Third Quarter 2015 Earnings Conference Call Prepared Remarks November 3, 2015

Transcription

1 Third Quarter 2015 Earnings Conference Call Prepared Remarks November 3, 2015

2 Mark McKechnie: Thank you. Welcome to our third quarter 2015 earnings call. With me on the call today are Scott Lang, our Executive Chairman, Mike Bell, 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 the 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 November 3, 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. 2

3 Scott Lang, Executive Chairman. Thanks Mark, and good afternoon everyone. We are very pleased with our performance for the third quarter of 2015, adding momentum to our strong first half results. Since Mike and I transitioned to the CEO role during the quarter, I d like to take a few minutes to introduce him, cover some highlights of the quarter, and to share some thoughts before I turn the call over to Mike and Jim. On behalf of the entire board, we could not be more pleased to have Mike Bell as our new CEO, who started on September 2 nd. As you may remember, we initiated a CEO succession plan about a year ago, with a commitment to find the next world class leader to build on Silver Spring s many accomplishments. Mike is exactly the leader we were searching for and quickly became the person we knew was right to take Silver Spring Networks forward. Mike is a Silicon Valley technology veteran who contributed to game-changing products at Apple, Palm and most recently Intel, and brings a strong passion for technology and operational excellence to our senior leadership, and we look forward to working with him. I will remain at the company as Executive Chairman, and will continue to be active on an ongoing basis to support Mike and the entire company in our strategy, execution, and support of a number of key relationships that we have built over the years. Mike joins Silver Spring Networks at a time of strength, as shown by our Q3 results, which demonstrate the strength of our business model that we have established over the past decade. We delivered another quarter of top-line growth, record gross margin, and strong cash flow, ending the quarter with $122 million in cash and no debt. We delivered over 800,000 network endpoints, bringing our cumulative to more than 22 million at some of the world s leading utilities across five 3

4 continents. Not only do these endpoints contribute to our strong results, we expect them to generate recurring revenue for the next years. Our customers continue to leverage their networks for additional solutions by tapping the broad ecosystem of pre-integrated devices and applications that enable them to accelerate ROI and time to value on our open platform. When I became the 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. We knew then, and we have even more conviction now, particularly with the robust deal activity we are seeing, that it is just a matter of time before every home and business gets connected to the grid. We are realizing our vision, and have established ourselves as a trusted partner to many leading companies and iconic cities around the world. So with that backdrop, I am very proud to now turn the call over to Mike. 4

5 Mike Bell, Chief Executive Officer Thank you Scott. Hello everyone. I am both excited and honored to be the CEO of Silver Spring Networks and I look forward to meeting all of you. I often get asked why I came to Silver Spring. In short, I see tremendous opportunity to lead transformational change for the benefit of consumers, cities, companies and the planet. Throughout the search process, I was aligned with the board on their shared vision of the positive impact we will continue to make in the world of energy, and also the opportunity to leverage our technology and platform to make an even bigger impact in the world in which we live. While others are talking up what I like to call the valley of hype of 50 Billion connected IoT devices by the year 2020, we are delivering upon that promise today, with more than 22 million network endpoints delivered, generating billions of transactions at some of the world s leading utilities and iconic cities. This platform is delivering reliable, proven results today for a critical industry, and is well-positioned for tomorrow s opportunities. After just two months on the job, I have a few observations. First I would like to touch on our technology leadership. Silver Spring s best in-class ability to bring distributed intelligence processing power to the world of energy has positioned our technology as a core part of the leading platform for smart grid and smart city projects around the globe and is even stronger than I realized when I accepted the role as CEO. I have immersed myself in Silver Spring s technology, business model, and how our customers are leveraging the platform to drive lasting benefits. I have also studied our roadmap and investment focus and am excited by our plans to deliver more innovation into core markets and further drive our technology into broader IoT markets. I ll start with our network architecture. In my opinion, no one else in the world offers a better IoT communications platform than Silver Spring. We leverage 5

