Safeguard Scientifics Inc (SFE) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder this call is being recorded. This call is also being webcast on Safeguard's website at www.Safeguard.com. At this time I would now like to introduce to you Mona Zehendalar, director of investor relations.

Good morning. Thank you for joining us this morning. Joining me today is our president and CEO, Tony Craig, and CFO, Christopher J. Davies. As we move to slide 2, let me remind all participants that during this conference call the statements contained in this call and in the presentation that are not historical facts are forward-looking statements which involve certain risk and uncertainties including but not limited to risks associated with the uncertainty of future performance of our partner companies, acquisitions of additional partner companies, and disposition of partner companies, additional financing requirements, the effect of economic conditions in the business sectors in which our partner companies operate, our ability to execute our strategy and other uncertainty described in the company's filing with the securities and exchange commission. The company does not assume any obligation to update any forward-looking statements or other information contained in this conference call and presentation. I would now like to introduce your host for today's conference, Tony Craig, president and Chief Executive Officer of Safeguard.

Good morning. We will begin with slide 3 and I will share with you today a recap of the last six months. Summary of our strategy, and strategic priorities and an update on our implementation and progress. Chris, will provide details on financial results and outlook, and update you on our partner companies and private inaudible. Then questions. Slide 4, it has been just over six months since I joined Safeguard. And we have accomplished a great deal. In that time we have assessed the company's assets including the people of partner companies. We have developed and begun implementation of a focused strategy. We staffed the organization to execute the strategy. And we have achieved financial stability. We are confident that we have successfully repositioned Safeguard. We have assembled a senior team including five managing directors that collectively have over 30 years of CEO and COO experience in 9 different venues. As previously announced we have hired a business leader or our business in IT services, Tony inaudible. I am happy to announce today the new business leader for the software area, Bob Crawley will refine our software strategy over the next six months. We identified companies that were slow growth or non-strategic and seized opportunities to generate liquidity. In the first quarter alone, we received over 22 million in cash from stock sales, escrow releases and fund distributions. Let me take moment to recap our strategic direction on slide 5. Our strategy is to create long-term value as a company. We will acquire and build technology companies with potential for strong cash flow and high growth, that will benefit from Safeguard's post acquisition operational influence. Next slide. Priorities, our business strategy builds on three specific paths to value. First, we are focusing on wholly owned business and IT services where our immediate goal is self-sustainability from internally generated cash flow. Our second path is to build or acquire majority owned software companies with compelling technology, where we will drive growth and accelerate value creation. Third path which we expect to pursue after we achieve significant progress in the first two areas will be acquiring interest in earlier staged companies where we can continue to support entrepreneurs in creating new technologies and applications. These three areas translate into two primary goals, near term cash generation, application of that cash to growth opportunities as you see on slide 7. Our objective is to generate the cash balance and cash flow. We are making good progress in this objective. In addition to 22 million of cash received in the first quarter, we received a tax refund. Cash balance as of yesterday stands at roughly 220 million. We will continue to look at every source of capital including managing dispositions to generate further cash. Since the business and IT service area is the cornerstone of our operating cash flow goal let me give you a brief update on what we have done here. Tony has built his team, and reorganized the wholly owned service, and developed acquisition criteria. The two service companies formerly known as Align Solutions and Palarco have been combined into one integrated organization now known as Lever8 Solutions. We believe this new company will increase sales effectiveness. Align Solutions continues as a separate business, providing high level IT solutions and its position is to take advantage of the recovery in the IT services marketplace. In our last call we said we planned to acquire full ownership or at minimum 80 percent of control of business and IT service companies. And generate significant cash flow and able tax and cash consolidation. Our current acquisition criteria for businesses in this area includes businesses with revenue run rates between 10 and 100 million, are cash flow positive, and have strong management team. We see plenty of opportunities and we have the capital to pursue them. We are well underway in implementing our first goal of cash generation. Slide 8, second goal is inaudible existing software companies. We seek to acquire software companies that are leaders in their market. We refer to these as time-to-volume companies and time-to-volume opportunities. We see significant potential in those companies that already have commercially viable product and are launching their growth phase. While software companies are cash consumers at this stage, they become cash producer earlier than others because of their operating model. Safeguard provides these companies with the operating leadership, to build their go to market model and enhance the likelihood of success. This translates to earlier cash flow self-sufficiency. Once Safeguard has assisted the company in achieving volume and building the infrastructure to generate significant value the company will become a candidate for monetization, as Safeguard will seek its invested capital. These software companies that show this potential for growth, we have been looking at several companies that are companies in which Safeguard has a majority interest with 63 percent, 65 percent, and 74 percent. These companies have several characteristics in common. Each has a proven technology that is solving decision critical business problems. Each has top tier major companies that have embraced the solutions. Yet in each company broader expansion is needed and that's where Safeguard will help. We are pleased with the strength of potential for growth for these companies. We expect them to be leaders in their space as well as with others we would acquire, and to have the products, expertise, and market necessary for success. We complement them by adding structure, mentorship, and capital to help them. After we have made sufficient progress in business and IT services and in software, our final path will be value creation in emerging technologies where we can make opportunistic acquisitions that keep Safeguard and our investors in the mainstream of entrepreneurial activity. As an example of this opportunistic approach, we mentioned in the last call, the acquisition of a majority interest in Procura this is now completed, a company with wireless technology in the wireless antenna space. We do continue a critical assessment of all of our holdings as a normal business process, looking at the strategy of each company, it's fit in our strategy, and its opportunity for growth. For those who meet our criteria we intend to provide appropriate management and operational support and if necessary, funding. We are also creating to assist these companies and affiliated talent bank of executives that can provide CEO, CFO, CIO, marketing and business acquisition expertise to our companies on a project basis. Slide 9, we are well on our way to achieving our first goal, cash generation. We are creating operating cash flow and the potential to increase our existing cash balances. We have a capital allocation model that calls for acquiring service companies that in themselves produce cash flow. We are progressing in the second priority of driving growth and opportunities in our software area. We now have considerable investable cash and are looking for the right opportunities. Recapping, we are embarked on a systematic process for developing and growing Safeguard. My first three months here were consumed with assessing the current situation, while monetizing some of the obviously off-strategy assets. The second three months we developed the strategy and we assembled a team, bringing us to today. We will develop the businesses we have. We will continue to pursue every monetization effort. Execution takes time and we are patient owners. I continue to believe that Safeguard is significantly under value with a solid strategy, solid management, over 430 million in cash and public securities, promising businesses in our software and services group, and less than a 300 million market capitalization, I believe Safeguard has great value generation potential.

