Fourth Quarter and Full Year 2016 Earnings Conference Call Prepared Remarks February 21, 2017

Transcription

1 1 Fourth Quarter and Full Year 2016 Earnings Conference Call Prepared Remarks February 21, 2017

2 Mark McKechnie, VP of Investor Relations and Strategic Initiatives Thank you. Welcome to our fourth quarter and full year 2016 earnings call. With me on the call today are Mike Bell, our Chief Executive Officer, and Ken Gianella, our Chief Financial Officer. After the call, we will post to our website at ir.ssni.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 investments, future events and the future financial performance of the company, including our outlook for the first quarter and full year 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 February 21, 2017, 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. Before we begin, a few words on our recent update on the reporting of our non-gaap metrics: As we discussed on our February 13th informational call, based on further evaluation of the SEC interpretations for the use of non-gaap financial measures, we have made further changes to the way we present our non-gaap financial results. As a result, beginning with this report, we will include some, but not all, of the non-gaap metrics that had been included in previous reports. We will continue to provide the financial data that will allow you to perform the same calculations we use internally to derive the non-gaap metrics we had previously reported, should you desire. These calculations will assist you in comparing our current results to our previously reported non-gaap metrics. For more information, please see the FAQ and supporting documents we posted on our website for our February 13th call at ir.ssni.com. Now I would like to turn the call over to Mike. 2

3 Mike Bell, President and CEO Thanks Mark, and good afternoon everyone. Almost 18 months into my role as CEO of Silver Spring Networks, I am even more confident in our position as a leading network and data platform provider for the Internet of Important Things, and our mission to securely and reliably connect the things that matter. We have further expanded our leadership, with record bookings in 2016, solid progress in international markets, and good initial traction from our efforts to extend our IoT platform deeper into our core smart utility and smart city businesses, and into additional vertical market opportunities. We ve never been stronger, and I am pleased with our results coming out of 2016 as we head into We ended 2016 in a solid financial position, closing the year on a high note with our fourth quarter results. With over $77 million of billings in Q4, we delivered more than $294 million in billings for the year. We generated $8 million in operating cash flow for the quarter, and over $20.7 million for the year. We ended with over $118 million of cash and equivalents on our balance sheet. We had our highest bookings year ever; with major AMI wins in the U.S., including ConEd, Entergy, PacificCorp and American Municipal Power; overseas awards in Mexico, India, Singapore, and Jamaica; and follow-on Distribution Automation awards from CPFL in Brazil and Baltimore Gas and Electric here at home. We ended the year with a backlog of $1.165 billion, up over 50% from the end of last year. We finished the year with more than 25.5 million cumulative network endpoints delivered, adding nearly 2.6 million in This expands the opportunity for our primarily recurring Managed services & SaaS business, which grew by 16% to over $60 million in 2016, and which is on track for another double-digit growth year in Now, onto today s announcements: I am happy to report that AEP Ohio, as many of you may already know, received regulatory approval for its smart grid program on February 1 st. We congratulate AEP on the approval, and look forward to the start to their Advanced Metering Infrastructure deployment, which is expected to enable improved energy efficiency, increased grid reliability, and better customer access to information about their electric usage. Planning is underway. Deployment of our IPv6 multi-application platform to nearly 900,000 homes and businesses in AEP s Ohio service territory is expected to commence in mid Next, CESC of India has selected Silver Spring s IoT platform to modernize the grid operations in its newly-acquired properties in Kota and Bharatpur. CESC s AMI deployment is expected to cover approximately 237,000 homes and businesses in the two cities, and includes ten years of Software-as-a-Service. This award is from CESC s recently-won distribution franchise to manage the grid in these two cities. Planning is underway, and the deployment is expected to start in the current quarter. For clarity, these projects are in addition to the project in Kolkata with CESC s flagship verticallyintegrated utility, which we announced in late I d also like to welcome our newest international customer, Dubai Electricity and Water Authority, or DEWA. 3

