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Silver Spring Networks (NYSE:SSNI)

Q4 2013 Earnings Call

February 10, 2014 04:30 pm ET

Executives

Scott Lang – President & Chief Executive Officer

Jim Burns – Executive Vice President & Chief Financial Officer

Tricia Gugler – Vice President, Investor Relations

Analysts

Simona Jankowski – Goldman Sachs

Patrick Jobin – Credit Suisse

Sven Eenmaa – Stifel Nicolaus

Mark McKechnie – Evercore Partners

John Quealy – Canaccord Genuity

Operator

Greetings and welcome to the Silver Spring Networks Q4 and Full-Year 2013 Earnings Call. (Operator instructions.) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Tricia Gugler, Vice President Investor Relations. Thank you, please begin.

Tricia Gugler

Thank you, Operator. Welcome to our Q4 and Full-Year 2013 Earnings Call. With me on the call today are Scott Lang, our Chief Executive Officer, and Jim Burns, our Chief Financial Officer. After the call we will post to our website at www.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 events and future financial performance of the company. Actual results and events 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 10, 2014, 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.

Scott Lang

Thanks, Tricia. Hello everyone. We made good progress in 2013 even though we missed our guidance in Q4 which I will address shortly. We grew top line by 13%, improved profitability, and made significant progress to cash flow by getting to breakeven this year.

In the US we won over 50% of the homes and businesses that were awarded in 2013, increasing our estimated overall market share to 33%. Close to 10 market share points separate us from our nearest competitor.

We completed two of the largest AMI deployments in the United States with Pacific Gas and Electric and Florida Power & Light. With these two customers we have successfully networked over 9 million homes and businesses, covering close to 100,000 sq. miles of challenged and varied service territory.

None of our competitors can claim a secure IP network operating at this scale. Both of these customers have already expanded beyond AMI and we continue to work with them to find more ways to add value to their smart grid.

Internationally our deployments with Singapore Power and CPFL Energia are progressing nicely, and we won all business that came to market in New Zealand. We launched our new street light solution which continues to see strong interest with hundreds of millions of dollars in pipeline building.

The global pipeline has expanded from a year ago and we ended the year with a record $875 million in total backlog, up 17% year-over-year. With the two new US utility wins that we were notified of in January we expect our total backlog to expand closer to $1 billion with over 9 million homes and businesses to be networked.

Although we made good progress in 2013 we are not pleased with our execution in Q4 and are making changes to improve the rigor of our sales process and performance.

In the year ahead we expect to grow top line by 5% to 8% and be profitable for the full year. I believe we will have strong growth in the second half of 2014, and as I stated on our last call I continue to feel good that 2015 is taking shape closer to our long-term model.

The softness we saw at the very end of 2013 will continue in the first half of 2014 as deployments are a little slower to start than we would have expected. But I do see this as temporary. In the $1 billion backlog that I mentioned earlier there are a number of large customers in early stages of deployment that will drive strong growth in the years ahead. I am confident in our long-term model based on our backlog, the pipeline of the opportunity in front of us, and the changes we are making to improve execution.

Before I turn it over to Jim let me touch on two additional topics – first, spectrum in Europe. We are pleased to see the recent announcement out of Europe that unlicensed spectrum will be allocated to field area networks which include smart grid and smart city networking infrastructure. Forty-eight countries can now make the necessary changes to conform to this new framework, which is expected to begin this year.

Although we have historically worked with our customers in Europe to free up spectrum as needed, this move will level the playing field across the whole of the EU in a standardized way allowing utilities, cities, and other operators to choose from the full range of globally proven technologies more quickly than ever before.

Second, SilverLink Sensor Network – our highly anticipated offering for how we will be a leader in big data was unveiled at DistribuTECH. This is strategic for Silver Spring and a huge idea not only for the energy industry but also for the Internet of Things.

Until now data collected from the smart grid has been batched up a few times per day, has been copied into back office systems that is then copied for various applications. This takes too much time and money and the apps are far too limiting. The processing power of the network isn’t leveraged and the smart grid does not get smarter.

We asked ourselves how we could make the smart grid work more like the internet with more connectivity, more near-real-time processing making it easier to browse, search and organize data. We have leveraged our networking leadership of connecting devices to develop a solution that enables continuously connected services for consumers and the utility.

