Changes to non-gaap Financial Reporting for Silver Spring Networks FAQ. February 10, 2017

Transcription

1 Changes to non-gaap Financial Reporting for Silver Spring Networks FAQ February 10, 2017 On May 17, 2016, the Staff of the United States Securities and Exchange Commission (the SEC ) updated their Compliance & Disclosure Interpretations ( C&DIs ) related to the use of publicly reported non-gaap financial measures. Silver Spring Networks responded by revising the presentation of its financial results, starting with its report for the second quarter ended June 30, After continued consideration of the C&DI s, Silver Spring Networks has determined to further revise the way in which it reports its financial results. Beginning with its report for the fourth quarter and full year ended December 31, 2016, and for future periods, Silver Spring Networks will no longer report gross profit or gross margin on billings, non-gaap operating income, non-gaap net income, non-gaap net income per share, or adjusted EBITDA. Silver Spring Networks will, however, continue to report billings, cost of billings, and non-gaap operating expense. In addition, Silver Spring Networks will continue to report the additional GAAP data that management uses internally to calculate adjustments to its GAAP financial measures. Silver Spring Networks management team uses these adjusted financial measures, which were previously reported as non-gaap financial metrics, to manage its business, make planning decisions, evaluate its performance and allocate resources. Silver Spring Networks will take the same general approach with its guidance. Specifically, Silver Spring Networks guidance will include billings, cost of billings, and non-gaap operating expenses, along with GAAP and other key data used internally to manage the business. In conjunction with this change, Silver Spring Networks will also no longer report recurring metrics in future reports. Silver Spring Networks will, however, continue to report managed services and SaaS revenue and billings, and cumulative network endpoints delivered, both of which can be used to calculate the previously reported GAAP and non-gaap recurring metrics. The following Q&A is intended to clarify the ways in which Silver Spring Networks will report its financial results, and the calculations management uses internally, to derive previously-reported non-gaap metrics. Should they choose, investors will be able to perform the same calculations Silver Spring Networks uses internally to derive the metrics which we had previously reported. These calculations are described in detail in this document, with a summary table in Appendix A. 1

2 GENERAL QUESTIONS Question 1: What specific changes are you making to your financial reporting? Answer 1: Silver Spring Networks will no longer report full operating results on a non-gaap basis beginning with its fourth quarter and full year ended December 31, 2016 financial report. The previously reported s that will no longer be reported include gross profit and gross margin on billings, non-gaap operating income, non-gaap net income, non-gaap net income per share and adjusted EBITDA. Silver Spring Networks will continue to report full GAAP results, and certain s, including billings, cost of billings, and non-gaap operating expense, along with the billings and cost of billings by the categories which the company has previously reported. Silver Spring Networks will also no longer report recurring revenue, recurring billings, recurring revenue per endpoint and recurring billings per endpoint. Silver Spring Networks had previously defined recurring revenue and recurring billings as revenue and billings from its managed services and SaaS offerings, respectively. For future reports, Silver Spring Networks will continue to report managed services and SaaS revenue and billings, and cumulative network endpoints delivered, both of which can be used to calculate the previously reported GAAP and non-gaap recurring metrics. Appendix A provides details for how management internally calculates the previously reported non- GAAP financial measures by using the information that will be provided in future reports. Question 2: Are you restating your previously reported financial results? Answer 2: No. This is strictly a change in Silver Spring Networks non-gaap financial reporting on a prospective basis. The changes have no effect on the way Silver Spring Networks manages its business, makes planning decisions, or evaluates its performance or allocates its resources. Question 3: What guidance metrics will you be providing on the fourth quarter and full year 2016 earnings call and future periods? Answer 3: For quarterly and annual guidance provided in the fourth quarter and full year 2016 earnings report and in future periods, Silver Spring Networks will continue to provide its GAAP outlook, and its non-gaap outlook for billings, cost of billings, and non-gaap operating expense. Investors may choose to perform the calculations used internally by management as described in Appendix A to arrive at the company s previously reported s. 2

