SuRo Capital Corp.
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Good day ladies and gentlemen and thank you for standing by. Welcome to the GSV Capital’s Second Quarter 2015 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today Thursday, August 6, 2015. I will now turn the conference over to Nick Franco of GSV Capital. Please go ahead sir.

[Nick Franco:]

Thank you for joining us on today’s call. I’m joined today by GSV Chairman, CEO and Chief Investment Officer 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 www.gsvcap.com under Investors, Events & Presentations. Today’s call is being recorded and broadcasted live on our website www.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’d also 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 future performance or financial condition. These statements are not guarantees of our future performance, or future financial condition or results and 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 the website at gsvcap.com or the SEC’s website at sec.gov. Now, I would like to turn the call over to Michael Moe.

[Michael Moe:]

Thank you, Nick, and good afternoon. We’re delighted to have the opportunity to share with you the results of a very strong quarter for GSV Capital, including achieving our highest per share NAV since inception for the second quarter in a row. First, I will review our portfolio as of June 30, 2015, then I will highlight some recent developments and update you on several investments. I’ll then turn it over to the Chief Financial Officer, Bill Tanona who will provide a brief financial overview and then open it up for questions. Let’s start with slides 3 and 4. As of June 30, 2015 our net assets were approximately $303.6 million or $15.72 per share. This is an increase from the previous NAV per share high last quarter of $15.66 and $14.86 at June 2014. Importantly we achieved this NAV per share high despite the $11.1 million decrease in the value of our remaining twitter shares held which start the quarter as our largest position. During the quarter we sold 400,000 shares of Twitter at an average net price of $51.52 recognizing approximately $13.7 million of net realized gains with resulted in a 43.5% IRR. We still hold 800,600 shares of Twitter and plan to continue to monetize our public and prior positions as we see the attractiveness our opportunities present themselves. The second quarter our top 10 positions accounted for approximately 57.4% of our total portfolio, consistent with prior quarters. Our three largest investments Palantir, 2U and DropBox represented 30% of the total portfolio. Palantir is a rapidly growing leader in Big Data analytics and security and is currently our largest position in the portfolio. Palantir’s platform has changed the way of organization data and has deployed in critical ways with government, commercial and non-profit organizations around the world. Co-followers include [indiscernible]. In late July Palantir filed a form D with SEC disclosing approximately additional $450 million under its $500 million offering of equity securities. According to the Wall Street journal and Fortune magazine, Palantir’s $6 billion valuation matches the fourth most valuable VC private company in the world. This is behind Xiaomi, Uber and Airbnb. The new plant financing was not reflected in our evaluation of Palantir for the record quarter per share in our NAV as it happened after June 30. We are excited about the strong momentum and milestones that Palantir has achieved and we believe we will continue to see strong progress. We believe 2U our second largest position continues to show strong performance, including the results that they posted this afternoon. A leader in digital education 2U partners with prestigious universities and institutions around the world to create market and deliver best of breed online degree programs through proprietary software as a service. 2U MBA UNC program was recently named the number one ranked online MBA by Princeton review. In June, 2U welcomed deputy secretary of education, Jim Shelton, as the Chief Impact Officer, and to accomplish a passionate leadership team. The progress at 2U has been impressive and we are confident that the company will continue to capitalize on the increasing global demand for anytime, affordable, high quality online education. After the market closed, 2U also announced a multi-program deal with NYU, which we view very, very positively and it is the third program with USC in the nursing area. Another notable financing among our portfolio companies this quarter was in Spotify the world’s music streaming service giant. According to Wall Street Journal the $526 million value of the company, $8.5 billion. Spotify is now available in 58 markets around the world and recently disclosed an impressive user base of over 20 million paying subscribers and 75 million active monthly users. Half of the 20 million paying subscribers were added just in the past year. There are two things that are unique and we believe impressive about Spotify besides its growth. First for a freemium model over 25% of its monthly users pay for it. Typical freemium models only convert between 1% and 10% of users into paying customers. So the fact that Spotify has more than doubled that we think is quite notable. The second given its young demographic you would expect a very high churn rate in its subscriber base, in fact it's very low. So you have got a company that’s growing very fast with a high subscription model, visible revenue growth, and we are quite pleased with Spotify and the outlook there. Please turn to Slide 6 to look at the equities in the IPO market do date in 2015. So year-to-date there has been 103 IPOs. This is approximately a 30% decrease from last year at this time. The immediate market cap of companies going public is $440 million. This is a lower market cap than we have seen recently. If you look at the pricing, pricing about 27% of IPOs are priced above the range, 53% within the range and this is I would say slightly higher than you would see in the normal market. Additionally the average one day POP of 21% is also slightly higher that what we would expect – see in kind of a normal market. Not to a level that the caution flags are coming out, but nonetheless something that we pay attention to. I think importantly with all the press around the unicorns and what we call Ubercorns, companies with $10 billion or greater market value. I think it's important just to look at the facts of where we are at in the market today and where we were at when previous periods that showed [Indiscernible] investor caution. So first of all when you look at the VC IPO activity in 2000 versus the today the number of unicorns in 2000 they were just one. Today there is 97 but when you look at the reasons for that it's really a function of the fact that private companies are staying private much longer plus digital tracks have been laid that let companies goes [Indiscernible] idea to reaching tens of millions of people at breathtaking speeds. When you look at the