Safeguard Scientifics Inc (SFE) 2007 Q3 法說會逐字稿

Greetings, and welcome to the Safeguard Scientifics 2007 third quarter earnings conference call. At this time, all participants are in 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 and Corporate Communications for Safeguard Scientifics. Thank you, Mr. Shave. You may now begin.

Good morning, and thank you for joining us for our third quarter 2007 earnings conference call. I'm John Shave, Vice President of Investor Relations and Corporate Communications for Safeguard Scientifics. Joining me on the call today are Peter Boni, President and Chief Executive Officer of Safeguard Scientifics, and Ray Land, Senior Vice President and Chief Financial Officer at Safeguard. During today's call, Peter will review Safeguard's third quarter 2007 highlights. Ray will then review financial results for Safeguard and our partner companies. Then we will open up the call for questions.

Before we begin, Safeguard would like to caution you concerning reliance on forward-looking statements. During the course of today's call, words such except, anticipate, believe, and intend will be used 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 our Form 10-K, describe in detail the risks and uncertainties associated with managing our business. 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. And thanks to those of you who joined our call today. As you can see from our quarterly press release which went out this morning, we've been busy with a number of activities, all of which are intended to enhance shareholder value. During today's call, I will provide you with a summary review of our financial results for the quarter, some recent milestones achieved as we execute our game plan, and third quarter highlights for some of our partner companies. So let's start with the results for the quarter. In the third quarter press release today, we reported that our majority held life sciences companies, Clarient and Laureate Pharma, combined for a substantial increase in revenues and reduced their aggregate loss. Building upon its momentum, Laureate Pharma was EBITDA positive for the quarter and Clarient achieved continued revenue growth throughout this year. In our technology sector, majority held Acsis increased its revenue year-over-year. As expected, Alliance Consulting's revenue declined for the quarter, largely due to loss of a customer which was acquired and completion of several significant contracts and delays in obtaining new contracts. There was modest improvement from Q2 to Q3.

We measure Safeguard's success and our ability to performing against our stated strategy, which is to deploy capital in growing high potential situations in the technology and life sciences arena, build value in those partner companies, and realize that value through selective, well timed exits. In the first three quarters of 2007 we deployed $53 million of capital in eight companies. In the third quarter we announced the deployment of $6 million of capital to Cellumen, $8 million to Broadband National, $2.1 million as a follow-on capital offering to NexTone, and $2.2 million to a new technology partner which has not yet been publicly launched. Although we didn't realize any exits during Q3, we continue to make progress towards that goal. Just over a year ago, I indicated that we were positioning one-third of our partner companies for liquidity within 18 months. Since then, we've realized exits from Mantis, Traffic.com and Pacific Title & Arts Studio. Clarient also divested its instrument business to Carl Zeiss MicroImaging.

Now let me get to some of our specifics around our recent activity. We deployed $6 million for a 40% ownership position in life sciences pioneer, Cellumen. Our funding represented the majority of an $8.7 million B round. Cellumen is a cellular systems biology company whose technology optimizes the drug discovery process. Cellumen's technology injects biosensors and cell manipulation reagents into different types of cells. With this capability, Cellumen's technology can examine cellular response to drugs and biologics in order to measure efficacy and potential toxicity well before companies enter the expensive clinical testing phase. Cellumen estimates that it has an addressable market opportunity of $2 billion annually growing at double-digits.

Our technology team deployed $8 million for an ownership position of 21% in Broadband National, leading a $9.7 million financing round. Broadband National is an Internet media company that provides one-stop shopping for digital services, including high-speed Internet, digital phone, Voice over IP, digital TV and music. Broadband has developed the leading comparative shopping website for those digital services and products, and has partnered with the leading digital service providers to integrate offerings into one technology platform. They provide the only nationwide solution to both residential and small business customers. Through our partnership with Broadband National, as is our model, we'll provide strategic guidance, as well as operational and management resources to help the company achieve its goals to build value for its advertisers, customers, and shareholders. Broadband National was recently ranked number 57 on the Inc. 500 list.

