SuRo Capital Corp.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GSV Capital Corp.'s Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. This call is being recorded today, Wednesday, November 8, 2017. I will now turn the conference over to Nicholas Franco, Vice President at GSV Capital. Please go ahead.

[Nicholas Franco:]

Thank you for joining us on today's call. I'm joined today by GSV Capital Executive Chairman, Michael Moe; and Chief Financial Officer, William Tanona. Please note that a slide presentation that corresponds to today's prepared remarks by management is available on our website at GSV-C-A-P.com, gsvcap.com under Investor Relations, Presentations. Today's call is being recorded and broadcast live on our website, gsvcap.com. Replay information is included in our press release issued earlier today. This call is the property of GSV Capital Corporation, and the unauthorized reproduction of this call in any form is strictly prohibited. I would just like to call your attention to customary disclosures in today's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements which relate to future events or our future performance or our financial condition. These statements are not guarantees of our future performance or future financial condition or results. It involve a number of risks, estimates and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including, but not limited to, those described from time to time in the company's filings with the SEC. Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of GSV Capital's latest SEC filings, please visit our website at gsvcap.com or the SEC's website at sec.gov. Now I'd like to turn the call over to Michael Moe.

[Michael Moe:]

Thank you, Nick, and good afternoon. We're pleased to share results of GSV Capital's third quarter 2017. First, I will review the recent quarter, including the several key initiatives that we're undertaking to enhance shareholder value. And I'll also discuss notable developments in the portfolio, including GSV Capital's top positions. I'll then turn the call over to Chief Financial Officer, Bill Tanona, to go into greater detail on some of GSV's initiatives and to provide an in-depth financial update. Bill will also provide a summary of the transactions we completed in Q3 and subsequent to quarter end. At the end, we'll open up the call for questions. As we've known over the last 2 earnings calls, the GSV Capital team is laser focused on specific proactive steps to enhance shareholder value, as we continue to concentrate the portfolio around blue-chip venture-backed companies with a line-of-sight to an IPO liquidity event. As part of ongoing expense reduction efforts, GSV Asset Management has agreed to voluntarily waive its management fee by 25 basis points in 2018. This is consistent with the fee waiver offered in 2017. On a related front, management and Board of Directors will review GSV Capital's incentive fee formula with the objective to better align shareholder and management interest. We anticipate implementing revised incentive fee formula prior to announcing our financial results for the fiscal year ending December 31, 2017. As of today, GSV Capital has nearly completed the $5 million discretionary share repurchase program announced in conjunction with the company's second quarter earnings report. GSV Capital's Board of Directors has authorized an expansion of the repurchase program to an aggregate of $10 million, and an extension through to November 6, 2018, whichever comes first. Finally, we are evaluating options to address GSV Capital's convertible debt outstanding. This activity has been supported by liquidity from recent closed transactions, including shares sold in Chegg, Snap and Spotify in the third quarter and subsequent to quarter end. With that, please turn to Slide 3 through 5 for a review of key developments in the portfolio. At the end of the third quarter, net assets totaled approximately $209 million or $9.69 per share. This is up from approximately $202 million or $9.11 per share at the end of the second quarter and $192 million or $8.66 per share at 2016 year-end. Of our 5 key investment themes, Cloud Computing and Big Data is the largest commitment, comprising approximately 36% of the total portfolio at fair value, excluding treasuries; Education Technology represents 34.5% of the portfolio; Social Mobile is 18.2%; Marketplaces is 10.8% and Sustainability is approximately 1%. As of September 30, 2017, there are 37 companies in our investment portfolio compared with 46 a year ago. This reflects