Silver Spring Networks' (SSNI) CEO Scott Lang On Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Silver Spring (SSNI)

Silver Spring Networks (NYSE:SSNI)

Q2 2014 Earnings Call

August 06, 2014 4:30 pm ET

Executives

Bonnie Hyun -

Scott A. Lang - Chairman, Chief Executive Officer and President

James P. Burns - Chief Financial Officer and Executive Vice President

Analysts

Patrick Jobin - Crédit Suisse AG, Research Division

Simona Kiritsov Jankowski - Goldman Sachs Group Inc., Research Division

John Quealy - Canaccord Genuity, Research Division

Mark McKechnie - Evercore Partners Inc., Research Division

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division

Presentation

Operator

Greetings, and welcome to the Silver Spring Networks Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bonnie Hyun, Vice President, Investor Relations. Thank you. You may begin.

Bonnie Hyun

Thank you. Welcome to our second quarter 2014 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 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 the future financial performance of the company, including our outlook for the third quarter and full year 2014. Actual events and results may differ materially from our expectation. We refer you to our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from those discussed today. We make these statements as of August 6, 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 comparison 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 A. Lang

Thanks, Bonnie. Hello, everyone. We had a solid quarter, delivering on the upper end of our revenue and gross margin guidance and better than expected on the bottom line. Once again, our Q2 results showed that our business model is working. As a reminder, our business model has 3 aspects: the network, new solutions and ongoing managed and SaaS. We won some nice networking and AMI deals this quarter which I will discuss shortly. In fact, we have been verbally awarded close to 2 million homes and businesses in the first half of 2014 as we continue to win as a result of our proven value proposition and innovative technology. New solutions grew 16% in the quarter, and we have a growing pipeline of street light and SilverLink opportunities. Our managed and SaaS business grew 12% with more than 19 million homes and businesses networked coming out of the quarter. The recurring revenue stream is now 16% of our top line.

Now on to some of our wins during the quarter. We continue to win new business in New Zealand and expanded our relationship with Metrix for Trustpower, a leading retailer. Trustpower will implement our multi-application networking platform to initially provide smart metering services to 220,000 homes and businesses.

I am pleased that we were awarded 3 new municipal and cooperative customer wins in the United States this quarter. As an industry leader, we are positioned nicely for this market segment as these 3 deals combined represent over 200,000 homes and businesses. We are pursuing this market with a strong product portfolio, which includes an advanced water metering solution.

Now let me also share with you progress we've made in our new solutions. In our street light business, we closed the Streetlight.Vision acquisition in May and the integration is going well. We also announced the Glasgow Adaptive Lighting project with our partner LED Roadway Lighting. This project will leverage our Smart City network platform to integrate street lights, traffic cameras and sensors, as well as utilize the Streetlight.Vision software platform. In addition, we are working with Evesa on a citywide expansion of our street light networking project in the city of Paris. Our initial Smart City customers are seeing our network as the foundation on which they create their Internet of Things strategy for their community.

In our SilverLink business, we continue to gain traction since our product launch earlier this year. We are actively deploying pilots for analytics that use the power of the network and pursuing a growing list of new application partners and clients, demonstrating a Web-centric alternative to less agile and more costly solutions.

Looking forward, as we said on our last call, we provided a broad range for 2014 top line of $300 million to $330 million due to some uncertainty when newer awards would begin to ramp up, and that we would expect to tighten this range as we progressed throughout the year. While there is more work to do in the back half of the year, we still expect to deliver within this range, albeit at the lower end. I'm pleased with our new awards already this year, but the timing around the start of these deployments has been difficult to predict. We continue to focus on driving productivity to improve our execution, growth and profitability. The changes we are making will make us a stronger company.

As we look towards 2015 and beyond, we see that the long-term opportunity remains strong. In the U.S. smart grid market, we expect to see some large investor-owned utilities come to the market and are seeing increased RFPs in the municipal markets. Internationally, we are seeing pilot activity in Europe, Latin America and the Middle East in both smart grid and Smart Cities. Our pipeline continues to build in Southeast Asia, and we are pleased to have Singapore Power as a strong reference in this region. As a market and technology leader, we believe we are well positioned to capitalize on these opportunities, and I look forward to updating you on their progress.

