So long WiFi thermostat

As growth slows, Opower looks beyond energy efficiency

Opower has long been the energy software player to beat. But almost a year after it went public at $25 per share on the New York Stock Exchange, the company is faced with the task of continued substantial growth as new competitors emerge. The company’s shares are trading at less than half of their debut price, at under $12 per share.

In Opower’s earnings report released earlier this week, the company divulged that it has decided to “reprioritize R&D resources away from” its Wi-Fi thermostat product, which it was initially working on with thermostat maker Honeywell. Opower still plans to support the thermostat software, but the company just didn’t “see a high level of demand” for it.

The founders of Opower, Dan Yates and Alex Laskey
Opower founders Dan Yates and Alex Laskey

The direct financial implications of that decision are “negligible,” Opower said. And many who have followed Opower over the years are probably not surprised by the final decision to cut funding for an experimental project to work on software for a consumer-facing hardware device; Opower has long been all software (and all utility-facing) all the time.

But there are longer term-consequences of struggling to grow beyond the company’s core “bread and butter” products.

Opower has had trouble growing internationally at the same rate that it’s been able to grow domestically in the U.S. over the past few years. Opower CEO Dan Yates disclosed on the earnings call that two international customers didn’t renew their business. Those two international non-renewals contributed to Opower projecting slower top-line growth in 2015 than it had in 2014.

Revenue from international customers made up only 14 percent of Opower’s total revenue in the fourth quarter of the year, flat compared to the same time in 2013. For the full year of 2014, international customers represented 14 percent of revenue, up slightly from 10 percent of revenue in 2013. For 2015, Opower says international contracts will comprise only 10 percent of revenue, but noted that in the longer term the company expects international contracts to make up “a substantial percentage of revenue.”

Opower

As of the end of 2014, Opower counted 98 utilities as customers of its products. But at the close of 2013, it had 93 utility customers. Not exactly a fast trajectory. The entire global utility market is 1,300 utilities.

If a company hasn’t been signing up that many new customers, what’s to be done? First off, they’ll have to expand sales to current customers. Energy efficiency software has long been a major source of revenue for Opower, but increasingly the company wants to grow its demand response software business.

At the end of 2013, Opower launched a software-only demand response product that uses data analytics, smart meter data and digital communication to get utility customers to turn down their power during peak periods. While Opower doesn’t break out revenue of the different business lines in its earnings reports, Yates did say that he expects demand response “to be a larger percentage of bookings and revenue this year than last.”

Sample utility bill with data from Opower
Sample utility bill with data from Opower

The attraction of Opower’s demand response software is that it’s much cheaper than hardware-based demand response products but can still cut energy use by three percent. Utilities, many of which are regulated, generally prefer spending as little money as possible.

Then there’s Opower’s latest software release. Earlier this year Opower launched the sixth version of its software platform, which has new features like a billing suite and a next-generation data segmentation tool. (You can hear more about Opower’s data analytics at Gigaom’s Structure Data conference in New York March 18–19.) Opower is now using analytics to run utility call centers and billing service. If those take off, they could offer some substantial growth.

Another way to grow sales is the obvious approach: hire a boatload of new salespeople. Opower said it met its goal of “nearly doubling” its global sales force in 2014. It takes about a year to get a salesperson signing deals and bringing in revenue. Operating expenses for the fourth quarter of 2014 were $29.5 million, up 37 percent from the same period in 2013, and those larger expenses were driven by headcount.

The now defunct Honeywell & Opower smart thermostat software
The now–de-funded Honeywell & Opower smart thermostat software

For now, this slower growth and larger investment mean that Opower remains unprofitable. The company’s net loss in 2014 was $41.75 million, a larger loss than in 2013, when it lost $14.16 million. But that was on growing revenue, of $128.44 million for the full year 2014, up from $88.70 million in 2013.

Those losses are supposed to start to turn in 2016, and in 2017 Opower hopes to be profitable and delivering “high sustainable growth for the long term.” The company also said it will have 20 percent growth (higher than projected in 2015) for 2016 and “the years to come.”

All that depends on whether Opower can grow its new software products, demand response service and international presence. It’s a public company now — close to reaching its one-year anniversary on the NYSE — and to make Wall Street happy it’s got to show it more growth.