Safeguard Scientifics Inc (SFE) 2006 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Safeguard Scientifics 2006 fourth-quarter and year-end results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. John Shave, Vice President of Investor Relations and Corporate Communications. Thank you, sir, you may now begin.

Good morning and thank you for joining us today for our fourth-quarter and year-end conference call. Joining me today are Peter Boni, President and Chief Executive Officer, and Steve Zarrilli, acting Chief Financial Officer. During today's call, Peter will review Safeguard's fourth-quarter and full-year 2006 highlights, noting specifically the progress that we have made towards our consolidated goals and objectives. Steve will then review the financial results for Safeguard and our partner companies providing some insight towards valuation, then we will take your questions.

Before we begin, we would like to caution you concerning forward-looking statements. During the course of today's call, words such as expect, anticipate, believe and intend will be used when referring to goals or events in the future, and the Company cannot be certain that the financial outcomes will be as described today. Safeguard's filings including our annual report of Form 10-K describe in detail the risks and uncertainties associated with managing our businesses. You are encouraged to read this language and the filings.

With that, I will turn the call over to Safeguard's Chief Executive Officer, Peter Boni.

Thanks John. Safeguard Scientifics and our partner companies are continuing to build momentum and we are very pleased to review with you a successful fourth quarter and a full year 2006. Many of these successes are a direct result of Phase I of our strategy that was put in place at the end of 2005. Safeguard is now positioned as a holding company in technology and life sciences.

During 2006 we realized successful exits that maximized risk adjusted value resulting in a profitable fourth quarter and year. Still as a holding company, our future success depends upon our deal machinery, our ability to identify growth companies, where we can deploy capital and partner with entrepreneurs to build value.

During the year, we augmented our organization both internally and externally with two advisory boards together with key board level and management additions, most recently, Dr. Mike Pellini joined our Life Sciences Group as a VP. His background as a former COO and CEO of a life sciences company along with investment banking experience enabled him to add value in many areas including the deal sourcing, the partner company coaching and the positioning for well-timed exits.

One position that remains to be filled is a CFO and we have an executive search under way. We're very happy to have Steve Zarrilli step up and act as our Chief Financial Officer for the Company in the interim. Collectively, these achievements position us to enter Phase II of our strategy, which is designated to increase our momentum to build shareholder value in 2007 and beyond.

First, some quick financial highlights. Safeguard reported consolidated Q4 revenues of $53.3 million after adjusting prior periods for discontinued operations largely as a result of the timing of our exits we recognized our fifth consecutive quarter of double-digit revenue growth. We also reported a profitable quarter with earnings per share of $0.59.

For the year, our revenue was $198.1 million with positive earnings per share at $0.38. These results are largely due to the successful Mantas exit we discussed on our last call earning us almost 4X our carrying value as well as the disposition of our stake in publicly held traffic.com which was recently acquired by NAVTEQ.

On the strength of our 2006 performance, we are now moving into the second phase of our strategy. Phase II of our strategy consists of four themes that we are executing upon in parallel, deploy, build, realize and provide, provide the additional tools to help you value our partners and Safeguard as a whole.

We're deploying capital in exciting growth companies in the life sciences and technology arena. We're building value in our partner companies by providing active, hands-on strategic and operational guidance as well as growth capital. We expect to realize the inherent value we are currently building from time to time as appropriate exits are timed to maximize risk-adjusted value. And lastly, we will be providing additional transparency to the investor community to better enable you to value Safeguard.

We believe that our successes in 2006 including the addition of five new and exciting partner companies and cash to our balance sheet position us to continue building momentum for 2007.

With that, let's review some of our highlights. We currently have 15 partner companies, eight in technology and seven and life sciences. Of these, five are majority held, one is public. We executed seven new transactions in 2006 including two acquisitions by partner companies and a follow-on financing.

On the technology side, Safeguard deployed $5.5 million for a 12% stake in security software company, Authentium; an additional $6 million in growth funding to the supply chain management software company, Acsis, raising our ownership to 96%; and $6 million to healthcare IT software provider, Portico Systems, for a 47% ownership; and $5.8 million to software enabled services company, Advantedge Healthcare Solutions for a 32% stake in the company. And Alliance deployed $5.6 million for the acquisition of Fusion Technologies.

We were just as active in the life sciences side with $20 million funding in Rubicor Medical for a 36% ownership; $6 million committed to NuPathe, for a 21% ownership; and $3 million in funding to publicly held Clarient for their acquisition of the assets of Trestle Holdings. Building value in our partner companies requires each of them to develop and maintain strong organizations so they can execute upon their game plans. Safeguard helps its partner companies to identify strong leaders to augment their organizations, it provides capital for organic or acquisitive based growth and it provides strategic and operational guidance and support to position each partner company for premium valuations.