4 DEWA has selected our multi-application IPv6 IoT platform to provide secure and reliable communications for multiple services, with plans to deploy a network canopy across the Emirate of Dubai. DEWA intends to use the network for electric and water services, and envisions additional services in the future. DEWA provides services for over 700,000 electricity and 600,000 water connections across its service territory. Looking forward, we continue to focus on several key growth initiatives to bolster our position in our core markets, and to expand our IoT platform into new verticals. First, we continue to invest in our platform. We are preparing for the ramp of our Gen5 platform to support our major upcoming deployments and other awards; we are further improving our developer tools to simplify and accelerate the adoption of our technology into more devices; and we are expanding our platform to enable a wider range of new IoT applications through our utility customer footprint, or through our Starfish Network-as-a-Service offering. Second, we continue our efforts to extend our technology deeper into smart utilities and smart cities. We announced a couple of large, new distribution automation awards in 2016, including Baltimore Gas & Electric here in the U.S., and CPFL in Brazil. These add to our successful deployments with Florida Power & Light Company, and ComEd, both of whom have reported record reliability, due in part to Silver Spring Networks technology. Our momentum in street lights continues. Florida Power & Light is progressing with their project to connect 500,000 street lights, and following their recent rate case approval, Oklahoma Gas & Electric is preparing to kick off their project to connect 250,000 street lights. o We are working with several other current utility customers on pilots for their own street lights, and, in some cases, to open their platform to deploy city-owned lights in their service territory. o We have expanded our smart city go-to-market approach to better reach municipalities and cities through relationships with Acuity, Ameresco, Panasonic, Philips, Rongwen of China, and Samsung. Our world-class Gen5 platform, along with our compact, battery-powered Milli5, and the upcoming IoT router which we are currently sampling, offer what we view to be one of the broadest IoT connectivity solutions in the market. o We have developed a comprehensive ecosystem for utilities, with a range of devices from various industrial companies, from street lights, to meters, to reclosers and line sensors, which provide complete solutions to our core customers. o Earlier this month at DistribuTECH, we announced new projects with Incon, which offers realtime transformer monitoring; Sentient, which offers intelligent line monitoring that hang directly from the power lines; and Varentec, which provides voltage regulation at the grid edge. o We also have a number of development projects, proof of concepts and pilot programs in various stages, including water, environmental monitoring, distributed energy, and other utility applications. 4

5 Third, we continue to see additional opportunity to expand our smart grid footprint in the U.S. To put it in perspective, just a little over half of the 150 million endpoints in the U.S. have been contracted for AMI deployments. We estimate our share of the awards to date at approximately 36%. With nearly half of the market remaining, we are aggressively targeting the remaining greenfield awards. We are also preparing to target some of the lower-tech AMR or AMI 1.0 deployments which were awarded about a decade ago, and will soon be up for refresh. Fourth, we are expanding our sales and marketing to further penetrate international markets. We see significant opportunity in overseas markets, with many countries still referring to their low bandwidth Power Line Carrier connections as smart grid deployments, a number of failed cellular attempts that have yet to deliver meaningful benefits, and other markets still reliant on primitive mechanical meters with bi-monthly reads. In addition to today s announcement of DEWA in the United Arab Emirates, we have a marquis list of international AMI deployments in countries such as Australia, Brazil, India, Mexico, and Singapore. These, along with our smart city projects in Paris, London, Bristol, Copenhagen and Stockholm, provide us with a solid group of reference customers in key geographic regions of the world. To better address international opportunities, we are reorganizing our sales and global go-to-market effort around geographic teams, with key leadership in EMEA, Asia Pacific, and the Americas. Placing senior leadership in each region will improve communication with local ecosystem players, cultivate local partners, yield better awareness within the local market sales channels, and enable regular contact with key decision makers. Finally, we are mobilizing to leverage our platform into additional industrial verticals with Starfish. Our technology platform is globally proven in some of the most demanding of utility environments. With this experience, we have developed what we believe is one of the most secure and reliable communications platforms in the industry, one that provides the right foundation for a wide range of industrial applications as we look to expand into new verticals. Our advanced Gen5 platform, which has been a key factor in our recent major wins, is designed to support the advanced requirements for these industrial applications, with megabit bandwidth, advanced security, and the ability to deliver service level agreements, none of which we believe can be met in the same way by competitive solutions. Our early development efforts are beginning to show promise. We envision a solutions-based model, developing an ecosystem of third-party device providers around our horizontal IoT network and data platform to address additional verticals. While we have a focused organic approach with early development and pilots underway, we are pursuing strategic partnerships, and are open to considering other options to drive our platform into new markets. To close, I am pleased with our performance in 2016, and I am optimistic in the growth potential ahead for Silver Spring Networks. I see significant opportunity to grow our footprint and deliver additional value to our core markets, both domestically and internationally, and I am excited to have launched Starfish, our vision to leverage our platform for the opportunity presented by the broader Internet of Things. Let me now turn the call over to Ken Gianella, our interim CFO, for detail on our financial results and our outlook for the first quarter and full year

