Safeguard Scientifics Inc (SFE) 2003 Q2 法說會逐字稿

Welcome to Safeguard Scientifics, Inc. Q2 2003 earnings conference call. We will begin momentarily. Good morning, ladies and gentlemen, and welcome to Safeguard Scientifics second quarter 2003 conference call. 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 call, please press star, then zero on your touch tone telephone. As a reminder, this call is being recorded. This call is also being web cast live 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 the ID number 1889178 until midnight on August 3.

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 the uncertainty of future performance of our company, acquisitions of additional companies and dispositions of companies, the ability to successfully integrate our acquisition, additional financing requirements. The effect of 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 filing with the Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statement or other information contained in this conference call and presentation. I would now like to introduce your host for today's conference, Mr. Anthony Craig, President and CEO of Safeguard Scientifics. Mr. Craig, you may begin.

Thank you. Good morning all. Today -- we will start on slide 3. I'll share with you an update of our strategic initiative companies and then an overview of our second quarter results of operations. As you may know, we held our annual meeting of shareholders on June 18, 2003. I will not repeat the material we presented at the annual meeting, as my remarks from our annual meeting are posted on our website, which you can reach at safeguard.com. After my remarks, Chris will give some details on Safeguard's second quarter financial results and then we'll take any questions that you might have. On slide 4, with 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 several of our majority owned companies falling into that category.

Slide 4 gives some highlights relating to Mantas, SOTAS and ChromaVision. At Mantas, our leading provider behavior detection technology for financial services, the company recently announced that ABN Amro a prominent international banking group with 3,000 branches in 66 nations has selected Mantas as its provider of money laundering detection software for its global operations. ABM amro will roll out the software globally with four key centers in Europe, Asia, Pacific, Latin America and North America. Its North American center has already started implementing Mantas' behavior detection software across its wholesale banking operations and an expected software to go live in retail, corporate and trust businesses later this year. Logic of CMG, which joined the Mantas global alliance program in April 2003, will be working closely with Mantas to deliver the software globally. In addition, Mantas also announced that the Co-America technology and life sciences division has provided Mantas with a $4 million revolving line of credit. SOTAS, a global software technology company providing business analytic solutions to wireless and mobile communication providers, recently announced the availability of the mobile version of secure wave. Its comprehensive real-time fraud detection management and deterrent solution that is geared towards current and next-generation voice and data switched fixed line and mobile networks.

With this latest release of secure wave, mobile communication service providers can reap the benefits of a proactive real-time fraud management system that identifies fraud-based on real-time usage with intelligent pattern analysis and provides an end-to-end alert in case management system that is capable of detecting fraud as it occurs. SOTAS also announced the appointment of Ajay Whahi (phonic) as the Managing Director for SOTAS Indian-based sales, support and engineering development center. Ajay brings over 18 years of experience in the software solutions and the systems integration industry to Sotas. Alliance consulting, which provides enhanced delivery capability in custom and packaged solution as well as professional services continues to compete in an extremely difficult market condition, resulting in a challenging second quarter which was below our expectations. However, notwithstanding the market in which most of its competitors are also experiencing depressed results, alliance has been able to manage through this difficult model, better than its competitors, primarily because of its ATO or assemble to order model. ChromaVision Medical Systems, the leading provider of automated cell imaging products and manufacturer of the ACIS cellular imaging system recently announced that the researchers at the Tex School of Medicine at the University of Southern California are conducting two multi-center clinical trials which will use the ACIS diagnostic tool to detect rare cancer cells in the bone marrow of breast and lung cancer patients.

ChromaVision's ACIS system was selected by principal investigators based on it's proven sensitivity and accuracy in detecting these rare cells. Earlier studies document the ability of ACIS system to accurately detect one cancer cell present in samples containing over 100 million cells. The sensitivity in automation of the ACIS system makes feasible clinical implementation of this test. A process that is highly tedious using conventional, manual, microscopic. ChromaVision second quarter revenues were 2.9 million, representing a 30% increase from the second quarter 2002. The company also reported a moderate increase in its installed base of units to a total of 246 building units compared to 236 reported at the end of the first quarter. If you'd like more information for this company, ChromaVision's earnings call regarding its second quarter 2003 results was held last Thursday, and is now posted on their website.