Additionally we deployed $2.2 million in what we'll term a stealth technology company which is still largely under wraps. This partnership represents an earlier than customary deployment of capital for Safeguard in the technology space, and we look forward to telling you more about this deal as the partner company debuts its offering publicly. These additions bring our total number of Safeguard partner companies to 18. Eight of those are life sciences companies. Ten of these are technology companies. Four of these are majority held, and one, Clarient, is public, and one is stealth.

Looking for the results of our major majority held life sciences partner companies in Q3, let's talk first about Clarient. Clarient's marketing and sales strategy continues to bear fruit in the third quarter of 2007. The company added 53 new customers, has expanded its diagnostics testing from only breast, when it first started, to also include the other major forms of cancer, including lymph, colon, prostate, and lung cancers. Clarient also achieved its first revenue from services related to its novel market strategy. Clarient's execution of its strategy has resulted in a 250% growth in its market cap year-over-year, from the end of Q3 '06 to the end of Q3 '07.

Laureate Pharma also had, by any measure, a successful quarter as revenue increased 223%. They enjoyed revenue increases in manufacturing, process development services, aseptic filling and support services. The company's backlog is strong, and that should provide a solid base for continued growth in 2008.

Our minority held life sciences partners are also making progress. Advanced BioHealings, a leader in the science of regenerative medicine, is now in the revenue stage and achieving impressive market acceptance. They began that market penetration in February and achieved their first $1 million revenue month in June. They recorded revenue just short of $2 million in September, and $4.3 million for the third quarter. ABH is looking to leverage its current infrastructure by identifying additional products to diversify and grow its revenue. Safeguard's ownership position is 28% in ABH. Avid, a leader in the development of molecular imaging products, and NuPathe, which specializes in the development of new delivery methods of medication for the treatment of neurological and psychiatric disorders, are furthering their clinical studies. Safeguard's ownership positions are 14% and 21% respectively. Rubicor is in the early commercialization stages with its minimally invasive breast biopsy and tissue removal technologies. Our ownership position in Rubicor is 36%.

Now let's discuss our technology partner companies. Acsis, a leader in connecting people, devices, and supply chains with enterprise business systems, increased revenue 17% for the quarter. During the quarter, Acsis was recognized by MBT magazine, a leading manufacturing supply business publication, as an emerging 40 vendor for its manufacturing intelligence. Alliance Consulting is a decent company with a fine management team and a viable market opportunity. It had a hiccup, but it's making progress in the execution of its corrective action plan. Ray will discuss their quarterly performance in more detail.

Now, our minority-held technology companies. Authentium, a leading developer of security software as a service technologies and systems has several prospects in the online financial institutions market for a new product offering. Safeguard's ownership position there is 20%. NexTone, a leader in session border controllers and scalable session management solutions for Voice over IP and network inconnects -- network interconnects, announced earlier this week the introduction of NextPoint, the world's first Integrated Border Gateway via a partnership with Reef Point Systems. Combining session border controller capabilities from NexTone and Security Border Gateway capabilities from Reef Point Systems, operators now can simplify, secure, and scale their next-generation IP networks and support multimedia session management over both wired and wireless networks. Recently ranked number two in Deloitte Technology's Fast 50 Program for Maryland, NexTone was recognized for its over 2,800% increase in revenue from 2002 to 2006, which the company attributes to a rapid adoption of Voice over IP worldwide and its expanding carrier customer base in the SBC market. In addition, NexTone also continues to make progress on its CEO search, and they closed a $10 million Series E financing to fuel its growth, of which Safeguard provided $2.1 million, bringing the ownership position to 17%.

