Safeguard Scientifics, Inc.
Q4 2015 Earnings Call Transcript
Published:
- Operator:
- Good morning ladies and gentlemen and welcome to Safeguard Scientific’s Fourth Quarter and Full Year 2015 Financial Results conference call. All participants will be in a listen-only mode. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. To withdraw your question, press the pound key. Please note this event is being recorded. I would now like to turn the conference over to John Shave, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.
- John Shave:
- Good morning and thank you for being with us. Joining me on today’s call are Steve Zarrilli, Safeguard’s President and CEO, and Jeff McGroarty, Safeguard’s Senior Vice President and CFO. During today’s call, Steve will review highlights from the fourth quarter and full year 2014, as well as other developments at our partner companies, then Jeff will discuss Safeguard’s financial results and strategies. After that, we will open the lines to take your questions. As always, today’s presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties, included but not limited to the uncertainty of future performance of our partner companies, the risks associated with our acquisition or disposition of interest in partner companies, risks associated with our decisions about the deployment of capita and the effect of regulatory and economic conditions generally, as well as the development of the healthcare and technology markets and other uncertainties that are described in our SEC filings. During the course of today’s call, words such as expect, anticipate, believe and intend will be used in our discussions of goals for events in the future. Management cannot provide any assurance that future results will be as described in our forward-looking statements. We encourage you to read our filings with the SEC, including our Form 10-K which describe in detail the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today. Now here is Safeguard’s President and CEO, Steve Zarrilli.
- Stephen Zarrilli:
- Good morning and thank you all for joining us for an update on Safeguard and our partner companies. For today’s conference call and webcast, I’m going to blend a review of the company’s performance in 2015 with our outlook and key objectives for 2016. In 2015, Safeguard’s partner companies recorded steady, meaningful growth in aggregate revenue. At $449 million, aggregate revenue of our partner companies was up 25% from 2014 and at the top end of our guidance for the year. Revenue growth at this pace was realized because these businesses provided real solutions for the issues and opportunities faced by their customers in enterprise computing, financial services, digital media, and healthcare. In addition, our partner company management teams achieved numerous operating and development milestones. During the course of the year, we kept you apprised of the dozens of product launches and platform enhancements, customer wins, regulatory approvals, strategic partnerships, industry awards, and financing transactions for our partner companies. Many of these highlights are summarized in our press release issued this morning. Safeguard puts more than capital to work when we acquire positions in our partner companies. The extensive experience of our deal team allows us to provide strategic and operational support to these high potential growth stage businesses. The Safeguard team is invested in these achievements just as much as the entrepreneurs managing our partner companies. In 2015, we deployed approximately $52 million of capital in eight new partner companies averaging $6.5 million per each new deployment. Those totals included fourth quarter deployments of $11 million in Cask Data, an open source software company, and $7 million in Zipnosis, a developer of white label virtual care platforms for healthcare systems. Follow-on financings during the year totaled approximately $33 million in 12 existing partner companies averaging $2.8 million for each follow-on funding. As of December 31, 2015, we had interest in 29 partner companies The pace of exit transactions was uneven in 2015 and more importantly below our expectations. Our goal remains to create greater consistency with respect to exit activity; however, we also realize that there are times when the dynamics of the market may temporarily disrupt our objectives. These hurdles should not imply a decline in the value of our assets. For 2015, we targeted a minimum of two profitable exits. We delivered two exits, DriveFactor and Quantia, in the second and third quarter respectively for total proceeds of $16.9 million in cash. These transactions could provide additional cash totaling $2.3 million of escrowed amounts are received as expected in mid-2016. The DriveFactor exist produced a two times cash-on-cash return. The Quantia exit was not profitable, but we were able to recover over half of our funded capital. In addition, exits from prior years generated milestone and escrow payments during 2015 totaled $7.5 million. A variety of factors led to a shift in timing of the expected 2015 exits. We expect 2016 to be a more active period for Safeguard from an exit perspective. Market turbulence and an uneven pace of exits likely have contributed to weakness in Safeguard stock. At year-end, shares of Safeguard closed at $14.51 and the decline has continued in 2016. This weakness wasn’t confined to Safeguard. Every one of the six indices of our peer companies that we monitor was significantly in negative territory in 2015 relative to broader market indices. At this point in 2016, the prospect of meaningful near-term exits has improved. Our deal teams have been very active and Safeguard’s partner companies are attracting interest from potential acquirers as these parties seek additional capabilities to grow their businesses. We are working diligently to create profitably turnover in Safeguard’s portfolio over the next 12 months. Management believes that 2016 will be an impactful year for Safeguard. We anticipate that the underlying interest in many of