Our SilverLink Sensor Network does this by turning physical devices into software-defined sensors using the significant computing power at the edge of the grid. Software-defined sensors are easily programmed to deliver information to any app at the frequency and at the granularity that makes sense for that app. Additionally, our SilverLink Sensor Network has the capability to leverage data from third-party networks.

We launched this new solution by demonstrating consumer- and grid-facing sensor-enabled apps including voltage monitoring, low disaggregation in the home, and a smartphone app that allows a consumer to remotely program their thermostat. We also launched the Silver Spring App Store which is showcasing 26 apps and sensors. In the future we expect utilities will add their own content to the App Store.

We currently have six partners and we’ve received significant interest from many more wanting to partner on revenue sharing opportunities. We are currently in discussions with a few existing customers for this offering and interest has been very strong. There will be a SaaS-based model that will be accretive to our higher-margin recurring revenue.

We believe this will be a transformative service for the industry and will take time to establish. Once it does we believe it will become a significant part of our business over time.

In closing, we’re in a stronger position today versus a year ago, both competitively and financially. And the leading indicators of our business are healthy. 2014 is off to a great start with three customer wins already. Our newest win, Hawaiian Electric Company, is networking homes and businesses in the initial phase of one of the country’s most extensive smart grid programs.

I am excited about the opportunity in front of us and look forward to updating you on our progress. Now I will turn the call over to Jim to discuss our results and guidance.

Jim Burns

Thank you, Scott, and good afternoon everyone. As Scott indicated 2013 was a good year for us. Let me cover a few highlights from the year and then I will get into our Q4 results and guidance.

For 2013 we delivered $344 million in non-GAAP revenue, growing 13% year-over-year and improved profitability to a non-GAAP operating loss of $3 million and breakeven operating cash flow. Our balance sheet remained strong with $146 million in cash and investments and no debt.

We finished the year with $875 million in total backlog. With the two new US utilities that we discussed in our January call that are currently in contracting, this number approaches close to $1 billion and represents over 9 million endpoints which is a strong leading indicator of future growth.

Our US and international businesses both experienced good growth of 13% year-over-year. We entered three new countries in 2013, expanding our global footprint and expect to add more this year.

Our new solution revenue was $31 million, up 19% from a year ago driven by growth in distribution automation as we helped customers improve the reliability of their grids. In 2014 we would expect new solutions revenue to have strong growth as customers continue to leverage our platform and generate higher returns on their network investment. For our new street light solution we see good demand and expect this business to approach $10 million in 2014 with backlog building throughout the year.

In 2013 we had managed and SaaS services revenue of $37 million with over $18 million homes and businesses deployed. We expect the annual run rate to approach $60 million as we deploy the additional 9 million endpoints. The gross margins for this revenue stream were 42% for the year, up from 39% a year ago as we scale this business. We expect gross margins to expand again in 2014.

In addition to the 26 million homes and businesses under contract as of year-end we are working with clients that represent more than 26 million incremental homes and businesses that are piloting or deploying our technology in phases. To quantify this opportunity if we win just half this business although we would expect to do better that represents an additional $1.3 billion in product revenue and an additional $26 million of recurring revenues at current price points.

This is just the opportunity from our existing pilots and phased deployments. We have substantial pipeline beyond these pilots and phased deployments which has expanded from a year ago.

This market is still early. There are approximately 80 million homes and businesses yet to be awarded in the US and the international opportunity has just begun to emerge in a meaningful way. There are 1.4 billion homes and businesses internationally and only a small fraction have been awarded to date. Our entrance into analytics and smart cities with over 300 million public lights has expanded our already large market.

Now on to our Q4 results. Q4 non-GAAP revenue was $90 million, up 5% year-over-year. Non-GAAP product revenue was $71 million, up 7% year-over-year. Endpoints grew sequentially to 675,000. Non-GAAP services revenue was $19 million. Non-GAAP professional services revenue was $10 million, up 7% year-over-year primarily due to new customer deployments. Non-GAAP managed and SaaS services revenue was $9 million.