In summary, the business model is working as we focus on growing networked homes and businesses, upselling new solutions and building our managed and SaaS business. We began the year with $875 million in backlog. And already, in the first half of the year, we have been awarded close to 2 million additional homes and businesses, and we expect our backlog to expand with these awards. With our innovative technology, we are successfully enabling new applications and continuing to see nice growth in our managed and SaaS business with every home and business we connect. Our long-term opportunity looks terrific, and we have further confidence that 2015 is taking shape and our long-term model is intact.

With that, I will turn the call over to Jim to discuss our results and guidance.

James P. Burns

Thanks, Scott. Now on to our Q2 results. Q2 non-GAAP revenue was $64 million, towards the higher end of our guidance and down as expected. Non-GAAP product revenue was $42 million. We delivered 371,000 endpoints in the quarter. Non-GAAP services revenue was $21 million, up 4% year-over-year. Non-GAAP professional services revenue was $11 million, down 2% year-over-year, and non-GAAP managed and SaaS revenue was $10 million, up 12% year-over-year. Through Q2, we have delivered 19.1 million cumulative network endpoints. Recurring non-GAAP revenue per cumulative network endpoint on a trailing 12-month basis was $2.07. We also had several renewals during the quarter which included one of our larger customers, Duke Energy, who extended their managed service agreement for another 5 years. We continue to expect double-digit growth for our managed and SaaS business in 2014 as we grow our endpoints and new solutions.

Network and AMI non-GAAP revenue was $52 million. We expect sequential quarterly growth in Q3 and year-over-year growth in Q4 as the new customer deployments ramp up. Our new solution non-GAAP revenue was $12 million, up 16% year-over-year, driven by growth in both Distribution Automation and street lights. We expect growth rates to accelerate as we ramp our street light business in the back half of the year.

From a geographical perspective, our U.S. non-GAAP revenue was $57 million and our international non-GAAP revenue was $7 million. Non-GAAP gross profit was $21 million, non-GAAP gross margins were 32.4%, up 2 points from a year ago. Non-GAAP product gross margin was 29.5%, which is flat from a year ago and non-GAAP services gross margin was 37.9%, up 5 points year-over-year. Professional services gross margin was 33.2%, up 8 points year-over-year, primarily due to new customer deployments and selling higher value services. Managed and SaaS gross margin was 43%, up 1 point from a year ago. Non-GAAP operating expenses were $31 million, up 2% from a year ago. G&A was up $1 million, primarily due to higher legal expenses and acquisition costs related to Streetlight.Vision.

Looking at headcount, we ended the quarter with 639 employees, up 8% year-over-year, primarily in services and sales and marketing. Our non-GAAP net loss was $10 million and our non-GAAP loss per share was $0.20. We ended the quarter with $125 million in cash and investments with no debt, down $15 million from last quarter, primarily due to the closing of the Streetlight.Vision acquisition.

Now on to the outlook. I'll now provide some more details on the full year 2014 and the third quarter. Related to our outlook, 2 previously awarded large-scale deployments that were expected to ramp up in Q3 have shifted to Q4. These 2 deals will require us to on-board services resources in Q3, which will temporarily dampen services gross margins in Q3. As we begin deployment in Q4, we expect these customers to initially purchase higher margin software licenses in network infrastructure and services.

For the full year of 2014, we expect non-GAAP revenue of approximately $300 million, non-GAAP gross margins of approximately 35%. For non-GAAP operating expense, we will continue to invest in R&D and sales to strengthen our position in our key markets and drive growth. At the same time, we're driving productivity and optimizing our cost structure. We expect to exit the year with a lower ongoing OpEx and a sequential decline from Q3, non-GAAP loss per share of approximately $0.30 and a full year share count of approximately 48 million.

For Q3 '14, we expect non-GAAP revenue of approximately $65 million to $70 million, non-GAAP gross margins of approximately 30% to 32%. For Q3, we expect OpEx to be roughly flat sequentially, non-GAAP loss per share of approximately $0.18 to $0.22 and share count of approximately 49 million.

