Third Quarter 2014 Earnings Conference Call Prepared Remarks November 5, 2014
Bonnie Hyun: Thank you. Welcome to our third quarter 2014 earnings call. With me on the call today are Scott Lang, our Chief Executive Officer, and Jim Burns, our Chief Financial Officer. After the call, we will post to our website at ir.silverspringnet.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 fourth quarter and full year 2014. Actual events and results may differ materially from our expectations. We refer you to our SEC filings for a discussion of risks factors that could cause our actual results to differ materially from those discussed today. We make these statements as of November 5, 2014, 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 Scott. Scott Lang: Thanks Bonnie. Hello Everyone. We are very pleased with our results this quarter. We executed better than expected on the top and bottom line, and we made terrific progress to improve our ongoing performance. This quarter, we delivered double-digit top line growth from last quarter and shipped over 600,000 devices that are connecting more and more homes and businesses. This is the largest expansion of footprint since Q4 of last year. In fact, next week, we will be celebrating our 20 millionth home and business, which represents a significant milestone. We thank our customers and are thrilled that our fourth generation technology is generating this kind of impact. We continue to make progress selling additional applications onto the network to deliver greater value for our customers; this part of our business grew 18%, while our customer 2
satisfaction is at record levels. I d like to share with you some examples of how our customers are utilizing our technology and realizing the benefits from these innovations. Florida Power and Light, who was our first large scale residential network and AMI deployment, has been pleased with the performance of our network and the value it is delivering to them. This quarter, they expanded the street light project we started earlier this year to include our Streetlight.Vision software. It is rewarding to see this acquisition start to penetrate our customer base. Pacific Gas and Electric was our second large scale deployment and represents more than five million connected homes and businesses. Our technology helped enable PG&E to restore power to 70,000 residents in about 24 hours following the earthquake in Napa. The overall ComED project has ramped up nicely. In fact, our Distribution Automation technology has helped ComED avoid more than 500,000 customer outages to date which saved their customers over $80 million. And CPS Energy in San Antonio, which is the country s largest electric and gas combined municipal utility servicing one million customers, began its field deployment this quarter for AMI and Distribution Automation all on one network. We had strong signings this quarter and I would like to highlight three wins that are particularly noteworthy as they expand our available market. We announced two deals in the municipal and cooperative markets. City Utilities of Springfield is our first triple-play of connecting electric, water and gas customers all on a single network. We also announced Choptank Electric, a full deployment project which is our first win in the cooperative market. And today we announced an exciting partnership with Consumers Energy for our SilverLink product. SilverLink was selected to be the technology platform for their consumer engagement and energy efficiency program across their nearly 2.7 million Michigan customers. This is the biggest win to date for the SilverLink platform launched earlier this year and reinforces two important aspects to our approach. First, it demonstrates that it can run on an alternative network. That s important because while we are a market leader in networking, it recognizes the value we bring to other network choices as well. Second, we built a product that is uniquely designed for the next evolution of consumer engagement, where in many cases, existing alternatives are falling short as our customers face one of their most important challenges. We made substantial progress in the quarter, and expect continued improvement in Q4. As a reminder, we won more than half the U.S. market in 2013 and we have continued to see our position as a market leader be recognized by a list of powerful wins this year. While we have experienced delays in seeing some of the projects ramp up, many are now getting under way. In addition to the deployments I have already 3
mentioned, AEP Oklahoma announced they are moving forward with the AMI deployment for half a million homes and businesses and we now expect AEP Ohio to begin deployment next year. I would also like to mention two important items that will have a lasting improvement on our financial performance in Q4 and beyond. First, we announced on September 16 that we would be realigning some of our investments that we are making. This was to recognize the industry is moving quickly and we have to move with it. We like our position as a market leader in core network technology and our new innovations such as SilverLink and street lights. We expect to increase investments in these growth areas while cutting investments in underperforming areas of the business. Additionally, we ll be shifting operating expenses from G&A to Sales. The second item relates to the quality of our top line and our product mix. We have made thoughtful moves to significantly increase the percentage of Silver Spring content and lower the percentage of low-margin third party content. We expect this shift to have an immaterial effect on profit, and a temporary top line impact. Based on this and other initiatives which Jim will discuss, we expect to show annual growth on both margins and profits starting next quarter. We expect Q4 gross margins to have strong improvement and be up close to 10 points from a year ago, delivering good gross profit growth, positive cash flow and earnings. As we have indicated, 2015 continues to take shape. We have had solid signings, and while we still plan to report on backlog during our next earnings call, backlog at the end of the third quarter is at a record level. We expect to share with you more announcements during the next quarter. We are seeing increased RFP activity globally and we expect to maintain our position as a market leader as these markets grow. We expect to continue to expand margins due to the richer mix of our content. In summary, I am pleased with this quarter s performance and have a high confidence in our Q4 outlook, which shows further growth in the top line from Q3, restoration of profitability and solid progression to our long-term model. With that, I will turn the call over to Jim to discuss our results and Q4 outlook. Jim Burns: Thanks Scott. Q3 was a positive inflection point for the company. We accelerated our footprint growth to be back in line with 2013 levels. We won deals that broadened our available markets in key strategic areas such as analytics, smart water and co-ops and we realigned investments for profitable growth. 4
