Second Quarter 2015 Earnings Conferen nce Call Prepared Remarks August 5th, 2015
Mark McKechnie: Thank you. Welcome to our second quarter 2015 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 third quarter and full year 2015. Actual events and results may differ materially from our expectations. We refer you to our SEC filings for a discussion of risk factors that could cause our actual results to differ materially from those discussed today. We make these statements as of August 5, 2015, 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. 1
Scott Lang, Chairman, CEO & President Thanks Mark. Hello everyone. Coming into the year, we said that our company was never stronger, with record backlog, strong customer satisfaction, a solid balance sheet, extending technology leadership, and markets with accelerating growth and activity. Our 2Q results reinforce this view, closing a strong first half of the year as we continue to build momentum. To put this strength in perspective, we grew our top line by 9%, expanded gross margin by 10 points to 42%, grew operating profit by $11 million, and delivered $10 million of cash flow from operations. These strong results reflect the leadership position Silver Spring has developed in the industry, and the advantages of our business model. Our focused R&D efforts are delivering exceptional value for our customers and driving expansion of our gross margin. A few additional highlights: We had our strongest deployment quarter in two years, adding approximately 700,000 new homes and businesses, bringing our total to 21.5 million. We expect deployments to remain strong in the second half, approaching nearly 23 million homes and businesses connected by end of year. Our top line returned to year over year growth, with double digit growth in our footprint, New Solutions, and our primarily recurring Managed Services and SaaS business. We are winning globally and achieved triple digit growth in our international business, which represented over 20% of our mix this quarter, and about half of our year to date bookings. The international opportunity is massive and it is still early days. Our conviction and ability to succeed in overseas markets has never been stronger. 2
Our continued R&D investments are not only fueling growth, they are also driving lasting improvements to our gross margins. o Our expanded gross margins, combined with over 20% growth of our own content, drove our gross profit to $29 million, up 41% from last year. Moving on to some recent wins and customer developments: We are pleased to announce today that CPFL Energia, Brazil s largest private electricity group, is extending its smart grid program to include our Distribution Automation technology in six cities in the state of Sao Paulo. This will leverage their existing network canopy, originally deployed for commercial and industrial customers, to now improve grid reliability for nearly 4 million people in CPFL s service area. We are also pleased to have booked over $20 million in software and software related services during the second quarter. A large part of this was one 10 year contract, which will contribute in the third quarter and add confidence to our longer term gross profit target. We would like to congratulate ComEd for its record grid reliability in the first half of 2015, avoiding approximately 879,000 customer outages, despite severe weather conditions. This is due in part to our advanced Distribution Automation solution that delivers communications and distributed intelligence capabilities to the edge of their system. It is fantastic to see benefits delivered early in this deployment, with over 1 million endpoints deployed of its 4 million planned. We started AusNet Services project during the quarter, and expect a steady ramp for the remainder of this year and next. This has been a smooth and quick start to an important award from just last quarter. This fast ramp is a testament to our proven technology and global delivery capabilities. We are proud to welcome our newest Municipal customer, New Braunfels Utilities, serving more than 60,000 residents in Central Texas, who will deploy our platform to support a double play of both electricity and water, all using our multi application network. 3
Silver Spring continues to be the only company demonstrating the power of a single network and software platform running multiple applications at large scale, with secure, utility grade performance. Our customers continue to leverage their networks for additional solutions by tapping the broad ecosystem of preintegrated devices and applications that enable them to accelerate ROI and time to value on our open platform. This value creation for our customers also supports a powerful business model for our company. The combination of our expanding footprint, and increased value that we deliver on an ongoing basis to our customers, is driving strong growth in both our New Solutions business and our Managed Services and SaaS business. We have achieved solid traction in our New Solutions business which sets us apart as a smart grid, smart city and IoT leader versus the alternative solutions that are single purpose and offer only a limited ecosystem of other devices compared to the broad choice and flexibility our platform has proven to deliver. Our customers have chosen us because our platform is enabling additional applications, which is critical for guaranteeing performance today, and ensuring the flexibility to meet the evolving business and regulatory needs of the future. As I said during our last earnings call, I hear a consistent message that confirms our vision that leading cities, businesses and industries around the world must embrace the benefits available from advanced technologies that we, with our customers, have proven. We are now seeing increasing deal activity in every region we operate validating the size and opportunity this industry offers for our leading technology. This trend is clearly positive, and reinforces our view of the massive opportunity and long term potential to take our business model into new customers, new geographies and new adjacencies. 4