6 Ken Gianella, CFO Thank you Mike, and good afternoon everyone. As a reminder, this is our first earnings call using the new presentation format for both earnings and guidance. Please see our website ir.ssni.com for reference material if you have any questions. Now let s begin. Q4 was another strong quarter, ending a great We grew our top-line with billings at the upper end of the range, improved the underlying profitability of our billings, and generated over $8 million in cash flow from operations. For the year, we won some great deals in the U.S. and international markets, grew our backlog by over 50%, and expanded our cumulatively-delivered network endpoints to over 25.5 million. Looking ahead, we are focused on delivering on our major new customer awards, and investing to expand into new verticals, and strengthen our position as a leader in the Internet of Important Things. Now onto Q4 results: Q4 billings were $77.7 million, up 4%. We had solid execution, continued the production ramp of our Gen5 technology to support new customer deployments, with additional strength from our better than expected year-end customer budget flush. Billings by type were as follows: Product billings were $47.5 million, down 1%. o We delivered approximately 564,000 network endpoints in the quarter, ending the year with over 25.5 million cumulative electric network endpoints delivered. Service billings were $30.2 million, up 12%, of which o Professional service billings were $13.2 million, up 3%, and o Managed services & SaaS billings were $17.0 million, up 19%. Q4 results benefited from a higher mix of set-up fees versus a depressed level a year ago. Advanced Meter Infrastructure billings were $59.7 million, up 2%. New Solution billings were $18.0 million, up 8%. International billings were $15.7 million, up 13%, and represented approximately 20% for the quarter. Total cost of billings were $39.0 million, or 50.2% of billings, The underlying profitability of our billings improved by approximately 3 points from the fourth quarter of last year. This was due to profitable mix on product billings, partly offset by operational investment in our services. 6

7 Cost of billings by type: Product cost of billings were $22.6 million, or 47.4% of product billings. The underlying profitability of product billings improved by approximately 8 points from last year, driven in part by manufacturing efficiencies, milestone billings, and a higher mix of software in Service cost of billings were $16.4 million, or 54.4% of service billings. o Professional services cost of billings was $7.3 million, or 55.7% of professional service billings. The underlying profitability of professional services billings declined by approximately 9 points, due to deployment investment and elevated levels of milestone billings in the period a year ago. o Managed services & SaaS cost of billings was $9.1 million, or 53.4% of managed services and SaaS billings. The underlying profitability of managed services & SaaS billings declined by approximately 2 points from last year, due primarily to operational investment. Q4 non-gaap operating expense was $35.3 million, up 29% as expected. This increase was due in large part to higher sales commissions and the launch of Gen5, Milli5, and other new product and other one-time spend. Our Q4 GAAP tax expense was $0.2 million, and GAAP other expense was $0.2 million. Weighted average basic and fully-diluted share count was 52.0 million shares. In the case of a net income position, fully-diluted share count would have been 54.4 million shares. Net cash was $118.3 million at the end of the period, up nearly $5 million from last quarter. Q416 cash flow from operations was approximately $8 million, capital expenditures were approximately $1.4 million, and depreciation was approximately $2 million. As we look back on 2016 we are pleased with our operational execution, focused on new product introductions, and the kick off of expansion of our sales and marketing efforts into IoT, channel, and international markets. Now let me highlight the 2016 results: Billings of $294.6 million, up 4%. o AMI up 7% for the year, partly offset by a decline in New Solutions due to the roll-off of demand response programs. o International was up 20% for the year, and represented 18% of sales. Billings by type for 2016 were: Product billings of $189.3 million, up 2%. Service billings of $105.3 million, up 9%, of which: o Professional services was $44.8 million, up 2%, and 7

