why I sold out of SSNI

Since I bought into SSNI in August, it quickly crept up to over 8% of my portfolio in September and October. I like the simplicity of its business model, the recurring nature of the revenues it’s trying to build, and in general, the story.

Bert came out with an incredible article yesterday, of which I read and hung on every word. While he concludes with a positive outlook, I will here take issue with the valuation (only…his analysis is invaluable).

Here’s the article: http://seekingalpha.com/article/4023332-silver-spring-can-in…

To cut to the chase…
The problem, as I see it, is simply that the recurring revenue is not growing fast enough. The stock enjoys a premium valuation, albeit not “as” premium as stocks that are growing much faster, like SHOP, PAYC, and HUBS. But those stocks really are growing much faster. As Saul pointed out recently, 98% of PAYC’s revenue is recurring. SSNI’s is a much smaller percentage:

Overall, services are now almost one-third of revenues compared to 27% of revenues in the year earlier period.

What does that mean in real numbers? Well when you really dig down, you find that the annual recurring billings at present are about $58M. A year ago that was about $50M. 16% growth is not terrible, but it’s not going to make anyone rich either, especially when it’s on just over 30% of the total revenue for the company. This is a ~760M market cap. Even if they could somehow double recurring billings in the next few years (which they’re NOT on pace to do), their annual recurring revenue would be about $116M. Ok, let’s say the average billings per endpoint go up a lot…then maybe $130M or so? $140M? These numbers fail to blow anyone away.

Also, let’s consider that costs are not likely to stay constant either. When it’s only a third of the total revenue, recurring revenue doesn’t have nearly as much impact on the bottom line.

We’ve also heard a lot about ConEd and other contracts. Bert is nice enough to spell out what this means for endpoints. Right now SSNI has about 25M endpoints (the units on which they charge their $2.31/year of recurring billings). ConEd accounts for about 5M additional end points, Entergy for another 3M or so, PacPower for less than a million. Sure, that’s 30-something percent more endpoints than they have now, but how many more huge contracts would they need to turn that into 30%+ per year for the next several years?

Maybe there’s a chance that ConEd is just the tip of the iceberg, the first domino in a chain that leads to growth beyond our wildest dreams. 25M could grow to 50M and then 100M endpoints in just a few years. The average annual billings per endpoint could increase more rapidly to more like $3 instead of $2.31…etc, etc. But even as rosy as that scenario seems (100M endpoints and a price near $3), that would only be $300M in recurring revenue from services (before adding their SaaS services), and I’m just not super impressed with or excited about that number.

And based on the actual billings growth in the last 12 months, this doesn’t seem likely, anyway. In short, I’m no longer convinced that this investment is a slam dunk. I’m out. I’ll keep an eye on it, but this one just seems all story. I really don’t see the numbers ever adding up.



Hello Bear,

Also, let’s consider that costs are not likely to stay constant either. When it’s only a third of the total revenue, recurring revenue doesn’t have nearly as much impact on the bottom line.

The value building in SSNI is that the utility companies capitalize the initial costs of the network. Thus, the margin for selling and installing the equipment and software that connects and establishes the network is relatively modest. However, the network is capable of connecting a diverse number of uses and the capacity of the network is vast. Once the network is in place, the capital investment to add connections and recurring revenue is very small and margins are great. Think of it a little like telephones in the early days: a few telephones on the fixed lines installed were of modest value; by the time everyone had a telephone, the value of the system was immense. What started for SSNI as investment in the infrastructure of the smart grid required to efficiently deploy forms of alternative energy is beginning to evolve in ways to manage street lighting, parking, traffic flows, crop irrigation and fertilization, etc.

The total addressable market has gone from hundreds of millions of automated meters to hundreds of billions of connections to support the
burgeoning Internet of Things. As this market evolves, the revenue dollars per year per connected device will compress rather than grow, but the costs of servicing and maintaining the network will compress on a device-connected basis and margins will get much better.

I am not sure than anyone can accurately predict the rate of growth of the recurring revenues portion of SSNI’s business model, but I am highly confident that this growth will accelerate and each layer of growth will bring higher margins with it. We are in the very early stages of this buildout. More and more networks are being constructed and more connections are being deployed, but if we picture a 10-step ladder, we are yet to reach the first step.

Best regards,