What Opower will need to satisfy Wall Street

This article originally appeared on Gigaom’s premium subscription research service Gigaom Research.

Opower is due to go public this week, and could raise as much as $110 million from an offering that would give it a valuation of just under a billion. Opower’s success is proof of the capital light approach to cleantech, the triumph of energy efficiency, which won’t transform the source of our energy but will set us on a slow but steady trajectory of reducing fossil fuel use.

The company defines itself as a provider of “cloud-based software to the $2.2 trillion utility industry.” Opower’s growth has been impressive, the type of growth that we tend to only see in software based solutions that can scale rapidly. In 2010 Opower served over a million homes. Last year that figure was up to 32 million with over a 100 billion meter reads analyzed annually. The company has shown the kind of traction and growth that is also difficult to achieve in a world in which the utility is the customer and tends to move slowly, only after numerous pilots.

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

But Wall Street is an unforgiving judge of performance, save for companies like Tesla that have potentially massive addressable markets coupled with game changing technologies. So what does the future look like for Opower?

In terms of total addressable market (TAM), Opower says there are 1300 utilities that it could reach around the world. Given its current customer base that leaves it having hit under ten percent of the market (at the close of 2013 it had 93 customers).  Opower opened an office in Singapore last Summer, in addition to its London office, and the company’s ability to convince foreign utilities that its services can save them money and improve customer engagement will be critical to Opower carving out additional market share.

But in terms of truly keeping Wall Street happy, it’s going to come down to cross-selling additional products and services to existing customers. Opower has dipped its toes in these waters with a partnership with 3rd party thermostat makers to offer web and mobile software to help manage and optimize HVAC. These partnerships appear to be slow going.

Honeywell & Opower smart thermstat website
Honeywell & Opower smart thermstat website

I’m more optimistic about the company’s behavioral demand response product. Currently only 5 percent of residential customers participate in a demand response program but if utilities had an easy and reliable way to reach and control residential power behavior during peak events, by leveraging Opower’s analytics and communications tools, that would be a win. Opower is poised here because it already has relationships with utility customers. If it can show utilities that the company can reliably execute behavioral demand response at a discount to what utilities are paying larger commercial customers to turn down their power, the company will be on the right path to showing the type of topline growth it’ll need to excite the Street.

Opower reported in its S-1 that at the end of 2013, 16 percent of its customers had licensed more than one service. Being able to up that figure will be key to growth because right now the company is pouring money into sales and marketing. While it did $89 million in revenue last year, it spent $30.5 on sales and marketing, its largest expense. Fortunately R&D costs are low for the company–a benefit of digital cleantech–but it’ll need to leverage those sales investments to produce more revenue if it ever wants to become profitable.

The reality is that Opower doesn’t have a ton of competition right now. Yes there are companies like EcoFactor and Nest that are working with utilities to produce energy efficiency and demand response outcomes. And down the road there’s likely to be increasing competition among all these players. But Opower has a headstart right now, having already reached almost a hundred utilities. Now to reaching that other 1200.