valuation of the market in 2000, in March of 2000 the NASDAQ 100 sold at over 100 times earnings, today the NASDAQ 100 sells at about 22 times earnings. In 2014 we had a record year for IPOs in terms of the last dozen, but that was almost half of what the number of IPOs was in 2000. The time from the VC investment IPO in 2000, which is three years, 2014 seven years, it has lengthened slightly. And importantly this I think is a really important thing just to monitor. You look at the average IPO first day pop in 2000, it was 53%. So you had 445 companies going public with the average company appreciating over 50% in its first day, yet finished the year down nearly 20%. If you look at last year the average pop was 14%, finishing the year up 24% as I referenced earlier, and the average pop this year is about 21%. The percentage of profitable IPO companies again there is much more companies today that are profitable when they go public and the companies are much larger. The average company going public in 2000 $18 million in revenue versus $68 million of revenue in 2014 and you look at the VC activity in 2000 again this was 15 years ago, it was $105 billion of venture capital investment in 2000, about half of that in 2014. I think more importantly from a fundamental standpoint when you look at the next slide, in 2000 you just had 6% of the world’s population on the internet, 370 million people. Today there is 3.1 billion people on the internet. Broadband penetration was 1% today it's 32% of the people around the world. PC penetration remarkably, which is 3% or 118 million people in 2000, today it's 1.4 billion or 20%. Mobile phone penetration was 12% in 2000, 5.2 billion today or 73% of the world’s population and here where it gets really interesting. Smartphone penetration was exactly zero in 2000. there is no such thing as smartphone. Today there is 2 billion smartphones effectively computers in people's pockets, tablet penetration no such thing, it was zero. 500 million tablets today. The mobile app economy, of course, didn't exist, 140 billion apps were downloaded just last year and the fundamentals behind that continuing cost down from $7.03 to $0.04. Computer storage cost $4.77 to $0.02. The digital [Indiscernible] in the workforce just 6% in 2000, 35% in 2015 and the global middle class has nearly doubled in the last 15 years. The point is the fundamentals for innovative, disruptive technologies companies is significant. You have the infrastructure, the tracks have been laid, and you are able to see companies on a fundamental basis grow significant value in a hurry and that’s what we are focused on. We are focused on companies that have that kind of opportunity. Next turn to Slide 9, where we break up the portfolio mix across things as of June 30. We are constantly analyzing the growth of economy and how mega-trends are influencing the emerging themes as we believe that’s where the mega winners will be found. Of the five key investments themes we have identified, education technology continues to be a large commitment consisting of 36.4% of the total portfolio, cloud computing and big data represents 32.1%, closed loop mobile represents 15.3%, marketplace is at 10.4% and sustainability is 5.8% of the total portfolio. Next please turn to slides 10 and 11 for highlights on recent investment activity. In late July, GSV made a $4 million follow-on investment in Enjoy, alongside Highland Capital Partners, Kleiner Perkins, Andreessen Horowitz, and Oak Investment Partners. Increasing our total investment in Enjoy to $5 million. Enjoy is led by former Apple retail executive Ron Johnson and the world’s first personal commerce platform built to redefine the way people buy and enjoy the world’s best technology products, but effectively making the Genius Bar on demand, Enjoy is the Genius Bar meets Uber or better yet in our case the Genius Bar meaning lift. Enjoy experts give customers unmatched personal experience effectively connoisseur like service. Today Enjoy has aggressively established a number of key retail partnerships, and has launched operations in the San Francisco Bay Area in New York City. In April 2015, we made $1.5 million follow-on investment in GSV Labs increasing our total investment in GSV Labs to $7.5 million. GSV Labs is a hub of innovation focused on incubated the high growth high impact verticals of Ed Tech, sustainability, big data and mobility, the focus areas of GSVC capital. GSV Labs houses over 140 startups, provide support services, networking opportunities for over 100 mentors and advisers and partners with industry leaders such as Intel, AT&T, IBM, Toyota, Mercedes Benz, [Indiscernible] open. Last month GSV Labs launched the Silicon Valley Data Academy where lead data engineering and data science experts teach high demand skills in an eight week immersive training program. GSV Labs also recently rolled out ReBoot and Accelerator that empowers women to restart their careers through immersive technology education and professional networking. With the dynamic and extensive network of entrepreneurs, thought leaders, expert mentors, and corporate innovation leaders we believe that GSV Labs is well positioned to accelerate the stars of tomorrow and will benefit GSV Capital shareholders greatly. In April 2015 GSV participated in a $50,000 follow on investment EarlyShares, which is a real estate crowd funding platform. Overall the fundamentals of our portfolio remain strong. We estimate the average portfolio revenue growth for over 52 companies is over 100% year-over-year consistent with the strong revenue growth we have seen in 2013 and 2014 as you can see on Slide 12. in the second quarter we had several events to support our investors and portfolio companies as well as unique access to innovate our fast growing businesses, including we held our second – our sixth annual ASU - GSV Education Innovation Summit in April, which we had over 2500 attendees, 270 disruptive education technology companies presented at this event which again is a terrific opportunity for portfolio companies as well as for us to get a window to future leaders. This continues to be an important vehicle to create investment opportunities in the transformational education technology world and we believe again it helps accelerate GSV portfolio company businesses. We also hosted our second annual investor day in June welcoming over 400 attendees to GSV Labs with presentations for portfolio company CEOs including Carlos Watson from Ozy Media, Rick Levin from Coursera, and Danny Shader from PayNearMe. Please visit the GSVcap.com to download our annual stockholders letter which addresses key themes covered at the investor day as well as the way that we have our approach to identify and investing in these dynamic growth companies we call stars of tomorrow. Also I just want to alert you to the Pioneer Summit that we are hosting on October 7 to 9 at GSV Labs, where we will have over 100 disruptive technology companies presenting. Thanks for your attention and with that I will turn over to our CFO, Bill Tanona.

