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SSNI > SEC Filings for SSNI > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for SILVER SPRING NETWORKS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SILVER SPRING NETWORKS INC


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our prospectus filed on March 13, 2013, pursuant to Rule 424(b) under the Securities Act of 1933, as amended ("Securities Act") with the SEC. In addition, the following discussion contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly the section entitled "Risk Factors."

Overview

We provide a leading networking platform and solutions that enable utilities to transform the power grid infrastructure into the smart grid. The smart grid intelligently connects millions of devices that generate, control, monitor and consume power, providing timely information and control to both utilities and consumers. We believe that the application of networking technology to the power grid has the potential to transform the energy industry through better communication just as the application of networking technology to the computing industry enabled the Internet.

We believe the power grid is one of the most significant elements of contemporary industrial infrastructure that has yet to be extensively networked with modern technology. We were founded in 2002 to address this challenge, pioneering a fundamentally new approach to connect utilities with millions of devices on the power grid. We believe our technology will yield significant benefits to utilities, consumers and the environment, both in the near term and the future. These benefits include more efficient management of energy, improved grid reliability, capital and operational savings, the ability to pursue new initiatives, consumer empowerment, and assistance in complying with evolving regulatory mandates through reduced carbon emissions. We believe networking the power grid will fundamentally transform the world's relationship with energy.

The foundation of our technology is a standards-based and secure IP network. Our networking platform provides two-way communications between the utility back office and devices on the power grid. In addition to our networking platform, we offer a suite of solutions that run on top of our network and complementary services, all of which we collectively refer to as our Smart Energy Platform. Our solutions include advanced metering, which allows utilities to automate a number of manual processes and improve operational efficiencies, offer flexible pricing programs to consumers, and improve customer service with faster outage detection and restoration; distribution automation, which provides utilities with real-time visibility into the health of the grid, enabling better management and control of power distribution assets to improve grid reliability; and demand-side management, which enables utilities to offer consumers a variety of programs and incentives to use energy more efficiently and reduce usage at times of peak demand. Our service offerings include professional services to implement our products, managed services and SaaS, to assist utilities with managing the network and solutions, and ongoing customer support. Our Smart Energy Platform comprises hardware, software and services and combines with devices manufactured by third-party partners to form end-to-end smart grid offerings. We have architected our networking platform to support multiple current and future smart grid solutions. As a result, we believe utilities can increase the value of their network investment as they deploy additional solutions on this network. Over the long term, we believe our networking platform has the potential to be extensible to areas beyond energy, including smart homes, smart buildings, and smart cities, thereby enabling the "internet of things." The "internet of things" refers to an architecture where physical devices gain the capacity to communicate with each other through the application of networking technology.

We market our Smart Energy Platform directly to utilities around the world. Leading utilities have selected our networking platform to be the foundation of the smart grid. Since inception through December 31, 2012, we were awarded contracts to network more than 22 million Silver Spring-enabled devices that connect homes and businesses. Our utility customers, as of September 30, 2013, include: Atlantic City Electric Company, a subsidiary of Pepco Holdings Inc., or PHI; Baltimore Gas and Electric Company, or BG&E, a subsidiary of Exelon Corporation; CitiPower Pty and Powercor Australia Ltd., or CHED, subsidiaries of CHEDHA Holdings Pty Limited; Commonwealth Edison Company, a subsidiary of Exelon Corporation; CPFL Energia; CPS Energy; Delmarva Power and Light Company, a subsidiary of PHI; Florida Power & Light Company, or FPL, a subsidiary of NextEra Energy, Inc.; Guelph Hydro Electric Systems, Inc.; Jemena Electricity Networks (Vic) Ltd; Modesto Irrigation District, or MID; Oklahoma Gas and Electric Company, or OG&E, a subsidiary of OGE Energy Corp.; Pacific Gas and Electric Company, or PG&E, a subsidiary of PG&E Corporation; Potomac Electric Power Company, a subsidiary of PHI; Progress Energy Carolinas, Inc. and Progress Energy Florida, Inc., subsidiaries of Progress Energy, Inc.; Sacramento Municipal Utility District, or SMUD; SP PowerAssets Limited, or Singapore Power; and Virginia Electric and Power Company. As of September 30, 2013, we had delivered 17.5 million Silver Spring-enabled devices that connect homes and businesses.


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Financial Overview

Revenue

We derive revenue from sales of products and services that enable utility customers to deploy our Smart Energy Platform.

Our product revenue is derived from sales of hardware such as communications modules, access points, relays and bridges, and software. We sell our communications modules primarily to meter manufacturers, however when requested by our utility customers, we sell third-party devices such as meters integrated with our communications modules directly to our utility customers. In addition, we sell our other hardware and software products directly to our utility customers.

