Safeguard Scientifics Inc (SFE) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Safeguard Scientific 2007 second-quarter results and 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, VP of Investor Relations. Thank you. Mr. Shave, you may now begin.

Good morning, and thank you for joining us for Safeguard Scientifics' second-quarter 2007 earnings conference call. I am John Shave, Vice President of Investor Relations and Corporate Communications, for Safeguard. Joining me on the call today from Safeguard are Peter Boni, President and Chief Executive Officer; and Ray Land, Senior Vice President and Chief Financial Officer.

During the call today, Peter will review Safeguard's second-quarter 2007 highlights. Ray will then review the financial results for Safeguard and our partner companies and provide some insights into valuation. Then we will open the call up for questions.

Before we begin, Safeguard would like to caution you concerning reliance on forward-looking statements. During the course of today's call we'll use words such as expect, anticipate, believe and intend and will be used when referring to our goals for future 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, describe in detail the risks and uncertainties associated with managing our businesses. You're encouraged to read the language in these filings.

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

Thank you, John. Thanks to those of you who are interested in the call today. Before we get started, I would like to extend a welcome to Safeguard's new CFO, Raymond Land. Ray joined us in June. He has over 30 years of experience, which includes more than 15 years of public company CFO experience along with private company, general management, and public accounting experience. Ray brings a terrific skill set to Safeguard with his knowledge of managing public companies through growth, acquisitions, and IPOs along with his experience with SEC regulations, Sarbanes-Oxley compliance, and audit committee responsibilities. We're really pleased to have Ray on board with us.

In today's call, we'll provide you with some recent milestones towards our game plan, second-quarter highlights from some of our partner companies and a summary of financial results for the quarter. As a holding company, not an operating company, we measure our success in how we perform against our strategy, which is to deploy capital and new high potential situations in the technology and life sciences arenas, build a value in those holdings and realize that value through selective well-timed exits.

In the second quarter of 2007, our management team executed well upon these areas. As you know, the timing around deploying capital [and partners], building value and realizing exits depends on many factors. Today we have an active pipeline, although the exact timing does not always fall cleanly within quarterly boundaries. During the quarter we spent a good amount of time helping to build value in our partner companies and then recognized tangible results for many. Ultimately, we aspire to time our exits to maximize risk adjusted value.

In May, we co-let a $26 million financing with AllianceBernstein's venture fund, providing $7.3 million of capital for a 14% stake of Avid Radiopharmaceuticals, which also included strategic partners Pfizer Strategic Investments Group and Lilly Ventures. We're also excited about Dr. Ernest Mario, Chairman of Reliant Pharmaceuticals and former CEO of Glaxo, joining the Avid Board. Avid is a leader in the development of molecular imaging products for neurodegenerative disease such as Alzheimer's, Parkinson's and dementia, which collectively represent nearly 80% of the memory disorders affecting patients today in the United States.

Also, according to the World Health Organization, nearly one billion people worldwide are affected by, and an estimated 6.8 million people die every year, as a result of neurological disorders. And as a global population ages, there is an increased demand for radiopharmaceutical imaging agents for diseases of the central nervous system, which is a fast-growing under-served market. Avid's agents have the potential to revolutionize early diagnosis and monitoring of neurodegenerative diseases and may become major growth drivers in the radiopharmaceutical business.

In June, Avid announced an expanded partnership with Bayer Schering Pharma, the world's leader in diagnostic imaging pharmaceutical field, in which Bayer will license Avid's molecular imaging agent that targets amyloid plaques in the brain. During the second quarter we also partnered with another life sciences company, Cellumen, leading an $8.7 million financing with $6 million coming from Safeguard for a 40% stake. Cellumen is a cellular systems biology company whose technology optimizes the drug discovery process. By putting biosensors and cell manipulation reagents in different types of cells, Cellumen's technology can examine cellular response to drugs and biologics well before entering expensive clinical testing. Their breakthrough technology is positioned to tap into a $2 billion market opportunity by focusing on the pharmaceutical industry's continuous push to improve product development timelines.

Just this morning we announced that we led a $9.7 million financing to obtain an $8 million stake in Broadband National, an internet media company that operates a network of shopping websites focused on digital services in products such as high speed internet, digital phone, voice-over IP, digital TV and music. Existing investor Constellation Ventures and select angel round contributors also participated in this round. The proceeds will help Broadband National expand into new vertical markets, continue development of its technology platform, pursue selective acquisitions and provide partial liquidity to a founder. We welcome Broadband to the Safeguard team.

Including Broadband National, year-to-date we deployed $48.5 million in capital in five new companies and one existing partner company, and we realized exits of Pacific Title and Art Studio in Clarient's imaging system.