[Bill Tanona:]

Thank you, Michael. Today I will be providing you with a brief financial overview and update on our current liquidity position and an update on the status of 851E application. Please now turn to Slide 13 for the financials as of June 30, 2015. Our NAV per share increased by $0.06 or 40 basis points quarter-over-quarter to a record high of $15.72 per share. This $0.06 increase was comprised of $0.71 per share of gross realized gains which were partially offset by $0.29 per share change in unrealized gains and $0.17 per share in net tax provisions related to those two items. Additionally we incurred $0.19 per share of net investment loss resulting from our ongoing operating expenses. In April 2015, GSV sold 400,000 shares of Twitter at an average net price of $51.52 per share for total net proceeds of $20.6 million. Our liquid assets ended the quarter at approximately $102.8 million consisting of $8 million of cash, $18 million of unused borrowings under our credit facility and $76.7 million of public securities not subject to lock-up agreements of which approximately $38.5 million are subject to periodic sales restrictions. Now I would like to spend a couple of minutes to give everyone an update on our RIC status. And ongoing priority for us is to be granted RIC status by the SEC. And as many of you are aware we resubmitted our A51E application to the SEC in December 2014 and in an effort to obtain certification be treated as a RIC for the 2013 taxable year. At the end of March, we received comments from the SEC regarding the re-submission of our application and are continuing to work with our attorney and the commission. For the past several months we have been engaged in an active dialog with the SEC explaining why we should be classified as such. There could be no assurance that we will be received SEC certification to be treated as the RIC for the 2013 taxable year and we are unable to make a reasonably reliable estimate when if ever we will become eligible to be treated as a RIC. Should we not qualify as a RIC for 2013 we intend to be allowed to be treated as a RIC for the 2014 taxable year if management determines it is in our best interest to do so. If we do elect to be a RIC in 2014 we would expect some modest accretion to NAV as we release the An associated with being a [C] corporation. Furthermore, in the event we qualify as a RIC, management would expect the board to declare a distribution payable from its net realized gains, which stood at approximately $26.9 million for the six months ended June 30, 2015. This figure can and will change based on additional realized gains and losses for the remainder of the potential distribution period in 2015 though. Once we receive clarity on this matter, we will be better able to provide investors with our future distribution and capital management plans. That concludes my comments and we would like to thank you for your interest. Now we will turn the call over to the operator to start the Q&A session.

[Operator:]

Thank you. [Operator Instruction] And we will take our first question from Andy Ellner with JMP Securities.