Our service revenue includes fees for professional services, managed services and SaaS, and ongoing customer support.

To date, a substantial majority of our revenue is attributable to a limited number of utility customer deployments of our advanced metering solution.

Our revenue includes amounts related to the utility customers' deployments that were billed directly to our meter manufacturers, as well as direct revenue from our utility customers. We expect that a limited number of utility customers will continue to account for a substantial portion of our revenue in future periods although these utility customers have varied and are likely to vary from period to period.

Substantially all of our customer arrangements include acceptance provisions that require testing of the network against specific performance criteria. Once we complete the required network testing and receive acceptance of the initial phase of deployment, we receive customer acceptances for follow-on phases of deployment on a routine basis, which leads to additional revenue until the completion of the specific customer deployment.

Cost of Revenue and Gross Profit (Loss)

Product cost of revenue consists of contract manufacturing costs, including raw materials, component parts and associated freight, and normal yield loss in the period in which we recognize the related revenue. In addition, product cost of revenue includes compensation, benefits and stock-based compensation provided to our supply chain management personnel, and overhead and other direct costs, which are recognized in the period in which we recognize the related revenue. Further, we recognize certain costs, including logistics costs, manufacturing ramp-up costs, expenses for inventory obsolescence, warranty obligations, lower of cost or market adjustments to inventory, and amortization of intangibles, in the period in which they are incurred or can be reasonably estimated. We record a lower of cost or market adjustment in instances where the selling price of the products delivered or expected to be delivered is less than cost. We also include the cost of third-party devices in cost of revenue in instances when our utility customers contract with us directly for such devices. In accordance with our accounting policies, we recognize product cost of revenue in the periods we recognize the related revenue.

Service cost of revenue includes compensation and related costs for our service delivery, customer operations and customer support personnel, facilities and infrastructure cost and depreciation, and data center costs. In accordance with our accounting policies, we recognize service cost of revenue in the period in which it is incurred even though the associated service revenue may be required to be deferred.

Our gross profit (loss) varies from period to period based on the volume, average selling prices, and mix of products and services recognized as revenue, as well as product and service costs, expense for warranty obligations, and inventory write-downs. The timing of revenue recognition and related costs, which depends primarily on customer acceptance, can fluctuate significantly from period to period and have a material impact on our gross profit and gross margin results.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses, as well as amortization of acquired intangibles. Personnel-related expense represents a significant component of our operating expenses. Our regular full-time employee headcount grew from 566 employees as of December 31, 2012 to 608 as of September 30, 2013.


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Research and Development

Research and development expense represents the largest component of our operating expenses and consists primarily of:

compensation, benefits and stock-based compensation provided to our hardware and software engineering personnel, as well as facility costs and other related overhead;

cost of prototypes and test equipment relating to the development of new products and the enhancement of existing products; and

fees for design, testing, consulting, legal and other related services.

We expense our research and development costs as they are incurred.

Sales and Marketing

Sales and marketing expense consists primarily of:

compensation, benefits, sales commissions and stock-based compensation provided to our sales, marketing and business development personnel, as well as facility costs and other related overhead;

marketing programs, including expenses associated with industry events, trade shows, and travel costs.

General and Administrative

General and administrative expense consists primarily of:

compensation, benefits and stock-based compensation provided to our executive, finance, legal, human resource and administrative personnel, as well as facility costs and other related overhead; and

fees paid for professional services, including legal, tax and accounting services.

Key Non-GAAP Financial Measures

We believe that our results of operations under GAAP, when considered in isolation, may only provide limited insight into the performance of our business in any given period. As a result, we manage our business, make planning decisions, evaluate our performance and allocate resources by assessing non-GAAP measures such as non-GAAP revenue (billings), cost of non-GAAP revenue (billings), gross profit (loss) on non-GAAP revenue (billings), and adjusted EBITDA, in addition to other financial measures presented in accordance with GAAP. We believe that these non-GAAP measures offer valuable supplemental information regarding the performance of our business, and will help investors better understand the sales volumes, and gross margin and profitability trends, as well as the cash flow characteristics, of our business. These non-GAAP measures should not be considered in isolation from, are not a substitute for, and do not purport to be an alternative to, revenue, cost of revenue, gross profit (loss), net loss or any other performance measure derived in accordance with GAAP.

