IPO Preview: Silver Spring Networks

Mar.11.13 | About: Silver Spring (SSNI)

Based in Redwood City, CA, Silver Spring Networks (NYSE:SSNI) scheduled a $63 million IPO with a market capitalization of $754 million at a price range mid-point of $17, for Wednesday March 13, 2013.

S-1 filed February 26, 2013.

Manager, Joint Managers: Goldman; Credit Suisse
Co Managers: Piper Jaffray; Stifel; Baird; Canaccord Genuity; Evercore; Pacific Crest Securities

SSNI provides a leading networking platform and solutions that enable utilities to transform the power grid infrastructure into the smart grid.

What's the demand for smart grids? There is a SSNI funded market research report that projects favorable growth trends, but it was paid for by SSNI.

$745mm backlog, which is 380% of revenue for 212. 69% funded by VCs, none of whom are selling on the IPO.


  • Post IPO SSNI will have a negative book value of -$109mm.
  • SSNI lost $90 million in 2012, or 46% or revenue.
  • 2012 revenue declined 17% from 2011.
  • The company is 10 years old and is still hemorrhaging cash.
  • There is incredible competition, see 'competition' below.
  • SSNI benefited in 2011 from the stimulus program, which non-recurring.
  • There are tax issues that negatively affect the installation economics of smart grids.
  • There is considerable public negative sentiment for smart grids. Who wants their air conditioning/heating systems automatically regulated by the utility/government?
  • Four customers account for 65% of revenue.


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In spite of the red flags mentioned above, institutional investors are very impressed with SSNI's backlog of $745mm, which incidentally is also the proposed market cap of $754mm. The backlog is 380% of revenue for 2012.

SSNI is worth taking because of the overall strength of the market and because of the large backlog.

SSNI provides a leading networking platform and solutions that enable utilities to transform the power grid infrastructure into the smart grid.

Since inception, SSNI has been awarded contracts to network more than 22 million Silver Spring-enabled devices that connect homes and businesses, of which 15.8 million have been delivered to utility customers as of December 31, 2012.

In 2012, product revenue represented 83% and service revenue represented 17% of total revenue.

According to Pike Research, the global market for advanced metering, distribution automation, demand-side management and related services is estimated to grow from $7.0 billion in 2010 to $19.5 billion by 2015, a compounded annual growth rate of 22.7%. Pike Research prepared this analysis at SSNI's request and SSNI paid a customary fee for its services.

According to an analysis prepared by IDC Energy Insights, SSNI is the United States market leader for electric advanced metering infrastructure communications, with 31% of homes and businesses awarded from 2002 through 2012. IDC

IDC Energy Insights prepared this analysis at SSNI's request and SSNI paid a customary fee for its services.

The adoption of the smart grid in the United States is evolving and is impacted by multiple factors.

Tax Treatment
In 2010, the rate of smart grid adoption slowed due to uncertainty surrounding the timing and tax treatment of U.S. government stimulus funding, negative publicity and consumer opposition, and regulatory investigations.

These uncertainties caused many potential utility customers that had been considering smart grid programs in the United States to further evaluate their smart grid initiatives and delay their procurement processes or extend their deployment schedules.

In 2012, SSNI's billings increased as it moved through the slowed rate of adoption.

International markets trail the US
Smart grid adoption in international markets has trailed adoption in the United States as international markets continue to explore the technology and define the benefits and regulatory requirements for the smart grid.

In 2012, the deployments for four customers represented 65% of billings: BG&E, FPL, OG&E and CHED represented 23%, 22%, 10% and 10% of billings, respectively.

As of December 31, 2012, SSNI's total backlog was $745 million and represents future product and service billings that SSNI expects to generate pursuant to contracts that SSNI has entered into with utility customers and meter manufacturers.

Utility customers, as of February 26, 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; and SP PowerAssets Limited, or Singapore Power.

SSNI's industry is characterized by the existence of a large number of patents and by litigation based on allegations of infringement or other violations of intellectual property rights.

There are current legal proceedings against SSNI. See page 127

As of December 31, 2012, SSNI had 42 patents issued and 83 patent applications pending in the United States and, in foreign jurisdictions, SSNI had 41 patents granted and 227 patent applications pending, which are collectively based on 56 U.S. patent applications. SSNI's patents expire at various times between 2015 and 2031.

Key competitors currently include Echelon , Itron , Elster Group SE, Landis+Gyr AG, which was acquired by Toshiba Corporation, Sensus Metering Systems Inc. and Trilliant Holdings, Inc.

Similarly, SSNI competes with traditional providers of distribution automation equipment, such as S&C Electric Company and Schweitzer Engineering Laboratories, Inc.

SSNI also faces competition from newer entrants that are providing specific narrowly focused products for the smart grid, including Coulomb Technologies Inc., Grid Net Inc., OPOWER Inc. and Tendril Networks Inc.

Furthermore, other large companies such as Alcatel-Lucent, AT&T Inc., Cisco Systems, Inc., Enel SpA, Électricité Réseau Distribution France, Fujitsu Limited, General Electric Company, International Business Machines Corporation, Mitsubishi Corporation, Motorola Solutions, Inc., Siemens AG, Sprint Nextel Corporation and Verizon Communications Inc. have announced plans to pursue business opportunities related to the smart grid.

Foundation Capital, 33%
Kleiner Perkins Caufield & Byers, 16%
NCD Investors LLC, 8%
WR Holdings LP, 7%
Contra Costa Capital, LLC, 5%

SSNI expects to net $53 million from its IPO. In addition, proceeds from the sale of the common stock sold in a concurrent private placement will be $12 million.

Proceeds are allocated for working capital and other general corporate purposes. In addition, SSNI will use $12 million of its existing cash balance to pay entities affiliated with Foundation Capital for termination of warrants to purchase convertible preferred stock shares.

Disclaimer: This SSNI IPO report is based on a reading and analysis of SSNI's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.