Safeguard Scientifics Inc (SFE) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Safeguard Scientifics 2007 first quarter 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, Mr. Shave, you may begin.

Good morning and thank you for joining us for Safeguard Scientifics first quarter 2007 earnings conference call. I'm John Shave, and joining me on the call are Peter Boni, Safeguard's President and Chief Executive Officer, and Steve Zarrilli, Safeguard's acting Chief Financial Officer. During today's call, Peter will review Safeguard's first quarter 2007 highlights, Steve will then review financial results for Safeguard and our partner companies and provide some insights into valuation, then we'll open up the call for questions. Before we begin, Safeguard would like to caution you concerning reliance and forward-looking statements. During the course of today's call, words such as expect, anticipate, believe, and intend will be used to -- when referring to goals or events in the future. The company cannot be certain that the final outcomes will be as described today. Safeguard's filings with the SEC, including the annual report on Form 10-K described in detail these risks and uncertainties associated with managing our business. We're encouraged to read the language in these filings. With that I will turn the call over to Safeguard's CEO, Peter Boni.

Thanks, John. I'd like to thank all of you for joining us this morning. As a result of the successful 2006 Safeguard Scientifics was able to drive forward into 2007 with the momentum that we built as a holding company in technology and life sciences businesses. My comments this morning, I'll share with you a quick review of financial results for the quarter, details around some of the milestones we achieved on our game plan, and recent highlights about our partner companies. For the first quarter of '07, Safeguard reported consolidated revenue with $39.5 million, with a net loss of $0.10 a share. This compares with consolidated revenue of 37.3 million and a loss of $0.05 a share in the first quarter of '06. As you know, Safeguard is a holding company, not an operating company. As a result, operating results may vary from quarter to quarter. The way we measure our success is the ability to deploy capital and attractive opportunities in technology and life sciences, build value in those holdings, and then realize that value through selective well-timed exits.

During the first quarter, we executed very well against this game plan. Our focus on the technology and life sciences sector is a key component to our strategy. Not only do these represent fast growing segments of the economy, but they also tend to run counter cyclical to one another providing some balance to our holdings In the first quarter, Safeguard deployed capital in two new companies, one in life sciences, one in technology. In February, we led a $25.5 million series C financing round for Advanced Bio Healings, a leader in the field of regenerative medicine. We deployed $8 million for a 24% stake in the company. ABH is using the proceeds of this round to -- for two primary purposes. First to launch Dermagraph, a cellular based artificial skin product approved by the FDA for the treatment of diabetic foot ulcers. And second to support clinical trials for Celladerm, its next generation bioengineered tissue replacement product. Currently the annual market spend for Dermagraph and comparable products is more than $500 million and is growing at a 13-18% compounded annual growth rate according to many analysts. In March, we provided $13.5 million to beyond.com for a 37% stake in the company. Beyond is the largest niche career network for business and the leading provider of career services to job-seekers in the United States.

Beyond operates over 15,000 online communities, which make up the largest niche and the local career network. Providing job postings, career services, online lead generation, and online advertising. This network of websites attracts over 3 million unique visitors per month and powers the career portals of some of the web's best-known career brands. Beyond.com is a rapidly growing its network of local career portals, which include Phillyjobs.com, Seattlejobs.com, and Phoenixjobs.com. Beyond will also use a substantial portion of the capital to fuel key executive hires, drive marketing, and pursue new strategic opportunities. The company's already a profitable company. And with Safeguard's support will help accelerate beyond.com's leadership and growth as a top 10 career platform. In the area of building value, we're continually working with management of our partner companies to develop and implement strategies to enhance value. An example is the sale of Clarient's advance cellular imaging systems business to [Inaudible] Micro Imaging in the first quarter. In 2006, Safeguard provided Clariant with funding of $3 million to acquire assets and technology from [Trussel] Holdings.

By combining these assets with Clariant's instrument technology, Clariant was able to increase the value of its systems business and ultimately sell it for gross proceeds of $12.5 million. Not only does the sale strengthen Clariant's balance sheet, but it also enables the company to focus on continued growth in the lab services business. We're very pleased to see Wall Street beginning to recognize the value of being created as Clariant's public market cap has nearly tripled since the beginning of Q4 to the end of Q1. Delivering on the third part of the strategy of realizing value from our holdings, Safeguard completed the sale of its wholly owned subsidiary Pacific Title and Art Studio for gross proceeds of $23 million at the end of March. Safeguard first acquired an interest in Pac Title in 1997. However Pac Title no longer fit the core focus within technology and life sciences Today, Safeguard primarily seeks technology companies that focus on software as a service, technology enabled services, and internet based businesses. And life sciences we primarily focus on molecular diagnostics, medical devices, and specialty pharmaceuticals. In addition to sharpening Safeguard's strategic focus, the Pac Title sale provided Safeguard with additional capital in Q1 to offset the capital deployed in both ABH and beyond.