6 6 unlicensed spectrum with our proven world class RF mesh technology to provide a secure, scalable, reliable and efficient communications platform capable of running multiple applications in a rugged, outdoor environment for critical infrastructure. o Our current fourth generation platform is world class, connecting millions of devices at scale. Our leading customers are delighted to find that our technology provides enough headroom on their existing networks to support additional applications beyond advanced metering such as distribution automation, demand response, or street lights. o Our break-through fifth generation networking platform, which we are sampling now and expect to ramp in the first half of 2016, delivers industryleading speed of over 1 megabit per second and up to 50 miles of range. Competitive smart grid applications offer only a fraction of this performance, while newer IoT entrants fall well short of our performance, scale and innovation. This is very powerful from two perspectives. First, our fifth generation technology gives our customers even more headroom for a growing set of use cases enabled with our platform. Second, it provides capabilities to serve an even broader set of critical infrastructure markets with secure and scalable solutions. o Earlier in the year, we launched the Milli 5, which is already proving to be another example of our technology leadership. This compact, batterypowered networking module connects to the same Silver Spring networking platform and brings connectivity to a wider range of devices that don t have ready access to AC power or which require a smaller form factor. The Milli 5 expands the range of solutions we can provide to our utility and municipal customers and also enables a broad range of IoT and industrial applications. But Silver Spring is much more than a networking technology company. We deliver a complete end-to-end horizontal platform with a growing ecosystem of third-party device and applications partners specifically developed to meet the growing data and analytics requirements of our smart grid and smart city customers. Our solution encompasses everything from our world class professional services organization, which guides our customers through the planning, deployment and realization of the many benefits of a smarter grid, to

7 our software and analytics tools which deliver rich applications. In addition, our Managed Services and SaaS business enable our customers to focus on their core business while we manage the many facets of a modern smart grid and smart city. Not only do we have strong technology advantages, we have also built an impressive customer base in our core markets. Our partnerships with many of the most-admired utilities such as Pacific Gas and Electric, Florida Power and Light, ComEd, Baltimore Gas and Electric, Pepco, and iconic cities such as Paris, Miami and Copenhagen, place us at the cutting edge of successful IoT deployments. Let me share a few highlights and updates from our customers since our last report: Consumers Energy of Michigan has successfully launched their consumer engagement and energy efficiency program, offering advanced capabilities to nearly 3 million residential electric and gas customers. The project runs on Silver Spring s CustomerIQ Suite, and represents our first deployment on a non-silver Spring network. Florida Power and Light, with more than 4.7 million customer accounts powered in-part by Silver Spring technology, was named as the winner of the 2015 ReliabilityOne National Reliability Excellence Award. With better than 99.98% service reliability, we are proud to call Florida Power and Light one of our earliest customers. Ausnet Services has completed deploying the network canopy in its first service area, and we are happy to report they have activated their first meter last week, a quick and smooth start to an important award from 2 quarters ago and a testament to our proven technology and global delivery capabilities. During the quarter, we were selected by the City of Halifax, Nova Scotia, to deploy our smart street light solution, including our Streetlight.Vision control software, to network 43,000 LED luminaires over its more than 400,000 residents and almost 12.5 thousand square mile geographic area. 7

8 We expanded our go-to-market reach in smart cities with an agreement with Acuity Brands, one of the largest outdoor lighting solution providers, to jointly develop an intelligent lighting platform for utilities, cities and large campus operators to allow them to upgrade their lighting infrastructure and establish a path to additional smart city applications and services. Last, we unveiled SLV6, our next generation smart city control and management platform, which enhances our already proven solution with 100 new features. Reiterating Scott s comments regarding our business model and results for the quarter, we have established a powerful business model based upon delivering strong benefits to our customers. Our business model starts with a large and growing footprint, and this quarter we delivered more than 800,000 network endpoints, up 29% from a year ago. Our footprint now extends to over 22 million homes and businesses. We continue to deliver differentiated technology and innovation, which customers value, as evidenced by our strong gross margin which grew to a record 44% this quarter, up 13 points from a year ago. This gross margin expansion, combined with 25% growth of our own content, drove our gross profit to $33 million, up 51% from last year. We had double-digit growth in our New Solutions businesses, representing the power of our multi-application network, driving incremental sales beyond Advanced Metering such as Distribution Automation and street lights. Our expanding footprint, growth in New Solutions, and expanded menu of new applications also fueled double-digit growth in our primarily-recurring and highlyvisible Managed Services and SaaS business. Finally, our balance sheet provides the strength to run the business with the flexibility to play offense as we execute our strategy. 8