Turning to Compucom, in what continues to be an extremely difficult market, the company reported second-quarter 2003 net earnings of 3.3 million, or 6 cents diluted earnings per share. Second quarter 2002 earnings were 4.7 million or 9 cents diluted earnings per share. Compucom also reported second quarter 2003 total revenue of $378 million dollars, up 14.4% sequentially, but down approximately 11.4% when compared to the second quarter 2002. Safeguard holds a 59% voting interest in CompuCom and it is a leading provider of IT outsourcing technology procurement and integration services. Turning to our legacy companies, consistent with our stated strategy for our legacy companies, during the second quarter Safeguard has sold its interest in Docucorp and Pac-West. We also announced our intention to sell our holdings of Internet Capital Group, the sales of which were completed on July 14, 2003. As shown on slide 5 for the quarter ended June 30, 2003, Safeguard's consolidated revenues were 419.2 million and our consolidated loss net of minority interest was $3.2 million dollars. Safeguard's consolidated revenues for our strategic initiative subsidiaries was 26.7 million. Our share of losses net of minority interest was 10.5 million. Our cash balance, as of June 30, 2003, was 119 million, and as of July 29, 2003, has risen to 133 million. Let me now turn the call over to Chris Davis, our Chief Financial Officer, who will give specifics on the financials.

Thank you, Tony, and good morning. As you will see on slide 6, I will update you today on Safeguard's second quarter and year-to-date 2003 consolidated results in legacy company update and an overview of the parent company cash and marketable securities. As shown on slide 7, we reported a consolidated net loss of $3.2 million dollars for the second quarter of 2003. A reduction over our second quarter 2002 consolidated net loss of $33.9 million dollars. The improved operating results are due to a decline of $6.3 million dollars in impairment charges from $7.1 million in 2002 to $.8 million in 2003. Other net gains of $13.8 million in 2003, including the gains from the sales of Docucorp and Internet Capital Group versus net losses of .8 million for the same period in 2002. A $900,000 gain recorded in 2003 versus a $5.7 million dollar loss in 2002 on the mark to market adjustment for vertical net shares and finally a decrease in our share of losses of affiliates accounted for under the equity method.

As shown on slide 8, we reported a consolidated net loss of $18.7 million for the six months ended June 30, 2003. A reduction over the loss in the same period of 2002 of $74.6 million dollars, excluding the cumulative effect of a change in accounting principal. Our loss for the six months ended June 30, 2002, included the cumulative effect adjustment, including the cumulative effect adjustment was $96 million dollars. The improved operating results are due to, first, a decline of $17.6 million in impairment charges from $19.1 million dollars in 2002 to $1.5 million in 2003. Next, other net gains of $18 million in 2003, including the gains from the sales of Docucorp and Internet Capital Group versus net losses of 2.6 million for the same period in 2002. Next, a $800,000 gain recorded in the 2003 versus a $13 million dollar loss in 2002 on the mark to market adjustment for vertical net shares. A decrease in our share of losses of affiliate's accounted for under the equity method and finally the elimination of the accretion related to our telelab's forward-sales contracts which were settled in 2002.

We have included in this quarter's press release the segment results of operations for the three and six months ended June 30, 2003, versus the same periods in 2002. Our results show increasing revenues in our strategic initiative segment, due primarily to the inclusion of alliances revenues subsequent to its acquisition in December 2002, and the inclusion of Mantas and ChromaVision's revenues subsequent to acquiring the controlling interest in the second quarter of 2002. We continue to show losses in our strategic initiative segment, while these companies mature and gain traction in their respective markets. Safeguard's carrying value of its investments is reported under the heading ownership interest in and advances to affiliates on the company's parent company only balance sheets as reported in our form 10K and 10Q filings. They aggregate $248 million dollars at June 30, 2003, and $260 million dollars at December 31, 2002 as shown on slide 9. 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 that's included in the parent company balance sheet. At June 30, 2003, and December 31, 2002, the carrying value of our private company investments was $32 million dollars and $33 million dollars respectively.

