Silver Spring Networks’ Organizational Restructuring Paid Off

Company Overview

Since Eric Dresselhuys and Keith Burge founded Silver Spring Networks Inc. (SSNI) as Real Time Techomm in Butler, Wisconsin, in 2002, it has grown to be one of the largest company in deploying large scale networks and solutions enabling the “Internet of things” for critical infrastructure.

Spring Networks Inc. (SSNI) first focused on the energy sector by deploying a smart grid network with innovative features such as advanced networking technology and solutions to the power grid. Its smart grid connects millions of devices in both the utilities and consumer sector that generate, control, monitor, and consume power, helping these devices to process and control information in a timely fashion.

Spring Networks, Inc.’s main source of revenue comes from creating wireless mesh networks ((WMN)) that transmits energy consumption data from meters at installed at the consumer’s end to utility companies in real time. Its software interface shows the generated electricity bill and provides an indication of how much money can be saved by implementing an energy efficient model.

Since the power grid is one of the few areas in the global industrial infrastructure that lacks extensive network for data feedback and communication technology deployment, Spring Networks Inc. (SSNI) has a huge growth potential in delivering the technology to yield significant benefits to utilities, consumers and the environment, both in the near term and the future.

In addition, they have recently started to aggressively expand into building other smart networks, including building critical civil infrastructures like smart lights for city streets that makes cities more “smarter” and energy efficient.

Spring Networks Inc. (SSNI) is also classified under the Section 107 ((b)) of the Jumpstart Our Business Startups Act of 2012 ((JOBS act)) as an “emerging growth company,” giving it certain regulatory advantage in delaying compliance in adopting new or revised accounting standards.

Recent Acquisitions and Organizational Restructuring

In the last 18 months, Spring Networks Inc. (SSNI) has made two major acquisitions. On May 23, 2014, they outright bought the Streetlight Vision SARL, a consulting company that provides central management software for streetlight and street applications. The acquisition gave Spring Networks Inc. (SSNI) access to its central management software that commands, controls, monitors, and configures networks of street lights.

The second acquisition happened on January 16, 2015, when Spring Networks Inc. (SSNI) bought Detectent, Inc., a provider of SaaS-based analytical software solutions for advanced metering infrastructure and utility grid operations.

Both of these acquisitions enabled Spring Networks Inc. (SSNI) to expand its core business and gain competitive advantages.

Next, Spring Networks Inc. (SSNI) initiated the organization wide “Restructuring Plan” in the third quarter of 2014 in order to refocus its strategy, optimize its structure, and improve operational efficiencies of the company on a global scale. The core of this restructuring plan called for a significant reduction in the worldwide workforce, which made the company more streamlined.

Performance After Organizational Restructuring

The worldwide reduction in workforce costed Spring Networks Inc. (SSNI) $1.8 million in severance by the end of 2014 and an additional $1.3 million in severance and other related costs by the end of June 30, 2015.

Gross and Net Income SSNI

Figure 2: Spring Networks Inc. (SSNI) Gross Profit and Net Income Quarterly % Change
Source: YCharts

However, since the restructuring plan ended on September 30, 2014, the immediate result started to appear on its performance within the next two quarters.

By the end of Q1’15, its gross profit astonishing increased by around 100% to 48.09%, where its net income climbed to 268.6% from below -450% at the end of September, 2014.

Market Overview and Long-Term Growth Prospect

Spring Networks Inc.’s (SSNI) core growth potential in the long run heavily depends on its smart grid network, which falls under the purview of the “soft grid” networks. GTM Research defines soft grid as software led approach to data analytics that allows utility providers to track, visualize and predict — the core elements of a power grid in order to increase efficiency and reduce waste.

Market Forecast for Soft Grid - GTM Research

Figure 1: Global Utility Analytics Spending, 2012-2020
Source: GTM Research

In 2012, GTM Research published a forecast that estimated that during 2012-2020, the cumulative global spending on smart-grid-related analytics to top $20.6 billion. According to David J. Leeds, Chief Smart Grid Analyst of GTM Research, in 2020 alone, the net global investment in smart-grid-related analytics is expected to reach $3.8 billion.

Although Spring Networks Inc. (SSNI) is strategically positioned to take advantage its growing industry, now the question is, are they internally prepared to compete in this sector and capture the market or not.

Continued Losses in Q2’15, But with Hope

In Q2’15, Spring Networks Inc. (SSNI) delivered a GAAP revenue of $72.2 million, which is 85% higher compared to the Q2’14 revenue. But, gross margin has gone down by 6 percentage point to 26% with a GAAP net loss of $16.2 million compared to $24.6 million in Q2’14.

However, non-GAAP gross profit margin increased by 42% in Q2’15 compared to 32% in Q2’14 and adjusted EBITDA jumped to $2.37 million compared to -$8.55 million in the same period.

Competitive Analysis

The day after Spring Networks Inc. (SSNI) announced to complete its organizational restructuring, on October 1, 2014, one of its competitors – Echelon Corporation (ELON) – announced to sell their smart grid monetization business to Austria based Networked Energy Services Corporation for cash proceeds of around $4.9 million.

Besides, Itron, Inc. (ITRI) and Opower Inc. (OPWR), the only remaining significant direct competitor of Spring Networks Inc. (SSNI) is now France based Alcatel Lucent SA (ALU).

Alcatel Lucent has a diversified portfolio, where revenues from smart grid solutions make up a small portion of its overall sales. By contrast, Itron and Opower have a more dedicated interest in expanding their smart grid market. Itron is clearly leading the industry as it announced Q2’15 ((YTD)) revenue of $154.9 million. That makes Silver Spring Networks Inc. (SSNI) the second market leader in the smart grid industry.

Conclusion

Although Zacks Investment Research is currently ranking Silver Spring Networks Inc. (SSNI) with a “hold” status, investors brushed aside Spring Networks Inc.’s (SSNI) Q2 losses and the company’s stock climbed 18.84% over the last week to $13.31 per share. It has already exceeded the $11.50 price target of Canaccord Genuity.

As the smart grid industry revenue is expected to increase in the next five years, and Spring Networks Inc. (SSNI) sits at the crossroads of this market with huge potential to capture the bulk of this growth momentum.

The revenue and EBITDA growth story of Spring Networks Inc. (SSNI) over the last 12 months speaks aloud for the effectiveness of its recent organizational restructuring and the bullish momentum in the market appears to be sustainable over the next two quarters.