Now we turn our attention to some of our other partner companies. Safeguard now has 18 partner companies, half and half -- nine in technology, nine in life sciences. Four of these are majority held, and they represent the financial results you see here today. One, Clarient, is public.

Q2 was characterized by our continued efforts to build value. In addition to deploying capital to Avid and Cellumen, many of our existing partner companies are going gangbusters. Clarient, a comprehensive cancer diagnostics company, just reported Q2 results last night and saw revenue grow 62% from a year ago. The company has now posted its 12th consecutive quarter of sequential revenue growth. Clarient also had a record quarter in new customer wins which fueled their growth and the company is on track towards cash flow breakeven by year end. Congratulations to Ronnie Andrews and his entire team for another strong quarter.

Additionally during the quarter, Safeguard's Dr. Michael Pellini was elected to the Clarient Board at the company's annual meeting. Dr. Pellini joins myself and Jim Datin on the Clarient Board. Life sciences partner company Laureate Pharma grew Q2 revenue 178% from a year ago with another record quarter building upon the performance we saw in Q1. Revenue for the first half of the year is more than Laureate realized in all of 2006, and for Q2, Laureate Pharma was EBITDA positive for the first time in its history -- certainly a breakthrough performance. Laureate's continued momentum is being driven by the company's impressive list of active clients and projects and their robust pipeline for new business. Congratulations to Bob Broeze and the entire Laureate team for another strong quarter.

Among our minority life sciences partners, two have launched products and are now experiencing strong market acceptance and are generating revenue. Rubicor is in the early commercialization stages and now is shipping their technologically disruptive, minimally invasive breast biopsy products. Advanced BioHealings -- ABH -- who became a partner company in Q1 is a specialty biotechnology company focused on the development and marketing of cell-based and tissue-engineered products in the emerging field of regenerative medicine. The company performed ahead of our expectations in Q2 and has seen monthly revenue cross the $1 million mark. In Q2 Safeguard deployed an additional $2.7 million on top of the original $8 million deployed for Q1 in ABH, so that brings our total ownership up to 28%.

Also, NuPathe reported positive Phase I results for its transdermal therapy for acute migraines, and Neuronyx is continuing Phase I trial tests for adult stem cell therapy in heart patients.

Additionally, we're proud to announce that Dan Skovronsky, CEO of Avid, and Anne Falkner Schoemaker, CEO of Neuronyx, received the PharmaVOICE 100 Award. This renowned industry award recognizes those people who inspire and motivate, have a great influence on corporate leadership, research and development, technology, creativity, marketing strategy and more, and who are impacting life sciences industries through their actions. We congratulate our partners on their well-deserved recognition.

Shifting gears to our technology team, while Alliance had a disappointing first half, most of our other technology partner companies are seeing strong growth and strong market penetration. Among our majority-held technology partners, Alliance Consulting Group, which provides business intelligent solutions to Fortune 2000 clients, posted Q2 revenue which was in line with Q1 of 2007 but down from Q2 of 2006. Results were driven by the declines in several existing accounts -- for instance, through M&A -- which offset new business wins. Utilization was slightly better.

In response, Alliance developed and is implementing a second-half improvement plan which includes improving sales team productivity, aggressively implementing expense and delivery management improvements, and discontinuing some lower margin projects. Increased bookings in the first half provide a strong backlog for the second half of this year. With that we believe that Alliance has taken steps to improve its performance for the second half of this year.

Acsis continues to grow its software solutions as their strategic transition, emphasizing supply chain software and services, progresses. During the quarter, revenue was up 12% from a year ago but more importantly, software solutions revenue was up 22% while hardware resale revenues declined as the company transitions to more profitable sources of revenue.

From a market perspective, Acsis has seen some delay in the Wal-Mart-driven RFID mandates. However, they've also seen an uptick resulting from FDA compliance mandates in the pharma industry.

Among our minority technology partners, NexTone experienced some strategic customer wins and was again the recipient of some industry awards in Q2. Specifically, NexTone was named Network World's 2007 Best of Test for voice-over IP security and the winner of the 2007 TMC Labs Innovation Award presented by internet telephony. Presently NexTone is looking for its next CEO to execute upon the company's momentum of bringing increased value to more than 500 service providers and enterprises they currently service today. Ultimately this new CEO will be charged with business development, global outreach, and NexTone's next stage of growth. Recruiting continues.

Authentium closed the follow-on round where Safeguard increased its stake from 12% to 20%, deploying an additional $3 million. The company also had an exciting new virtual ATM product moving into beta testing and recently announced contracts with major ISPs in both the UK and Australia. Additionally, we're pleased with the results of our new partner companies Portico and Beyond.com that are showing strong revenue growth.

