Safeguard Scientifics, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Ladies and gentlemen thank you for dialing in to today's Safeguard Scientifics' First Quarter 2021 Financial Results Call. My name is Abby and I'll be coordinating your call today. I would now like to hand over to Matt Barnard, General Counsel to begin. Matt, please go ahead.

[Matt Barnard:]

Good afternoon, and thank you for joining us for this presentation on Safeguard Scientifics' first quarter 2021 financial results. Joining me on today's call and webcast are Eric Salzman, Safeguard's Chief Executive Officer, and Mark Herndon, Safeguard's Chief Financial Officer. During today's call, Eric will provide some corporate and strategic updates, and Mark will discuss our results. Afterwards, we will open up the call to your questions. Today's presentation includes forward-looking statements, and those statements are subject to risks and uncertainties.

[Eric Salzman:]

Thanks, Matt and thanks for joining us this evening. As we discussed on prior calls, Safeguard's primary strategy is to maximize the exit values of our ownership interest and return capital to our shareholders. Since our last call, we have exited three companies

[Mark Herndon:]

Thanks Eric. For the quarter ended March 31, 2021, Safeguard's net income was $17.6 million or $0.84 per share, compared with a net loss of $16 million or $0.77 per share for the same period of 2020. This quarter's net income was positively impacted by the Zipnosis transaction that Eric addressed, which resulted in a gain of $17 million as well as the $7.3 million dilution gain at Syapse that we also referenced in our year-end call. As you may recall, 2020 is a net loss, including a variety of impairments totaling $11.3 million and a severance charge of $1.7 million. Safeguard's cash, cash equivalents and restricted cash at March 31, 2021 totaled $21.8 million and we have no debt obligations. Subsequent to the quarter, we also received an additional $3.4 million of cash resulting from the completion of Velano Vascular's acquisition. Taken together with the reduction of our liquidity threshold from $20 million to $18 million, this allowed us to announce a $6 million stock buyback.

[Operator:]

Thank you, Mark.

[Mark Herndon:]

And as she's lining up those questions I'll also just mention too we hope this shift to an afternoon announcement has helped us reach more of our shareholders on a live basis. We have received some feedback that this timing might be more conducive to our West Coast shareholders. So we're going to give that a shot. As always we want to continue to look for additional ways to provide you with information and interact with you and just support you in your evaluation of Safeguard's investment opportunity.

[Operator:]

We do have a few questions now on the line. So our first question comes from . Ross, please go ahead. Your line is now open.

[Unidentified Analyst:]

Thank you. Hi. Appreciate you taking the questions. So quickly on MediaMath. Clearly we sold the peak of our interest a few years ago. Since that time has that company gone through a bit of a turnaround? And would you describe it as coming out the other side at this point?

[Eric Salzman:]

So, yes, Ross, thanks for the question. So we did sell a piece of our stake, it was almost half of our stake back to the company back in -- I think it was the summer of 2018, as part of capital raise that MediaMath had done at that time. The company -- you are correct. The company has been going through a transformation over, let's say, the last 18 months or so. That includes new senior management team. You may have seen some announcements even as recent as this quarter, as they continue to add senior talent. They also addressed certain product asset they felt they had in the marketplace. And they've rolled those out or are in the process of rolling those out. And of probably significant note, they took the opportunity during COVID to take significant fixed costs out of their business, mostly comp and benefits. So they brought down their revenue breakeven level significantly. And as ad spend growth returns and as their revenues grow, there will not be a sort of corresponding addback of that head count. So they brought there, sort of, a much more attractive operating leverage and margin profile for that company. So as I indicated earlier and I think on last quarter's call, we view sort of the second half of 2021 being a critical period for MediaMath to post that accelerating revenue growth and margin expansions.

[Unidentified Analyst:]

Okay. That's helpful. And then, for this new Bright Health holding, that actually looks like a pretty big gain, a pretty good deal. But how do you value the $15 million that we're carrying it at? Is that a -- what's that sort of based on? And how might that change over time?