Now on to our Q3 results. There are a number of areas of our business that make more sense to compare sequentially this quarter given the strong one-time software licenses that we deployed a year ago. Q3 Non-GAAP revenue was $71M, and up 11% sequentially. Network and AMI non-gaap revenue was $61M, up 18% sequentially. We expect further sequential quarterly growth in Q4 and have high conviction given the coverage in our backlog. Our new solution non-gaap revenue was $10M, up 18% year-over-year driven by growth in both demand side management and street lights. Non-GAAP product revenue was $50M, up 17% sequentially. We delivered 633K endpoints in the quarter, expanding our footprint to 19.7 million. Non-GAAP services revenue was $21M, which is flat from a year ago. o Non-GAAP managed and SaaS revenue was $11M, up 9% year-overyear. Recurring non-gaap revenue per cumulative network endpoint on a trailing twelve month basis was $2.04. o Non-GAAP professional services revenue was $11M, down 9% year-overyear due to completed deployments. We expect this to return to growth in Q4. From a geographical perspective, our US non-gaap revenue was $64M and our international non-gaap revenue was $7M. We expect international revenues to accelerate from these levels. Non-GAAP gross margins were 30.8%, as expected. Non-GAAP product gross margin was 29.3%, flat from last quarter. Non-GAAP services gross margin was 34.3%, down 4 points year-over-year. o Managed and SaaS gross margin was 43.2%, flat from last quarter. o Professional services gross margin was 25.3%. As we indicated last quarter, margins were temporarily dampened due to the ramp up of services resources for new customer deployments. We expect the gross margin to increase in Q4 as these deployments get under way. Non-GAAP operating expenses were $29M, down 2% from a year ago and 5% sequentially despite strong sales commissions. We expect operating expenses to decrease further in Q4, primarily in G&A. Looking at headcount, we ended the quarter with 589 employees. Our non-gaap net loss was $7.0M and our non-gaap loss per share was $0.14. We expect to be profitable in Q4. We ended the quarter with $110M in cash and investments and no debt. The cash decrease was due to EBITDA and higher accounts receivable as we had strong billings 5
in the back half of the quarter as deployments ramp up. We expect to generate positive cash flow and positive EBITDA in Q4. Now on to the Outlook. I ll now provide some more details on the fourth quarter 2014. We feel confident in our Q4 outlook as nearly all of our projected revenue is contracted and does not require further regulatory approvals. With a stronger top line, a richer mix, and the benefits of our productivity initiatives, we expect to restore profitability and generate cash. For Q414, we expect: Non-GAAP revenue of approximately $73-$78M. Non-GAAP gross margins of approximately 38-40%. As Scott mentioned, we took actions to improve the mix of percentage of Silver Spring content and reduce low-margin third party revenue. Additionally, we expect reductions in supply chain costs and improved service utilization. Non-GAAP operating expenses of approximately $27-$29M. Non-GAAP earnings per share of approximately $0.01 to $0.04. Fourth quarter share count of approximately 50M. In summary, we executed on the quarter. Q3 results were a marked improvement from Q2, and we expect Q4 will show further progression. We are building backlog and expanding into adjacent markets. Looking forward, we have strategically repositioned our product mix and investments in order to fuel revenue growth and generate profits and cash flows which we expect to see in Q4 and beyond. Thank you for your time today now I will pass it back to Scott. Scott Lang: I am extremely proud of Silver Spring s achievements. We took the softness that we experienced as we exited 2013 seriously and we are very pleased our results are showing terrific progress, with the strongest foundation that we have ever had. I m especially grateful to our employees for their superb performance in recent months, and to our growing family of customers for their continuing support and trust. As you can see from our latest results, with our innovative technology we will be surpassing 20 million homes connected, with commitments in place to add millions more. Our balance sheet is very strong, driven by a pipeline of innovation that is the strongest I ve seen in the past 10 years. When I joined the company as the founding CEO more than a decade ago, it was our vision that networks of smart, connected devices would transform the energy industry and lead to greater efficiencies for the benefit of cities, consumers, and the planet. That 6
is exactly what we have done. Clearly, our vision and platform have expanded to have a greater influence on the coming era of intelligent connected devices the Internet of Things bringing Silver Spring Networks innovations to even more businesses and governments, globally. Our special relationships with business leaders around the world have been crucial in creating the opportunities that are now ahead of us, and those relationships will remain a key differentiator. No other company is so focused on delivering the innovation behind smart networks, or as capable of understanding the unique needs and challenges faced by those who are deploying them. To fully realize this opportunity that is in front of us, we will now be strengthening our already strong senior management team. As Silver Spring s Chairman, I am initiating a succession plan to identify the company s next CEO. The board and I are committed to find the next world-class leader, one who will build on our many accomplishments. Upon the appointment of our new CEO, I will remain as an active Executive Chairman. I am passionately excited about this decision, and proud that we are in a position to take this next step. As Executive Chairman, I will continue to chair our board. Perhaps more importantly, I will be able to focus even more of my time on the relationships that established us as a market leader, while investing in new relationships to open new markets and opportunities in the coming era of intelligent, connected devices. I am additionally excited that we will be adding another seasoned executive to our team who will have the passion and experience to take our leading platform to this next level. We will keep you updated on our progress as we enter this new and exciting point in our journey. Bonnie Hyun: Thanks Scott. Operator, we will now 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 activity; future growth and market opportunity; future investment; future financial results, including expected improvements in gross margin and outlook for the fourth quarter 2014; and succession plans. Statements including words such as "anticipate", "believe", "estimate" or "expect" and statements in the future tense are forward-looking statements. These forwardlooking statements are preliminary estimates and expectations based on current information and are subject to business and economic risks and uncertainties that could 7
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; 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; 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; 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 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 November 5, 2014. 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 financial results set forth in this document are estimates based on information currently available to Silver Spring. 8