In summary, we executed on the quarter and delivered results that were at the higher end of our guidance. The large-scale nature of our network and AMI business can lead to nonlinear growth rates and the timing of new deployments can be difficult to predict. As Scott mentioned, we have been awarded close to an additional 2 million homes and businesses in the first half of the year, and we expect to expand our backlog. Each home and business we connect creates opportunities to monetize additional applications and drive highly profitable recurring revenues. Looking ahead, we remain focused on execution so that we're well positioned to deliver strong financial performance as we progress towards our long-term model.

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

Bonnie Hyun

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Patrick Jobin with Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

So first question, just when you think about the, I guess, 2 projects that slipped to Q4, are those contracted today? I just want to better understand the risk of the Q4 start date. And then on the 2 projects verbally awarded, Scott, I think you mentioned that they're AEP contracts. What's your expectation for when those can get converted to backlog? Then I have a follow-up.

Scott A. Lang

Okay. Yes, I think the timing is very close. They want to do it. We're anxious to get started, obviously. They're anxious to get started. So I think we're very close on timing. There's still some work to do kind of around the commission side, but everything there appears to be lined up on a calendar with a date. And I expect when we get to our next quarter, we'll be able to give you a date and hopefully, we will have got a nice start on both of those contracts.

Patrick Jobin - Crédit Suisse AG, Research Division

Okay. Then just a question on 2015 and your long-term visibility. I think in the past, you've given kind of pipeline metrics for how many endpoints you think are there for the network side, and then kind of what that opportunity could translate to as you layer on the other offerings. Any update for how that opportunity set has changed with what your sales force is tracking? And then, just anymore color you can provide on 2015 on taking shape, if that's anyway we can riverbank kind of growth expectations at this stage, given some of the long-lead contracts.

James P. Burns

Yes, sure. Patrick, I'll start. Scott can jump in. So as Scott mentioned on the prepared remarks, 2015 is taking shape. We do have a strong level of backlog. We entered the year with $875 million of backlog. We've been awarded 2 million more endpoints this year. We do have a strong -- so we've got a strong net of '15 that's already, basically, been won. That being said -- and we do have a good set of deals lined up to get signed in the back half of the year and we've got strong pipeline coverage to get to those deals, too. So we won't give specific numbers on '15 today, but it's definitely taking shape. And the composition of it, in terms of the amount of our own IP in the backlog, which should give some lift to margins, is taking shape, too. So we're making progress on our long-term model, and we're looking to get back on track to that in 2015.

Scott A. Lang

Yes, I just will echo that. As we said earlier in the last couple of quarters, 2015 was taking shape, and I'd say at every single quarter it continues to look -- continue to improve. And the numbers look good, the coverage already looks good, the pipeline is good. There's an enormous amount of work going on to finish this year strong. And go into next year with a foundation in place, to Jim's point, the mix, the quality of the mix, the quality of the customers, the clarity of the actual projects and the calendar related to that, all of that's being done here in this last quarter and for the rest of this year. So we feel good about 2015. We feel good about our long-term model is intact, and I especially feel good about the diversity and the quality of the mix within our business that we see really starting to take shape and how that kind of layers into the 2015 growth goals that we have.

James P. Burns

We've got that street light business, for instance, Patrick, has built a really solid pipeline this year. We're expecting some good wins in the second half of this. And that's a business that really should start having a more meaningful contribution to the top line and the bottom line next year, too.

Patrick Jobin - Crédit Suisse AG, Research Division

Has there been any change to the activity of endpoints reflected by piloting customers? Or anyway we can get a sense of kind of some of the long lead or early leading indicators for the conversion to backlog? Just any sense on that regard.

Scott A. Lang

No change on that. We're still kind of in the mid-20 million kind of customers that -- endpoints that they're managing that have yet to have been awarded that are piloting our technology right now, so we're really no change from quarter-to-quarter on that number. We would expect -- but some of them obviously have been doing this for a while and we are seeing some increased RFP and bidding activity on some of those ones that are under management today.

