I am still trying to figure out Silver Springs Networks (SSNI). For those of you unfamiliar with the stock, it is an Internet of Things company that helps with smart electric grids, smart lights and a few other things. This quarter they posted non-GAAP earnings that increased from 0.02 last quarter to 0.13 this quarter. I was thinking that the revenues should follow suit, BUT revenues last quarter were $122 MM last quarter and $74MM this quarter which has me scratching my head. I have also tracked YOY end point growth: Q4 '15 = 10.1%, Q1 '16 = 9.8%, Q2 '16 = 9.0% and Q3 '16 = 8.7%.
So we have non-GAAP earnings rocketing up, a huge drop in revenue, and a slowing growth. How can earnings be moving up so well in this kind of environment? Do they have unique accounting? I don’t quite understand things here.
BUT revenues last quarter were $122 MM last quarter and $74MM this quarter which has me scratching my head. I have also tracked YOY end point growth: Q4 '15 = 10.1%, Q1 '16 = 9.8%, Q2 '16 = 9.0% and Q3 '16 = 8.7%.
GAAP revenues are very misleading for SSNI. For example, SSNI signs a large AMI contract with Consumer Edison initially for the network and installation of 1.5 million meters. When the first meter is installed GAAP
requires that the known $ amount of the contract be taken into revenue. This is accomplished by crediting income with $xxxxxxxx and debiting cash x(which represents the actual cash to be paid by Con Ed for the work actually performed and debiting deferred income by xxxxxxx (which represents the value of all the work to be performed). You will see in this example that while 1/8 of the work has been billed, 7/8 of the work remains to be done. As the contract proceeds, progress payments are billed and the accounting credits deferred revenue and debits cash or A/R.
In this stage of their development the installation of product is the largest revenue producer, thus GAAP accounting distorts the revenue. Down the trail, the subscription revenue will become the bulk of revenue and GAAP will be closer to reality. In the meantime, non-gaap revenue and accompanying cash flow will give a better picture of the business progress.
I wanted to clear up a few things regarding SSNI’s recent quarter and also ask a few questions.
Let’s just look at non-GAAP for now.
Revenue/Billings - $76.1M up 1.8%
Earnings - 13 cents up 30%
Earnings were elevated due to a mix of greater than normal software billings this quarter. They expect a return to normal margins next quarter and are guiding (mid-points) for Billings of $76M and EPS of 2.5 cents, up 1.3% and down 69% , respectively.
One wonders why earnings will fall much lower than last year’s December quarter and I’m not sure much was discussed on the conference call regarding that.
A final question…why were GAAP Revenues lower than non-GAAP this quarter? This is the exact opposite of the trend we’ve seen.
non-GAAP defers billings until product actually ships and GAAP recognizes it all upfront as I understand it. It seems odd with all of the announcements we hear from SSNI about their major deals that GAAP would ever fall short of non-GAAP.
It sure is nice to have some accountants (or pseudo-accountants) on this board. Thanks for your explanation Mike. I have a tiny position in SSNI. Been trying to decide if I should up the investment or bail.
I think I’ll be adding. But I’m still concerned about a moat. Is there anything so unique about SSNI that some bigger networking companies can’t emulate? I don’t see anything particularly unique about their business.
But I’m still concerned about a moat. Is there anything so unique about SSNI that some bigger networking companies can’t emulate? I don’t see anything particularly unique about their business.
From my perspective, the bulk of the revenues that SSNI (and their competitors) receive come from the automated metering side of the business. I don’t believe there is a moat for this part of the business. I think it is important to realize that we are at less than the midpoint of deployment of smart meters. Call it 40% today and you won’t be far off. Therefore, more new AMI product will be deployed in the future that has been thus far. There also may be an “upgrade cycle” as some utilities will not meet new aspirations with older meters.
If SSNI has a moat, it is in the efficacy of their technology. They deliver an open-standards mesh network to connect the endpoints in their system. This means that a customer has “future-proofed his investment” because the first generation produced will be compatible with each forward generation. This moat does not show up well in the early innings where most of the revenue is for the automated meters and not for the operation of the network that connects them. SSNi’s network will layer on any of the various IOT functions that want to be deployed in the geography that the network serves. So far, the moat has been established in the recurring revenue base that is derived from the operation of the network. The permanence of the moat is questionable. In this recent article on Itron by Saul’s guru, Bert Hochfeld, he speculates that Itron may have developed a network that will compete with SSNI.
IMO, SSNI enjoys first mover advantage here and could prevail as ITRI is not yet tested. Bert says there is enough market to enable multiple winners, but I am not interested in such an outcome. We should know in less than two years whether or not SSNI is the clear leader in the space.