At June 30, 2003, and December 31, 2002, the carrying value of our public company investments was $177 million and $184 million dollars respectively. The market value of the public company investments as of July 29, 2003, was $232 million dollars. At June 30, 2003, and December 31, 2002. the carrying value of our fund interest was $39 million dollars and $43 million dollars respectively. I'd like to turn now to providing an update for both our public and private companies and our private equity funds. As of June 30, 2003, we had 10 companies in our private company portfolio, as you can see on slide 10. Of which, three are considered strategic initiative companies. This reflects the closing of two companies during the quarter. As stated above, these companies had an aggregate carrying value of $32 million dollars at June 30, 2003, excluding the carrying value of Alliance Consulting, which was consolidated. We continue to assess our legacy companies for balance sheet and liquidity contribution on an ongoing basis with a view towards supporting our strategic initiatives.

We currently have seven public companies with a market value of $220 million dollars as of June 30, as seen on slide number 11. In June of 2003, Safeguard sold its interest in Docucorp -- to Docucorp for $5.95 per common share, resulting in total net proceeds of $17.7 million dollars. Safeguard reported a gain on this sale of $5.9 million dollars. In May 2003, Safeguard sold its interest in Pac-West Telecom, resulting in net proceeds of $.9 million dollars and a gain of $.2 million dollars. In connection with these sales, we also collected approximately $1 million dollars from Pete (inaudible) which was applied against the book value of his outstanding loan. We continue to pursue all legal avenues, collection of the entire amount due under this loan. During the second-quarter, Safeguard also announced its intention to sell its holdings of Internet Capital Group. As of June 30, 2003, we have sold $6.5 million of our Internet Capital Group shares, of which $3.8 million dollars in proceeds was received in the second quarter. The remaining cash of $2.7 million dollars was received during the first week of July. We sold our remaining holdings of Internet Capital Group during July, resulting in additional net proceeds of $12.7 million dollars, bringing the aggregate proceeds from sales of Internet Capital to $19.2 million dollars. We recorded a gain of $6.5 million dollars in the second quarter, and will report a gain of $12.7 million dollars in the third quarter.

As we noted in our press release regarding our sales of ICG shares, we may use the proceeds of these transactions to make additional investments in strategic subsidiaries, acquire additional subsidiaries which compliment our existing companies and markets, and depending on market conditions from time to time, consider steps to modify our capital structure, which may include the repurchase of a portion of our outstanding convertible debt or the purchase of outstanding securities. With respect to our private equity funds, we currently hold general partner and limited partner interests in 11 funds on our campus. These 11 private equity funds have an excess of $2.6 billion dollars in funds committed and Safeguard's commitment fees funds is a total of $126 million dollars, $95 million dollars of which has already been funded, including $3 million dollars during the second quarter.

We expect the remaining $31 billion dollars 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 dollars and Safeguard's commitment to them is $86 million dollars, of which $85 million dollars has already been funded. We continue to reduce our commitments to and participation in off campus private equity funds. Turning to slide 12, Safeguard's parent company cash balances were $119 million dollars, as of June 30, 2003, and $133 million dollars as of July 29, 2003. At June 30, 2003, we also carried a receivable of $2.7 million dollars relating to the sales of Internet Capital Group stock. The increase from $106 million dollars reported during our last earnings call on May 1, primarily reflects proceeds generated from the sales of Docucorp, Internet Capital Group and Pac-West. Partially offset by the $5 million dollars interest payment on our convertible notes and other corporate costs. Let me also note that these parent company cash balances at June 30, 2003, exclude $136 million dollars of additional cash balances primarily associated with our less-than fully owned but consolidated subsidiaries. The value of our public company marketable securities was $220 million dollars at June 30, and $232 million dollars at July 29. The increase is attributable to the fluctuation in the market values of these companies.