Operator

Our next question is from Simona Jankowski with Goldman Sachs.

Simona Kiritsov Jankowski - Goldman Sachs Group Inc., Research Division

Just first as a follow-up to the prior question, I think last quarter you indicated you were comfortable with expectation for about 20% growth next year. Is that still in the ballpark of what you think might be reasonable?

James P. Burns

Yes, I think so. I think that's a good ballpark. That's certainly getting closer to our long-term model and what we see next year, Simona.

Simona Kiritsov Jankowski - Goldman Sachs Group Inc., Research Division

And in the quarter, I think you said international was $7 million, which would be down almost by 50% year-over-year and 20% sequentially. Could you just expand on what is going on there?

James P. Burns

Yes, sure. We've had some successful deployments in Australia and New Zealand, and in the kind of first phase of Singapore Power, which is why the business is down. We did win some new business this quarter, as we mentioned, 220,000 endpoints for metrics for Trustpower. And we have some other international deals that are very, very late stage here that are looking good, too. So we would expect to -- in Q4, the international growth rate to pick up quite a bit.

Simona Kiritsov Jankowski - Goldman Sachs Group Inc., Research Division

And when you kind of talked about some of the regions where you're experiencing pilot activity, I don't think you mentioned Asia, which was a little surprising, given your success there with Singapore Power. So can you talk a little bit about the challenges and to the extent that they are unique that you're seeing in Asia specifically?

James P. Burns

I think I probably referred to Southeast Asia. But just in case, we -- our strategy for Southeast Asia in that market was -- we partnered up with Singapore Power. I mean they are really recognized as the standard in that entire region, they're enormously respected by the region and the utility market there. And our project -- they've been extremely pleased with our project, we're very proud of it, we're very proud of the relationship and they're a great reference for us now. And so the pipeline and the activity in Southeast Asia is very promising. And I know we've reinforced that for the last couple of quarters and that is still the case. And with the progress that we've made and are making and are continuing to make at Singapore Power, we feel good about that market in that region.

Simona Kiritsov Jankowski - Goldman Sachs Group Inc., Research Division

And then just last question for me. I think during the quarter, we saw an update from ComEd on getting approval to accelerate their deployment. And it doesn't look like that's flowing through to your numbers. Is that because you had already baked that in or are there any other reasons to account for that difference?

James P. Burns

Well, we're in close contact on a daily basis with ComEd relative to deployment schedules, so we have pretty tight alignment and we feel like we're current in our numbers here relative to when they'll be deploying. And it's great news to see that they're getting that kind of value out of their network that they would go, make a case to go get the -- pull the deployment in by a few years. It's really a fantastic proof point to the value that we're delivering.

Simona Kiritsov Jankowski - Goldman Sachs Group Inc., Research Division

So the way to think about that is, it's accelerated for you guys relative to the kind of run rate business once it gets started. It's just that it's not starting quite yet in the next quarter or 2.

James P. Burns

We've been working with ComEd to gear up for this and we've been -- so we're deploying with them. Their deployment will happen over a multi-year period, but we're already working with them and shipping the product to deploy.

Scott A. Lang

And I think 2015 is going to be a nice year for ComEd. I mean they did a lot of work this year to prepare for the deployment. We're running very successfully the AMI and the DA at a very large scale, the percentages are good. They just recently got the request to move a little faster was prolonged deployment over several years and so I think they're coming out of this year kind of building up that momentum, and I think that will carry on for a full year next year and the years after that. As Jim really reinforced, the value that we're unlocking there for them is very strong.

Operator

Our next question comes from John Quealy with Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

I apologize if you said this already, but did you give that sort of $2-and-something revenue on service revenue per customer. Did you give that metric, updated metric?

James P. Burns

We did. It was $2.07 this quarter, John.

John Quealy - Canaccord Genuity, Research Division

Okay. And how should we think about the trajectory of that into '15? Is it still sort of -- I know at one point we're talking about a perhaps an ultimate midterm $2.50 per seat. How should we think about that into '15?

