Silver Spring Networks - Strong Potential, Strong Public Offering

Mar.20.13 | About: Silver Spring (SSNI)

Last week, Silver Spring Networks Inc (NYSE:SSNI) made its public debut on Wednesday the 13th of March. Shares of the provider of networking platform solutions for utility companies ended their first trading day with gains of 29.4% at $22.00 per share. Shares have seen a modest correction ever since, currently exchanging hands around $21 per share.

The Public Offering

Silver Spring is a provider of leading networking platform and solutions which enable utilities to transform the power grid infrastructure into the smart grid. The smart grid connects millions of devices which generate, control and consume power, thereby providing timely information to control both utility power generation and power consumption.

Silver Spring Networks sold 4.8 million shares for $17 apiece. The company raised $82 million in gross proceeds in the offering process, valuing the company at $772 million.

The offering was a success. The offer price was set right at the midpoint of the preliminary $16-$18 price range set by the firm and its bankers. Some 10.5% of the shares outstanding were offered in the public offering. At Monday's closing price of $21.10, the firm is valued at $958 million.

The major banks that brought the company public were Goldman Sachs, Credit Suisse, Piper Jaffray, Baird and Canaccord Equity, among others.

Valuation

Silver Spring Networks believes that its smart grid solutions have the potential to transform the entire energy industry through better communication between devices.

The company which is founded in 2002 could transform the energy sector like internet and networking functions have done for the technology industry. The more efficient management of energy will result in lower costs, lower capital requirements and an improved grid reliability. Since inception, Silver Spring has been awarded contracts to more than 22 million devices.

The company reported annual revenues of $196.7 million for the full year of 2012. The company reported a net loss of $89.3 million for the year. Despite the fact that revenues fell 17.0% compared to 2011, net losses narrowed slightly from 2011's annual loss of $92.4 million.

The company raised $82 million in gross proceeds in the offering process. As such, net proceeds are expected to come in around $70-$75 million. The company operates with $72.6 million in cash and equivalents and $3.3 million in capital lease obligations. As such, Silver Spring will operate with roughly $140 million in net cash.

Based on Monday's valuation of $958 million, the market values the firm's operating assets around $820 million. This values the firm at roughly 4.2 times 2012's annual revenues.

Note that billings for the year of 2012 grew by 28.9% to $304.3 million. The strong revenue growth resulted in a book-to-bill ratio of 1.55. At the end of the year, deferred revenue ended at $508.1 million, or 2.6 times 2012's annual revenues.

Investment Thesis

As noted above, the offering of Silver Spring Networks has been a success. Shares were offered at the midpoint of the preliminary offering range and closed 24.1% above the preliminary midpoint range on Monday.

It is important to notice that the long term revenue trends remains positive. The fact that 2012's revenues fell compared to the year before is largely explained by timing of government stimulus programs. Annual revenues are still largely dominated by product revenues at 83% of total revenues. The remainder of revenues are generated by services and could grow as a portion of total sales, thereby making revenues more predictable and stable in the future.

A risk which is often common among growth companies is the concentration of its customer base. Utility names like BG&E, FPL, OG&E and CHED make up roughly two-thirds of Silver Spring's total revenues.

According to market research firm Pike Research the market in which Silver Springs operates will grow from $7.0 billion in 2010 to $19.5 billion by 2015. Competition in the lucrative growing market is fierce from traditional competitors like Echelon (NASDAQ:ELON) and potential entrants with massive resources like General Electric (NYSE:GE).

While the valuation is high and the competition is fierce, the potential is great as well. The strong market potential and the massive order backlog are strong arguments for the bullish case. Another good sign is that investor Foundation Capital purchased $12 million more in stock in the offering, boosting its stake to 28%.

While I recognize the tremendous growth opportunities I remain on the sideline for now. The company still has to transform its backlog into actual revenues in a profitable manner.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.