We started the company over a decade ago with the vision that networks of smart connected devices would transform the energy industry and lead to greater efficiencies for the benefits of cities, consumers, and the planet. Over that period, we have led the technology innovation behind smart networks, and amassed significant experience with the operational needs and challenges faced by those who are deploying them. This perseverance and performance has earned us the privileged position as a trusted partner to the leading energy companies around the world, which we cherish. Our fifth generation technology and global deployment experience continue to set us apart in the world of energy, and are also opening an even broader set of opportunities to become the leader in smart cities and the Internet of Things. Our results this quarter shows we are on track to capture this significant opportunity. Now I will turn the call over to Jim to discuss our results and guidance. 5
Jim Burns, Executive Vice President and CFO Thank you, Scott. 2015 is progressing very well, with solid results for both Q1 and Q2. We grew our top line, expanded our footprint, delivered our third consecutive quarter of 40+% gross margins, and generated $9.6 million of cash flow from operations. Our business model is working and we are on track for a great year. Now on to our Q2 results: Q2 non GAAP revenue was $69 million, up 9%. o The strength was driven by the acceleration of customer deployments. Non GAAP product revenue was $45 million, up 6%. We delivered 692,000 network end points in the quarter. Non GAAP services revenue was $24 million, up 14%. o Non GAAP professional services revenue was $11 million, up 9%. o Non GAAP Managed Services and SaaS revenue was $13 million, up 19%, and on track to exceed $50 million this year. Through Q2, we have delivered 21.5 million cumulative network end points, up 13% from last year. Recurring non GAAP revenue per cumulative network end point on a trailing twelve month basis was $2.26, up from $2.18 a year ago. Non GAAP network and AMI revenue was $56 million, up 8%. Non GAAP New Solutions revenue was $13 million, up 11%. Non GAAP International revenue was $15 million, more than double last year s level, representing 21% of Q2 revenue. Non GAAP gross margin was 41.9%, up 10 points from last year on favorable product mix and manufacturing efficiencies. Our total non GAAP gross profit grew solidly, up 41%. By reporting segment: Non GAAP product gross margin was 43.6%, up 14 points from last year. 6
Non GAAP services gross margin was 38.8%, up 1 point from last year. o Non GAAP Professional Services gross margin was 33.7%. o Non GAAP Managed Services & SaaS gross margin was 43.2%. Non GAAP operating expense was $28 million, down 8%; and We ended the quarter with headcount of 640 employees. Our non GAAP net income was $1.1 million, an $11 million improvement from the prior year period, with profitability one quarter ahead of schedule. Non GAAP EPS was $0.02 per diluted share, and this result included a penny benefit from favorable taxes. On the balance sheet: We had a great cash flow quarter, with $9.6 million in cash flow from operations, bolstering our balance sheet to $119 million in cash and no debt. o Our receivables improved by $6 million sequentially to $42 million, improving our days of sales outstanding to 55 days versus 69 last quarter. Now onto guidance: For Q3, we expect Our non GAAP revenue to range between $70 and $75 million. Q3 Non GAAP gross margin of approximately 42 44%. o The strength in Q3 is due in part to a favorable mix of software that has already been contracted. Our full year guidance, which I will give shortly, anticipates a return to the low 40 s gross margin in Q4. Q3 Non GAAP operating expense of $29 $30 million. We expect nonrecurring engineering expenses associated with our Gen5 product to accelerate in the second half. Approximately $500K in taxes, and 7
Q3 Non GAAP earnings per share of $0.00 to $0.05. 2015 has started out strong, and is taking shape as a solid year for the company. For the full year: We are tightening our guidance range for non GAAP revenue to $275 to $287 million versus our previous $270 to $290 million range. o Our new guidance has potential upside should a few previously contracted awards, which have not yet begun, commence in the second half. 41 42% non GAAP gross margin, up from our previous 39 41%. $117 $119 million in operating expense. Approximately $500K in taxes per quarter in Q3 and Q4. Non GAAP loss per share of about four cents at the mid point. Full year share count of approximately 50 52 million, and Positive cash flow for the full year. In conclusion, we built strong momentum in the first half of the year, and we expect it to continue for the remainder of the year. Mark McKechnie: Operator, we will 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 and industry activity; future growth and market opportunity; future investment; future deployment pace; and future financial results, including expected improvements in gross margin and outlook for the third quarter and full year 2015. 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 estimates and expectations based on current information and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth in the forward looking statements. Important factors 8
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, including our recently announced fifth generation networking platform and products; 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 August 5, 2015. 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. 9