Scott A. Lang

I'll tell you, I'll take that, and, Jim, you can follow on. We'll come out of the year this year with about 20 million homes connected, is our estimate, is kind of how we're looking at it. It should be at least that many. And every time we connect one of those homes and businesses, this number continues to go up. And we are continuing to be impressed by and pleased, very pleased that how many of our customers are signing us up to these long-term SaaS and managed contract because they see the kind of value of running their operation 24 by 7. Jim mentioned a couple of new customers that extended 5-year contracts on that. And that's kind of just from a set of services we offer today. Now as we have a new water product and we've launched it and we've actually now sold it successfully this last quarter, along with our gas and along with our street lights, that numbers gets incremental. So we should start to see a nice move as we come out of the year and into 2015, we've always said the $2 to $3 range, and I think we're going to see some nice move towards the upper end of that range here over the next several quarters. And then on top of that is the -- I referred to it a little bit in my prepared remarks that, that excluded anything regarding the SilverLink launch because that's a product we just launched earlier this year, and there's, I think, some nice upside on top of that. Our product is being piloted by many of our clients now. There's a long list of new clients both previous SSN customers and non-SSN customers that really see some differentiation of what we're bringing to the table regarding a data analytics platform and their ability to kind of leverage the assets that they've deployed. And so that is upside on top of that. So I think we're kind of at an interesting point here where I think that hopefully we're kind of near the low watermark on it and we come out of the year strong, and I think we'll see some strong growth on it as we move into 2015.

James P. Burns

Yes, I mean, if a customer bought everything that we were selling right now, we would be kind of in the $7 per range piece, and we keep adding to our menu of offerings there, too, particularly as we sign up more of these partnerships on the SilverLink deal. So we're still a long way from getting the penetration that we see, that we can get to. But the fact that we're growing our new solutions consistently double-digits, grew 16% this quarter, and we expect it's going to even accelerate in the back half, gives us confidence out there because every time we sell a new solution there's generally a recurring fee that comes with it that, that will be additive to where we're at today. But it will take some time, it will take some time to get to it.

John Quealy - Canaccord Genuity, Research Division

That was a good answer. My last question maybe, Scott, bigger picture from an M&A perspective. You haven't done anything sizable, I don't think, ever. How do you think about things now as to your point, you are at a good inflection point, lumpiness in these AMI deals, I mean, it's just par for the course. That's not surprising. But street lights, Internet of Things, are you and the board thinking about a bigger acquisition or maybe another movement in a secular area to accelerate some of this or is it more execution in '15? Any thoughts you can offer there I would appreciate.

Scott A. Lang

Okay. Thanks, John. I would -- we are always looking. I would tell you, we are always looking. We've looked at a few things and it's good to be in a position with a very strong balance sheet. We have over $100 million of cash. We have no debt. We have a very strong backlog. We have a lot of happy customers. We have a product that's at least 18 months ahead of this, what I believe is the second-place guys, and we are continuing to innovate and invest a lot in R&D. And so it puts us in a position where we can look at a lot of deals. There is a lot of deals that come our way and it's active. Obviously, if we were looking at anything, I wouldn't be able to talk a lot about it but -- and specifically, but it's something we're constantly keeping our eye open for and looking for the right play, and we'll keep evaluating that on a regular basis. And when something looks like it's the right alignment with our technology and really taking the opportunity and moving faster in this market, we'll take a very serious look in moving forward on it. Jim, do you want to add?

James P. Burns

I'll just say, we look for targets, obviously, that are strategically a good fit, but then are also accretive to our growth rates and our gross margins and valuations where we can get the thing to be accretive to earnings within a reasonable period of time. And those stars don't always line up. Some people have a frothier valuation, expectations for themselves and we're being pretty diligent about that going forward. But we'll continue to look and we're also partnering with a lot of pretty cool companies right now, too.

Scott A. Lang

I think that's just a good point to maybe wrap that question up is we have over 100 partners that we bring to the table. And our customers really see value in the agnosticism. And so we're doing a lot on the partnering side, the SilverLink play has truly differentiated how we come into this market with a new set of partners around energy efficiency and non-technical loss and low disaggregation and analyzing appliance level information. And so we're going to be very diligent, as Jim said, of what do we go build? We've done a very nice job building and investing in R&D. What do we partner for? And we like nice a ecosystem of -- and our customers love that and then there's going to be certain assets where it make sense that we'll want to own it.