With the activity that I just described, Safeguard now has 15 partner companies. 8 are in Technology, 7 in life sciences, 4 are majority held, and one is public. There's much activity to report on our partner companies, so let's just go right at it. The life sciences side of the house was very active during Q1. In addition to the sale of the instruments business, Clariant had a strong Q1 performance reporting 61% year-over-year revenue growth. Clariant is now tightly focused on lab services where revenue grew from $2.2 million in 2004 to $28 million in 2006. And the annualized run rate in Q1 was over $35 million. After record growth in 2006, Laureate Pharma saw Q1 more than double year over year for the second quarter in a row. Laureate's annualized revenue run rate in Q1 was $20 million. Since its acquisition in December of '04, Laureate has focused on targeting biopharmaceutical companies doing preclinical, clinical, and small scale commercial projects. Laureate has achieved break through performance, doubling their revenue while substantially reducing their losses. The company has grown its customer base and pipeline by targeting large scale molecules and complex proteins in smaller quantities in its FDA registered facility. Among our minority life sciences partners, many of them are entering revenue stage with bright growth prospects.

Rubicor, in the medical devices space, is launching their FDA cleared biopsy devices. Advanced Bio Healing launched its Dermagraph engineered tissue product, it sold out its first two production runs and it's very encouraged as an interest in first full quarter of commercial activity. Among our majority held technology partner companies, Access continues its transition, less hardware resale and more software solutions. Also, new executive talent and marketing, its partnership with SAP, and the initial implementations of its new Pharma and new CPG specific solutions are all gaining traction. Additionally, the company announced the Access Solution Center in support of the SAP manufacturing solution and the SAP supply chain management application. They just returned from SAP's annual Sapphire Show in Atlanta and an [RFD] show in Orlando having received excellent feedback for the software solutions in both categories and both shows. Alliance Consulting faced some revenue challenges this quarter due to customer decision delays and a weaker overall IT project spending. However, technologies saw modest booking strength in Q1.

Despite softness in CapEx and IT services spending among fortune 2000 companies, the remainder of our companies, the remainder of our technology partner companies, among them [Portico], beyond.com, and [Authentium] continued to show significant traction as they execute upon their growth strategies. Health care IT company Advantage Healthcare Solutions completed the acquisition of a profitable billing provider and it's working on integration activities, as well as continuing it own organic growth. And they kicked-off their alliance with IBM. And Next Home is seeing growing attention from both customers and industry thought leaders, as it continues to execute its growth plan. It was named as the winner of Network Worlds 2007 Best of Test for Voice Over Internet Protocol Security. Before turning the call over to Steve, let me summarize by saying that Safeguard delivered against its strategic plan in Q1 with two new acquisitions, the sale of one partner company and many developments building value at our majority and minority held technology and life sciences partner companies. While we can't promise this level of activity every quarter, we believe we're well-establishing an appealing track record, and we're working hard to keep that momentum going. Now, let me hand the call over to Steve to go over the financial results.

Thank you, Peter. I'd like to start by presenting our first quarter 2007 financial results, and then I'll provide you with some tools to help you value our partner companies. Safeguard's consolidated revenue was $39.5 million in the first quarter of 2007, up from 37.3 million in the first quarter of 2006. For the quarter, we had a net loss of 11.7 million compared to a net loss of 6.5 million in Q1 of 2006. The primary reason for the change in this net loss between Q1 of 2007 and Q1 of 2006 of approximately $5 million is in part due to one, a $3 million of other income in 2006 comprised of a mark to market adjustment on our investment in traffic.com, a discount achieved on the repurchase of certain debt, and the distribution received on a legacy investment. In addition, in Q1 of 2007, we have recorded our share of operating losses of approximately $2 million on new holdings accounted for under the equity method of accounting. As Peter mentioned, Safeguard is a holding company, not an operating company. While our goal is to enhance shareholder value over the long-term, our results can fluctuate significantly quarter to quarter. In Q1, we added two new partner companies deploying a combined 21.5 million in capital.

