Silver Spring Shares Tumble on Warning of Missed Q4, 2013 Revenues

Delayed software, services deals cut into bottom line for smart grid networker

Looks like Silver Spring Networks (SSNI) wasn’t able to push a few key deals forward in the fourth quarter -- and the upstart smart grid networking company’s shares are suffering as a result.

On Thursday, the Redwood City, Calif.-based company reported that fourth-quarter revenue will fall short of previous projections, coming in between $88 million and $89 million, compared to analyst projections of $105 million. For fiscal year 2013, Silver Spring is projecting a loss of $3 million to $4 million on annual revenues of $325 million to $326 million, up 13 percent from 2012 -- far short of the 18 percent year-over-year revenue growth it had projected as recently as October.

Shares of the Redwood City, Calif.-based company took a tumble after the news came out, falling nearly 30 percent in after-hours trading on the New York Stock Exchange, before stabilizing at about $18 per share as of 8 p.m. EST, or 23.4 percent lower than its 4 p.m. EST closing price of $23.50. That’s flirting with the lower bound on the company’s share price, which has ranged from $14.63 to $33.82 since its March IPO

CEO Scott Lang blamed the shortfall on “just a few deals with existing customers” that didn’t come through in the fourth quarter. “For example, we had a couple of customers defer their decision to buy software applications for budgetary reasons, and another customer that is piloting our technology pushed their deployment decision to early 2014,” he said in a Thursday afternoon conference call.

“None of the revenue shortfall was due to competitive losses,” he said. Rather, on the international front, “some deals are taking longer than expected, and some customers in the United States are progressing to full deployment pace slower than we would have expected.”  Even so, he said that all the delayed deals are expected to go through in 2014.

Chief financial officer Jim Burns noted that the delayed projects weren’t related to hardware deployments, but rather “primarily [to] software, and to a lesser extent, services.” That’s a bit troubling, but not necessarily unexpected. Silver Spring, like many of its smart meter and grid networking competitors, is seeking to grow its share of software and services business that can offer recurring revenues, as opposed to the one-time smart meter deployments that have made up the majority of its business to date.

But pushing new software and services into the slow-moving and regulation-burdened utility sector takes time. Silver Spring is adding outage detection and fault location, demand response and customer engagement, and distribution automation networking to its portfolio of services, both with existing customers and as additional services to woo new customers like municipalities seeking “smart city” connectivity -- but these still represent a small portion of its revenues.

Burns noted that the company expects managed and software-as-a-service revenue to add up to $2 per networked endpoint for 2013. That’s a useful measure of recurring value that Silver Spring will be eager to expand to more of the roughly 18.2 million endpoints it had networked as of the end of last year, not to mention the 8 million homes and businesses it now has on backlog.  

In the United States, Silver Spring has completed multi-million-smart-meter networking deployments with Florida Power & Light, Pacific Gas & Electric, Pepco, Oklahoma Gas & Electric, Baltimore Gas & Electric, and has upcoming deployments with Commonwealth Edison, Progress Energy, AEP Ohio and San Antonio, Texas municipal utility CPS, among others. But the U.S. smart meter market, which boomed in 2008-2010 with the influx of billions of dollars of federal stimulus grants, has since slowed considerably, pushing Silver Spring and its competitors abroad in search of new markets.

Internationally, Silver Spring has large-scale deployments in Australia, is expanding its work in New Zealand, and has a potentially large deployment being planned by Brazilian utility CPFL Energia, as well as smaller-scale pilots underway in Portugal and Singapore. But some of the larger international prizes it was seeking, such as smart meter contracts in the U.K. and Japan’s Tokyo Electric Power Co., have gone to others.

As for what’s to come this year, Lang offered the following guidance:

Our $875 million of total backlog represents 8 million homes and businesses that will be networked. And as those projects ramp up, I believe that we will return to growth in the back half of 2014, and 2015 is already taking shape. When we look at the backlog and when we expect it to turn into revenue, there is more related to 2015 and beyond, and the gross margin is looking good. We now have 26 million homes and businesses under contract, and we expect our recurring revenue stream to continue to expand over the coming years.

Some other tidbits from Thursday’s conference call:

- Lang noted, “We've already been notified in January that we were selected for the two largest deals in market,” which aren’t part of its $875 million backlog calculation. While he didn’t provide more details, he did say, “I believe they're the largest deals in the market.”

- Lang also noted that “one of our U.S. utility clients has committed to a 75,000-streetlight project, making this our largest streetlight deal yet.” In October, Silver Spring announced a 20,000-streetlight project in Copenhagen, one of its first large-scale deployments connecting devices beyond smart meters. While he didn’t name the new U.S. utility planning for an even larger street light deployment, it would be natural to speculate that it might be San Antonio’s CPS, which has long talked of expanding its Silver Spring network to city lighting.

- Finally, Lang dropped some hints that at the DistribuTECH conference coming to San Antonio in the last week of this month, Silver Spring plans a big reveal of its data analytics solutions. That launch will include “a couple of customers that are already moving forward and that'll be part of the launch,” he said. “So I'm glad the day is finally here. We can talk about our approach to big data and really leveraging our networking leadership, what we've learned that other players in the space may not have seen, [and] how we can really unlock and bring additional value.” Stay tuned for news on that front.

SSNI data by YCharts