As you can see, Safeguard has been very active adding three new partner companies since our last call. We continue to build value in our partner companies and expect to seek well-timed exits for those companies who have achieved a certain level of maturity, and we'll keep you updated on all of these fronts as these events occur.

Now let me hand the call over to Ray to go over our financial results. Go ahead, Ray.

Thank you, Peter, and thank you for the warm welcome to Safeguard. I am excited about being able to apply my extensive experience as a CFO to help Safeguard increase value in our partner companies and for our shareholders.

Let me start by presenting our second-quarter 2007 financial results and then discuss some metrics to help you value our holdings. As we disclosed in today's press release, Safeguard's consolidated revenue for the second quarter of 2007 was up 11% to about $44 million as compared to approximately $39 million in the second quarter of 2006. As in recent quarters, most of this increase was driven by the combined 95% growth at Clarient and Laureate Pharma. For the quarter we had a net loss of $13.6 million compared to a net loss of $9.2 million in the second quarter of 2006. In the second quarter of 2007, we deployed $19 million of capital and used $2.4 million of cash for corporate expenses. There were no exits during the quarter. As a result, cash on our balance sheet went from about $147 million at March 31st to around $126 million at June 30th.

Now I would like to make some observations about our thoughts regarding value creation at Safeguard. The focus of the Safeguard management team is in building longer-term value rather than managing predominantly for quarterly earnings. Our objective is to realize an average 3 to 5 cash multiple on our deployed cash within a three- to five-year time horizon.

In other words, our operating results may be lumpy from quarter to quarter while we work toward enhancing shareholder value over the long term. We have included in our press release a schedule of partner company financial data. It is intended to assist investors to understand more about the main driver of Safeguard's shareholder value which is in our partner companies. The schedule shows the carrying value of our partner companies. The carrying value of a partner company represents its original acquisition costs adjusted for any subsequent fundings or impairment. If the company is consolidated or accounted for on the equity method, then the balance is also adjusted for our share of their earnings and losses.

It is important to recognize that carrying value may not reflect the market value of our holdings. For example, as of June 30th, 2007, Clarient's NASDAQ traded market value was $86 million or about nine times its $9 million carrying value. While the Clarient example may not be reflective of our overall market to carrying value multiple, it does illustrate that there can be a significant difference between a partner company's carrying value and its market value.

As of June 30th, the carrying value of our holdings was about $183 million. It consists of about $168 million from our private companies, about $6 million from our remaining private equity fund interests and about $9 million attributed to our publicly traded partner company Clarient. Therefore, in evaluating Safeguard, we believe it is useful to look beyond the carrying or book value of our partner companies.

Because there are no market-based values readily available for our private companies, we discuss financial and business milestones that may be reflective of value-added events so that you can track the progress of a company's growth. Many of Peter's comments are directed towards these value-added events in our partner company. This is how to evaluate the growth and value of our partner companies and of Safeguard.

Let me turn the call back over to Peter now. Thanks.

Thanks, Ray. So as you can see, Safeguard is executing well against its game plan. We've been actively deploying capital, we're helping our partner companies to develop and implement strategies to increase their value. While we have no exits to discuss in Q2, we continue to act upon our game plan, which will ultimately build value for our shareholders.

In terms of our outlook for the rest of the year, we're actively working through a solid pipeline that could enable us to deploy additional capital in attractive well-positioned companies. We expect to continue to build value in our holdings through strategic initiatives that drive growth and improve profitability. Our deal strategy holds firm and we're targeting a 3 to 5 X return within a three -to five-year horizon from deal inception, which we anticipate will be realized in selective well-timed [exits] which could include public offerings and private sales. That's the driver of Safeguard's economic engine.

On that note, Jackie, go ahead and open the line now so that Ray and I can take some questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) One moment, please, while we poll for questions. Our first question is coming from Robert Labick of CJS Securities Incorporated.

Good morning.

Good morning.

Hi, Bob.

How are you?

Alive and well, thanks. How about you?

Doing well, thank you. I have a few questions. First I just wanted to touch base on Alliance and see if you can give us a little more color. It appears that the overall environment for their services has picked up a little and is doing better. I was wondering if you could help us understand the disconnect between their recent results and the overall environment and then give us examples of what specifically is being done and what we should expect more concretely for the second half of the year?

I don't see a disconnect, Bob. We stated that Alliance's bookings actually in the first half gave us some confidence that the second half would see some improvement. There is oftentimes a lag between the time that something is booked and the time that services actually begin to be delivered. So with that backlog increased, we don't see a disconnect. We see a connect.