GSV Capital's continued strategy of consolidating the portfolio around top positions in later-stage companies. To emphasize this point, our top 5 positions, Palantir, Jamf, Spotify, Coursera and Dropbox account for approximately 48% of the total portfolio at fair value, excluding treasuries. By comparison, this approaches the weighting of the top 10 positions at the same time last year, which accounted for approximately 55% of the portfolio at fair value, excluding treasuries. Historically, leading portfolio positions with runway to IPO or a liquidity event have been a positive catalyst for our stock. In fact, GSV Capital traded at a premium to NAV in advance of high-profile IPOs of Facebook and Twitter. Our largest position continues to be Palantir, a disruptive Big Data analytics and security company that works with leading government, commercial and nonprofit institutions around the world. It accounts for approximately 13% of our total portfolio at fair value. IDC estimates that Palantir operates in a sector that'll grow from $150 billion in 2017 to over $210 billion in 2020. The company's applications range from cyber security to capital markets intelligence, health care delivery and defense. Importantly, while Palantir launched with a focus on large government contracts, CEO Alex Karp has indicated that corporate customers now represent over half of its revenue. Key clients include Airbus, AXA, Merck, BP, Deutsche Bank and GlaxoSmithKline. Karp has suggested publicly that Palantir is positioning for an IPO, knowing in February that he expects the company to breakeven by the end of 2017. To date, Palantir has raised $1.9 billion of equity funding from a syndicate of investors including Founders Fund, In-Q-Tel and Tiger Global. GSV's second largest position is Jamf, a pioneer in enterprise IT management platform for Apple products. We are pleased to report that on October 11, the company announced a definitive agreement to be acquired by Vista Equity Partners, a leading private equity firm focused on software data and technology-enabled businesses. The transaction is expected to close in the fourth quarter of 2017. While the financial terms have not been disclosed, if completed, we believe the transaction will represent a return of approximately 3.5x on GSV Capital's investment, which is reflected in our third quarter valuation. JAMF's other primary backer is [indiscernible] Partners. GSV's third largest position is Spotify, the world's leading music streaming platform, which now accounts for over 140 million users and 60 million paying subscribers across 60 international markets. To date, it has raised over $1.6 billion with a syndicate of investors, including Accel Partners, Founders Fund, Technology Crossover Ventures and Goldman Sachs. According to multiple reports, Spotify is considered a direct listing on the New York Stock Exchange in late 2017 or early 2018. At third quarter end, GSV Capital valued it's position in the company at approximately $32 million or 11% of the total portfolio at fair value. GSV's third quarter valuation implies a value for Spotify of approximately $14 billion. But we're seeing growing interest in the company's potential listing approaches. On September 27, [indiscernible] reported that prior trades were valuing the company at about $16 billion. Since then, CNBC, Forbes, Yahoo Finance have said estimates of the company's value could jump to $20 billion when it goes public. While we're pleased to see a growing excitement around Spotify, the company's long-term valuation growth has been driven by outstanding fundamentals. Spotify reports that since 2014, listening hours per user are up 25%, and the average number of hours each listener streams per week has increased 37% over the same period. In other words, not only are people spending more time on the platform, they're engaging with a broader range of content. It's a double play. Not coincidentally, since 2014, Spotify has invested heavily to improve its core technology, included advanced recommendations engine powered by artificial intelligence that tees up new music that people love. At the same time, as the company continues to renegotiate royalty agreements with Lee Record Labels, including a crucial deal signed with Warner Music Group in August, we're seeing a positive impact on gross margins. The net result is that Spotify appears to be well-positioned for long-term open-ended growth in a market that Goldman Sachs predicts would double to $12.3 billion by 2020. GSV Capital's fourth largest position is Coursera, the world's