There is a lot going on here so I will focus my comments on the fourth quarter activity. Our majority partner companies had a number of successes to report in Q4 demonstrating their ability to build value with the Safeguard support. In the fourth quarter, our IT consulting partner company, Alliance Consulting, posted a $1 million operating income. With strong Q4 bookings, Alliance is starting 2007 with a healthy level of backlog.

Acsis had the strongest software license booking during the fourth quarter of 2006. Its customer base increased 17% and management is effectively extending its software solution with a line level appliance solution within supply chain management. Acsis recently rearchitected its product portfolio and expects its expanded relationship with SAP to drive new business opportunities in 2007.

Pacific Title has been able to maintain its results despite movie production being down 20% or more. Nonetheless, Pac Title Services continue to gain recognition within their digital archiving technology. They recently received an academy award further new digital archiving technology. Congratulations Pac Title.

On the life sciences side, Laureate Pharma achieved record growth in 2006 with 14 new client agreements and a substantial increase in backlog. Its strongest pipeline in the company's history, Q4 revenue was up more than 100% on a sequential quarter basis and December was EBITDA positive. Now that's a first.

Publicly held Clarient reported significant growth in advanced cancer diagnostic services with decreased losses. In Q4, Clarient reported that they had started recognizing revenue on their new ACIS III systems and earned milestone payments for their development efforts with Dako.

Let me touch on some of the successes of our minority held partners during the last quarter as they have been building value. On the technology side, NexTone continues to be on a steep trajectory in terms of revenue growth, customer count and industry attention. With their hardware based competitor, Acme Packet having completed an IPO and now with a market cap approaching $900 million, we continue to be very encouraged.

The market for NexTone products is expected to double year-over-year over the next few years driven largely by the huge growth in Voice over Internet Protocol subscribers. While nearly 100,000 subscribers in 2003, the market approached 10 million in 2006. Analysts are predicting the market to more than double by 2010 to over 22 million subscribers. NexTone received the Internet Telephony Magazine 2006 product of the year award and was also cited as a Fast 50 company in Maryland by the Deloitte & Touche.

Authentium signed some significant orders including British Telecom and they have completed key management team additions with their CFO and sales executive posts filled.

Portico produced strong Q4 results as they continue to deliver software and implementation services to large healthcare insurance payers. Portico also received recognition by Gartner Group as the leading vendor in the National Provider Identification solution space.

In life sciences, Rubicor Medical has started shipping its initial quantities of some of their products, technologically, disruptive and minimally invasive biopsy and lumpectomy devices that couple with ultrasound technology to move these procedures from the operating room to the doctor's office. And Neuronyx has progressed into human clinical trials.

Our minority partner companies continue to progress in their business strategies including a 50% aggregate growth in year-over-year revenue based upon their preliminary results.

In addition to building value in 2006, we also realized value through four selective well timed exits. Earlier in the year, Mantas sold its telecom unit for $2.1 million and then we sold Mantas itself to i-flex, a subsidiary of Oracle for which Safeguard received $112.8 million. Alliance Consulting sold its Southwest operations for $4.5 million. Lastly, we sold our small minority position in publicly held traffic.com ahead of their acquisition by NAVTEQ which was completed earlier this week.

I will let Steve provide you with more detailed financials later but as a result of all of this activity, cash on our parent company balance sheet at the close of 2006 was $154.1 million. We have entered 2007 with a strong balance sheet.

We have a very active pipeline of opportunity and we are assessing both technology and life sciences businesses. We have anticipated deploying capital in both of these areas this year. Our strategy for deploying capital is to identify and embrace major trends in the industries that we have targeted. We then locate companies who are actively in those target segments and we qualify these companies as potential partners. We then become confident that we can build a valuable partner and a strong management team and then we move towards committing capital.

Once we make the decision to dedicate both capital and our internal resources to a partner company, we become an active partner. Remember that we have put a considerable effort into building a team here at Safeguard with tremendous industry and management expertise. One of the reasons our partner companies choose Safeguard is because of that industry strategic and operational experience that we bring to the team.

While growth potential was one of the top criteria in selecting partner companies, Safeguard's ability to be a hands-on partner to nurture this growth and we do that in many ways from helping to focus the business strategy in management, reposition companies in the marketplace, align resources and assets with long-term goals and of course, deploying capital for these partners to fund organic and acquisitive growth.