With our $23 million sale of Pac Title, cash on our balance sheet was $147 million at March 31st, 2007. Naturally, Safeguard's unique business model has an impact on the presentation of our results as well as how we believe our shareholders should look at us. As we have said in the past, we believe the true value of our partner companies is not fully reflected in our financial statements. We don't believe that the carrying value or book value of our partner companies fully reflects their actual market value as we have seen in recent transactions. As of March 31st, 2007, the carrying value of our holdings was $173 million, with $11 million from our public companies, $156 million from our private companies, and 6 million from our remaining private equity fund interest. We currently have one public partner company, Clariant. The market value of our stake in the company was $94 million as of March 31st. This is almost 9 times our carrying value for Clariant. 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's important to recognize that carrying value does not reflect the actual market value of these holdings.

Therefore, in evaluating Safeguard, we think you should look beyond the carrying or book value of our partner companies. The multiple unrealized exits and the market value of our public company holdings verses carrying value are ways to estimate market value of our other partner companies. Since there are no market values readily available for our private companies, we discuss financial and business milestones so that you can track progress. This is how we evaluate the growth and the value of our partner companies. This will also help you to measure the value of our partner companies and of Safeguard. Again, this quarter we are providing you with the tools to help investors estimate Safeguard's value. Our press release shows individual carrying value for our majority-owned companies as well as aggregate costs and carrying value data for our minority partner companies. With that, I'll turn it back to Peter.

Thanks, Steve. I'd like to recognize Steve. We're really pleased with how Steve has stepped in and smoothly managed our finance and administration efforts while we continue to search for a permanent CFO. Before we open up the call for questions, let me tell you how excited we are at Safeguard about 2007. We've ignited our deal machinery, we're on track to deliver the goals we set forth last quarter, and by delivering on our game plan, we expect to keep building value for our shareholders. Diego, let's open up the call for some questions at this time, okay?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Bob. One moment please while we poll for questions. Our first question comes from Bob Labick with CJS Securities. Please state your question.

Good morning.

Hi, Bob.

Hi. I have a couple questions. First I wanted to ask-- and Peter, I know you touched on this a little in your prepared remarks, I was hoping you could expand on it, Could you give us a sense of the factors that are impacting the current environment for alliance? And are those factors impacting the rest of your IT? Or are they independent and what's the outlook for kind of the year?

Okay, Bob. IBM recently announced a 1500 person downsizing in their global services business, specifically in North America, specifically as a result of enterprise 2000 accounts with a softening of CapEx and a softening of deployment implementation. I think that is the impact that is seeing that alliance is seeing. That being said, with the bookings that they had in Q1 and the scheduled backlog for Q2, and the past track of revenue in previous years from a seasonality standpoint, I think we'll see a rebound, a modest rebound, in a going quarter. And uplift in their profitability, as well. So we would look for modest growth, if you will in alliance going forward.

Got it, and in general, you've discussed this company -- you're not an operating company, you're a holding company. And if the company had reached an inflection point such as Alliance is approaching or is at. You seek a well-timed exit. Does the current near term change in environment your thinking in relation to Alliance?

We have no change in our thinking with Alliance at this time. You had another question regarding the impact on our other companies, Bob, and let me address that, as well. Many of our newer companies reflect our strategy and the focus we've had in some growth segments. And as a result, each of those companies is undergoing its own growth initiatives and are tracking admirably well to varying plans we have. Remember, we have five strategic themes. Maturity, Migration, Convergence, Compliance, and Cost Containment found equally within life sciences and technology. In the technology segment, we have focused in on pieces of enterprise applications or analytics or pieces of the IT infrastructure that come with the recurring revenue theme. Software is a service, or the on demand delivery model, as well as technology enabled services. And we believe there were three vertical markets where entrepreneurs had greater opportunity for penetration and rapid growth. And the IT healthcare space, and financial services and certain internet based businesses. In the life sciences arena, it was diagnostics, devices, and drug delivery, or specialty Pharma. And each of our new companies reflect that strategy. And as a result, they are growing admirably and not seeing the same issue that Alliance is seeing.

Great. And then one last question and I'll get back in queue. Just switching over to -- I don't know if you can answer this or not. But in terms of your latest, I guess second to last acquisition of Advanced Bio Healing Obviously you said you led a $25 million round, but you took a 24% stake for $8 million. Could you walk us through, the decision you guys think about when why 24% why not 50% or 100%? You were obviously involved in the entire round. How is the decision made to be a 24% stake versus 50, I guess is the question?

