Safeguard Scientifics Inc (SFE) 2003 Q1 法說會逐字稿

Good morning, Ladies and gentlemen, and welcome to Safeguard Scientific first quarter 2003 conference call.

At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will follow at that time. If anyone should require assistance during the call, please press star then 0 on your touch tone telephone. As a reminder, this call is being recorded. This call is also being web cast with slides for your viewing on Safeguard's website at www.Safeguard.com. Two hours after the conclusion of the call, a replay will be available from Safeguard's website or by dialing 1-800-642-1687. And entering identification number 9958037 until midnight on May 3rd.

The company has asked that we give you the following reminder. The statements contained in this call and in the presentation that are not historical facts are forward-looking statements which involve certain risks and uncertainties, including but not limited to risks associated with uncertainty of future performance of our company's, acquisitions of additional companies and disposition of companies, the ability to successfully integrate our acquisitions, additional financing requirements, the effects of our economic conditions and the business sectors in which our companies operate.

Our ability to execute our strategy and other uncertainties described in the company's filings with the Securities and Exchange Commission. The company doesn't 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 house for today's conference, Mr. Anthony Craig, President and CEO of Safeguard Scientific. Mr. Craig, you may begin your conference.

Good morning.

It has been only 60 days since our last earnings call. Nonetheless today, I will share with you a description and update of our strategic initiatives and then an overview of our first quarter results for operations as shown on slide 3.

Since our last call, we have mailed our annual report, including the form 10-K to our stockholders. My remarks today will track the information provided in that report which you can access in our website in the event you have not received your copy. After my remarks, Chris will provide details on Safeguard's first quarter financial results and then we'll take any questions you may have.

As you can see on slide 4, our strategic initiatives are to operation, extend our reach to companies that provide business intelligence and analytic solutions and in life science solutions. These companies would be in the timed volume stage of their life cycle, and we will acquire a controlling interest in these companies and manage them for revenue and profit growth.

Our Legacy companies are those companies in which, for the most part, we hold less that a majority interest or whose businesses don't currently fall within our strategic initiatives. We intend to manage our Legacy companies to contribute to our balance sheet strength and liquidity with a view toward supporting our strategic initiatives.

With regard to our Legacy Private Equity Funds, we continue to examine our current commitments and participation in both on-and-off campus funds to evaluate their fit within our strategy. As we mentioned in our last call, we don't intend to make any new investments in any private equity funds.

Similarly, we don't intend to make and stand alone minority acquisitions or acquisitions of early-stage companies in 2003. We will continue to evaluate acquisitions which are complementary to our strategy.

As you can see on slide 5, our current strategic initiative subsidiaries focus on the following vertical markets: Pharmaceutical, health care and Life Sciences, financial services, manufacturing, retail, and distribution, and telecommunications. Safeguard has undergone substantial change in the last 12 months. We evaluated our assets and emerging trends in the marketplace and used this data to develop our evolving strategy. Central to this strategy is developing a group of strategic subsidiaries which share certain characteristics where we would have the opportunity to utilize our expertize to accelerate growth.

Our strategic subsidiaries from our software or service solutions primarily based on business intelligence solutions and analytic or life science solutions in a variety of vertical markets. These companies are targeted to be cash flow positive within 12 months and we will maintain or acquire controlling interest in them. As you can see, Safeguard is now much more focused and our team is operationally applying their collective expertise to our strategic subsidiaries.

Moving to our majority-owned strategic initiative subsidiaries, we see a growing market for companies that offer business analytic and life science tools and solutions, meaning complex software, systems and services that deliver specialized information that is the basis for decisions by domain experts in their businesses. We see many of our majority-owned companies falling into this category.

Slide 6 provides first quarter highlights relating to Alliance Consulting, Mantas, and ChromaVision. Alliance Consulting is providing enhanced delivery capabilities in custom and package solutions as well as professional services, continues to compete in the extremely difficult market conditions resulting in a challenging first quarter, which was modestly below our expectations.

In addition to managing their business in a context of these challenging external factors, the team has worked hard to integrate Alliance and Safeguard's other service companies. The integration is progressing in accordance with our expectations.

The new organization has a streamlined infrastructure, 475 billable consultants and practice areas such as digital intelligence, which add business-decision capabilities to data warehousing applications, and expertise around SAP, and JD Edwards software. Our current market data indicates any increase for IT consulting services is to unlikely to occur before the third quarter of 2003. However, during the first quarter, Alliance consulting and Mantas have begun working together to develop custom engagements around Mantas software.

