and every other smart metering company out there has to watch out for some macroeconomic trends that could hurt them. First of all, general economic conditions remain poor, with continuing high unemployment in the U.S. and debt crises in Europe, which affect utilities just as they do every other sector of the economy.
Secondly, utilities are selling less electricity, as a poor economy and, ironically, increased energy efficiency erodes revenues from their core product, he said. Some utilities, like California’s big three investor-owned utilities, are decoupled from direct power sales for their revenues, but most of the country’s utilities are not. That’s put a squeeze on utility budgets, with companies trying to decrease workforce and holding off on big capital purchases, and provides a disincentive to invest in more efficiency, Ibrahim said.
Investor appetite for green technology has also taken a nosedive over the past five years or so, both in terms of venture capital invested in the overall sector and in the dearth of breakout IPOs in the sector. “Market conditions” seem to have turned in Silver Spring’s favor this week, but only for a soft IPO, in comparison to the company’s expectations back when it filed its S-1 in July 2011.
Billing at Utility Timescales. One thing to note about Silver Spring’s financials is the difference between its revenues and its backlog. That difference represents “a lot of IOUs out there” from utility customers undergoing the aforementioned economic strains, Ibrahim noted. “How long can a company the size of Silver Spring maintain such a lousy negative cashflow situation?”
Silver Spring’s S-1’s have made this point pretty clear, but the non-GAAP metrics it has used to represent it have caused some confusion. For example, the company reported 2012 revenues of $196.7 million, but also reported billings for the same year -- a measure of product and services sold but not yet officially recognizable as revenue -- at $304.3 million. As a publicly traded company, however, it's going to have to boost its revenues, which declined slightly from 2011 to 2012, as well as chart a path to profitability -- Silver Spring has lost money every year, though its 2012 loss of $89.7 million was an improvement over its $92.4 million loss in the previous year.
Managing the Smart Metering Slowdown. Silver Spring has its fair share of deployments supported by the nearly $4 billion in federal smart grid stimulus funds made available in the American Reinvestment and Recovery Act since 2010. That one-time jolt of matching funds helped bring some 12 million smart meters to the country, but it’s also coming to an end, which means a market slowdown. GTM Research has tracked a decline in North American smart metering deployments from 2011 to 2012, and predicts a flat market this year.
On the other hand, GTM Research smart grid analyst Zach Pollock pointed out that Silver Spring is different from other smart meter vendors in that it’s “not a hardware business; it's a networking business.” That means it doesn't have the same eroding meter hardware margins as the more vertically integrated vendors, which gives it some insulation from a less than stellar AMI market.
Growing Internationally. Silver Spring has made it clear that it gets most of its revenues to date from a few big customers. In 2012, a whopping 79 percent of the company’s revenue came from three customers, FPL (31 percent), PG&E (30 percent) and OG&E (18 percent). Its S-1 states that a “limited number of utility customers will continue to account for a substantial portion of our revenue in future periods,” which implies that its billing cycle issues will persist in coming quarters.
At the same time, the company has highlighted diversification, including its move to overseas markets. In 2009, it landed its first Australian project with Jemena Electricity Networks, and has since grown its revenues from Australia to just under $14 million in 2012. Other international forays include projects with Brazilian utility CPFL Energia, New Zealand utility Unison, and pilot projects in Singapore and Europe.
It’s also challenging other vendors on smart grid networking opportunities in Europe and Japan, and has a strategic investment from Hitachi that could lead to developments on that front. Still, in 2012, international utility customers accounted for 8 percent of revenue and 16 percent of billings, indicating a small start to its international diversification project.
Building the Services on the Network. Silver Spring reports that product revenue represented 83 percent of its overall revenues in 2012, with service revenue making up the remaining 17 percent. It’s also said that it needs to grow that share to deliver ongoing revenues, as compared to the company’s one-time product sales to utilities.
To make that happen, Silver Spring is making more of a push to bring in recurring revenue, Pollock noted, via its professional services, hosting and managing its networks from smart meter to head-end, and its UtilityIQ software-as-a-service (SaaS) platform for managing distribution grid devices, smart thermostats, electric vehicle chargers and other such endpoints of the smart grid.
As we’ve noted before, several Silver Spring customers are using the company’s hosted networking service, including big customers like FPL and smaller pilot customers like Maui Electric. That’s akin to running the AMI network from the cloud, so to speak, and provides some ongoing revenues. Other customers, such as PG&E and BG&E, are using Silver Spring's outage detection and notification system, as well as working on delivering home area network (HAN) connectivity via smart meters.
As for Silver Spring’s demand response and distribution automation platforms, they’re being used by Oklahoma Gas & Electric and AEP, respectively, and are being tested out by many other utilities. The company also has a long list of partners working on such tasks as using AMI data for voltage conservation management schemes on the grid, or linking meters to electric vehicle chargers. Even so, revenues from managed services and SaaS only made up only 8 percent of the company’s total revenues in 2012, leaving a lot of room for improvement.