Would you expect growth, then, year-over-year in the second half? Because obviously you had some strong growth in the second half last year --

I expect an improvement in the second half over the first half. I do not expect that the second half will equal the second half of 2006.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is coming from Bill Sutherland of Boenning & Scattergood Inc.

Thanks. Good morning, Peter, everybody. Peter, I was curious what you're seeing in the -- as you look for additional investments and exits as the investment world has taken a little bit of a turn here in the change of the credit climate. How do you feel about your position competitively as you look for additional investments and exits?

We continue to feel really strong, Bill, about the opportunities we have to deploy capital, and very interesting situations. We continue to be extremely well-positioned. We're doing a good deal of syndication with others that are coming to us, recognizing the value that we can build. Our pipeline remains very strong, the quality is high, and we're working those deals accordingly, so honestly, we believe we're well-positioned.

You don't feel any change as you kind of monitor things the last couple of weeks in the pipeline and so forth?

No.

Okay.

I have John Loftus with me -- actually Jim Datin is out on the road -- and I will let John make a comment regarding what he's seeing in the technology world.

Thank you.

Bill, at least in most of our financing activities we're equity players, so the fact that some of the debt markets are more expensive actually probably helps us. In addition, at the top end of our financing range, our growth buyouts where debt is employed -- it will be a little bit more saner in terms of the valuations at that top end. So I think as we move forward, it is not a bad thing for us that there is a little bit more sanity in some of the debt markets.

Great. Thanks, John. Thanks, Peter.

You bet, Bill.

We have a follow-up from Robert Labick of CJS securities.

Thank you. Another question I wanted to ask is if you could give us overall color on your market commentary. It appears that certainly in the first half you're buyers rather than sellers, I think from an outsider it is easy to see that. I believe you're likely in the markets as -- try to find exits as well, as is part of your strategy.

Could you discuss what's holding back exits at this point? Is it that your expectations are too high on valuation versus what people want out there? Or is it that there is not a lot of interest in your companies right now but there might be in six months? Or give us a little color on what's going on on that -- and no company-specific stuff, obviously, but just overall the market for your companies and what you're running into as to why we haven't seen any exits in a little while?

Well, we had two exits in Q1, Bob. That was Pacific Title and Art Studio and a product line within Clarient. You won't see exit activity every quarter. That's a lumpy activity. There may be activity going on, but you can't predict that it is going to occur in the strict timelines of a quarter.

I understand that. Given the fact that it won't be on every time on a quarter, could you just give us a sense of discussions -- not specifically but that you may be having, and whether it is your expectations, others' expectations, if you're close, if you're not -- what are people looking for as it relates to your holdings out there?

We continue to build value on our holdings, Bob, and our goal is to always maximize risk-adjusted value accordingly. Whatever activity might be ongoing, I can't give you any speculation.

Okay.

(OPERATOR INSTRUCTIONS)

Operator, do you want to take the next question, please?

Our next question is coming from Charlie Park of Findlay Park Partners.

Yes, good morning. Could you tell me if you think you're still on track to sell the one third of the 14 remaining companies or 12 remaining companies, and you mentioned there was a new CEO for NexTone. How the revenue growth is going there?

Charlie, hi. How are you?

Fine. Thank you.

Charlie, to answer your questions, first of all, NexTone continues to perform well, but they haven't released as a private company their specific revenue. I can tell you they continue to have a growth machine. And the CEO recruiting is going and going nicely there within NexTone.

And just on the -- you obviously have this plan --

Yes, right. About eight months ago I stated that we had then around 12 companies in our holdings and I stated that about a third -- approximately a third -- we were positioning for liquidity within the next six to 18 months. A third could be positioned for liquidity within the next 18 to 36 months, and about a third is going to take us a while to build some value on those holdings.

Since then we've had a couple of exits -- Mantis, and Pacific Title and Art Studio and of course, the product line within Clarient, the imaging system. There is another 10 months to go, I guess, in that prediction, if you will, that we would see some exits of about a third of our holdings within the next six to 18 months. We've delivered a few. We have a few more to deliver, but we have a timeline, and the timeline doesn't necessarily strictly fall within a quarter. I can't be predictive as to when that might do.

Does that timeline have anything to do with the NOL runoffs or is it just a market situation?

It has nothing to do with NOL runoffs, Charlie. It is just seeking exits is a time-consuming art form, and it doesn't necessarily fall within quarterly boundaries.

Thank you.

And Bob, that's probably a footnote to your question as well. I could have answered your question that way as well.

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Thanks, Jackie. As a reminder, we'll be attending and presenting at the Canaccord Adams Growth Conference next week, and at the CJS Summer Conference the week thereafter, so both in August. Thanks for participating. We appreciate your interest.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.