Moving to Mantas, which is the leading provider of behavior technology for the financial services industry, in addition to its new relationship with Alliance Consulting, the company has recently announced that Logica, CMG, and Bearing Point have joined in the Mantas global alliance program. Mantas and Logica CMG are working together for a technology that enhances profitable for client by reducing risks and developing business growth opportunities.

Logica CMG brings to the partnership its global marketing relationships, experience and reputation as a full-service provider of management consulting in addition to its systems development and integration expertise and the outsource management of targeted business processes. Mantas insurance offers technical and domain expertise that enabling its customers to meet their compliance needs and business objectives. The Bearing Point Mantas relationship offers clients access to a team that can integrate, deploy, and maximize the benefiting of the Mantas system across an entire enterprise on a global basis.

Bearing Point is a well-known name with a great rep take, and this relationship demonstrates Mantas' ability to scale for larger clients. The relationship also demonstrates Mantas' ability to leverage its internal resources by training partners to work on its deployments and upgrades. By the nature of the work that Mantas provides prevents us from disclosing the names of clients. Mantas has already begun working with Bearing Point on a major client assignment.

The globe software technology company providing analytic solutions to wireless and mobile communications providers recently announced they have selected your product auto wave for its fraud management and fraud detection application. This complete solution automates and simplifies the resource intensive and lengthy process of billing verification while identifying revenue leaks and providing calculations for margin optimization.

ChromaVision Medical Systems recently announced the edition of two senior executives, David Bowman, Senior Vice President of Sales and Marketing and Karen Garza Vice President of Business Development and Strategic Initiatives. These executives reporting directly to ChromaVision's CEO Carl McNamack bring more than 25 years of marketing sales and developing expertise to ChromaVision.

ChromaVision is the leading provider of automated cell imaging products and manufacturer of the ACIS imaging system. [inaudible] diagnosis of various diseases and conditions.

In the first quarter, ChromaVision reported revenues of $2.9 million. This is a 59% increase from the first quarter of 2002. The company also reported an increase in its installed base of units to a total of 236 compared to the 217 reported at the end of 2002. If you would like more information on this company, ChromaVision's earning call regarding its first quarter 2003 results is being held today at 11:30 this morning. As we previously announced during the first quarter of 203, we increased our holdings In ChromaVision from 56% to approximately 62% for our purchase of $5 million of additional shares of ChromaVision common stock.

Slide 7 shows the primary characteristics of each category of our companies. Where our strategic subsidiaries, each has proven products and services and established customer base and is expected to become cash-flow positive within the next 12 months. In addition during the last few months, Mantas and SOTIS added to their executive management teams to meet these challenges and lead the way to continued growth.

Turning to Compucom, in an extremely difficult market, the company has reported first quarter 2003 net earnings of 3.35 million or 6 cents diluted earnings per share. The first quarter 2002 earnings, excluding the cumulative effect of a change in accounting for negative goodwill were 2.65 million or 5 cents per share.

First quarter 2002 net earning, including the cumulative effect in change of accounting principal for negative goodwill were 3.3 million or 6 cents per share. Cumpucom's first quarter revenues of $330 million represents a slight increase over the sale period of 2002. Safeguard holds a 59% voting in Compucom, which is a leading provider of IT up-sourcing, technology procurement and systems integration services.

On slide 8, while Chris Davis will provide you with more details on the results of our operations, a note for the quarter ending March 31, 2003, consolidated revenues for our strategic initiative subsidiaries was $31.7 million. Our share of -- [ Indiscernible ] Net minority interest was $7.7 million.

As we described in our annual report and as shown on slide nine, we're now in the second stage of a three-stage process. We're moving from what could be characterized as an early-stage portfolio company in the direction of a software and services solutions-based operating company. The first stage was turn around initiation and strategy formulation and is largely complete. In fact, all of our strategic companies have new management or have received funding from Safeguard.

We year currently in the second same where we're continuing the turnaround process of strategy refinement while actively supporting operational excellence in our base of strategic initiative companies. This stage includes providing the necessary funding and management and developing the right measurements by which to review our results.

We will arrive at the third stage when we have evolved to the point where we can share measurements we feel drive our businesses and when we are evaluated against traditional operating company parameters. This is not a static level. It will continue to evolve as our businesses mature and face market challenges.

We're in the early days of this second stage and as such, we're limited in our ability to give you more transparency into our results. As we progress, we plan to provide more visibility into the operating results. Let me now turn the call over to Chris Davis, our Chief Financial Officer who will provide specifics of the financials.

Thank you, Tony and good morning.