Partner companies are in various stages of their growth from pre-revenue to more mature. We believe we are constantly building value in our partner companies. In 2006, we had a number of exits, the most significant being Mantas which returned 4X our carrying value. While we can't promise that this type of return we always expect to see, we hope to provide additional data points for you to help you triangulate the market value versus the carrying value of our holdings.

From time to time as appropriate we expect to realize the value we have helped build. Over the next 18 months, we would expect that as many as a third of our partner companies could present us with liquidity opportunities. Over the following 18 months or to 1.5 years to three from now, you would realize value -- we could realize value in another third of our holdings. And then in the last third we could see exits beyond that three-year horizon. And naturally any decision to sell our holdings in a partner company would be made based upon their prospects, market timing, many other considerations which could meaningfully impact overall timing estimates.

Of course, we will continue to redeploy capital and build value with partner companies during this period as well. In order to provide our shareholders with the proper tools for valuing Safeguard, Steve will provide some illustrations to help investors value our public majority private or minority private partner companies. Our intention is to provide you with the additional tools to assign the appropriate market value to our holdings and to Safeguard overall.

Now before I turn the call over to Steve, let me say that we believe Safeguard made significant progress in 2006. We executed well against Phase I of our strategy, and we move into Phase II, we believe we can accomplish much, much more in the quarters and year ahead. Steve, go ahead.

Thank you Peter. And to those of you I have not had the opportunity to meet, I'm glad to be here as the acting Chief Financial Officer for Safeguard. I'd like to start representing our Q4 and 2006 financial results and then review the financial impact of changes in our holdings. Finally, I would like to provide you with some tools to help you value our partner companies through historical examples.

Safeguard's consolidated revenues were $53.3 million in the fourth quarter of 2006, up from $40.7 million in the fourth quarter of 2005. For the full year, our revenue was $198.1 million. After restating prior periods for discontinued operations related to our sale of Mantas, this is the fifth consecutive quarter of strong year-over-year growth in quarterly consolidated revenues for Safeguard.

The magnitude of the exits that we realized in Q4 drove Safeguard to profitability not only for Q4 but for all of 2006. In Q4, Safeguard is reporting earnings of $71.3 million. For the year, we are reporting earnings of $46 million.

In Q4, we provided a new partner, Advantedge Healthcare Solutions, with $5.8 million in capital for a 32% ownership position in the Company. As you know, we sold our holdings in Mantas and traffic.com. These sales helped drive a significant jump in our cash position from Q3 to Q4 with cash at year end of $154.1 million.

Safeguard has a distinct business model and that has an impact on the presentation of our results and how we believe our shareholders should look at us from a valuation perspective. We believe the true value of our partner companies is not fully reflected in our financial statements. The carrying value or book value does not reflect the actual market value of our partner companies.

Because market values for our private companies are not readily available, we discuss operating and business milestones to provide a measure of their progress. As of December 31, 2006, the carrying value of our holdings was $178 million with $11.7 million from our public companies, and $158.6 million from our private companies and $8.1 million from our remaining private equity fund interests.

We currently have one public partner company, Clarient, with an aggregate market value of $72.8 million as of December 31. This is over six times our current carrying value for Clarient. Our carrying values represent the original acquisition cost and follow-on funding, plus our share of the earnings or losses of each company reduced by any impairment charges.

It is important to recognize that carrying value does not reflect the actual market value of these holdings since under Generally Accepted Accounting Principles, we cannot mark-to-market the value of our companies. Therefore, in evaluating Safeguard, we think you should look beyond the carrying or book value of our partner companies. The multiple on realized exits like Mantas and the market value of our public company holdings versus the carrying value is one way to estimate market value.

Since there are no market values readily available for our private companies, we discuss financials and business milestones so that you can track progress. This is how we evaluate the growth and the value of our partner companies and will help you to measure improvement in our net asset value or NAV.

We have also recently discussed providing Wall Street with tools that will make us more transparent allowing you to better value Safeguard. For example, in our press release we provided individual carrying value data for our majority owned companies as well as aggregate cost and carrying value for our minority owned companies.

We are also happy to report that we now have four analysts actively covering the company, up from one analyst a year ago. They are Bill Sutherland of Boenning & Scattergood; Bob Labick of CJS Securities; Cheryl Cortez of Susquehanna Financial; and Manish Vora from Monness, Crespi, Hardt. Each analyst provides tremendous insight on Safeguard and how to value our partner companies and Safeguard as a whole.