Through Q4 we have delivered over 18 million cumulative network endpoints, up 15% from last year. Recurring non-GAAP revenue per cumulative network endpoint for the full year was $2.02. We expect our recurring revenue per endpoint to expand in 2014 as we layer more new solutions on our platform.

Network and AMI non-GAAP revenue was $82 million, up 5% year-over-year. Our new solution non-GAAP revenue was $7 million, up 3% year-over-year. We expect new solutions to experience stronger year-over-year growth in Q1.

Our US revenue grew 7% while international revenue was down $1 million. Our newer international markets are ramping nicely but did not offset the decline in Australia revenue which was our largest international market in the year-ago quarter. International revenue grew sequentially over $6 million primarily due to our business in New Zealand.

Non-GAAP gross margins were 30.0% versus 33.5% a year ago. Non-GAAP product gross margin was 28.3%, down four points year-over-year. Our product gross margins in the quarter were a reflection of the product mix. Non-GAAP services gross margin was 36.3%, down 1.4 points year-over-year. Professional services gross margin expanded nicely to 33% due to increased utilization and selling higher-value services. Managed and Saas gross margin was 39.8% down from a year ago when we had significant one-time setup fees.

Non-GAAP operating expenses were $27 million, down $1 million from a year ago. We ended the year with 602 employees. We expect our operating expenses to return to $30 million in Q1. Our non-GAAP net income and EPS was roughly breakeven.

Now on to the outlook. For the full year 2014 we expect non-GAAP revenue growth of approximately 5% to 8%. In 2014 we expect to deploy our 20 millionth endpoint, achieving a significant milestone. Non-GAAP gross margins of approximately 35% to 36%, up two to three points year-over-year. We have higher gross margin and backlog for the year ahead versus this time last year and we expect our 2015 gross margins to expand again, getting closer to our long-term model. This is due to higher margin deployments and further benefits of scale in our services business. Non-GAAP EPS of approximately $0.05 to $0.15 and full-year share count of approximately 51 million.

For full year ’14 we expect non-GAAP revenue of approximately $67 million to $68 million. The sequential decrease is primarily due to one customer that is nearing the end of their successful deployment. We expect to return to sequential growth in Q2 as several deployments ramp up.

Non-GAAP gross margins of approximately 30% - we expect gross margins to continue to expand throughout the year in 2014 as we ramp our higher-margin deployments. We expect gross margins in the back half of 2014 will be in the high 30%s. Non-GAAP loss per share of approximately $0.20 to $0.21 and share count of approximately 48 million.

Thank you for your time today and I will now pass it back to Tricia.

Tricia Gugler

Thanks, Jim. Operator, we will take our first call.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions.) Thank you. Our first question comes from the line of Simona Jankowski with Goldman Sachs. Please proceed with your question.

Simona Jankowski – Goldman Sachs

Hi, I just had a clarification first. Your 2014 guidance, what does that assume for the couple of software deals that got pushed out of Q4?

Scott Lang

Hi Simona, it’s Scott here. Those decisions have now been made and the contracting is completing, and so I expect those to start in 2014.

Simona Jankowski – Goldman Sachs

So you have earned that business and it is included in your outlook for this year?

Scott Lang

Yeah, right. Yes, it was. It is included in that.

Simona Jankowski – Goldman Sachs

Okay. And then Scott, you mentioned that you’re making some changes to improve execution. Can you just expand on that a little bit?

Scott Lang

You bet. Well I’d first say that this team has demonstrated the ability to sell top to bottom across the silos of a large utility in our customer base, but as I said on the last call there’s always room for improvement and we want to go focus on that to improve our execution. And one area is in the pipeline and our end-to-end support of making that tighter.

Our Sales Team have done a nice job, and the changes I’m putting in place is not a complete overhaul but really the focus on supporting that pipeline on an end-to-end basis from the company regarding the product, the timing of the product coming into the market and getting in front of those with our customers from a more expected basis. So I’ve got basically the top 100 leaders across the company together tomorrow and the next day to address these issues.

The reporting on it on a very regular basis with the Sales Team to make sure we’re getting out in the field with the new products and services and the end-to-end support they’re getting from the entire company is where I’m focused on the improvements that we’ll be making and putting in place immediately.