Thank you, Tony, good morning. As you will see on slide 10, I am going to update you today on Safeguard's continued strong cash and marketable securities position, our cash activities during the first quarter and year to date 2002. Our first quarter results, a brief update of our public and private companies and our private equity funds and a brief outlook for the balance of 2002. Turning to slide 11, I am pleased to report Safeguard's cash balances remain very strong with cash of 175 million dollars as of March 31st, and 220 million dollars as of yesterday. Yesterday's balance includes the 63 million dollar tax refund. Let me also note that these cash balances exclude 117 million dollars of additional cash balances of our less than wholly owned consolidated subsidiaries. The value of our public partner company market securities as of March 31st was 243 million dollars and it was 215 million dollars as of yesterday's close. Our cash and public companies securities therefore totaled 418 million dollars as of March 31st, and 435 million dollars as of yesterday. In an attempt to help our investors better understand our cash flow and operating results, you may have noted on pages eight and nine of our annual report that we added detailed descriptions of safeguards sources and uses of cash and the components of our operating results. The remarks that follow will include an update of these items for Q1 using that new format. Slide 12 shows the changes in our cash for the first quarter. During the first quarter we received 22 million dollars from monetization activities including fund distributions. As you may recall inaudible was acquired by Palm in December, and Safeguard received 3.7 million shares of Palm common stock. We completed the sale of all of these shares during the first quarter for 13 million dollars which is included in the 22 million dollars. The remaining cash received includes 6 million dollars that was released from an escrow account relating to a previously cold partner company. During the first quarter we acquired a majority interest in Protura. We completed 10 million dollars in funding to partner companies. And we completed 4 million dollars in fundings against our existing commitments for a private equity funds. During the first quarter our net G and A cash usage was 7 million dollars including several annual costs paid during the first quarter, such as insurance. We also paid 4 million dollars to settle inaudible 2002 obligations. We remain on track to meet or beat our targets for cash usage of 22 million dollars. The forecast and contribution from our existing wholly owned service companies is expected to be 2 million dollars for the year 2002 due to soft IT services markets and therefore, we anticipate that our net corporate cash usage will be 20 million dollars for the year. Future acquisitions in this area will contribute to reducing our net cash inaudible usage. Turning to our progress during the second quarter, so far you can see on slide 13 that we have received 4 million dollars in cash from monetization activities and fund distributions. We also received 63 million dollar tax refund in April relating to the carryback of our 2001 capital losses. We also completed an additional 16 million dollars of funding for our existing partner companies including approximately 15 million dollars to Mapus. Let me now turn to our first quarter financial results which are shown on slide 14. For the quarter ending March 31st we reported a 40 million dollar net loss which is an improvement over our fourth quarter 2001 loss of 63 million dollars and our first quarter 2001 loss of 250 million dollars. This slide as in our annual report should help you understand the components of our operating results. The improvement over the fourth quarter of 2001 was primarily the result of lower equity losses, lower impairment charges and the elimination of goodwill amortization partially offset on lower gains on sales. As required in January of 2002 we adopted the provisions of FAS 142 relating to goodwill and other tangible assets, that includes negative goodwill be a cumulative change in the quarter of 2002. FAS 142 also requires that any impairment charges resulting from the transition to FAS 142 or positive goodwill and other intangible assets be reflected as cumulative effect as a change in accounting principles. We are required to test each reporting unit for indicator of impairment by June 30th of this year and to determine any impairment charge by December 31st of this year. We have not yet determined the financial impact, if any, that the impairment provisions of FAS 142 will have on the financial results. In addition under this new standard, goodwill and intangible assets that have indefinite useful lives are no longer amortized beginning on January 1. Note that amortization of goodwill and tangible assets in the fourth quarter of 2001 was approximately 9 million dollars. Please