What will you do for an encore?
That’s the question that Silver Spring Networks will increasingly get asked as it hits the road to drum up excitement for its initial public offering. It is a rite of passage. First, a company zooms to stardom. Second comes the era of obsequiousness where you're more adorable than a toddler riding a baby zebra. Third, investors begin to pose the question, what have you done for me lately. Skeptics questioned how First Solar could survive in a commodity market: relentless manufacturing and utility-scale solar parks answered that question. Tesla Motors answered the “Where’s your factory” question through a deal with Toyota. Battery maker A123 Systems... but I digress.
Silver Spring -- which sells networking equipment and services to utilities -- is arguably the most successful smart grid company to date. Revenue shot from $58,000 in 2008 to $3.3 million in 2009 to $70.2 million in 2010.
Revenue in the first three months of 2011 came to $46.7 million.
The numbers get even better when you look at the sales generated from goods and services delivered (billings) minus costs. Looking at billings eliminates distortions caused by stock options or one-time charges. Billings came to $261.4 million and costs came to $217.7 million, leaving a gross margin of 17 percent, well above the gross margin of 4 percent. The gross margin on billings for the first three months of 2011 came to 29 percent.
The company has amassed contracts to install over 17 million devices -- mostly mesh networking cards attached to electric meters -- and eight million have been installed.
Now the scary part. The Redwood City, Calif.-based company sells to utilities -- financially stable, yet ponderously slow organizations that must run nearly every weighty decision through the public hearing process. (Personally, I like the public hearing and regulatory process. It would be miserable if you had to start every morning haggling with your utility over the price of necessities like water or light. In fact, it would be more than miserable. It would be a Mad Max sequel.)
Nonetheless, the hearing process means that large deals take time, and profits and margins that might pass muster in a private transaction could get squeezed.
Since the start of the company through March 2011, it has amassed an “accumulated deficit” of $401.8 million and expects losses to continue. That’s larger than the cumulative net losses of both Tesla ($236 million) and A123 ($146 million) at IPO time combined.
There aren’t a lot of large deals to be found, either. In 2010, 91 percent of the company’s revenue came from Florida Power & Light (37%), Pacific Gas & Electric (33%) and the Modesto Irrigation District (21%)
On page 47, it lists a total of 12 customers; three of them are subsidiaries of the same company, PHI.
The bulk of Silver Spring's product line is also based around mesh networking equipment. Mesh works, but it particularly shines in situations where nodes jump on and off a network, like when people leave or enter a conference auditorium. If your home continually moves out of range, you’ve got bigger problems.
The bandwidth with mesh is also limited compared to some other options. Competitors such as Trilliant have expanded their technology portfolios, while large utilities such as Duke Energy have said they plan to use a panoply of different networking technologies.
To get around some of these problems, Silver Spring has begun to emphasize software and services through its IQ platform. FPL and PG&E signed up for managed services last year, and in 2011, Oklahoma Gas & Electric agreed to deploy CustomerIQ to manage local demand at 775,000 locations. Still, product sales account for 92 percent of all revenue.
A future based on services, but a present dominated by large, yet infrequent, contracts for hardware facing all sorts of competitive pressure. Jonathan Schwartz, the former Sun Microsystems CEO who now sits on the Silver Spring board, can tell everyone how much fun that is.
So what can they do?
1. Buy a Building Management Company. It worked wonders for Serious Energy. The drywall and window maker faced an urgent dilemma: the slowdown in building made building products a tough sell. Last September, Serious Energy acquired Valence Energy, a small startup with a roster of customers, and repositioned itself as a software/services company.
Others have already been shopping in this mall. IBM bought TriRiga, Siemens bought SureGrid and Schneider Electric bought two companies in France. Silver Spring already has some real estate management tools in its arsenal -- it bought home networking specialist Greenbox in 2009 -- but a second acquisition could give it an instant customer list.
More importantly, it would give it a customer list consisting of companies that aren’t utilities. Some candidates include Cimetrics, which counts the University of Texas and Auburn University as customers; BuildingIQ, which has been posting intriguing results in Australian buildings; and Optimum Energy and its software for controlling AC chillers. Demand response, building management: it's becoming the same thing.
2. Buy a Lighting Management Company. PG&E estimated in 2009 than only 1 percent of lights in California's commercial buildings are networked. Most building management companies don’t offer this service yet. By tying IQ to lights, it could differentiate itself. Adura Technologies, Daintree Networks, Lumenergi, Lumetric, etc.: the list goes on.
The particularly compelling aspect of lighting networks is that revenue can be generated from REITs and building owners (for hardware and managed services) and utilities (for peak power control.)
3. Buy More Networking Protocols. Silver Spring will partner with others to fill in gaps that mesh can’t handle, but considering the hardware-heavy nature of many of these contracts, owning multiple protocols might be the way to go. Options include long-range specialists (On-Ramp Wireless, for example) or someone with a basket of technologies (Tantalus). Combinations abound. Investing more in hardware might seem like a step backward, or at least like not taking a step forward, but it would certainly help Silver Spring solidify its place in the market.
4. Get Bought by a Company From Asia. Toshiba paid $2.3 billion for Landis & Gyr. Panasonic has said it wants to be number one in green electronics by 2018. Samsung’s energy division is now run by Steve Fludder, the former GE Ecomagination chief that’s no stranger to acquisitions. Hitachi and Fujitsu have both developed smart grid technologies and want to establish a firmer foothold in the U.S.
The European conglomerates like ABB and Schneider have just burned through a major shopping spree, so they might be tapped out at the moment.
It may not be the glamorous exit the company hopes for, but selling out could be the safest option.