Simona Jankowski – Goldman Sachs

Okay, and then just a last question on the press release and the comments you made on Europe. Since you talked about that taking into effect this year is that changing how you’re prioritizing your sales efforts this year? And are any of those countries in your pilot pipeline at the moment or do you expect to add any of them in the course of the year, and which ones would appear to be the most promising from your perspective?

Scott Lang

Well, I think it’s a great progress to see the spectrum continue to be freed up across Europe, 48 countries. We are using various spectrum today in the UK and in Portugal and this is good news that we get our hands on more spectrum. We’ve never been that religious about any one spectrum as you know, Simona. We’ve always been able to work with our customers in different geographies around the world to make the spectrum the right spectrum for them and their territory, and the customers and the kinds of applications that they’re using.

But I do certainly see this 6 GHZ or so of spectrum that the framework is in place that’s now going to be put in place and implemented in a number of countries where we have a very good pipeline, have shown very good progress with the solutions we have in market today. And I do think this really brings a nice boost and more flexibility and more value to them as they implement our technology.

Simona Jankowski – Goldman Sachs

Great, thank you very much.

Operator

Thank you. Our next question comes from the line of Patrick Jobin with Credit Suisse. Please proceed with your question.

Patrick Jobin – Credit Suisse

Hi, good afternoon, thanks for taking the question. So a few questions: first, what percent of 2014 guidance do you think is in backlog today?

Jim Burns

Well, we’ve got as Scott mentioned – hi Patrick, this is Jim. We’re entering the year with a strong backlog. It’s $875 million if you count what was booked at the end of the year. If you look at the business which was awarded in January it gets close to $1 billion. Backlog in this business is a snapshot of time in a given day. When we look at our backlog and we look at our forecast and we look at our pipeline coverage on the forecasts that we have all that kind of rolls up to the 5% to 8% growth that we see for next year.

And in the second half basically it returns to kind of mid-teens to low-20% growth with gross margins in the second half that are kind of expanding to closer to 40% in the high-30%s as we mentioned on the call. So we feel like the second half is going to be strong. 2015 is taking shape nicely. The margins get closer to our model and we’re basically pushing to the longer-term model of 20% growth and 20% operating margins.

Patrick Jobin – Credit Suisse

Great. And then just a quick follow-up on Simona’s and then I have one other question. But to follow up on Simona’s question ,the software sale that got pushed out from Q4, did I hear correctly that that is contracted and reflected in guidance? And then I’m trying to understand because I thought that was a higher margin opportunity but Q1 margins don’t seem to reflect that.

Jim Burns

Yeah, there’s a couple things that happened at the end of Q4. There was the software project but then there were also a couple of large awards that the timing didn’t happen until early in 2014. So there were two separate things. The software project I believe will happen and we are confident that it will come in in 2014; and then regarding the timing of some of the larger awards we were expecting at the end of last year, we were notified of them early in January which we mentioned on the last call.

Scott Lang

And Patrick, I just wanted to put a pen also in Jim’s point on the question you raised regarding 2014. Some of these projects are a little slower to get pace. The decisions now have been made and we go from a slower decision to now a decision and the ramping up of those, so it gives us that confidence. So I’m confident with the range we’re looking at for this year.

But also when I look at, we talked a little bit about first half/second half – when I look at the second half, and this is where I wanted to put a pen in Jim’s comment, we see the mid-teens to low-20% growth rate coming back in the second half with these timings that are starting to loosen up and as the deployments go into full deployment pace, with the gross margins closer to 40% as we exit the year and the EPS that’s kind of $0.30 to $0.40 in the second half of the year. And the timing of that business as you know can be a little bit lumpy.

It’s nice to see the decisions now get made; it’s nice to see those deployment plans being established with our customers. And that’s why we see the confidence coming out of 2014 and why we feel so good about getting closer to our long-term model in 2015 – ultimately that long-term model being 20% growth and delivering a 20% operating margin just because the movement towards that here in 2014 is as good as it is.

Patrick Jobin – Credit Suisse

That makes sense. Just a last quick question: if we think about the SilverLink analytics offering and the way I look at it is adding high-margin recurring SaaS revenue kind of on top of that $2.00 number. Is there a way you can kind of frame what the potential is in the medium term and longer term just to get on top of that $2.00 number?