see our 200110 K for additional information on this subject. I would also like to point out in 2002, we settled the first portion of our hedge of Telex holdings. This had no impact on cash inaudible and minimal impact on the first quarter operating results. However as a result of this settlement, total current assets and total current liabilities have decreased from by 91 million dollars. We anticipate settling the second portion of this transaction in August of this year by delivering 1.4 million shares of Telex stock with no impact on stock and minimal impact on operating results. This will remove the remaining balance of 84 million dollars current assets and current liabilities relating to this transaction. To understand our operating result, our business model requires us to acquire interest in software companies. The accounting principles requires us to reflect in our operating results our share of those company's income or loss. As a result, some companies have carrying values of zero, including ICG, even though their fair market value is significantly higher. When we have a monetization event we record a gain or loss based on the difference between the proceeds received and the carrying value of that asset at that time. We said during the last call that we intend to provide additional insight into the financials of our partner companies as we begin to implement our new operating model. In the first quarter 10 Q that we will file shortly, you will see we have expanded our segment reporting to correspond with the implementation of our new strategic direction. As more of our private companies are consolidated because of our majority ownerships, and as we begin to group similar companies together, key financial results for business segments should become more visible to our shareholders. I would like to turn now to provide update for public and private companies, and our private equity funds. We currently have 15 companies in the private company portfolio and 10 public companies. During 2002, to date, we have provided a total of 26 million dollars in fundings to these partner companies. We continue to assess the remaining private companies and take appropriate action for those that no longer fit our strategic objectives or our investment return objectives. With respect to the private equity funds we currently hold general partner and limited partner interest in inaudible funds on our campus. These private equity funds have in excess of 6.2 million dollars committed, and Safeguard's commitment to these funds is total of 128 million dollars. 87 million dollars of which has already been funded. We expect the remaining 41 million dollars will be funded over the next several years. In addition to on campus funds, Safeguard has investments in six other private equity funds. The aggregate size of these funds is approximately 900 million dollars and Safeguard's commitment to them is 116 million dollars of which 100 million dollars has already been funded. We are examining our current commitments and participation in these off-campus private equity funds to look at their fit with our business strategic. As a result of this review we recently reduced our commitment to one off-campus fund by 6.3 million dollars. The reduced commitment to this fund allows us to free up capital, people, time, and effort. Turning now to our cash outlook. Remember, that our cash balance is from period to period are significantly impacted by the pace of our monetization activities, the pace and size of acquisitions, follow on fundings to partner companies and private equity funds, and to our net G&A cash burn. For these reasons as well as the sequencing of the implementation of our new strategy, it is difficult to predict a meaningful cash flow forecast for the remainder of 2002 at this time. However, we begin the rest of the year with cash balances of 220 million dollars. We anticipate funding 17 million dollars to partner companies and private equity funds based on today's commitments. Our net G and A cash usage is estimated at 15 million dollars for the remainder of the year. Interest paid during 2002 will include two 5 million dollar interest payments on the debentures due in 2006. We have no current plans to retire that debt. What we can't predict is the pace of cash distributions and our acquisition activity. In conclusion, as seen on slide 15, our cash position of 220 million dollars is very strong and our marketable securities were 215 dollars as of yesterday's close. We expected additional monetizations when realized will continue to improve our cash balances. And we are well capitalized with more than ample cash to support our acquisition activities to implement our strategy. Tony and I will now take any questions you may have.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. We will pause just a moment to compile the Q and A roster. Your first question comes from Steve Moyer from Imperial Capital.