[Mark Herndon:]

Sure. I'll answer that. First off, let's talk about the valuation methodology. So we go through a pretty detailed process to evaluate using a number of different factors. That would include evaluating past rounds that other investors have invested in the company. We look at comparable market company projections of their results and projections of, of course, what we think eventually will happen with it. And we use, I'll call it, traditional valuation techniques in terms of discounting and weighting these different methods together. And obviously, we'll go over that. We follow the regulatory guidelines about how to value the companies and we would go over that in detail internally. So it's a comprehensive process. Once we came up with that point specific amount that we recorded this quarter, it essentially stays put. We're not -- this is not something that we would expect that would change period to period, except for a few circumstances. Those circumstances would be, like the other items that we talked about, that are subject to the other -- the observable price change, right? So if the company --

[Unidentified Analyst:]

Is there anything publicly announced around when they might do something with that company that would shine a sort of a market light on what that actual value might be?

[Mark Herndon:]

Yes. We've heard rumors and we've seen press reports, but that's something that we don't have specific information about.

[Unidentified Analyst:]

Okay. And then lastly, just -- again, thank you so much. Lastly, just on the buyback of $6 million. Is that something you would anticipate growing over the course of 2021 as more cash comes in, or do you have a view on that?

[Mark Herndon:]

Yes. I mean our model there really hasn't changed much, right? So we have this targeted liquidity threshold, right? That's $18 million. And so, anytime that we have exits and cash that are going to be over that amount, we need to make a decision about what to do with that cash, right? And then that's going to be -- the model is to evaluate the opportunity for a buyback or providing that cash directly back to shareholders via dividend.

[Unidentified Analyst:]

Okay. Thanks.

[Eric Salzman:]

I'll add just one more. Yes, Ross, I'll just add one more on the stock buyback. I think we called it out. So in Q3 we reduced the liquidity threshold from -- of 25 to 20 and then this quarter we reduced it to 18. And that sort of is our, if you will, mass cash if you think about it from the standpoint of -- that we'll carry. And then, cash above that we will aggressively look to return to shareholders, whether that, as Mark said, through stock buybacks tender offers or dividends and we'll evaluate that. So we're -- we are focused and committed to generating additional cash, additional units, so we can return cash to shareholders.

[Unidentified Analyst:]

Great. Thanks so much.

[Operator:]

Thank you, Ross. Our next question is from Jason Stankowski from Clayton Partners. Jason, your line is now open. Please go ahead.

[Jason Stankowski:]

Hey, guys. How are you?

[Eric Salzman:]

Good.

[Jason Stankowski:]

Can you hear me?

[Eric Salzman:]

Yes.

[Mark Herndon:]

Yes.

[Jason Stankowski:]

Yes. So maybe I'll just walk down and walk down the press release a little bit and maybe relatively quickly. I could get back in the queue if I get too long in the tooth. But the buyback and the 10b5, I'd just say, thanks a lot and I think it's a great idea and happy to see you guys proactively do that here in a time where we have a window of opportunity to do it. On the -- you already explained the mechanics of the $15.3 million on the Bright Health. Can you maybe just give more context to it? Like, as you go through your process, is that the number that you thought you were getting in value in the deal? Is it slightly less? Is it a lot less? Just conceptually how do you think about -- understanding you have to go through these mechanics of the valuation and all those things? But if that's all you get in the end, are you happy with that? That's sort of the benefit of the bargain, or was it in your mind's eye higher and this is an appropriate discount, given the minority nature you hold and you're expecting more? Some context around that would be helpful.

[Eric Salzman:]

Yes. I can maybe start, Jason. So as Mark alluded to the valuation that we came up with factors in both kind of loss around value, roll forward, public comps and some present value of what we think we'll exit at in some sort of combination and methodology. So, I think as shareholders, first of all, we were very supportive of the transaction, which resulted in us getting the $3.3 million of cash in the Bright Health stock. So, we are definitionally, constructive and bullish on the company or we wouldn't have supported taking equity in Bright House. I think the valuation -- to try to more directly answer your question, the valuation reflects our own internal valuation methodology that we've developed internally. We share with our auditors Grant Thornton, and it reflects a combination of, let's call, it last round public comps at a discount discounted exit value. So, it's hard to say that if -- we're constructive on the company, we believe that they're playing a -- they're in a very disruptive space as the insurtech industry and we'll see how they develop. We believe they have a top-tier management team we're bullish on their prospects. I think that's as far as I would sort of -- the context I would put. And frankly, I know there are -- I know that there's interest in the secondary market for equity in Bright Health. We've heard that from different -- from different places. So, I think it is a company that has great prospects, and as an equity holder, we're supportive of the business and its trajectory.