As you will see on slide 10, I am going to update you today on Safeguard's first quarter 2003 results, provide you with the Legacy company update, give an overview of the parent company and multiple securities and a brief outlook for the rest of 2003. Before I begin I would like to point out that the format in my comments and the accompanying slides have changed significantly from prior quarters. There are two reasons for these changes: First, as we continue the transition that Tony has discussed with the emphasis of the data we provide is shifting toward our strategic initiative companies and their operating results. This has led us to change our segment reporting in our SEC filings.

When our first quarter 10-Q is filed in the next two weeks, you will see new segment data for companies as well as our Legacy companies for the first quarter of 2002 and 2003. The second reason for the change in format is the new REG-G requirements that became effective on March 28, 2003. As you probably know, REG-G regulates the disclosure of non-GAAP financial information for Safeguard and all public companies. Some of the information we previously provided is subject to those provisions of REG-G, and until we are able to gain more experience with the SEC's interpretation of REG-G, we have determined not to disclose some of this information. However, where possible, we're now providing as much of this information as possible.

For the first quarter we reported a consolidated net loss of $15.5 million as shown on slide 11. This is the significant reduction over our first quarter 2002 consolidated net loss of $62.1 million, which included a cumulative effect in the change of accounting principle of $21.4 million. This loss compares favorably with our fourth quarter consolidated net loss in 2002 of $31.2 million.

Included in our first quarter consolidated net loss of $15.5 million, is an additional $659,000 impairment charge related to Safeguard's loan receivable from Pete Buster, our former Chairman and CEO.

As of March 31, 2003, the value of the collateral [inaudible] to secure the loan had an approximate value of $13.8 million compared to the value of $14.5 million. We will continue to review the loan for further impairment on a quarterly basis and continue to pursue all available legal avenues to collect the amounts due under this loan. We remain fully committed to enforcing the contract and maximizing our collection of the amounts due from Mr. Buster.

The value of its investments is reported under ownership interest in and -- [ Indiscernible ] On the company's parent company owning balance sheet as recorded on our form 10-K and 10-Q.

In aggregates $264.3 million and $259.9 million at March 31, 2003, and December 31, 2002 respectively as shown on slide 12. The components of the carrying value include our interest in private companies, public companies, and private equity funds, but exclude Alliance Consulting, a 100% owned consolidated entity in the parent company. On March 31, 2003, and December 31, 2002, the carrying value of our private company investments was $33.7 million and $33.2 million respectively.

At March 31, 2003 and December 31, 2002, the carrying value of our public company investments was $189.1 million and $184.3 million respectively. The market value of these securities as of April 29, 2003, was $200 million. At March 31, 2003 and December 31, 2002, the carry value of our fund interest was $41.5 billion, and $42.4 million.

I would like to turn now to provide a brief update for our public and private companies in our private equity funds.

As of March 31, 2003, we control companies in our private company portfolio as you can see on slide 13. Of which four considered strategic-initiative companies as stated above, these companies had an aggregate carrying value of $33.7 million on March 31, 2003, excluding the carrying value of Alliance Consulting, which is consolidated. We continue to assess our legacy companies for balance sheet and liquidity contribution on an ongoing basis when with a view toward supporting our strategic initiatives.

We currently have eight public companies with a market value of $200 million as of April 29 as seen on slide number 14. We re -- with respect to our private equity funds, we currently hold general partner and limited-partner interest in 11 funds on our campus. These 11 private equity funds have an excess of $2.6 billion of funds committed and Safeguard's commitment to these funds is $126 million. $92 million of which has been funded already. We expect the remaining $34 million will be funded over the next several years. In addition to our on-campus funds, Safeguard has investments in three other private equity funds. The aggregate size of these funds is approximately $365 million and Safeguard's commitment to them is $86 million of which $85 million has been funded. We continue to reduce our commitments, too, and participation in the off-campus fund.

Turning to slide 15, Safeguard's parent company cash balances were $109 million as of March 31, 2003 and $106 million as of April 29, 2003. The decrease from $114 million recorded during our last earnings call on February 27 primarily reflects our investment of $5 million in ChromaVision. Let me also note that these parent company cash balances at March 31, 2003, excluded $152 million of additional cash balances primarily associated with our portfolio and consolidated subsidiaries.

The value of our public company marketable securities was $181.6 million at March 31, and $200 million at April 29. The increase is due to the fluctuations of the market valuing of those public companies. Our parent company cash and public company securities therefore total $90.6 million as of March 31, and $306 million as of April 29.

During the first quarter, we completed new investments and follow-up fundings of $12.3 million, including the previously-recorded $5 million purchase of additional ChromaVision shares. These investments are included in acquisitions of ownership interests and employers and subsidiaries, net of cash required on the parent company's consolidated statement of cash flows.