leading digital education platform. Today, Coursera reaches over 27 million learners with more than 2,000 courses from 149 premier global universities, including Stanford, Yale, Princeton, the University of Pennsylvania, Peking University and a number of others. On the one hand, Coursera has capitalized on a new technology fundamentals, enabled people to learn anytime, anywhere, but is also addressing accelerating lifelong education demands sparked by the twin forces of globalization and automation, that are making craps lessons a new reality. Kaizen is a Japanese business term meaning continuous improvement, and as is a case in corollary is GSV's concept of Kaizen EVU, which means continuous learning. In a world where smart machines are now [indiscernible], you can no longer fill up your knowledge tank until age 25 and drive off to life. You got to continually need to replenish it. The fact that workers must be filling knowledge tanks continuously, but will not be feasible to drop by the way and take on massive amounts of debt just to stay current and educated. Coursera has the potential to democratize global access to high-quality education with certificates from leading academic institutions that costs as little as $29, and an accredited degree in high demand fields like Data Science which start at $15,000. Lucrative recurrent revenue engagements with enterprise customers including IBM, BNY Mellon, Boston Consulting, AXA and L'Oreal compliment its consumer offering. Coursera represents approximately 6% of the GSV Capital portfolio at fair value. In June, it completed $64 million Series D financing at a valuation of approximately $800 million as reported by PitchBook. To date, the company has raised $210 million from a syndicate of investors that include NEA and Kleiner Perkins. Dropbox rounds out the top 5, representing about 6% of GSV Capital portfolio at fair value. It continues to be widely viewed at the top by appeal candidate of college UI imports from Bloomberg, Business Insider and others that the company is likely to hire Goldman Sachs as a lead advisor. The fundamentals speak themself. It's the fastest software-as-a-service business in history to reach $1 billion revenue run rate according to IDC. It reported that it's profitable on an EBITDA basis since April, and it counts over 500 million users and 200,000 business customers, including a majority of Fortune 500 companies. Today, Dropbox has raised over $600 million from a syndicate of investors includes Sequoia, Benchmark, Accel, Goldman Sachs, BlackRock, Greylock, Morgan Stanley and T. Rowe Price. Outside of the top 5, I'd like to call your attention to Lyft, which announced on October 19 that it raised $1 billion at $11 billion valuation. The financing was led by CapitalG, a venture investment arm of Alphabet/Google. GSV Capital's third quarter valuation implies a value of approximately $6.7 billion for Lyft. That position is currently market fair value of $8.8 million. We remain extremely bullish on Lyft's long-term growth potential. The company reported its 500 millionth ride in October, and it has already completed more rides than all previous years combined. Lyft is now available to 95% of the U.S. population, up from 54% at the beginning of the year. To date, Lyft has raised over $3.6 billion from investors including Andreessen Horowitz, General Motors, Founders Fund, KKR, Alibaba, Alliance Bernstein, Coatue and others. Please turn to Slide 6. According to Renaissance Capital, there have been 131 U.S. IPOs to date, a 37% increase over the same period last year, and nearly $32 billion proceeds were raised to date are up over 88% year-over-year. For context, just 102 U.S. companies went public into all of 2016, and only 40 were venture-backed. There have been 46 VC-backed IPOs in 2007 teeing to date. In 2017, 17% of all IPOs were priced above the range, and 62% were priced within the range, and the average one day pop is 13%. Overall IPO performance is up 29%, which mirrors the positive movement in the broader market this year, and more specifically NASDAQ in technology. We maintained a strong conviction that GSV Capital's shareholders will benefit from the tailwinds as we continue to concentrate the portfolio on what we believe are some of the world's most dynamic venture-backed private companies. With GSV Capital stock currently selling at roughly 40% discount to NAV as of November 7, we believe there is great and compelling risk reward opportunity for investors. Thanks for your attention. And with that, I'll hand it over to Bill Tanona.