[Jason Stankowski:]

Okay.

[Eric Salzman:]

I don't know, Mark, if there's anything you want to add to that.

[Mark Herndon:]

Yes. I mean I think one other just sort of fundamental thing that we would always think about is, when you think about whatever value we've ascribed to it now versus -- think about it, it's just the same as you would any other investment, right? It's what we -- it's our view of the fair value. So -- and if we were making an investment on this day, we obviously have an expectation that it would go up. I mean we've talked about our model being -- exit values are typically higher. Our expected exit value is typically higher than what we think fair value is, because there's a risk and time to get there to that point. This is one of the investments that is -- certainly is subject to change and a lot of judgment that goes into it. But, fundamentally, yes, we continue to be optimistic about the company and are happy to be shareholders in that large organization.

[Jason Stankowski:]

Right. You're happy enough to be -- to have $15 million in stock, and a little -- I guess, I think that that has been some more upside relative to just taking $18.6 million in cash if you could have done that. Okay. On the T-REX and WebLinc, the kind of the mixture of those two in the next bullet point. You had already talked about the WebLinc exit right? So, basically T-REX is -- was not talked about before and that's new data point with $3 million associated with that, because WebLinc was $6.2 million, right?

[Mark Herndon:]

Yes, that's right. That's right. WebLinc, we call that at the year-end as a subsequent event. So, it gets a little confusing when we talk about the quarter cutoff versus what we know about in the call. So, it's the same thing with Velano, right? So, Velano is excluded from our results this quarter, but we've included it here because we thought it was meaningful enough to tell everybody that we got another $3 million of cash.

[Jason Stankowski:]

Yes, yes. No, I got it. Just wanted to make sure I was just aggregating the WebLinc and T-REX thing correctly based on what had already been disclosed. That's helpful.

[Mark Herndon:]

Yes, you are.

[Jason Stankowski:]

And I think you went into a little bit the 10 out of 11 being -- companies being up. When you get into the company performance, will we be able to see some of the -- you kind of go through some median and averages, because just saying the total is down eight doesn't really help us that much. But the context of the 10 of 11 being up quarter -- year-over-year in the quarter was -- is super helpful. And just because you have such a couple of big guys moving the numbers around it, it doesn't help us really understand the path of the rest of the other nine or so.

[Mark Herndon:]

Yes. I get that. I'll give you a little extra, because it's hit a couple of different pieces over the course of the year. And let me separate two topics for you. So, one the 8% decline is that trailing 12-month measurement. So, it's calendar 2020 compared to calendar 2019, right? So, during that time period, you had the -- this impact of 2020, right, the year that everyone will remember, right? And so, that hit some companies harder than others, right? So the companies that are retail focusing, with elective medical procedures, so some of those hit pretty well. We've talked about for multiple quarters some of the company-specific performance in the ad tech space has been negative. So that definitely is an impact there. And then with the other piece and the one company that had the kind of the one-time positive event back in 2019 -- Q4, 2019 that impact is just kind of rolling through that 12-month comparison. So it just makes it for -- they had a big benefit at that point in time, so it makes the comparables harder. So, that's a bit of an impact and that's in the health care space. So, now the 2021 quarter, the 10 out of 11 is just this first quarter. So, we've gotten some preliminary reports of the 10 out of 11 across the board they're up. And so, there's more to happen and the comparables will be probably beneficial and easier on a go-forward basis. But, I mean a lot more of the year to see how it plays out. But that's where we're starting. So, that's encouraging.

[Jason Stankowski:]

Right. Okay. That's helpful. And the Q and the presentation should be out end of the day tomorrow is your thinking?

[Mark Herndon:]

Yes, that would be the expectation, yes.

[Jason Stankowski:]

Okay. And then great job on the operating costs, it's great to see that continue to come in. Appreciate the guidance on it, continuing to trend lower. And then, I guess the last one plus a little one. The Syapse going backwards in the year, is that a function of kind of the onetime medical thing look back, or I know they changed the business model. And clearly someone decided to put $68 million so they're not expecting a negative path going forward. But it's just surprising to see that size of an investment with -- I wouldn't have expected that investment to be one of the ones that's going -- slipping backwards for us. Is there any context you can put on that? Is it the revamping of the business model, or...