Scott Lang

It’s hard to quantify a number on that today. I think as that, we just announced that the reaction has been very good. I actually couldn’t be more pleased with the reaction of it, the interest in it, the number of customers and the number of partners calling to learn more and get on the program and get on the platform. We already have a couple of customers that are moving down and putting this in place but I think it’s a little too early to say exactly what quantified the amount above $2.00 but I believe it could be significant. But it’s early.

It’s early; it’ll take a little time to take shape but we feel very good about it, that it’s a completely differentiated approach. It really takes some of the stress from our utilities of really continuing to just copy the data and replicate it over and over again in the back office, and using this network that they’ve deployed across millions of homes and businesses to have this continuously connected relationship with their consumers for their services .

And when we see the OPEX impact that it helps for the utility and the value unlocked for the customer it’s really a homerun for the utility and for the customers, and it’s leveraging this network versus just continuing to be in this vicious circle of copying and replicating behind the old batch processes. So we couldn’t feel more excited about it on the medium to long-term, but I think here as we come through the year we’ll start to be able to monetize the upside that we’ll see above that $2.00 number.

Jim Burns

Yeah, just the model, Patrick, to clarify the model will be – think of it like an iTunes-ish model but rather than purchasing a software there’ll be kind of a recurring revenue share model with dozens of partners. We’ve already had really strong interest to (inaudible) from partners who are willing to kind of get on our platform here, and we’ll be able to monetize on kind of a per-endpoint basis not just for one-time fees but on a recurring basis. That’s our model.

Scott Lang

And we’ve got 26 apps up on the store today. We love the utilities, they kind of want to have… They’ve got their app-du-jour and want to make it available to the industry at large. So I think it’s going to be a pretty cool platform and we enjoy bringing it to the marketplace.

Patrick Jobin – Credit Suisse

Thank you.

Operator

Thank you. Our next question comes from the line of Sven Eenmaa with Stifels. Please proceed with your question.

Sven Eenmaa – Stifel Nicolaus

Yes, hi, thanks for taking my question – a couple quick ones. First I wanted to ask about your geographic mix as it evolves through 2014 in terms of US versus international.

Jim Burns

Well, we’re expecting to get you know, we see growth in both areas but we’re expecting a higher growth rate international although the market is bigger internationally. It’s big in both but if you think of 1.4 billion homes and businesses international and with a market which is still in what in baseball terms we’ll call the first inning as far as deployment. And we’ve got a very solid pipeline against that. We’ve got a very solid pipeline in the US too so a lot of opportunities domestically, internationally. But I think going forward we’re going to see more of our growth rate coming internationally than domestically just based on the market that’s there, the pipeline that’s there and the opportunity in front of us here as it moves from the first inning to later innings.

Scott Lang

And our ability to go in and ignite those markets as well. In Brazil with CPFL Energia, truly an innovator and a leader in South America I think is showing really exciting growth now that those deployments are happening and there’s real proof points in the market. And then in Southeast Asia on the back of the Singapore Power that was a deal that was won this year, and now that project has gone very nicely and continues to expand and be a terrific reference point for what I believe is a very strategic market in the whole Southeast Asia play. And then the spectrum in Europe is a good thing that we talked about.

And to close the point is we did add three new countries in 2013 with our new products and our new service offerings, so I think all the things combined with Jim, and just the size and scale of that market and the need for utilities is even more acute than we’ve seen in the US markets of having a more intelligent grid and being able to manage the challenges of the 21st century that these utilities have. And they’ve now put technology at the top of the list and we really like that dynamic and we think we’re in a great position as the market leader to take advantage of it.

Jim Burns

The other thing is that we talked about the US being ahead on AMI, but when we look at smart cities which we’re moving into with street lights, there are many cities outside of the US that are actually ahead of the US. You look at what we’re doing with street lights in Copenhagen and Paris and other areas, and as we start moving adjacently into smart cities that bodes well for international growth too.

Sven Eenmaa – Stifel Nicolaus

Great. And if you think about kind of the professional services attach rate to international growth versus domestic growth how does it differ? And is the same profitability opportunity there the same as in the US?