Meanwhile, Advantedge Healthcare Solutions, a technology based services provider that provides medical billing solutions to hospital physician groups, using its proprietary software, has hired a CEO with significant domain expertise in the space. Dave Langsam is presiding over seeing organic growth and is aggressively reviewing selective acquisition opportunities. Safeguard's ownership position there is 35%. Beyond.com, a leading provider of online technology and career services to job seekers and corporations, has expanded its relationships with CMP Technology, the publisher of Information Week and EE Times, by being selected as CMP's exclusive agency of record for recruitment advertising. In addition, Beyond has acquired TechCareers.com from CMP Technology, which includes all of its staff and assets located in New York City. This acquisition allows Beyond.com to gain broad penetration within the IT and engineering sectors. The company is also experiencing recognizable growth in employer sales and advertising. Why do I say recognizable? The company was recently ranked number one on Deloitte's 2007 Greater Philadelphia Technology Fast 50, number 16 on the Philadelphia 100, and number 345 on the Inc. 500 list, and they were recognized as the best place to work in Philadelphia. Deloitte reported that Beyond.com has grown revenue over 6,000% from 2002 to 2006. The online career services marketplace was estimated to be $5.9 billion in 2006 and growing north of 10% a year. Safeguard owns 37% of Beyond.

Portico, which offers health plan software solutions exclusively focused on unlocking the value of provider network management, has some large customers implementations underway, and its growing sales team is helping to win new accounts. The company also capped a nine-month period of rapid growth with revenue climbing 67% year-over-year with improved gross margins. Customers, including five of the top 30 health plans, are accelerating rollouts of Portico's solution based upon tangible evidence that the software meaningfully increases bottom line performance by optimizing provider network operations. Portico was recently ranked number 45 on Deloitte's 2007 Greater Philadelphia Technology Fast 50, 2018 on the Inc. 5000 list, and number 57 on the Philadelphia 100 list, for which Portico was inducted into the Hall of Fame for appearing on the list five times. Safeguard's ownership position of Portico Systems is 47%. As with our minority held life sciences partners, we're working with all of our technology partners to narrow losses and put them on a path towards profitability and additional value creation for future exits. These successes, in turn, make us a more desirable partner as we assess new companies in which to deploy capital and start the cycle all over again. With that, let me turn the call over to Ray to go over our financial results. Ray?

Thank you, Peter. Let me start by presenting our third quarter 2007 financial results, and then take a look at some metrics that will help you value our partner companies. You should be aware that as a holding company, our focus is tuned to deploying capital in partner companies, building value into these companies, and then realizing gains through strategically timed exits. As a result, our operating results can fluctuate significantly from quarter to quarter, while we work toward enhancing shareholder value over the long term. In today's earnings press release, we reported that Safeguard's consolidated revenue was $45.7 million in the third quarter of 2007, up from $41.8 million in the third quarter of 2006. For the quarter, we had a net loss of $24.1 million, compared to a net loss of $9.6 million in Q3 of 2006. Q3 results also include impairment charges of $5.4 million and $4.5 million for Alliance Consulting and Ventaira Pharmaceuticals respectively. The Alliance impairment resulted from a third quarter independent goodwill impairment review which was triggered by Alliance's first half of 2007 financial underperformance as compared to historical and expected results. Ventaira's impairment resulted from a lack of fit with our current strategic direction and a decision by their collective investment group to not fund the operations going forward. Ventaira recently announced the acquisition of their assets by Battelle and the expected closure of their operations by year end.

Clarient reported their Q3 results earlier this week and saw revenue increase to $12.1 million, up 52% from a year ago, and 17% from Q2, with 13 consecutive quarters of revenue growth. The quarterly increase in revenue over 2006 was due to increased overall volume from new customers and expanded test offerings. Laureate Pharma reported their fourth consecutive record quarter. Q3 revenue of $7.2 million was up 223% year-over-year, with almost 20 customers contributing to revenue in the quarter, which contributed to a positive EBITDA of $600,000. This is the second quarter in a row that Laureate has reported positive EBITDA. Revenue at Acsis increased 17% year-over-year at $4.8 million. Their served pharmaceutical segment is beginning to show promise. Operationally, Acsis saw its loss from operations narrow on both a year-over-year and sequential basis to $2 million.