In addition to the increased sell side coverage we have attracted, we plan to increase our visibility in 2007 by presenting at more conferences and meeting with investors one-on-one throughout the year to proactively communicate the Safeguard story.

With that, I'm going to turn it back to Peter.

Thanks Steve. 2007 takes Phase II into full swing; deploy, build, realize value and provide the tools to better analyze the value of Safeguard Scientifics.

Just to provide you with a quick update on year-to-date 2007 activities, last week, we announced the recent capital deployment in Advanced BioHealings, our regenerative medicine company focused on the development and marketing of cell based and tissue engineered products.

In addition, another one of our partner companies Advantedge Healthcare Solutions just announced its acquisition of Professional Billing & Management Services, a premier anesthesia billing company located in Chambersburg, Pennsylvania. This acquisition reflects AHS's corporate growth strategy to utilize their highly efficient platform as an acquisition vehicle in the physician billings arena.

Expect to see continued activity as we deploy, build, realize and provide. Safeguard has a rich and colorful history of innovation. We are working to keep that motor running. Thanks for your continued support.

Donna, we would be happy to turn this over to questions now.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Good morning and congratulations on a great year, gentlemen.

Thanks Bob.

A couple questions I wanted to ask. First, if you could give us an update on some of your companies in terms of which are performing ahead of expectations? And maybe which are a little behind either for company specific or industry reasons. And tell has us how this impacts your investments in them and your time spent with these companies, just to give us a sense of how you are running the show?

Okay overall, Bob, we're very pleased with the progress of our companies in total as well as individually. Each one of our companies has been executing against their own specific game plan and Safeguard continues to put the hand on the stick with a management there to help that execution. So in aggregate, we are very pleased with the performance of each of our companies in both the technology as well as the life sciences space.

Great. Could you -- I guess based on company specific or industry specific reasons is there any way that you would spend more or less time or how do you allocate your time that you spend with your partner companies if you could help us understand that?

How do we allocate our time? I think we take a look at where we can build the highest degree of value in the quickest period of time, and that is where we spend our time.

Manish Vora, Monness.

Hey guys, congratulations again. A couple questions. Can you give us a little bit more detail in terms of what metrics you would be providing going forward on the partner companies?

I'm going to turn that over to Steve Zarrilli and let Steve answer that question.

This year as you can see in our press release, we for the first time shared specific information with regard to carrying value of our majority partner companies and we have also provided in the aggregate a carrying value for minority partner companies as well as aggregate cost data. As we continue to evolve with the companies that we have and investment in, we're going to look to consider providing other information, things like EBITDA for these companies, especially our partner companies -- our majority owned companies. And we will continue to evaluate what information we believe would be meaningful as it relates to the other minority owned companies as well.

It is not necessarily going to be a specific metric on a quarterly basis, it is going to be kind of as we go and also some additional details on the quarterly calls?

Right. It is going to evolve is the best way to put it. As we begin -- as we continue down this path of greater activity around making -- putting capital to work so to speak and having a significant portfolio of partner companies, we will continue to look to see what information would be most appropriate.

Eric Swergold, Gruber & McBaine.

Good morning. It is certainly a pleasure to see the progress over the last 18 months.

Thank you, Eric.

Two questions for you. One, the question I have asked for the last couple of years, which is given that your cash position is high and has now jumped dramatically, would it makes sense to have a share repurchase plan in place for those times where the shares dip below either NAV or your perceived NAV based on the market values of your holding?

And then the second question is, in the BDC space, companies that you lend money and you collect a dividend, obviously that doesn't really apply to us because you have the NOL, so we pay no taxes on your gain. But would it makes sense to have part of your investment portfolio be carried in loans to some of your companies where you could use the coupon from those loans to cover your operating costs so that the company could operate at sort of a breakeven level? And then when you have the big equity gains you could get earnings as opposed to kind of shifting back and forth between profits and losses depending on the timing of exits?

Thanks Eric. We believe we have the proper degree of cash to execute against our business plan of deploy, build, realize and provide, and that is what the Board of Directors has given us a directive to do at this stage. Take that cash and execute against the business plan. And we have a pipeline of activity that is significant and we believe we can adequately put that cash to good and effective use.

I will let Steve address the potential loan possibility with some of our capital.

Thanks Eric. We will continue to look at opportunities to put capital to work in ways beyond just acquiring equity within these companies. We are mindful of the opportunities that may exist to provide some form of mezzanine financing to not only generate income to shelter or cover some of the operating expenses of the parent, but also recognizing that this type of lending to these partner companies may be advantageous to them as they mature in their growth.

All right. Thank you very much.

