Both Itron (NASDAQ:ITRI) and Silver Spring Networks (NYSE:SSNI) have struggled to show consistent revenue growth and profitability. There are too many companies worldwide competing in a slow growing business in the highly regulated industries such as electric, water and gas. As smart meter companies have struggled to grow, they have tried to diversify into broader Internet-of-Things applications like managing street light in Smart City initiatives. But these initiatives are yet to prove that they will spur significant growth. Consolidation may be an option to drive down cost, increase scale and grow revenue.
Water, electricity and gas are essential to life. One would think given the increased environmental awareness and increasing demand due to population growth would lead to rapid adoption of smart meters that help monitor and inform use of resources and help drive conservation and new consumption models. Yet, smart meter adoption in the U.S. has either stalled or is growing very slowly and adoption in countries with vast populations, such as India, has been extremely slow. According to Silver Spring Networks, a little over half of the 150 million end-points in the U.S are managed by Advanced Metering Infrastructure (AMI).
Theft of electricity and the subsequent loss in revenue is a problem in India and smart meters could help reduce theft. Yet, India has been very slow to adopt smart meters. The Indian Government plans to install 50 million smart meters by 2020. Considering that India has potential for approximately 250 million smart meter end-points, that's a 20% market penetration over five years. Silver Spring Networks announced that CESC of India will use its smart meters and AMI infrastructure for 237,000 homes. There is also local competition in India from companies such as Larsen & Toubro.
China, which has the largest installation of smart meters in the world with 150 million units installed by 2015, has sourced smart meters from local manufacturers. That has left companies like Sensus, Itron and Silver Spring Networks with little or no business from China. In China, companies like Yantai Dongfang Wisdom Electric Co., Ltd., Wasion Group and Shenzhen Kaifa Technology have dominated the market.
Europe is targeting a deployment of close to 200 million smart meters for electricity by 2020. According to Berg Insight, Europe may achieve deployment of 150 million smart meters in 2017.
Exhibit: Smart Meter Deployment in Europe (Source: Berg Insight)
A look at even an incomplete list of smart meter manufacturers shows extensive competition in the industry. The smart grid products - the software that manages the data - has an extensive list of competitors too.
Exhibit: Smart Meter Manufacturers (Source: Berg Insight, Company Filings)
Exhibit: Smart Grid Product Companies (Source: Berg Insight, Company Filings)
So, it's no surprise that companies have struggled to show consistent growth and profitability. Add to this mix the government regulation and the time it takes to get deals signed, one ends-up with a greater level of uncertainty.
Itron has seen uneven growth over the years. Its 2016 revenue is just 5.4% greater than its revenue in 2008. In essence, there's been no revenue growth for Itron over this period.
Exhibit: Itron Annual Revenue and Growth Rate (Source: Company Filings)
Exhibit: Itron Gross Profit & Growth Rate (Source: Company Filings)
Silver Spring Networks presents a similar story with uneven revenue growth and profitability.
Exhibit: Silver Spring Networks Annual Revenue and Growth Rate (Source: Company Filings)
Exhibit: Silver Spring Networks Gross Profit and Growth Rate (Source: Company Filings)
Elster Group shows similar stagnation of revenues. The exhibit below shows revenue and growth rate before it was bought by Melrose PLC - a British Private Equity firm.
Exhibit: Elster Group Annual Revenue & Growth Rate (Source: Google Finance)
Under Melrose's management, revenue growth showed similar stagnation but operational performance improved due to changes to manufacturing cost structure. Manufacturing was moved to low-cost countries.
Exhibit: Elster Group Annual Revenue in USD based on Author Calculations and in British Pounds as reported by Melrose PLC (Source: Melrose PLC.)
I have used the following historical exchange rates to convert British Pounds to U.S. Dollars for years 2012 to 2014 when it was under Melrose management. The revenue in 2012 was for four months that ended on 31 December 2012. Elster's revenue for 2012 to 2014 includes Elster Gas, Electricity and Water business segments from Melrose annual reports.
Exhibit: Exchange Rates (Source: X-Rates)
Elster was acquired by Honeywell (NYSE:HON) in 2015 for $5.1 billion.
Excessive number of global and local competition, coupled with regulatory and political hurdles have made consistent growth extremely difficult. On the surface, demographic, environmental, technological trends coupled with global size of the utilities market make smart meters and smart grid markets and the companies that operate in it look very attractive. But, in practice, lot of competitors entered the market highlighting the fact that the industry did not have a wide moat to keep out competition. This industry may be ripe for consolidation.
Disclosure: I/we 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.