Non-GAAP revenue (billings) represents amounts invoiced for products for which ownership, typically evidenced by title and risk of loss, has transferred or services that have been provided to the customer, and for which payment is expected to be made in accordance with normal payment terms. Non-GAAP revenue (billings) excludes amounts for undelivered products, services to be performed in the future, and amounts paid or payable to customers. Non-GAAP revenue (billings) is initially recorded as deferred revenue and is recognized as revenue when all revenue recognition criteria have been met under our accounting policies as described in our Prospectus. We reconcile revenue to non-GAAP revenue (billings) by adding revenue to the change in deferred revenue in a given period.

Cost of non-GAAP revenue (billings) represents the cost associated with products and services that have been delivered to the customer, excluding stock-based compensation and amortization of intangibles. Cost of product shipments for which revenue is not recognized in the period incurred is recorded as deferred cost of revenue. Deferred cost of revenue is expensed in the statement of operations as cost of revenue when the corresponding revenue is recognized. Costs related to services are expensed in the period incurred. We reconcile cost of revenue to cost of non-GAAP revenue (billings) by adding cost of revenue to the change in deferred cost of revenue, less stock-based compensation and amortization of intangibles included in cost of revenue, in a given period.

Gross profit (loss) on non-GAAP revenue (billings) is the difference between non-GAAP revenue (billings) and cost of non-GAAP revenue (billings).


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Adjusted EBITDA is net income (loss) adjusted for changes in deferred revenue and deferred cost of revenue, other (income) expense, net, provision for income taxes, depreciation and amortization, stock-based compensation and certain other items management believes affect the comparability of operating results.

The non-GAAP financial measures set forth below for the three and nine months ended September 30, 2013 and 2012 have been derived from our condensed consolidated financial statements. Reconciliations to the comparable GAAP measures are contained in the notes below.

                                                   Three Months Ended                              Nine Months Ended
                                                      September 30,                                  September 30,
                                              2013                     2012                  2013                    2012
                                            (unaudited, in thousands, except               (unaudited, in thousands, except
                                                    for percentages)                               for percentages)
Non-GAAP revenue (billings)(1)          $          94,216         $        85,221       $       254,438         $       218,757
Cost of non-GAAP revenue
(billings)(2)                                      54,673                  58,483               167,337                 144,225

Gross profit (loss) on non-GAAP
revenue (billings)(3)                   $          39,543         $        26,738       $        87,101         $        74,532

Gross margin on non-GAAP revenue
(billings)                                             42 %                    31 %                  34 %                    34 %

Adjusted EBITDA(4)                      $          11,392         $         2,300       $         2,502         $            49

(1) The following table reconciles revenue to non-GAAP revenue (billings):

                                                Three Months Ended                   Nine Months Ended
                                                  September 30,                        September 30,
                                             2013                2012              2013               2012
                                            (unaudited, in thousands)            (unaudited, in thousands)
Revenue, net                            $       72,481       $      39,628     $     229,694       $  146,666
Change in deferred revenue, net of
foreign currency translation                    21,735              45,593            24,744           72,091

Non-GAAP revenue (billings)             $       94,216       $      85,221     $     254,438       $  218,757

(2) The following table reconciles cost of revenue to cost of non-GAAP revenue (billings):

                                               Three Months Ended                    Nine Months Ended
                                                  September 30,                        September 30,
                                            2013                 2012              2013               2012
                                            (unaudited, in thousands)            (unaudited, in thousands)
Cost of revenue                         $      49,255        $     35,194      $     148,084        $ 125,495
Change in deferred cost of revenue,
net of foreign currency translation             6,842              23,858             30,028           20,867
Less: Stock-based compensation
included in cost of revenue                    (1,376 )              (521 )          (10,631 )         (1,993 )
Less: Amortization of intangibles
included in cost of revenue                       (48 )               (48 )             (144 )           (144 )

Cost of non-GAAP revenue (billings)     $      54,673        $     58,483      $     167,337        $ 144,225

(footnotes continued on the next page)


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(3) The following table reconciles gross profit (loss) to gross profit on non-GAAP revenue (billings):

                                                  Three Months Ended                             Nine Months Ended
                                                     September 30,                                 September 30,
                                             2013                    2012                  2013                    2012
                                           (unaudited, in thousands, except              (unaudited, in thousands, except
                                                   for percentages)                              for percentages)
Gross profit                            $       23,226         $          4,434       $        81,610         $        21,171
Change in deferred revenue, net of
foreign currency translation                    21,735                   45,593                24,744                  72,091
Change in deferred cost of revenue,
net of foreign currency translation             (6,842 )                (23,858 )             (30,028 )               (20,867 )
Stock-based compensation included in
cost of revenue                                  1,376                      521                10,631                   1,993
Amortization of intangibles included
in cost of revenue                                  48                       48                   144                     144