9 To close, I am proud to join a strong team and to lead the company to its next chapter of growth. I am pleased with our performance this quarter and our innovative technology roadmap. I believe we are well-positioned to continue to serve and grow our core markets, and capitalize on the long term opportunity presented by the Internet of Things. I ll now turn the call over to Jim to go over our third quarter results and the outlook. 9

10 Jim Burns, Executive Vice President and CFO Thank you Mike. Q3 was a great quarter for Silver Spring Networks, continuing our momentum for the year. We accelerated our footprint expansion and drove 25% growth of our own content. This growth combined with record gross margin and disciplined spending drove significant operating leverage a $12 million profit improvement from a year ago. We had another strong quarter of cash flow, generating over $4 million of cash. In fact, in the past four quarters we have generated $27 million of cash flow from operations. Our business model is working, and we are well on track for a great year. Now on to our non-gaap results for the third quarter: Revenue was $75 million, up 5%; Product revenue was $52 million, up 5%; and Services revenue was $23 million, up 7%. o Professional Services revenue was $10 million, up 4%. o Managed Services and SaaS revenue was $13 million, up 10%, and on track to exceed $50 million of primarily recurring revenue this year. We delivered 815,000 network endpoints in the quarter. Through Q3, we have delivered 22.3 million cumulative network endpoints, up 13% from last year. Recurring revenue per cumulative network endpoint on a trailing twelve-month basis was $2.23, up from $2.16 a year ago. Advanced Metering Infrastructure revenue was $64 million, up 4%. New Solutions revenue was $11 million, up 14%, with strong growth in smart cities and Distribution Automation. 10

11 International revenue was $9 million, up 31% and representing 12% of Q3 revenue. Gross margin was 44%, up 13 points from last year on favorable product mix and manufacturing efficiencies. Our total gross profit grew solidly, up 51%. By reporting segment: Product gross margin was 47%, up 17 points from last year. Services gross margin was 38%, up 4 points from last year. o Professional Services gross margin was 36%, and o Managed Services & SaaS gross margin was 40%. Operating expense was $28 million, down 5% from last year, and we ended the quarter with headcount of 645 employees. Our net income was $4.9 million, up $12 million from last year, and earnings per share was $0.10, a $0.24 improvement from last year. On the balance sheet: We had a great cash flow quarter, with $4.3 million in cash flow from operations, bolstering our balance sheet to $122 million in cash and no debt, up from $119 million last quarter and $110 million last year. o The positive cash flow was driven by solid earnings and continued working capital discipline. Now onto non-gaap guidance. For Q4, we expect: Revenue to range between $71 to $76 million, Gross margin of approximately 42-44%, Operating expense of approximately $28-29 million, Approximately $800,000 in taxes, Earnings per share of $ $0.08, and Share count of approximately 52 million shares. 11

12 For the full year 2015, we expect: Revenue of $278-$283 million, versus our previous $275-$287 million, Approximately 42-43% non-gaap gross margin, versus our previous 41-42%, $115 - $116 million in operating expense versus our previous $117-$119 million, Earnings per share of $0.03-$0.08, up about 10 cents from our previous guidance, and Share count of approximately 52 million shares. In closing, 2015 continues to shape up as a strong year, marked by disciplined execution, focused investments & improving market conditions. With nearly all of our deployments still in early stage, we have good visibility into finishing a strong year in 2015, and we anticipate continued growth in Mark McKechnie: Thanks Gentlemen. Operator, we will take our first question. Mark McKechnie - closing comments: Thanks to everyone on the call. We appreciate your continued interest in Silver Spring Networks. We look forward to seeing you on our upcoming roadshows. We will be at a couple of investor conferences during the quarter, including Credit Suisse on December 3 rd in Phoenix and Raymond James on December 9 th in New York City. That s all, thanks. 12

13 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 deployments; future innovation; future growth and market opportunity; and future financial results, including outlook for the fourth quarter and full year 2015 and continued growth in 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 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; 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 new 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 13

14 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 press release reflect Silver Spring s expectations as of November 3, Silver Spring undertakes no obligation, and expressly disclaims any obligation, to update any forward-looking statements in this press release in light of new information or future events. In addition, the preliminary financial results set forth in this press release are estimates based on information currently available to Silver Spring. 14