3 NON-GAAP METRICS TO BE REPORTED PROSPECTIVELY Question 4: Will you continue to report billings? How do you calculate billings? Answer 4: Silver Spring Networks will continue to report billings and billings by category in future reports. Billings, a, are calculated by adding change in deferred revenue to revenue for the period. GAAP financial measures Revenue Change in + deferred revenue Billings Question 5: Will you continue to report cost of billings? How do you calculate cost of billings? Answer 5: Silver Spring Networks will continue to report cost of billings and cost of billings by category in future reports. Cost of billings, a, is calculated by adding cost of revenue to the change in deferred cost of revenue and subtracting stock based compensation, amortization of intangible assets, and acquisition-related costs included in the cost of revenue in a given period. GAAP financial measures Cost of revenue Change in Stock-based + deferred cost of - compensation, revenue amortization of intangible assets, and acquisitionrelated costs included in cost of revenue Cost of billings 3

4 Question 6: Will you continue to report non-gaap operating expense? How do you calculate non- GAAP operating expense? Answer 6: Yes. Silver Spring Networks will continue to report non-gaap operating expense in future reports. Non-GAAP operating expense is calculated by subtracting stock-based compensation, amortization and impairment of intangible assets, restructuring charges, legal settlements, and acquisition-related costs from GAAP operating expense. Operating expense GAAP financial measures Stock-based compensation, amortization and impairment of intangible assets, restructuring charges, legal settlements, and acquisition-related costs included in operating expense - non-gaap operating expense DERIVATION OF PREVIOUSLY REPORTED NON-GAAP METRICS Question 7: Will I still be able to calculate your previously reported gross profit on billings and gross margin on billings from your future results reports? Answer 7: Yes. Although gross profit and gross margin on billings will not be included in future reports, these previously reported s can be calculated by subtracting cost of billings from billings. s Previously reported non-gaap Metric Billings - Cost of billings Gross profit on billings Billings Cost of billings Billings Gross margin - / on billings 4

5 Silver Spring Networks will also provide cost of billings by category, including product cost of billings, professional services cost of billings and managed services & SaaS cost of billings. This information can be used to calculate the previously reported metrics of gross profit on billings and gross margin on billings by category as shown in Appendix A. Question 8: Will I still be able to calculate your previously reported non-gaap operating income (loss) from your future results reports? Answer 8: Yes. Although non-gaap operating income (loss) will not be included in future reports, the previously reported non-gaap operating income (loss) metric can be calculated by subtracting cost of billings and non-gaap operating expense from billings. Current and future s Previously reported Billings Cost of billings non-gaap non-gaap - - operating operating expense income (loss) Question 9: Will I still be able to calculate your previously reported non-gaap net income (loss) and non-gaap earnings per share from your future results reports? Answer 9: Yes. The previously reported non-gaap net income (loss) metric can be calculated by adding GAAP other income (loss) and subtracting an assumed tax expense (benefit) from the non-gaap operating income (loss) calculation as described above. In previous reports, Silver Spring Networks non- GAAP tax rate, which was used internally to evaluate the performance of its business, was the same as its reported GAAP tax rate unless otherwise noted. For quarterly and annual guidance provided in the fourth quarter and full year 2016 earnings report and in future periods, Silver Spring Networks will provide tax information which it expects to apply internally to evaluate the performance of its business for the specific periods. Non-GAAP net income (loss) per share can be calculated by dividing non-gaap net income (loss) by either fully-diluted shares in the case of a non-gaap net income, or by basic shares in the case of a non- GAAP net loss. 5