Jim Burns

It’s very similar. Really the professional services and the margins associated with the business really are a reflection on what are we doing for those markets rather than the geographic mix with it. So we don’t see any noteworthy difference between doing business internationally versus domestic on the professional services.

Sven Eenmaa – Stifel Nicolaus

Great, thank you.

Operator

Thank you. Our next question comes from the line of Mark McKechnie with Evercore. Please proceed with your question.

Mark McKechnie – Evercore Partners

Great, thanks. So I’ve got a couple lines of questioning. First on the two deals it sounds like they’re still not necessarily closed but you’re quite confident that you’re going to ink those. Do you have a sense of when you expect to close those? Am I correct that they’re not finalized yet?

Scott Lang

Yeah, that’s correct. They’re very close. I expect that Q1 that those will be closed out. But we’ve been notified that we’ve been selected and we know this customer for a long time. They love our technology. We share the same vision of what we are getting done and embarking upon and now it’s just a matter of wrapping it up and bringing it to closure, and seeing that deployment get started.

Mark McKechnie – Evercore Partners

Gotcha. And then on this, how much… You’re talking about a sequential uptick in June and then a much bigger second half. I’m sure there’s a lot of drivers to that but I’m not quite sure as to how impactful these two deals might be on that.

Scott Lang

Well, they do make an impact along with there’s some other awards from 2013 that were awarded that were slower to start as well. And you know, I think between a little bit slower of the business that we won – I mean we won a lot of business in 2013, and many of those projects are just taking a little slower to get ramped up than we would normally have expected. So that’s a big driver from the first half to the second half, and then the other driver is obviously to do so well here out of the blocks in 2014 on a couple of decision that got delayed and now have been made, and to finalize.

And so the 2014 gives us that kind of confidence when we see the combination of the deployments moving to full deployment pace and a combination of the decisions that have been and get started. And that’s what gives us that overall improvement in the second half of the year that Jim and I went through.

Mark McKechnie – Evercore Partners

Gotcha. And Jim, a couple for you. On the cash flow I’m guessing a bit of a burn in the first half and a positive in the second half. But do you see cash flow positive for the full year or how are you looking at your cash flow?

Jim Burns

Well cash flow starts with our non-GAAP earnings which is our best reflection of cash flow and then it goes into the working capital metrics. So yeah, there’ll be some burn in the first half aligned with the non-GAAP earnings that we expect and then it’ll pick up in the second half for us. The earnings, the non-GAAP EPS we put out there, $0.05 to $0.15 – if the working capital metrics stay in line with where they are today the cash flow will come close to that, but it’s really going to depend on what happens with the timing of collections, etc., of the working capital metrics. But the non-GAAP EPS on sort of an overall basis is sort of the best way of approximating what we’re going to do from a cash flow standpoint because the working capital stuff does fluctuate a bit quarter to quarter.

Mark McKechnie – Evercore Partners

Gotcha. And then this is probably my biggest question, given what happened in the December quarter any change… Like how should we look at the guidance we have here for March and June? Any change in how you’re guiding? I think there was an earlier question about how much of this year is in backlog? You’re not really answering that but I’m just trying to get a sense for, you talked about changing some of your procedures but fundamentally, Jim, any change in the guidance that we just got here versus the way it was done previously? And maybe if you have a second to talk about some of the rivers in the near term and for the full year.

Jim Burns

Well, we’re giving you ranges now which is a change from what we’ve done before, just realizing that there’s some fluctuation. So we are giving ranges, that is a change. It’s something that I think is the right thing to do for this business. We still, when we give our outlook it’s our best view of what we think is going to happen as we look into our backlog, we look into our pipeline, we look into our forecast. And so really nothing changes associated with that.

As we look into the near term obviously in this business the amount of business which is contracted is a big deal in the near term given the way that things move through the pipeline in this business and so we’ve got a good line of sight into that. But really nothing has changed as far as our guidance practices other than giving the ranges. We still give numbers out that we believe are the right things and we aim to get better at that, and we set plans to do better at that.

Mark McKechnie – Evercore Partners

Great, okay. Thanks, I’ll turn it over. I appreciate it.

Operator

Thank you. Our next question comes from the line of John Quealy with Canaccord Genuity. Please proceed with your question.