[William Tanona:]

Thanks, Michael. Today, I'll provide a financial overview of our results, followed by an update on our share repurchase program, comments on our expense-reduction initiatives and our current liquidity position. Please turn to Slide 7. We ended the quarter with an NAV per share of $9.69. A breakdown of the change in NAV during the quarter is shown on Slide 7, that is consistent with our financial reporting. In sum, the $0.58 per share increase in NAV during the third quarter was driven by $0.71 per share of net change in unrealized appreciation of investments, $0.05 per share of net realized gains, $0.12 per share of accretion from our share repurchase program, all of which was partially offset by $0.30 per share of net investment losses or operating expenses. As we announced on August 8, 2017, GSV Capital's Board of Directors authorized a $5 million discretionary share repurchase program. During the third quarter, the company repurchased 574,109 shares of GSV Capital common stock for $2.8 million. After quarter end and through November 7, the company repurchased an additional approximate 300,000 shares of GSV Capital common stock for $1.7 million. As Michael mentioned, our Board of Directors has authorized an expansion of the repurchase program to an aggregate of $10 million and an extension through November 6, 2018, whichever comes first. This leaves us with approximately $5.5 million in aggregate amount of shares that may be purchased under the program after considering repurchases subsequent to quarter end. Moving on to expense reduction initiatives. Management recognizes that our operating expenses diminish our net asset value and reduce our overall NAV performance. As a result, we have been focused on opportunities for us to reduce our overall operating expenses. Year-to-date, our overall operating expenses, excluding the incentive fees, have declined 18% or $2.8 million year-to-date versus the same period a year ago. As part of these expense reduction initiatives, GSV Asset Management voluntarily agreed to a 25 basis point management fee waiver for the 2017 fiscal year. Year-to-date, this waiver totaled over $0.5 million in savings to our shareholders. As part of our ongoing expense reduction efforts, GSV Asset Management has agreed to voluntarily waive its management fee by 25 basis points for the 2018 fiscal year as well. Furthermore, as noted earlier, management and the Board of Directors are reviewing GSV Capital's incentive fee formula with the objective to better align shareholders' and management interests. We anticipate implementing a revised incentive fee formula prior to announcing our fiscal results for the fiscal year ending December 31, 2017. Shifting over to our liquidity and our convertible notes. We ended the third quarter with $5.1 million of cash on the balance sheet. As you will see in our 10-Q, we had several subsequent events that have or will increase our overall cash position in the fourth quarter. First, we sold 3,657 shares of Spotify at $3,800 per share net to us, which resulted in approximately $14 million of proceeds. Second, we sold approximately 180,000 shares of Chegg at an average net share price of $15.69 resulting in $2.9 million in proceeds to GSV Capital. In addition to these 2 transactions, as Michael stated, we are also expecting the closing of the Jamf transaction in the next few days, which we expect will provide additional liquidity to the company. As many of you're aware, our convertible senior notes mature in September of 2018. We are evaluating options to address GSV Capital's convertible debt outstanding. This activity has been supported by liquidity from the recently closed transactions that I previously discussed. Ultimately, we expect that our cash position in the fourth quarter of 2017 should provide the company with greater flexibility regarding our desired capital structure and optimal leverage levels moving forward. Finally, I want to say a couple of words on our deferred tax liability. I would like to make a brief comment regarding our $10 million deferred tax liability that's on our balance sheet. As some of you may recall, we booked a deferred tax liability upon the conversion of GSV Corp. from a C corporation to a registered investment company, or RIC, following the 2013 tax year. This cash liability potentially could be triggered if certain events occur within a 5-year period after our conversion. The company is actively managing the portfolio to ensure that we minimize any actual tax liability paid. While there are no guarantees that this will be achieved, we have succeeded in minimizing any tax payments to date. Should we not trigger this liability through year-end 2018, we would eliminate our cash liability related to this conversion, resulting in approximately $0.47 of NAV accretion to our shareholders based on the November 7 share count. Those are my final comments. We appreciate our stockholder support of GSV Capital, and we will continue to strive to add value to our shareholders. That concludes my comments. And we'd like to turn the call over to the operator to take any questions that might be on the line. Operator?

[Michael Moe:]

It doesn't appear that there's any questions. So again, we very much appreciate our shareholder support, and we're working very hard to create value for GSV Capital and we're very bullish on how we are positioned and the opportunities in front of us, and we look forward to making a lot of progress between now and year-end in 2018. So thank you very much. Anybody has any questions, we'll follow up with in our offices. Thank you.

[Operator:]

And that does conclude today's conference. We thank you for your participation.