Well, we took what we could get, is one answer. And if we could get more and as the company continues to perform well and if it's properly priced to enable return to our shareholders when we see an exit, we'll do so.

Terrific. Thank you very much. I'll get back in queue.

Our next question comes from [Manesh Vohr] with [Monas]. Please state your question.

Hey, guys.

Hi [Monesh].

How are you? The next question on Alliance is in terms of you moved over to an operating loss for the quarter. Do we expect as the revenues kind of come back a little bit that we'll get back to an operating positive?

As the revenues for Alliance goes positive, I think the earnings for Alliance will go positive, as well.

Okay. Switching over to Laureate, we're expecting some kind of operating margin improvements this year and it doesn't look like that's happened in Q1. Can you kind of comment on how you see Laureate for the year?

Can I turn that over to Steve and ask him to comment?

Actually, Laureate is actually exceeding plan, meaning and slightly exceeding planned. And we expect that they will continue to do so for the balance of the year so when we look at Laureate, we actually think they are headed in the right direction as their losses begin to lessen as they move towards profitability.

Laureate doubled their revenue and halved their losses, we'll call that directionally correct,[Monesh] okay?

Okay. And in terms of kind of how you're seeing the deal pipeline right now. How does it look?

We're very encouraged with the depth and breadth and the quality in our pipeline. And we continue to work that pipeline. And when we have something to announce, we'll announce it.

Okay. Thanks, guys.

Our next question comes from Bill Sutherland, with Boenning and Scattergood. . Please

Thanks, hey, Peter.

Hi, Bill.

Most of the questions have been hit. I'm kind of curious at the place you're at with access in terms of the transition away from the hardware [Inaudible] revenue. How much more do you have to work through so we can start to see the growth really come through there?

Well, what we're looking at, Bill, honestly as the continued growth in the software solutions business and that continues to perform very well. And on top of that, that comes with the higher margins. So as we continue to make that transition, we should see the abatement of the effect of lesser hardware revenue and greater software revenue. Doesn't come with appreciable margin. So frankly we don't really think that overall if the company has got flat revenue that that's a negative. We think this is a positive because the software solutions is growing so rapidly.

Can you just give us a feel for the mix of revenue?

It's -- Bill, Steve Zarrilli here, it's not something we've really provided detail as of yet.

OK, that's it. I'll talk to you all later.

Thank you.

Our next question comes from Eric Swergolg with Gruber McBaine . Please

Good morning.

Hi, Eric.

In terms of Alliance consulting, I know it's a big portion of your revenues, but not necessarily a big portion of your value creation in recent years. How does this quarter change your thinking in terms of whether that's a platform to make further acquisitions in the IT services base verses a potential candidate for value realization verses your low-cost [Inaudible]?

I'd say that there's no real change in our fundamental thought process regarding the positioning varying of our companies. For liquidity. If you'll recall last fall, I stated that as a guidance that we had, I think 14 or 15 companies at that time. I stated that a third of them should be positioned for liquidity the next 6-18 months, a third in the 18-36 month time frame, and a third it'll take us a few years to build value in those holdings to realize an exit. In the 6 months that has thus far passed, we've divested of 3 companies.

Okay. And then second question on Alliance is in terms of the top line softness there this quarter, was there any customer concentration in particular that set that off? Or was it broad based?

There was some concentration, Bill. And one in particular is that a customer was acquired by another firm. And as a result that project went away. And I think that was more than half of the downturn in revenue. The other couple of million dollars were attributed to delays by customers because of the environment in which the IT solutions business is in within enterprise 2000 clients.

Okay, and then you mentioned that the backlog is now up within Alliance.

As it reflects upon the coming quarter given the backlog and the schedule for delivery, I would anticipate an uptick in the revenue in Q2 there. And if one looks at past seasonality I think they'll see the trend.

I mean, it sound like the issue at Alliance is more a customer specific issue than necessarily a loss of market share for Alliance, I mean, maybe it's partly to blame by the environment, but it sounds more like businesses get acquired and you get a change of mix and have a short-term hole to fill, but not necessarily a loss of market share.

Yeah, I think 60% of the revenue down tick was as a result of that one customer and 40% as a result of the market trends. Not to down play the market trends, they're real, and IBM is just an example of a company that is addressing that and the adjustment of its business.

Okay. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS] We will pause for a moment to poll for questions.

Okay, with no other questions, I'd like to thank you for your continued interest in Safeguard and stay tuned as we execute against our game plan. We're very excited about what results we'll put forward. Thanks much.

Thank you. This concludes today's conference, thank you all for your participation.