our partner companies will continue to strengthen and bring opportunity for monetization. Strategic acquirers will be searching for additional ingredients for growth, and our partner companies provide real opportunities to them. We also believe that the climate for deploying capital will be fruitful from a valuation perspective given the overall market dynamics that currently exist, which are expected by many market analysts to continue throughout the year. Our core strategic goals for 2016 are to selectively deploy capital in our target markets of healthcare and technology; to provide strategic and operational support to enable partner companies to achieve significant development milestones; to drive continued growth of our partner company aggregate annual revenue and operational scale and efficiencies, and to realize significant cash-on-cash returns from well-timed exit transactions. As you would expect, a variety of matters shapes Safeguard’s capital allocation strategy and decisions on returning capital to shareholders. Our current $25 million share repurchase program is a flexible and appropriate element of capital allocation given Safeguard’s current market valuation and resources. From its authorization in 2015 through December 31, 2015--I’m sorry, from its authorization in July 2015 through December 31, 2015, we have repurchased approximately 300,000 shares of common stock for $5 million in open market transactions. As Safeguard continues to seek achievement of exits, we will continue to evaluate the capital allocation strategy to ensure there is a proper balance with respect to the cash needs of the business and the opportunity to return further capital back to our shareholders. Safeguard is well positioned in 2016 to grow our valuable portfolio of partner companies and to realize significant gain from an increased pace of exit transactions. Now here is Jeff with an update on financial performance and metrics in the quarter and the year.
- Jeffrey McGroarty:
- Thanks Steve. As Steve mentioned earlier, at December 31, 2015 we had 29 partner companies. The cost of our interest in those companies was $301.2 million. The carrying value of these partner companies at year-end was $167.5 million. Safeguard’s reputation for building high potential growth-stage businesses in our target markets of healthcare and technology means our pipeline is full with prospects. In 2015, our deal teams screened more than 950 companies, resulting in more than 85 qualified prospects, eight issued term sheets, and eight closed deals. At this point in 2016, deal team activity remains high and we expect to continue to evaluate many prospects to identify promising companies at attractive valuations which allow us to create shareholder value. During 2015, we realized initial cash proceeds of $9.1 million and $7.8 million from the sales of DriveFactor and Quantia respectively. These amounts exclude aggregate proceeds of $2.3 million which are expected to be held in escrow until mid-2016. Exits in previous years generated milestone and escrow payments during 2015 of $2.9 million for Crescendo Bioscience, $1.7 million for Elvarex, and $3.3 million for ThingWorx. During the year, we deployed $51.6 million of capital in eight new partner companies. Fourth quarter new deployments were $11 million for Cask Data and $7 million for Zipnosis. Follow-on fundings during the year totaled $33.3 million to support the growth of 12 existing partner companies. Fourth quarter follow-on fundings were $1 million for AppFirst, $0.7 million for Hoopla Software, and $0.6 million for WebLinc. In 2015, corporate expenses excluding interest and stock-based compensation expense declined to $15.7 million from $17 million in 2014 due to lower professional fees and employee costs. We expect corporate expenses for 2016 to range between $16.5 million to $18 million. Safeguard’s cash, cash equivalents and marketable securities totaled $73.6 million at year-end. The carrying value of outstanding debt was $51.7 million, resulting in net cash, cash equivalents and marketable securities of approximately $21.9 million. Aggregate partner company revenue for 2015 was $449 million, up from $359 million in 2014 and $290 million in 2013 for those same partner companies. These figures do not include new partner companies in which Safeguard initially deployed capital in 2015. For 2016, aggregate partner company revenue is projected to be between $500 million and $525 million, which includes revenue for all partner companies in which Safeguard had an interest at January 1. Our aggregate revenue guidance represents 8 to 13% growth. When you exclude a few of our larger, longer tenured companies, the rate would be approximately 20 to 25%. Additionally, our companies experienced some softness beginning in Q4 and were concerned about a few quarters of potential slowing due to the macroeconomic environment, so when developing 2016 budgets they were somewhat conservative. Aggregate revenue for the same partner companies was $465 million for 2015 and $366 million for 2014. Aggregate revenue for all years reflects revenue on a net basis. Revenue data for certain partner companies pertain to periods prior to Safeguard’s involvement with those companies and are based solely on information provided to Safeguard by those companies. Safeguard reports the revenue of its equity and cost method partner companies on a one quarter lag basis. Safeguard’s financial strength, flexibility and liquidity are evident on this slide showing the company’s balance sheet at December 31. The balance sheet also reflects the effects of our current share repurchase authorization for us to $25 million that was initiated during the third quarter of 2015. As Steve mentioned, as of December 31, we had repurchased approximately 300,000 shares of common stock for an aggregate cost of $5 million in open market transactions. From year-end through March 2, we repurchased approximately 424,000 additional shares for an aggregate cost of $5.4 million. Now here’s Steve to lead us through the Q&A segment of the call.