Very clear report. Thank you very much. My only question is, I believe you mentioned one of the strategic purposes for increasing holdings in partner companies might be consolidation for tax purposes. In light of your substantial refund is there any possibility that such a strategy could yield further refunds in the future?

Thank you for the question. Actually, at this point all of the carry back opportunities that Safeguard has in its consolidated returns have been realized. So any benefits from tax consolidation will be future events. There are no further carry back opportunities.

Okay. Thank you.

The only reason for inaudible the cash consolidation, it also makes the distribution of any cash up to the parent company somewhat easier.

Okay.

Your next question comes from Rallie Jones from Union Securities.

Good morning, gentlemen. Two questions. Tony, since you have been there, has there been any changes in your relationship with Internet Capital Group and to what degree?

Good morning. There have been changes in terms of the structure relationship. We continue to be a holder of the stock and as you know, structurally we have Walter Buckley on our board. Who obviously serves with ICG. Other than that, nothing meaningful has changed or that really occurs between the two different companies.

Second question, Tony, as a 15 partner companies, how many of those are cash flow positive on a consistent basis? And is there any particulars you can give us in that regard?

Really our objective in getting this segmentation reporting sorted is to make visible that as we gradually determine which companies are staying and which ones are leaving, so we can provide the right kind of information to our investors to make decisions. I can tell you some are cash flow positive, but we are not ready to disclose it until we complete the segmentation work.

Thank you. Best of luck with the progress.

Again, if you have a question at this time please press star then the number one on your telephone keypad. We will pause again to compile the Q and A roster. At this time there are no further questions.

Well thank you, everyone for your interest in Safeguard. I feel we are making a lot of progress. I hope you might agree. I look forward to updating you as we continue to execute our strategy. If there are people on this call who would have additional questions you would like us to address at the annual meeting, please e-mail us at ir@safeguard.com and we will make every effort to incorporate a response at that time. Thank you very much.

This concludes today's conference call, you may disconnect at this time.