Alliance Consulting Group's Q3 revenue decreased $5.9 million as compared to the prior year. The quarter's revenues were lower due to the loss of a major customer which was acquired, the completion of several significant contracts, and delays in obtaining new contracts. This decrease in revenue and a $5.4 million impairment charge contributed to a loss of $6.4 million for the third quarter. Alliance's senior management has taken certain steps to improve the company's performance. It includes strengthening the financial services sales segment team, bringing in new delivery leadership in the manufacturing and technology segment team, and getting some low-margin contracts behind them. In addition, Alliance's sales efforts suffered during the early part of 2007 as key members of their sales management team were struck with illness. Those members have recovered and are now back and focused on increasing revenues, as well as reducing costs through improved project management. In summary, the quarterly operating performance for our four consolidated partner companies before impairment charges, showed a 26% improvement in operating results year-over-year. Excluding Alliance Consulting, it is a 44% improvement year-over-year.

Equity losses for our minority-owned partner companies in the quarter were higher than the prior year by $2.2 million or 118% due to an increase in the absolute number of equity method partner companies from four to nine. As we do at each earnings conference call, we would again like to emphasize that because we are a holding Company, we believe that the market value of Safeguard and 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 reflects their actual market value. An example of the difference can be found in our only public partner company. Clarient has a total market capitalization of about $151 million as of September 30th, which means our stake has a value of about $89 million, or about 11 times its $8 million carrying value. While this actual multiple will vary from partner to partner, we believe that this is an effective illustration which demonstrates the difference between carrying value and potential market value for our partner companies.

As of September 30th, 2007, the carrying value of all of our holdings was $179 million. Carrying value of a partner company represents the original acquisition cost, any follow-on funding, and our share of the earnings or losses of each company, reduced by impairment charges, if any. Therefore, in valuing Safeguard, we believe that it's useful to look beyond the carrier book value of our 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. To help you perform your own analysis, our Q3 results press release show individual carrying value for our majority owned companies, as well as aggregate cost or carrying value data for our minority owned partner companies. With that, let me turn the call back over to Peter.

Thanks, Ray. So as you can see, Safeguard is executing against its game plan. We've been actively deploying capital, and we're helping our partner companies to develop and implement strategies to increase their value. While we have no exits to discuss in Q3, we continue to execute upon our game plan, which will ultimately build value for our shareholders. In terms of the outlook for the rest of the year, we're actively working through a solid pipeline that could enable to us 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 substantial returns 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 a final note, I'd like to congratulate Andrew Lietz on his recently announced Lifetime Achievement Award. Andy, a member of our Board of Directors and head of our Corporate Governance Committee, will be honored by New Hampshire's State Chamber of Commerce with the Business and Industry Association's 2007 award. With that, operator, Latina, would you please open the line now, so that Ray and I can take some questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

First just a quick comment, and then leading to my question. Just we broadly understand what your philosophy is, invest in revenue-stage companies while they're growing, and then plan for a well-timed exit as they turn into profitable operating companies. And your goal is not to necessarily just be an operating company in the future. With that said, it looks like due to the very strong performance from Laureate, it's well down that path. Could you give us a sense of public comps or trading multiples for a firm like Laureate, understanding that your time frame to exit, if that were the case, would be in the next 12 months. Not trying to pin you to anything. But it seems like it's moving in the direction of, it was revenue stage, it's becoming profitable, it's putting up terrific results.

Bob, I believe at the analyst day that we had awhile ago, Bob Broeze addressed some ranges and some companies, that while not specifically in his space, could be considered as comps.

Could you remind us of those?

Off the top of my head, I can't.