- Stephen Zarrilli:
- Thanks Jeff. Operator, let’s open the phones for any questions.
- Operator:
- [Operator instructions] Your first question comes from the line of Bob Labick with CJS Securities. Your line is open.
- Bob Labick:
- Good morning.
- Stephen Zarrilli:
- Good morning, Bob.
- Bob Labick:
- Hi. Steve, you touched on this in your opening remarks, and I have to ask - last call, you talked about potential sizeable exit by the end of the year, and obviously nothing’s been announced yet. Can you maybe just elaborate a little bit on what has happened? Does it relate to the interest from participants, did they walk away because of market volatility, was there financing? What are the factors there, and what gives you the confidence in the next three to six months we should see something happen?
- Stephen Zarrilli:
- Well, with respect to the timing of any transaction, as you can imagine, some of the elements that go into assessing one’s interest and the valuation that a party may pay for a business is going to be dependent on a couple of different factors. Sometimes it’s wanting to see the solidity of revenue for a particular year so that as they base valuations off of next year’s projections, they will have a better sense of what that revenue growth might look like. Sometimes they are looking for the completion of an approval process that the company may be going through, especially if it’s in the healthcare segment, that will influence potential valuation, and in many cases it’s to our benefit to allow some of those elements to mature a bit longer - it could be an additional 90 days or so - for that valuation discussion to have further elements that would benefit us and our shareholders. So we’re still very bullish in 2016, Bob. There’s nothing that’s changed my mind with regard to the profitability that we achieve with the companies that are currently in active processes, and timing is going to be a little bouncy. The general market has caused people to take a little bit of a harder look at certain things, but the good news is we’re not seeing any evidence or sense that those harder looks are resulting in something that would yield a lesser result for Safeguard.
- Bob Labick:
- Okay, great. Very helpful there. Then looking at some of your pre-2008, call it legacy holdings, clearly they’ve been around longer than the average and the expected holding period. Can you talk a little bit about those? Is there an opportunity to potentially get back collectively their cost or something close to that, and even if not, have you guys thought about does it make sense to cut bait on these older holdings and reinvest in some of the current themes that you’re invested in?
- Stephen Zarrilli:
- Yes, it’s a good question. In fact, we just had a conversation with our board this week about these types of situations. We have three companies today that we refer to as legacy, and they are placed in that bucket because they predate anyone here on the management team as to when those decisions were made. They were made in business models that today are companies that we would probably not be pursuing under the current strategy. Those companies, and there are three of them, have had challenges in developing significant growth trajectories over the last couple of years. In fact, Jeff alluded to the fact that when you look at our revenue growth estimates for 2016 and you remove those three companies specifically, you get back to a normalized range of 20 to 25%, which is in line with what we had last year. So what we need to do with those three companies is actually come to a conclusion as to what we want to do with them, and to your point, Bob, one of the debates that we’re having internally, which will come to closure in short order, is do we take the opportunity to find a new home for our interest in those companies, even if it’s just a return on capital for a couple of those companies, because we know that we could put that capital to work in other areas of the market that we think are going to be more highly profitable for our shareholders and will be more consistent with the themes that we’re pursuing in the marketplace.
- Operator:
- Your next question comes from the line of Jim Macdonald with First Analysis. Your line is open.
- Jim Macdonald:
- Good morning guys. Any specific goals for exits in 2016? I know it’s a tough--
- Stephen Zarrilli:
- We have put forth a specific number. There is a number of things that are fairly fluid, and in order to be balanced with regard to setting expectations, I have not put a number out there in specificity.
- Jim Macdonald:
- Okay, and just in--maybe this is hypothetical, but let’s say the markets get tough here and you can’t get exits done, you have about $70 million in cash to deploy, that might be gone this year. What’s your thought process around what would happen if you can’t get exits done?