In addition, during the first quarter, we received $5.3 million related to Legacy company liquidations and $1.4 million in repayments of advances to affiliates. Turning to our parent company cash outlook on slide 16, please remember that the parent company cash balances from period-to-period are significantly impacted by the pace of our acquisition activities and any follow-up funding to our companies and private equity fund. For these reasons, as well as the sequencing of the implementation of our new strategy, it's difficult to predict a meaningful cash flow forecast for the remainder of 2003.

However, we begin the rest of the year with parent company cash balances of approximately $106 million. We anticipate funding $15.3 million to existing companies and prior equity funds during the remainder of 2003 based on today's commitments. Interest paid during 2003 will include two $5 million interest payments in June and December on the 5% supported for ventures due in 2006. We continue to evaluate the capitol we have available. This valuation includes considering other debt requirements, purchases, and further acquisitions. However, you can't predict the pace of modifications and acquisition activity.

At this time time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Steve Moyer with Imperial Capital.

Hi, gentlemen, one quick detailed question, really toward your last comments. You mentioned that the first quarter cash investments were $12.3 million and I didn't get whether that included Chroma excluded it for a total of $17.3 versus, I take it a total of 6.6 in effective monetizations. Is that correct?

Good morning, Steve. The numbers that I reported were a total of $12.3 million of new investments and follow-on investments that include 5 million for ChromaVision.

Okay, great, thanks for that clarification.

And then the 15.3 million that you noted would be the, possible additional commitments. Was that for both, portfolio companies or was that just for the aggregates of your funds?

It's both of those things. It would be for the existing, companies as well as the private equity fund.

And that was a remainder of 2003 number?

Yes, from this day forward. Right.

All right, terrific. Thank you very much.

Your next question comes from Eric -- [ Indiscernible ] with Grubber and McBain.

Good morning, it seems looking at your slide presentation that you further refined what you define as our your core investments and it appears the number of companies you're focused on has continued to now, I think you're most focused on four companies in which you think have the greatest prospects going forward. Are those the four companies within the portfolio that you would use as acquisition platform?

Thank you.

I think your observation is correct as we described. The strategic initiatives. We see a lot of promise in the use of complex comprehensive software in the business-decision area and in the diagnostics area. And the markets that are being addressed here are showing the customers have real need for that. As to whether we use those for platforms or not, that remains to be discovered and it's really not something I should or could comment on at this point.

Okay, and then secondly, with regard to your comments on the IT services market, hopefully improving some time in Q3, could you talk a little about what you have done over the last six months to make sure that you're well-positioned to get in front of that capital spending cycle should it occur and in terms of building customer relationships and making sure you're in deep enough in those organizations when the time comes you get the order? Thanks.

If you look to some of the comments I made, Eric, we're seeing that in each of these software-related companies there are a large complex solutions being addressed, which draw the need for IT services associated with them. The acquisition of Alliance gives us a tremendous bench of talent that we can move toward fulfilling that need.

We are hopeful, I think the whole rest of the world is that the IT service market will turn around and there will be some notion of pent-up demand that always seems to be two quarters away. So we're pretty conservative of looking at that. We think we made the moves to put ourselves in a position addressing integrated solutions of software and services together.

Okay, and then lastly, I'd be remissed if I didn't ask you the age-old question of where do stock buy-backs and convert buy-backs come into play versus your strategic initiative.

I would be remissed if I didn't answer it same way by turning it back to Chris.

Eric as you know, we have followed a pretty disciplined approach of evaluating each investment, we evaluate new acquisitions against stock repurchases and/or debt repurchases and will continue to do that. The relative importance of those things has not particularly changed. We looked at a lot of opportunities and we'll continue to devote capital to the opportunity that we think will provide the highest return for us. For -- so our answer to your question hasn't changed since the last time we talked about it.

Thank you very much.

At this time time, there are no further questions. I would like to now turn the call back over to Mr. Craig.

Thank you. Today, we have shared with you our strategic and operational bias line from which we will manage our strategic initiatives for future growth.

Slide 17 illustrates the refinement of our strategy. As I have said, Safeguard has changed significantly in the last 12 months and we're now in the second stage of a three-stage program. I'll refer you to the annual report for a little more hallucination on that. As we have demonstrated, Safeguard is moving rapidly towards becoming an operationally-focused company, and we have a clear strategy for growth in quite well-defined areas. We'll keep you informed as to our progress and direction through the year and thank you very much for your continued interest.

Thank you for participating in today's Safeguard Scientific conference call. You may all now disconnect.