[Mark Herndon:]

Yeah. Yeah. It's -- I would characterize that as the onetime event that we talked about in 2018.

[Jason Stankowski:]

Okay. Okay. So they had a regular kind of plus in the 2019 quarter so...

[Mark Herndon:]

Yes. Blip yes.

[Jason Stankowski:]

Yeah blip. Okay. Positive blip. All right. And then lastly can you -- just wondering who you guys are using for the buyback?

[Eric Salzman:]

Yeah we'll be using Stifel.

[Jason Stankowski:]

Stifel. Great. Okay. Good job. Keep up the good work. Oh and then last I'll leave you with this. You guys have been -- and I missed the first couple of minutes of the call for -- I had a wrong number. But did you talk at all about -- you obviously had one of the two exits that you thought were imminent at least in the near term. Is the second one still on track? And any thoughts around timing third quarter fourth quarter?

[Eric Salzman:]

Yeah. So we -- so on our last call you're right, we said there was one company that we were cautiously optimistic about where it was and that was the Zipnosis deal. And then we mentioned in the last quarter that there was another company that had just begun a process. So that was two months ago that call. The company is progressing in its sales process as you would expect. And I wouldn't give a timing guidance on when that could close or would close. But we remain optimistic of that process, but it is early because it's only been probably less than 60 days.

[Jason Stankowski:]

Okay. So do you get insight into that process that would make you less or more encouraged along the way, or are you just going to kind of wake up and find out what happened like the rest of us?

[Eric Salzman:]

No, no. We -- yeah, we're on -- we get regular updates. We know what's happening. We speak to management team. We speak to the different advisers involved. I think as you know even in this robust M&A environment deals are -- deals can be precarious. Nothing is done until it's done. And this is at the beginning of the process. So we don't want to get ahead of our skis on it. We will update you kind of as appropriate as it relates to where this -- where the process is at our quarterly calls. So...

[Jason Stankowski:]

Okay. And nothing to update on any new companies entering the process at this point in time?

[Eric Salzman:]

What we mentioned -- we mentioned that there were three other companies that we're having preliminary conversations with investment bankers about strategic options. We said that none of them have formally launched the process, but they're having those conversations now. That is -- again we're very active in those discussions at a Board level with the management teams.

[Jason Stankowski:]

Right. That's great to hear. Thanks guys.

[Mark Herndon:]

Thanks.

[Eric Salzman:]

Thank you.

[Operator:]

Thank you, Jason. Our next question comes from Lee Alpher from Hammock Investments. Lee, your line is now open. Please go ahead.

[Unidentified Analyst:]

Thank you. I may have missed this. But on Bright Health will you be locked in at all once they go public?

[Eric Salzman:]

Yeah. It's a good question. Mark, do you want to go ahead.

[Mark Herndon:]

Yeah, either way. Yeah, so we hold a preferred interest and what is typical in those arrangements and -- is that if they were to have some type of event, liquidity event we could be locked in for a period of time. So that would be I would call it the normal course.

[Unidentified Analyst:]

Have you already -- I'm not asking you to disclose it, but have you already worked out those terms with them, or is it to be worked out?

[Eric Salzman:]

So the preferred security has standard kind of lockup provisions that we're a party to that agreement. So we would live by whatever provisions are in that. But a lot of times things change between that point in time and if there were to be a transaction. But I think you can assume that we would be treated -- if there were to be an IPO of that company we would be treated like any other kind of institutional preferred investors from that perspective.

[Unidentified Analyst:]

Okay. Great. Thanks.

[Eric Salzman:]

Yeah.

[Operator:]

It looks like we don't have any further questions. So if I hand back over to the management team for any closing remarks.

[Eric Salzman:]

Sure. Thank you. Thanks for joining us on the call today. Thank you for your continued interest in Safeguard. And we'll be following up for kind of one-on-one calls over the next week or so. So if you're interested, please reach out to us and we look forward to continuing the dialogue with you. Have a good evening.

[Operator:]

This concludes today's call. Thank you for joining. You may now disconnect your lines.