- Stephen Zarrilli:
- Well, I haven’t spent a whole lot of time thinking about that, Jim, because I’m highly confident we’re going to get exits done this year, so let me underline the word highly. But if in the event that we were slowed in our process, there are other matters that we can pursue to augment capital resources in order to continue to make sure that we’re putting money to work on a consistent basis. One of the things that we’re making sure that we’re staying mindful of is we actually believe 2016 will be a good year to put capital to work, and it’s because of the macroeconomic elements that are playing out that are starting to adjust valuations for certain earlier stage enterprises that are looking for capital and for which we are targeting, and for where valuations are becoming more rational by the day. While we haven’t potentially used leverage on our balance sheet in any significant fashion in the past, and not that I’m--[audio lost].
- Operator:
- Ladies and gentlemen, please stand by. The speakers have disconnected. Again ladies and gentlemen, please stand by. Thank you for your patience. Ladies and gentlemen, please stand by. There will be a brief delay in today’s conference. Thank you for your patience. You have now been connected.
- Stephen Zarrilli:
- Hello, we’re sorry. For some reason, we lost the signal. Jim, I’m going to start with re-answering your question, if that’s okay.
- Jim Macdonald:
- Great, thanks.
- Stephen Zarrilli:
- So the question is if we were not to see--and I’m not sure where you lost me in the conversation, so I’m going to try to do the entire answer over again. If we were to see any slowdown in our expected inflows this year with regard to monetization, there are a couple of things that we could be doing to augment our resources to take advantage of the opportunities that we see in 2016. One of those--and we’ve already talked to a number of parties where we could augment some borrowing capacity in order to continue to provide capital into the market. We actually think ’16 is going to be an interesting year to put capital to work. But I am highly confident that we are not going to need to be going down that path, given what we see as opportunity within our portfolio today as it relates to exits in 2016, and obviously we’ll be keeping you apprised but I really want to underscore highly, the word highly in my statement. We are highly confident about our exit opportunities.
- Jim Macdonald:
- Okay, great. Maybe could you talk to us a little about MediaMath and what your thoughts are there now?
- Stephen Zarrilli:
- MediaMath continues to grow, and we continue to pursue opportunities to either have a partial or a full monetization where appropriate. We’ve been working with the company, they’ve been very helpful in our endeavors there. MediaMath potentially could be looking for other capital providers who are later stage players, that could provide them with growth capital for other initiatives, and we play that into how that might look with regard to our ownership stake today. MediaMath understands that we’re an earlier growth capital provider. Our niche is to put money into a company like MediaMath when we did it with them doing $3 million in revenue back in 2009, that after about a five to six-year period of time with a high growth company like MediaMath, it’s time to turn over our capital and to put it back into the core themes that we pursue and at the core stages of growth that we are more expert in. So that conversation, it’s not only a conversation, there’s active tasks at work today that are trying to figure out ways in which we can achieve our goals and for MediaMath to be able to continue their growth initiatives as they go forward.
- Operator:
- Your next question comes from the line of Josh Nichols with B. Riley. Your line is open.
- Josh Nichols:
- Yes, hi. I just want to ask what’s your take on the company’s competitive position whenever it’s bidding on new investment opportunities. What can you offer that you think other players can’t in the space?
- Stephen Zarrilli:
- Thanks Josh. The answer that is most relevant to that question is, first, it is a competitive marketplace when we’re looking for opportunities, so we do not take that lightly. So while terms of the financing will always be one of the key elements, valuation, the preferences that we may want, the governance features that we may ask for, the other elements that seem to resonate to allow us to potentially get it over the goal line in these competitive environments will be our intimate knowledge of the specific space that the company operates in and what our track record has been in working with other entrepreneurs in that regard, whether or not we have a particular point of view that will help them or relationships that will help them with the growth of their business, some of the internal resources that we’re able to commit to them, what we call free of charge in the areas of finance and operations and marketing. So those elements do come into play and serve as additional elements of competitive advantage for us, but I don’t want anyone on this call to lose sight of the fact that we are out there every day competing for these deals, so we have to compete not only on those special ingredients but we also have to remain competitive as it relates to valuation and other dynamics. Having said that, though, we have walked from a number of opportunities where we just couldn’t get comfortable with valuation. We do remind ourselves that if we can get in at the right number, it just makes our job that much easier to produce the profits that our shareholders expect.
- Josh Nichols:
- Great. The company has been buying back shares pretty aggressively since the price dipped. What’s your take on the carrying value of the company’s assets versus the intrinsic market value?