Our parent company cash and public company securities therefore totaled $339 million dollars at June 30, and $365 million dollars as of July 29. During the second quarter, we completed new investments and follow-on fundings of $6 million dollars, including the $3 million dollars to fund existing commitments to private equity funds. These investments are included under the heading acquisitions of ownership interests and affiliates and subsidiaries, net of cash acquired on the parent company's consolidated statements of cash flows. In addition, during the second quarter, we received $24 million dollars related to legacy company liquidations and fund distributions primarily related to the sales of our interests in Pac-West, Docucorp and Internet Capital Group. Turning to our parent company cash outlook on slide 13, remember that these balances from period to period will be significantly impacted by the pace of our (inaudible) activities, the pace and size of any acquisitions and follow on fundings to our existing companies and private equity funds.

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 2003. However, we begin the rest of the year with parent company cash balances of approximately $133 million dollars. We anticipate funding $6.6 million dollars against our existing commitments to private equity funds during the remainder of 2003 based on today's commitments. As we have previously said, we can't predict the size or pace of monetizations, cash distributions, or acquisition activity. Interest paid during 2003 will include the $5 million dollar interest payment made in June and the second payment of $5 million due in December related to the 5% subordinated debentures due in 2006. Tony and I will now take any questions that you may have.

If you would like to ask a question at this time, please press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Steve Moiier, Imperial Capital.

Hi, gentlemen, nice quarter. I apologize for my voice I'm a little under the weather. I caught the -- during the quarter you advanced $3 million dollars to your venture capital for your -- your private equity funds, did you also tell us how much you did to your sort of portfolio companies?

That's correct, we funded $3 million dollars to the private equity funds that were against previous commitments.

Uh-huh?

The total for the period was $6 million dollars, the remaining $3 million dollars was split between one small new investment and the balance was a follow-on investment to one of the private companies.

And then you were going through the changes to the parent company's cash position and you basically talked about other corporate expenses. Could you sort of fill in that blank for us so we could sort of see what you're doing in terms of cash for the holding company? I know I could probably get there if I really tightened up on what the total proceeds of all the stock sales brought in, etc., but --?

Yeah, the number for the second quarter relating to corporate operations was about $3.8 million dollars in total.

Great.

So that's -- that's all of the difference between the other numbers that I gave you.

Okay. That was it. I'm pleased with your monetization progress and it sounds like a lot of your portfolio companies are developing nicely.

Thank you.

Again, if you would like to ask a question at this time, please press star 1 on your telephone keypad. Your next question comes from William Brockalbank, Finly Park.

Good afternoon, gentlemen. Or at least it is here in London. Could you just help me understand exactly whether you received proceeds from the closing of your positions in procures wireless and Agari Media?

No, we didn't. There were no proceeds received.

No proceeds. And -- and nothing other than standard management costs in -- in doing that?

I'm sorry, Will, I didn't understand the question.

Well, -- no other costs associated with that -- with the winding up of those two companies?

No. We don't expect there will be any significant additional costs in winding them up.

Great. Thank you very much.

Your next question comes from Allan Khan, alman price Securities. Mr. Khan your line is open.

Hi I just have a quick question on Alliance. The integration of those businesses, can you comment? Has any turnover in consultants been greater or less than maybe you would have expected?

The integration of what was previously (inaudible) has gone pretty much according to plan. We've achieved the benefits we were looking for from that and the action itself did not induce any specific turnover of consultants.

Terrific. Nice quarter.

Ladies and gentlemen we have reached the allotted time for questions and answers. Mr. Craig, are there any closing remarks? .

Thank you. I think all I could say is we are encouraged, we are continuing to make progress in implementing our strategy in the second quarter. We're encouraged with the monetization pace, including the related gains and losses of those dispositions. While we continue to nurture our strategic initiatives companies. We'll keep you informed as our direction and progress makes -- as we make progress throughout the year. Thank you very much for your interest today.

Thank you. This concludes your conference. You may now disconnect.