Gross profit on non-GAAP revenue
(billings)                              $       39,543         $         26,738       $        87,101         $        74,532

(4) The following table reconciles net income (loss) to adjusted EBITDA:

                                              Three Months ended                  Nine Months ended
                                                September 30,                       September 30,
                                            2013               2012             2013               2012
                                          (unaudited, in thousands)           (unaudited, in thousands)
Net income (loss)                       $     (12,269 )      $ (26,868 )    $     (67,165 )      $ (68,707 )
Change in deferred revenue, net of
foreign currency translation                   21,735           45,593             24,744           72,091
Change in deferred cost of revenue,
net of foreign currency translation            (6,842 )        (23,858 )          (30,028 )        (20,867 )
Other (income) expense, net                        54            2,028             24,966             (219 )
Provision for income taxes                        100              373                492              469
Depreciation and amortization                   1,624            1,815              4,990            5,459
Stock-based compensation                        6,990            3,217             44,503           11,823

Adjusted EBITDA                         $      11,392        $   2,300      $       2,502        $      49

Non-GAAP measures have limitations and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. The most significant of these limitations include:

our non-GAAP measures do not reflect the effect of customer acceptance provisions as required under GAAP;

our non-GAAP measures do not reflect the effect of contingent revenue recognition limits due to potential refunds and penalty provisions related to future delivery or performance as required under GAAP;

our non-GAAP measures are based on contractual invoiced amounts and therefore do not reflect the effect of relative selling price allocations between separate units of accounting as required under GAAP;

our non-GAAP measures do not reflect the impact of issuing equity-based compensation to our management team and employees or in connection with acquisitions;

our non-GAAP measures do not reflect the impact of the amortization of acquired intangibles arising from acquisitions;

our non-GAAP measures do not reflect other (income) expense primarily related to gains and losses from the remeasurement of embedded derivative and preferred stock warrant liabilities, and interest expense or loss on conversion from our promissory notes;

our non-GAAP measures do not reflect income tax expense or legal settlement costs;

although depreciation and amortization are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures;


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our non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs; and

other companies, including companies in our industry, may not use such measures, may calculate non-GAAP measures differently or may use other financial measures to evaluate their performance, all of which reduce the usefulness of our non-GAAP measures as comparative measures.


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Results of Operations and Other Financial Measures

The following table sets forth our condensed consolidated results of operations
for the periods shown:



                                              Three Months Ended                  Nine Months Ended
                                                September 30,                       September 30,
                                            2013               2012             2013               2012
                                          (unaudited, in thousands)           (unaudited, in thousands)
Condensed Consolidated Statements of
Operations Data:
Revenue, net                            $      72,481        $  39,628      $     229,694        $ 146,666
Cost of revenue                                49,255           35,194            148,084          125,495

Gross profit                                   23,226            4,434             81,610           21,171

Operating expenses:
Research and development                       16,980           15,480             60,851           46,872
Sales and marketing                             7,424            6,822             26,514           21,732
General and administrative                     10,937            6,599             35,952           21,024

Total operating expenses                       35,341           28,901            123,317           89,628


Operating income (loss)                       (12,115 )        (24,467 )          (41,707 )        (68,457 )

Other income (expense), net                       (54 )         (2,028 )          (24,966 )            219


Income (loss) before income taxes             (12,169 )        (26,495 )          (66,673 )        (68,238 )
Provision for income taxes                        100              373                492              469

Net income (loss)                       $     (12,269 )      $ (26,868 )    $     (67,165 )      $ (68,707 )

Revenue

The following table sets forth our revenue for the periods shown:



                       Three Months Ended                        Nine Months Ended
                          September 30,                              June 30,
                        2013          2012        Change        2013          2012         Change
                          (unaudited, in thousands)                (unaudited, in thousands)
   Product revenue   $   56,650     $ 30,394     $ 26,256     $ 146,366     $ 122,292     $ 24,074
   Service revenue       15,831        9,234        6,597        83,328        24,374       58,954

   Revenue, net      $   72,481     $ 39,628     $ 32,853     $ 229,694     $ 146,666     $ 83,028

Of the $72.5 million total revenue recognized in the three months ended September 30, 2013, 88%, or $64.0 million, was due to the receipt of customer acceptances and the performance of related services for follow-on phases of deployment of our networking platform and solutions from utility customers for which acceptance of initial phases of deployment was achieved prior to 2013, and 12%, or $8.5 million, was due to the receipt of customer acceptances of initial phases of deployment of our networking platform and solutions during 2013. Revenue from our advanced metering solution and demand-side management and distribution automation solutions represented 92% and 8%, respectively, of total revenue for the three months ended September 30, 2013.

. . .

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