Operator

Our next question is from the line of Mark McKechnie with Evercore.

Mark McKechnie - Evercore Partners Inc., Research Division

I wanted to drill in on your backlog a little bit, and I know you only disclose so much. But if I do some quick math, I think you're at $875 million at year end and I estimated about $925 million at the end of March. But if we're talking 2 million additional endpoints in contract or close to being signed, I mean I'm assuming that steps you up by about $200 million, I just assume $100 a piece. So net-net, is my thinking right? I mean, is over $1 billion, say, $1.1 billion in backlog about the right number?

James P. Burns

Well, I think you're thinking about things roughly right. We usually give our backlog out at the end of the year. But as Scott mentioned earlier, we got -- we feel good at how the first half has started. We were awarded a couple of million of those things will go to contract and into the backlog and we got a line of sight to some other business, too. And so we continue to win in the market and that at the end of the day, I know there's always timing issues with these, getting the deployments going. At the end of the day, winning and growing that backlog is the most important indicator of the health of the business for me.

Mark McKechnie - Evercore Partners Inc., Research Division

For sure. And then can you -- I think you mentioned 220,000 homes and businesses in New Zealand and then 200,000 here in the U.S. so you're 400,000 and change. So does that 2 million, that includes the 400,000 from that? And is that right?

James P. Burns

Yes. Yes, that's right. We announced the AEP wins on the first quarter, too, that make up the bulk of the remainder of the number.

Mark McKechnie - Evercore Partners Inc., Research Division

The 2 million -- okay, that was on the first half. Okay. No, no, it's just, yes, of course, we got those in the first half. Okay, got you. And then any chance you can give us a sense of the aging of that backlog? Backlog's -- the timing of your deployments varies, but you sound really confident in 20% growth there for calendar '15. Is that -- do you feel like that's more than covered or pretty much covered by your backlog for the year or what can you tell us about the overall aging of that backlog over a 3- to 5-year period and more interestingly in the near term?

James P. Burns

Yes, so generally our backlog is having a kind of a longer shape to it. We get to about half of the backlog converting to revenue with the next 2 -- 2 to 3 years.

Scott A. Lang

Of the existing backlog.

James P. Burns

The existing backlog is sort of how we think about it. There's a little bit of a tail beyond that. But it sort of takes us about 2, a little over 2, sometimes 2 to 3 to get to the midpoint of the backlog number in general.

Mark McKechnie - Evercore Partners Inc., Research Division

To work through it, okay. That's super helpful. I appreciate it. And it sounds like things are ticking nicely on a forward basis here.

Scott A. Lang

We like what we see. I mean the size of the market, I think, is good. It's huge. I think the new activity coming into the market is promising. The geographic investments we've made has been good and so far we've been right on kind of Smart Cities and our differentiation. I think our projects there are going extremely well. Our project with -- here in the States, our big project in the States, and Paris, Copenhagen, we announced the Glasgow deal. So those are going good and -- so yes, I think we're all feeling cautiously optimistic here. We're going to come out of the year in a good way and really get ready for some special growth and performance in 2015.

Operator

Our next question is from Ben Kallo with Robert W. Baird.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

On the street light opportunity, could you say that it's probably about a 5% of revenue this year and then maybe going to 10% next year? Any color around that?

James P. Burns

Yes. I think it will be in that range for this year. And I think your numbers for next year -- we'll obviously have to see. We've got a lot of deals that are kind of late stage right now of discussions with our customers that are doing the proof of concepts on it right now. But I think -- I'm thinking about it sort of similar to the way you're thinking about it in terms of how this deal flow kind of translates to revenue.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Great. And is the way to think about the DA opportunity more about showing the benefit of AMI projects versus an actual real revenue opportunity? It's hard for me to get my head around the numbers, around the revenue opportunity. If I can see it on the cost benefit analysis.

Scott A. Lang

For the distribution automation?

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Right.