[Andy Ellner:]

Good afternoon, and thank you for taking my question. In absence of any near term resolution on the company’s RIC status and the potential to efficiently distribute realized gains to shareholders what actions have you and the board considered to create value to shareholders and improve performance at GSVC?

[Michael Moe:]

Well I mean first we are very, very focused on the most important thing we can possibly do is focus on investments and investments we made and the management of our portfolio, which again I think we are very pleased with the fundamentals, what’s going on there. Secondly, as it relates to RIC focus and distributions I think as Bill outlined we are working rapidly to get resolution and I think one way or another I think we are going to have that to be able to communicate in the short term what the end result is, but I think it's – we have gains, we have taxes that we have already booked provided that we didn't get the RIC status, [Indiscernible] that we do that would result in a pretty significant bump in NAV and as Bill outlined even if we didn't and we elected to pay taxes we still think there will be a modest increase in NAV. So I mean I think we are focused on the portfolio. We are focused on optimizing the NAV and we are looking forward to making distributions to our shareholders.

[Operator:]

Our next question will be from Jeff Houston with Northline Capital Markets.

[Unidentified Analyst:]

This is Andy filling in for Jeff. Thanks for taking my call. My question is, is there any uptake on the expected dividend scheduled for 2016?

[Michael Moe:]

Hi, Andy as we just indicated, you know, we are clearly looking for some hopeful resolution to our 2013 RIC status, but in the event that we don't get it, it would be our intention to elect RIC status in 2014 and beyond and therefore if applicable we could pay distribution from the amount that we just highlighted previously, which was 26.9 million but again that number could change based on additional net realized gains or realized losses that we …. That we earn here to the remainder of 2015.

[Operator:]

[Operator Instructions] And we’ll go next to Ed Woo with Ascendiant Capital.

[Ed Woo:]

Yes thanks for taking my question. I just want to know you know right – for Silicon Valley. Just what are some of the bigger themes you are seeing right now and are there really concerns with some of the sky high valuation and what are some of the key themes that you think will persist through the rest of this year?

[Michael Moe:]

Yes, well what’s exciting to me about being here at Silicon Valley is of anything innovation is accelerating and its’ being driven by a number of powerful fundamentals and we as a firm are focussed on how we get involved with the companies and areas that have the strongest growth, the strongest fundamentals. You know themes that are quite significant, meaning the big data theme and Palantir is a great example of this, is an area of that offers tremendous amount of growth and opportunity and use powerful software that you know is allowing businesses to really be transformed and have real time data to be both competitive and great managers we are seeing all sort of interest themes. Companies in the big data areas, we also have investment in the company called Silicon Valley Data Sciences which is a spin-off [Indiscernible] which is consulting to our large organizations and you know government and so forth about big data issues. Also a company we invested in called [Indiscernible] literally President Obama just had [Indiscernible] present to the White House on Tuesday highlighting their very powerful technology and kind of look what they are able to do, I think it was one of three companies that they brought in and that itself is a great investment of ours. Yes other areas that continue to be very exciting [ph] I mean the education technology area is booming, right. And its’ booming for a number of key fundamental reasons and now as the economy, the global market place education is critical for the individual, for a company and for revenue and other country. And so for example the investment that we have in Coursera, and I was just at a meeting down there this morning. It’s wildly exciting what is going on from an online education standpoint to you reported that the results tonight. So I asked another theme that we’re very, very excited about the sharing economy, clearly our investment lift is a great example of what’s going on being able to leverage the billion smartphone. There are two billion smartphone, two billion people have smartphone and the build to basically leverage other assets whether when you are looking at [Indiscernible] what they are able to do with real estate or what we are able to do with cars, that’s a phenomenal theme. And I think sustainability is an area that is you know we’re very, very bullish in terms of new technologies and solar is obviously has got a number of competitors but I think an emerging theme is water. When you look at what water technology and we are here in California acutely aware of how critical water has but you know water technology is going to be bigger if opportunity and growth and then certainly an area of people’s focus.

[Operator:]

It appears there are no further questions at this time. Mr. Moe, I’d like to turn the conference back to you for any additional or closing remarks.

[Michael Moe:]

Just again, we’re very appreciative of people’s attention and support of us. You know we’re delighted what’s going on at GSV Capital from a portfolio standpoint. We’re achieving second quarter role of record NAV we think is a strong indicator that the path we are on. We are working very hard trying to identify and get involved with great companies that can add value to the portfolio, can add to our NAV. And we look forward to answering questions to the people down the road and showing the kind of results that have earned people’s attention to us. So thank you very much, appreciate it and look forward to the follow ups. Bye.

[Operator:]

This concludes today's call. Thank you for your participation.