Okay. I can follow up with you then offline, which would be fine, if that's okay. Next question, could you just broadly comment on the, I guess deal activity out there. And I believe you've said that generally you're positioning your companies to exit to strategic. So I would imagine that activity hasn't been as impacted by the capital markets fluctuations, or the credit crunch, if you will. But could you just comment in general on the deal activity?

In general, Bob, our deal activity is measured by our pipeline, and the qualitative quality that we view in our pipeline continues to be very strong. And we continue to be well positioned here to attract very attractive situations to Safeguard. Today, from an exit standpoint, I believe the numbers are something like 90% M&A and 10% IPO from an exit standpoint. Years ago, a few years ago, it was 80/20. So strategics, whether it was yesterday or today, still play an important part in the exit strategy. This credit crunch, if you will, has really more impacted financial buyers. And what we have seen and what has been reported also in the press is that the financial buyers were competing with the strategic buyers and actually putting up similar price points. Strategic buyers traditionally have been able to pay some higher pricing points because of all the leverage they have to reduce costs or maximize revenue and make it a highly accretive situation.

Now we continue to see that the strategics are active using not only their cash, but their currency, their stock, in order to accomplish some of this M&A activity. The financial buyers are the ones that the private equity community, the ones that have been using primarily debt to supplement whatever equity they put into a company. So honestly, this credit crunch we can't see impacting the strategic buyer, if you will. We continue to see a very active environment out there for M&A. Now, in our positioning of a company for exit, we have an exit strategy in mind up-front, before we put our capital to work. While we're building value for that company, we continue to position to maximize the value of a company and maximize its desirability, if you will, to the strategic community, recognizing that there's always an opportunity for an IPO. And in 10% of the world's situations, that is the pathway that will be taken for an exit.

Great. That was very helpful. Thanks.

[Alan Weinfeld, Hendley and Company.]

Great performance in Laureate. Widely exceeded my expectations there. At Alliance Consulting, does the charge there explain all the difference between the negative $1 million operating loss I was looking for and the negative $6 million operating loss which you put up there? Is that the whole difference there, or is there something else? Because your revenue at Alliance Consulting was almost exactly where we were looking for.

Basically, that's the difference between the $1 million and the $6 million, yes. There's a $5.4 million impairment charge for Alliance Consulting. And there is no tax benefit, so that just falls directly to the bottom line.

As you said at the analyst day, you're continuing to try to make them more value-added business with the competitive consulting arena, especially what's going on in India with the kind of generalized consultants, and you're going to continue the more value-added path. And I guess we should look for a tick-up in revenue and a come-back to somewhat closer profitability in '07 and then profitability in '08 in that unit?

We're anticipating improved performance in the second half of the year relative to the first half. That was true in Q3 with a modest uptick in revenue and a substantial improvement in EBITDA. We would anticipate that that improvement would continue through Q 4, and as we roll into 2008.

And I mentioned in my script that the senior management team has taken a number of steps to improve their performance, including strengthening the financial services sales segment team and bringing in new delivery leadership in manufacturing and technology, and getting some low-margin contracts behind them. And they're, of course, focusing on reducing costs through improved project management. So we're taking steps, and we're hopeful that that will improve performance in the second half of the year.

So my $100 million estimate for 2008, is that in the ballpark? Or is that just not realizable, especially because they did $105 million in 2006?

We don't give guidance.

Right. Just trying to build the model properly and try and get all the numbers in there. All right. Thanks a lot. Appreciate it.

[Phil DiToolio, Boning and Skatgood.]

I just have one quick question With the $2.1 million investment in NexTone this quarter, what is the total investment to date, the dollar investment?

I don't think that's been released, Phil.

Has not?

I don't think that's been released. I'll consider NexTone an enclosed legacy company. But $2.1 million represents the first amount of money that Safeguard has put in since I've been here.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Shave for closing comments.

Thank you for joining us today, and we look forward to speaking with you soon. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.