Scott A. Lang

Yes, the DA opportunity is very interesting. More and more of our clients are having real -- the big focus is grid reliability. I mean it's one thing to do all the other stuff, and we've unlocked a lot of benefits across the board with our consumer engagement and DR and other projects which are great. And there's a lot of utilities that are just focused on basic reliability and our DA solution is terrific in helping them with reliability. We're unifying a DA and an AMI network in Chicago, for example, where there was enormous number of storms 2 or 3 years ago when we built some of those applications and their ability to do restoration, notification and restoration and outage monitoring has really improved their response time. And that's true with more and more of our customers. And then so when we do the reclosers, the fault circuit indicators and actually can control and monitor the devices that control the flow of power on the grid and align that with, not only AMI, but now with street light business, they have a truly fortified eyes are on all the time, controls in place, being able to send commands. And whenever there's an outage over a large neighborhood, we can start helping them redirect the power flow to isolate that to one street versus an entire neighborhood very quickly. I still will go in to meet with a utility CEO and if they've had an outage, I hear story after story, it's the first time in our 100-year history where we knew 8 minutes before the power was out -- before the phone rang from one of our customers, the power was out, where it was out, what kind of outage it was and already had trucks dispatched to fix it. I mean, and so that reliability message, even though it's a lot of times around 10% of the deal where a customer wants to do a lot of DA, the value proposition for it and the reliability, unlocking that reliability value and that impact, is a pretty powerful part of the business case. And when you can put both of those applications on one network infrastructure, do integration once, that ROI in that business benefit is a really strong proposition for our customers. And so you hear us talk a lot about value prop. That's one of the things that's truly unique about our technology of being able to run that because the DA technical requirements, our communication's in microseconds, not seconds or minutes and our technology and our Gen4 and the unique approach we've really built sophisticated, modern secure networks can handle all those latency and security requirements of DA, whereas a lot of solutions if you just buy metering and an AMI system, that's kind of all you're going to get. You have to build out a separate system for DA. And ours is very unique like that, and that's why you see a lot of the customers that are progressive and thinking I need to use this for more than one application, love our value prop. I know that may be a little bit longer answer to what you were looking for, but it's a critical part of our overall solution for our customers and the reliability aspects of running that grid, day in and day out.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

No, that's very helpful. And my last question is on backlog. And you guys talked a bit about this and I'd like to try to dig in a little deeper because some people try to value off of backlog, and so if I think about half your backlog, 2 to 3 years, what would you say to that 3-plus years, how long does that stretch out? So if we just use $1 billion for purposes of example, I mean do we have stuff stretching out 5 years or 7 years? Or can you just talk about some color there?

Operator

[Technical Difficulty]

[Due to technical difficulties, management did not hear this question and an answer was not provided.] (inserted as requested by the company).

Our next question is from the line of Sven Eenmaa of Stifel.

Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division

I wanted to ask about the municipal opportunity. You mentioned there's a couple of hundred endpoints here. What is the kind of the initial configuration, what to deploy and what is the margin profile on that? And how do you size your opportunity on the market currently?

Scott A. Lang

We -- yes, there is about 200,000 in 3 different municipal and cooperative customers. A lot of municipal markets have also water so we have a very strong water offering now that we've come to market with, so they'll have water, gas and electric and want to do -- some of them are wanting to do street lights and then around the data as well. So I would say our overall -- Jim, you might be able to talk to the overall specific profile on those, but they are very -- they look similar to any of the other deals we would have, it's just they're unique in that a lot of times, they'll have water where our IOU customers wouldn't a lot of times have water.

James P. Burns

Yes, typically see municipalities operate typically off of a OpEx budget versus a CapEx budget, so we tend to see deployments happen over -- get a little bit of a slower start and happen over a longer period of time and typically have a financing arrangement with it also that allows them to sort of pay-as-you-go on this, too. But muni market we've seen -- it wasn't something that we were participating in a big way about a year ago, and we're seeing a lot more deal flow on that, particularly now that we can -- got the trifecta of electric, gas and water to go after it.

Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division

Are you guys deploying it to your cellular network or your mesh network?