Bob Labick, CJS Securities.

Thanks. Another question I wanted to ask was regarding your pipeline. Is there any way you can discuss the pipeline maybe now versus a year ago? And I don't know if it is quantifiable or not, but just give us a sense of the I guess acquisitions or investment opportunities that you are looking for and quantify it and tell us how we should think about it going forward?

Thanks Bob. Actually with me dusting off some of the road dust from going out and building that pipeline of activity is both John Loftus, who runs our technology group and Jim Datin, who runs our Life Sciences Group. I will ask each of them to comment anecdotally about the generation of activity in our pipeline.

John, can I start with you?

Sure. I guess, the starting point is, over the last year we have built the technology deal team up. Our latest addition was Erik Rasmussen, a veteran in venture capitalist for eight years that joined our team. Correlated to that staffing is probably the biggest pipeline of deals that we have seen in the last four years across the spectrum from majority opportunities to minority financing opportunities.

So I would say from a qualitative perspective in the technology side of the house that we have our strongest pipeline ever. And we look forward to continuing to deploy capital in great opportunities.

Bob, it's Jim. I would echo what John just said. In regards to the team, we brought on Dr. Michael Pellini, as Peter mentioned earlier. Mike will be a great addition to our team and we continue to expand that. Specifically in regards to Life Sciences Group, the pipeline is the largest that it has been our company history. Tremendous amount of deal flow and we are out executing to get a lot of transactions completed this year, so we remain very favorable as to what we plan to accomplish this year. It will be a good year for us.

That being said, the thing to look for from Safeguard -- and this isn't numerically correct, it is directionally correct -- we would rather have larger stakes in fewer companies than having 5% stakes in 55 companies.

Bill Sutherland, Boenning & Scattergood.

Thank you. Good morning everybody. I've got a couple of operating company questions if I might. In Alliance, can you give us a little color behind the numbers? And how you feel about the growth outlook for '07?

Hi Bill. This is John Loftus. Tony Ibarguen and John Castleman down at Alliance had a terrific year in 2006. They repositioned the company with both a disposition of the Southwest region and then a strong acquisition of more offshore talent infusion. They continue to build offshore. It is a business as you know that is -- has some seasonality in that the first half is typically weaker than the second half both on the top line and the bottom line. And we believe that it will continue with our path.

I think underlying it is the quality of revenue continues to improve. Meaning as we shift revenue offshore and shift to higher level services, the value of that revenue increases. But again, the first half is typically weaker than the second half. That has held true since we acquired the asset and we anticipate that for 2007.

Okay and the other one, I'm just not getting a sense of their direction is Pac Title. I understand the macro picture is challenging. How do you manage in that environment?

Though we manage by focusing on -- we brought out new products with the digital intermediate and the shift to digital versus analog. And so they shifted revenue within different service lines at Pac Title. But we have also been very mindful of watching operation on expenses and trying to minimize our CapEx investment to [match] the opportunity. So I think we watch it closely and we work with the management team to ride through the dip in overall demand.

Okay and then over on Jim's side, that was incredible uptick in Laureate. And you are looking for that to be EBITDA positive next year, Jim?

Well they were EBITDA positive, Bill, in Q4. So we are pleased with that. That happened because they won 14 new customers last year and as you know, they have expanded the facility so their capacity has grown significantly for what the can now accomplish. The pipeline remains very strong there and you're going to see a very strong performance in topline growth this year. We're working to get to EBITDA positive, but not have stated publicly when we hope that to be accomplished yet.

Just to qualify, Laureate was EBITDA positive in December as opposed to in Q4 but we will call that directionally correct.

Cheryl Cortez, Susquehanna International Group.

Hello. Congratulations. Actually most of my questions were answered with Bill's, but I was just wondering, according to the 8-K that came out recently that Pacific Title doesn't plan to renew its credit facility. I was just curious as to why?

This is John Loftus, Cheryl. They have sufficient cash on the balance sheet and don't have any need for that facility at this point in time.

Okay. Thanks for a great quarter and the rest was answered.

Thanks Cheryl. I'm glad to see that you read some of our publications.

Manish Vora, Monness.

Sorry guys. The questions on Alliance and Laureate were answered. Thanks and we will see you on the Life Science Day.

Okay, great. Thanks.

Thank you. At this time, I will turn the conference back over to Mr. Shave for any closing comments.

Well, if there are no additional questions, you can always call John Shave at 610-975-4952. And on that note, we are very pleased to have presented our results and look forward to continued progress as we build value in Safeguard Scientifics and all of its partners. Thanks very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.