8 o as Mike mentioned, managed service & SaaS billings for the year were $60.5 million, up 16%. Total cost of billings of $150.9 million, or 51.2% of billings, a 5 point improvement over last year. Non-GAAP operating expense was $130.2 million, as expected. Our 2016 GAAP tax expense was $2.4 million, and GAAP other income was $0.7 million. Weighted average basic and fully-diluted share count was 51.4 million shares. In the case of a net income position, fully-diluted share count would have been 53.7 million shares. Total backlog, which we report once a year, was $1.165 billion, up over 50% versus $770 million in 2015, a significant growth year on year. We ended the year with pilots at customers which represent an opportunity of over 26 million electric endpoints. Now, onto our outlook. Please refer to material from our February 13th call for a discussion of how we internally calculate our previously-reported non-gaap metrics. Our 2017 GAAP outlook includes: Revenue of approximately $400 million to $420 million, with a continued focus on reducing our deferred revenue. A provision for tax and other income (expense) combined of approximately $3 million. Weighted average basic and fully-diluted share count of approximately 53 million shares. In the case of positive net income, we would expect fully-diluted share count of approximately 55 million. Positive cash flow from operations. And, net capital expenditures for 2017 of approximately $5 to $10 million, down from 2016 due to the near completion of our new San Jose headquarters. Our 2017 non-gaap outlook includes: Billings of approximately $300 million to $320 million. Our outlook considers the following factors: o Double-digit growth of our managed services & SaaS business; o The start of several new AMI, street light and DA awards, offset by the roll-off of projects nearing completion; o A balanced mix of book-and-bill business and/or deployment acceleration similar to historic results; o Contribution from IoT and new vertical initiatives; and a o Linearity of billings similar to 2016, with slightly higher mix of business in the second half of the year due to ramp up of new deployments. Cost of billings at approximately 55% of billings, plus or minus 100 basis points. Non-GAAP operating expense of approximately $127 million to $132 million. o We will continue to invest in our core AMI and domestic work force, but see a slightly lower spend in the second half of the year due to resources shifting from products that enter in full 8

9 production, projects that are ramping down, and the increased focus on growth in our International and IoT businesses. Our first quarter 2017 GAAP outlook includes: Revenue of approximately $45 million to $50 million. A provision for tax and other income (expense) combined of approximately $0.5 million. Weighted average basic and fully-diluted share count of approximately 53 million. In the case of positive net income, we would expect fully-diluted share count of approximately 54 million. Our first quarter 2017 non-gaap outlook includes: Billings of approximately $67 million to $71 million. Cost of billings of approximately 52% of billings, plus or minus fifty basis points. Non-GAAP operating expense of approximately $33 million to $34 million. In closing: We delivered solid results in 2016, with record bookings, great underlying profitability of our billings, and a strong operating cash flow. We are mobilizing in the near-term on our Gen5 to support the ramp of our major wins to which are expected to begin their deployments in this year and next. Finally, after a record 2016 bookings, we will continue to invest in our operational execution and growth initiatives, with a focus on gaining international market share with a geographic focused go-tomarket strategy, continued innovation to our platform driving our technology deeper into our core smart utility and smart city markets, and we will aggressively be exploring new verticals in the Internet of Important Things. Thank you, and I will now turn it back to Mark for questions. Mark McKechnie: Thanks Ken. Operator, we will take our first question. 9

10 Mark McKechnie: Thanks for joining the call today, please feel free to follow up with me for any additional questions. We look forward to seeing you at several upcoming investor conferences in Q1, including JMP Securities in San Francisco on February 27 th and 28th, KeyBanc Pacific Crest in San Francisco on March 1st, Roth Capital in Laguna on March 13th, and Williams Capital in Las Vegas on March 22 nd. Forward-Looking Statements This document contains forward-looking statements that involve risks and uncertainties. These forwardlooking statements include statements regarding the momentum in Silver Spring Networks business; future growth and market opportunity; the scope and timing of future deployments; expected benefits from our products; future investment; future innovation; customer and market activity; and future financial results, including outlook for the first quarter and full year 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 forwardlooking statements. Important factors that could cause results to differ materially from the statements herein include: timing around customer decisions and deployment pace; receipt by our customers of required regulatory approvals; 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; the expansion of our target markets, including the IoT market; 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 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 All forward-looking statements in this document reflect Silver Spring s expectations as of February 21, 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 preliminary financial results set forth in this document are estimates based on information currently available to Silver Spring. 10