Scott A. Lang

What was the -- I'm sorry, what was the question? Is it...

Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division

Are you deploying it over your mesh network or a mesh or is it -- or do you use the cellular network to [indiscernible]...

Scott A. Lang

Well, we can use either. That's another real benefit we bring to the table is we have a mesh in cellular, we have a unified mesh in cellular. We, in these deals in particular, we combine it with our micro AEP solution that was deployed and tested at a large scale in Singapore with Singapore Power where we will unify both cellular and mesh together. We focus on just building out networks to touch every device in a utility's footprint. Every device that controls or monitors the flow of power and they consider is a resource they need connected, we find a way to get connected and we're a networking company, that's what we do best, we can leverage a lot of different transports, a lot of different protocols. So when you say are we using mesh or cellular, it's probably a little bit of both, depending on the customer. But in that particular case on the munis and coops, I think we use both.

Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division

Got it. And second question I have is in terms of SilverLink side. When do you expect to move from a pilot stage to actually having the initial orders in place and the initial revenues?

Scott A. Lang

Well, we have several customers already that are beyond pilot stage. I mean we launched this product in a big way with Oklahoma Gas & Electric and they're recognized as the most successful smart grid deployment, customer engagement, customer satisfaction deployment in the United States and that's kind of started our journey in this whole area that started there with Oklahoma Gas & Electric, and we do things like we're up 1 to 2 kilowatts of demand response for every one of their customers that have opted into that. They're saving money, OG&E is not building as many peaker plants, and that was kind of the beginning of SilverLink. And then you couple that with the fact that we're bringing about 500 million records a day off of our network so we have a massive amount of -- we're touching a massive amounts of data and knowledge. And so our customers, they're just not that happy with the other alternatives out there. They tend to be large, complex, hard to build, single-purpose applications and we came in with a system that says, listen, build this platform, expose the network, have it run more like the Internet and index the grid. That's what we're doing is we index the grid, working with our customers, so they can then use that and access that information and unlock an entire community of applications and companies to unlock value for them. There was an interesting example, one of our partners recently won a non-technical loss deal and it was 1/10 of the cost of the other alternatives out there in the market doing analytics. And it's, to us, that's where it's going to go. We're going to bring an entire ecosystem. We already have more than 20 partners on our SilverLink platform. When we launched this product early in the year, I was fairly -- I was optimistic but I thought it would take a little time to build it. And I have been very pleased with the new clients that are engaged, all of our existing clients wanting to run pilots. And so while I mention the pilot thing, we have a lot of pilots going on. We have a number of new clients that are kind of in the final stages of signing up on larger deals and we have a couple of existing customers running it in a very big way. So overall, it's a really nice business for us, and I think we've got true differentiated approach on this market and I still believe it's going to be a very exciting business for us long term. But hopefully, that gave you a little bit more context on it.

Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division

That's very helpful. And the last question I had is I just wanted to ask in terms of your -- this year guidance. What is your expectation in terms of kind of product versus service mix for the full year?

James P. Burns

Well, the -- we think the services mix will actually pick up a bit more in the Q4. The nice thing about the services business, especially on the managed business, is that we generally get paid on the cumulative amount that we've actually booked. And then we do have, particularly as some of these engagements in Q4 are picking up stronger than normal services content to that, too. So it will be -- it will -- you'll see more of a mix shift towards services than you've seen before. And that's a good margin part of our business and so I think what we should be -- kind of think of for the full year services being kind of a little -- maybe a little less than 1/3 of the overall business, 30%-ish sort of thing, which is quite a bit up from where we are.

Operator

There are no further questions at this time. Ms. Hyun, would you like to make any closing remarks?

Bonnie Hyun

Great, thank you. We want to thank everyone for their time today. We also wanted to let you know that we will be presenting at the Annual Canaccord Genuity Conference next Wednesday, August 13, and we hope to see you there. Thanks, everyone.

Operator

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

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Silver Spring Networks (NYSE:SSNI): FQ3 EPS of -$0.20 beats by $0.03. Revenue of $63.6M (-26.4% Y/Y) beats by $1.66M.