Mergers are up, but are we at the bottom of the revenue trough?
Before we answer the question posed in the title of this piece, let's paint in some of the background of the smart grid business.
Last month on our blog, we posed the question: will smart grid outperform its cleantech cousins and become the jewel in the industry's crown? We concluded that for a number of reasons, smart grid offers a less risky investment to both financers and players, and that there is a growing trend among investors to move away from the highly capitalized sectors of the renewable market in favor of smart grid.
Not all sectors of the smart grid are as capital intensive, and as we showed in the April report "Smart Grid is Just Too Big for the Utility Companies to Finance and Manage," the industry will require some nurturing to overcome some of its growing pains. We concluded that the electrical utility industry will likely be required to invest massive sums of money, and while they may be able to justify this based on long-term projections, it remains to be seen whether they will be able to find the money to fund such an effort. It cannot be generated from cash flow alone and government subsidies are unlikely to continue at their present level of generosity.
However, in the case of smart grid, there is another solution in the shape of the IT and communications companies. They will be more than willing to invest their capital and expertise in the smart grid information and communications infrastructure, generating revenues from a plethora of value-added services. This would relieve the utility companies of the major responsibility of finding the funds and toiling in an area in which they have little expertise. In our March issue, in an article contributed by Microsoft entitled "Smart Grid Revolution Becomes Disruptive for Utilities," the IT giant kindly shared some of the findings of a study they had commissioned. Expect regular promptings from the IT and communications industry about the major contributions they can make to the future of smart grid. This industry offers enormous potential and a robust business case that will continue to attract well-managed, innovative companies, financing and some government support all over the world.
On this occasion, we shall judge performance based on business growth and by how well players are developing the business opportunities available to them....
...Finally, we come to assessing the financial performance of players in the business. The financial reports from Itron, Landis & Gyr, Sensus and EnerNoc show increased revenues and profitability. Smaller specialist suppliers such as Comverge, Acorn and Tollgrade have increased their revenues, but not particularly profitably. Major electrical manufacturers such as 3W Power Holdings / AEG Power Solutions are much more a bellwether for the fortunes of the electrical transmission and distribution industry, which turned in a poor performance in 2009. The former had Q1 revenue and profits down year on year by 50% and 90%, respectively, reflecting the late cyclicality of business operations.
However, they are more optimistic about the future, with an order backlog at the end of Q1 2010 standing at €188 million, 37% higher than the end of Q1 2009. Similarly, ABB reported a decline in orders in 2009 of 19 percent (13 percent in local currencies) compared to 2008, due to (1) the global economic downturn, which has significantly weakened demand, particularly in the industrial and construction-related markets, and (2) price erosion in both utilities and industrial sectors in many geographical markets....MORE, including the big 'ol chunk on mergers.