6 Question 10: Why are you no longer reporting recurring revenue, recurring billings, recurring revenue per endpoint, and recurring billings per endpoint? Answer 10: Silver Spring Networks had previously defined recurring revenue and recurring billings as revenue and billings from its managed services and SaaS offerings, respectively. These recurring metrics, therefore, can be considered as redundant as their values are represented by their managed services & SaaS counterparts. As described in the Form 10-Q, these billings are primarily recurring in nature, and include managed services, hosting and software, maintenance, and support fees, as well as one-time managed services & SaaS set-up fees. The company believes these measures provide useful information to investors, but to avoid potential confusion regarding the inclusion of some one-time items, Silver Spring Networks will no longer report these measures. Instead, Silver Spring Networks will continue to report its managed services & SaaS revenue and billings, and its cumulative network endpoints delivered. Question 11: Will I still be able to calculate your previously reported recurring billings and recurring billings per endpoint from your future results reports? Answer 11: Yes. For future reports, Silver Spring Networks will continue to report managed services and SaaS revenue and billings, and cumulative network endpoints delivered, both of which can be used to calculate the previously reported GAAP and non-gaap recurring metrics. Although recurring billings and recurring billings per endpoint will not be included in future reports, the previously reported s can be calculated from metrics that will be reported in future reports, including managed services and SaaS billings, and cumulative network endpoints delivered. (s) Previously reported Managed services and SaaS billings Recurring billings Managed services and SaaS billings (TTM) Cumulative / network endpoints delivered Recurring billings per endpoint 6

7 APPENDIX A: INTERNAL CALCULATIONS OF PREVIOUSLY REPORTED NON-GAAP METRICS Table 1: High-level statement of operations metrics Previously reported s Future s Internal calculations Billings Billings Billings Cost of billings Cost of billings Cost of billings Gross profit on billings Gross margin on billings Table 2: Detailed metrics by type and solution and other metrics Billings - cost of billings (Billings - cost of billings) / (billings) Non-GAAP operating expense Non-GAAP operating expense Non-GAAP operating expense Non-GAAP operating income (loss) Non-GAAP net income (loss) Non-GAAP net income (loss) per share Billings - cost of billings - non-gaap operating expense Billings - cost of billings - non-gaap operating expense + GAAP other income (expense) - GAAP tax expense Non-GAAP net income (loss) / fully-diluted shares, OR Non-GAAP net income (loss) / basic shares Adjusted EBITDA Billings - cost of billings - non-gaap operating expense + depreciation expense Previously reported s Future s Internal calculations Billings by type: Product Product Product Services Services Services Professional services Professional services Professional services Managed services & SaaS Managed services & SaaS Managed services & SaaS Billings by Geo and by Solution: International International International Advanced Metering Infrastructure Advanced Metering Infrastructure Advanced Metering Infrastructure New Solutions New Solutions New Solutions Cost of billings by type: Product Product Product Services Services Services Professional services Professional services Professional services Managed services & SaaS Managed services & SaaS Managed services & SaaS Gross profit by type: Product Product billings - product cost of billings Services Services billings - services cost of billings Professional services Professional services billings - professional services cost of billings Managed services & SaaS Managed services & SaaS billings - managed services & SaaS cost of billings Gross margin by type: Product Product gross profit on billings/ product billings Services Services gross profit on billings /services billings Professional services Professional gross profit on billings / professional services billings Managed services & SaaS Managed services & SaaS gross profit on billings / managed services & SaaS billings Recurring Metrics: Recurring billings Managed services & SaaS billings Recurring billings (TTM) Managed services & SaaS billings (TTM) Network endpoints delivered Network endpoints delivered Network endpoints delivered Cumulative newtork endpoints delivered Cumulative newtork endpoints delivered Cumulative newtork endpoints delivered Recurring billings per endpoint Managed services & SaaS billings (TTM) / Cumulative network endpoints delivered 7

8 FORWARD LOOKING STATEMENTS This document contains forward-looking statements that involve risks and uncertainties. These forwardlooking statements include statements regarding the ways in which the Company will modify and present its financial reports. Statements including words such as "anticipate", "believe", "estimate" or "expect" and statements in the future tense are forward-looking statements. These forward-looking statements are preliminary expectations based on current information and are subject to risks and uncertainties that could cause actual events 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: additional guidance or rules from the SEC, comments from the SEC with respect to the subject matter of the forward-looking statements, refinement of our analysis with respect to the subject matter of the forward-looking statements, and other risk factors set forth from time to time in Silver Spring Networks filings with the SEC, copies of which are available free of charge at the SEC s website at All forward-looking statements in this document reflect Silver Spring Networks expectations as of February 10, Silver Spring Networks 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. 8