John Quealy – Canaccord Genuity

Thank you, good afternoon folks. Just a few questions, first I’ll try the backlog a different way – can you talk about hardware versus software services or just generally how we should think about the tenor of the lights in the backlog especially as it relates to the software services contracts?

Jim Burns

Well, if you look at the backlog you know, we said that we had at the end of December about 8 million in backlog which represents about $875 million, so the revenue per endpoint is kind of in line with what we’ve been seeing. That will fluctuate obviously quarter to quarter based on the mix of the deployments that we’re seeing. As far as the hardware and software, we sell software as a managed SaaS offering or as a licensed business, and both are good business for us.

We tend to prefer the recurring piece and if we get the opportunity we nudge our customers in that direction because it builds up a nice predictable cash flow system for us in the long term and we see that we’re going to have some pretty solid growth in our managed revenues, not just on a total dollar basis but on a per endpoint basis. So some of the software business that we’ve got and the growth we’ve got going forward in the coming year is going to come in the form of recurring revenues versus in the product business.

But the gross margin rate that we’ve got, the expansion for the year is really going to be more related to higher margin deployments versus just purely a hardware and software mix. Within hardware we’ve got specific margins; within services we’ve got different margins. But deployment based on what kind of value – we get more margin and more value when we push through some of our new solutions, for instance, versus other parts of the business so that helps. We get more margin as you know in our managed service business. On a cumulative basis that grows and we get margin expansion on that level.

So the margin expansion we’re seeing this year is primarily related to the mix of the deployments that we’ve got this year, and we’ve got good visibility into that.

John Quealy – Canaccord Genuity

Okay, thank you. And then my last question, Scott, congratulations on SilverLink. Can you talk a little bit qualitatively for maybe milestones in ’14 – do you think maybe the APIs with an Oracle MDM system or an ITRON system get built? Personally I think that once those APIs are built that some of the ubiquity of the SaaS model I think might accelerate for Silver Spring, but can you talk about do we expect ’14 to have those gateways built and maybe customers request that? If you can just sort of help frame that thought, thanks guys.

Scott Lang

Okay, thanks John. Yes, I do expect that many APIs are going to get built and the intelligence used in these endpoints that we’ve networked. And what I love about SilverLink is I’ve been, you know, when I sit down with a CEO of a utility that says “70% of the data coming into our enterprise is coming from this network that we’ve deployed – what’s the next thing that I can do with this network?” And it’s a strategic decision to have put this much intelligence close to the edge. And at the same time, these various SaaS companies, we saw a trend that was made – you know, printed reports was kind of popular for a while and now it’s different apps and different uses and there’s dozens of them out there.

And a utility is saying “For me to do a batch collection, copy that data into a back office and replicate it for every one of these apps is driving IT costs up fast. But I do see the value of these applications. How do I open up the network to do those more real time on a continuously connected basis and have it operate more like the internet? And so those are going to force more APIs. You mentioned Oracle – there’s dozens of companies here reaching out to us that want access to that real time continuous flow. So that’s why we’re excited about it.

But the second thing is we’ve designed this and built this in a way that it can work with other networks, not just the Silver Spring network. And the size of the market and the total addressable market, we’re going to win our fair share – last year we won more than 50% of all the homes and businesses that came to the market. We don’t have 100% but yet we want to bring a solution in place with our knowledge of networking better than anyone else’s in this space of how do we put a platform on top of anybody’s network so they can unlock the same benefit or similar benefits of these various applications.

So between those dynamics and multiple apps and multiple APIs I think we’re going to see a couple of our existing customers here in the first half of the year start to use it at scale. We understand the reference model and how to leverage that about as well as anybody in this industry and then I think the pipeline and the interest behind that will move pretty quickly when they see how much faster utilities that are leveraging that can move versus the ones who aren’t.

John Quealy – Canaccord Genuity

Okay.

Operator

Thank you. We have no further questions at this time. I’d like to turn the floor back over to Ms. Gugler for closing comments.

Tricia Gugler

Great, thank you. We just wanted to let you know that we’ll be at the Stifel Technology Conference tomorrow and the Goldman Sachs Technology Conference on Wednesday. We hope to see you there and thanks again for your time today.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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