- Stephen Zarrilli:
- So today, as Jeff reported, the total carrying value of our underlying assets is about two-thirds of our cost, I believe the number was, cost of approximately $300 million and carrying value of about $170 million. As you might know, carrying value for us is a result of taking cost and then applying against that cost on a quarterly basis our share of any book losses that one of our partner companies may produce and we have to take our share and reduce our cost by that amount. That’s usually the reason for the delta between cost and carrying value. When we look at our historical track record of producing at least 2x returns, and you just take the pure cost knowing that we have been on the low end of scenarios where we have lost money, and just apply that 2x return to the $300 million, that would imply potentially a $600 million value for the collection of those 29 companies that we have today. Obviously some maybe greater than 2x, a few may be less than 2x, even when we’re just returning capital in a situation where we don’t think the company has growth opportunity. But on average, our historical track record has been at that 2x number and we’re looking to apply--and you can use that in applying a forward-looking multiple to what the cost of the current portfolio is.
- Operator:
- Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Arnold Ursaner with Ursaner Capital. Your line is open.
- Arnold Ursaner:
- Hi, good morning, Steve. I just want to start with a follow-up to Bob Labick’s question. You mentioned several times you’re highly confident on the two transactions you thought would close at year-end. To be as clear as you can be, was it a pricing dynamic or pricing change that caused you to slow these down? You mentioned also some milestones, or was it a financing issue at the part of the buyer?
- Stephen Zarrilli:
- It was neither. It was the desire to see certain matters mature within the company in order to complete our discussions around valuation.
- Arnold Ursaner:
- Okay, and I think you said 90 days or so, and these were two you had highlighted at your analyst day at the end of November, so we’re already 90 days past that. Does highly confident mean we should expect these in the next three to four months?
- Stephen Zarrilli:
- In the first half of 2016, and Arnie, there was one that we were expecting before year-end, not two.
- Arnold Ursaner:
- Okay. A couple of other clarifications, if I can. It sounds like your three legacy companies are slowing down a fair amount, so two clarifications. One is, I assume those are not among your sale candidates; and number two, would you have declining--would those three legacy companies be expected in 2016 to have declining revenues?
- Stephen Zarrilli:
- Well, let’s parse that out. First of all, those legacy companies have had slowing, if not damn near no growth in the last couple of years, so we do recognize that those business models need to be rationalized as to how we ultimately look at them within the construct of the portfolio and their valuations. When I talk about the landscape for exit opportunity in 2016, while they will be part of the mix, they’re not the ones that I would focus our shareholders in getting excited about. Obviously we need to rationalize our ownership in those companies, but they are not going to produce the types of returns that our shareholders are expecting. There are other matters that we are pursuing that will provide what we believe to be the types of return profiles that our shareholders are expecting.
- Operator:
- Your next question comes from the line of Lee Zimmerman with Baird. Your line is open.
- Lee Zimmerman:
- Hi Steve. Could you talk about--you kind of gave me and the Street’s put a value on MediaMath between $150 million and $200 million to you guys. With the weakness in the markets, where would you put that value at now, and could you talk about the value of Putney?
- Stephen Zarrilli:
- So when we look at the value of MediaMath, one of the critical components or matters that we look at is certain public company comps, and most notably a company by the name of Criteo, which is a NASDAQ traded business. Criteo reported recently their year-end results. They were very strong. They have a business model is that is very similar to MediaMath, and their valuation paradigm has seemed to remain relatively steady, if not improved a little bit since the end of the year. So when we look at MediaMath, we take a discount to some of those valuation paradigms and then apply to what we think are appropriate elements of MediaMath’s business in order to try to gauge a value for the business. Based upon what we’ve done thus far, we don’t believe that our previous communication of value expectations for MediaMath have changed in any measurable way.
- Lee Zimmerman:
- And Putney?
- Stephen Zarrilli:
- With regard to Putney, Putney should be viewed as a valuation that is framed as a multiple of revenue, and as we’ve communicated in the past, that range, depending on how one looks at the multiples of perceived competitors or comps in the marketplace, could be anywhere from 2 to 4x revenue.
- John Shave:
- We now have a question from the web from Lee Alper, and Lee has requested an update regarding Teva’s sales of Zecuity.
- Jeffrey McGroarty:
- Yes, I’ll answer that one, Steve. Teva is only required to notify us when their sales on the product exceed $100 million. We don’t get any interim updates from them, so we don’t really have any more visibility on how that’s going, more so than anyone else outside of Teva.
- John Shave:
- With that, are there any more questions to be asked?
- Operator:
- There are no further questions from the phone lines. I will now turn the call back over to Steve Zarrilli.
- Stephen Zarrilli:
- Thank you, Operator, and thank you all for your continued interest and confidence and support in Safeguard. Good day.
- Operator:
- Thank you ladies and gentlemen for your participation. This concludes today’s conference call. You may now disconnect.
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