Safeguard Scientifics Inc (SFE) 2008 Q1 法說會逐字稿

Good morning. I would would like to welcome everyone to the Safeguard Scientifics first quarter earnings conference call. My name is Christy and I will be your conference operator today. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to John Shave, Vice President of Investor Relations and Corporate Communications. Thank you. Mr. Shave, you may begin your conference.

Good morning. Thank you for joining us for our first quarter 2008 earnings conference call. Joining me on today's call are Peter Boni, President and Chief Executive Officer, and Ray Land, Senior Vice President and CFO at Safeguard. During today's call, Peter will review Safeguard's first quarter 2008 highlights. Ray will then review financial results for Safeguard and our partner companies. That will be followed by a question and answer session. Before we begin, we would remind you that we will be making forward-looking statements during this presentation. Safeguard would like to caution you concerning reliance on forward-looking statements since they involve certain risks and uncertainties included but not limited to risks associated with the uncertainty of future performance of our partner companies, acquisitions or dispositions of interest in partner companies, the affect of economic conditions generally, capital spending by customers, development of technology and life sciences markets in which Safeguard focuses, and other uncertainties.

During the course of today's call, we will use words such as expect, anticipate, believe and intend. That will be used when referring to future goals or events. The company cannot be certain that the financial outcomes described today will occur. Safeguard filings with the SEC, including our form 10-K, describe in detail the risks and uncertainties associated with managing our business. You are encouraged to read the language in these filings. The company does not assume any obligation to update any forward-looking statements made today. Please note as a result of the bundled sales definitive agreement, Acsis, Alliance Consulting, and Laureate are now reported as discontinued operations. Therefore, our reported revenues for the quarter ended March 31, 2008, result from the consolidation of our one remaining majority owned company, Clarient. With that, I will turn the call over to Safeguard CEO, Peter Boni.

Thanks, John. Thank you for joining us on Q1 2008 conference call. Before reviewing Q1 results and accomplishments with you, I would like to update you on the planned bundled sale of our position in sixth partner company, the Saints Capital. As we previously announced, Safeguard signed a definitive agreement to exit its ownership position in three majority held partner companies, Acsis, Alliance Consulting, and Laureate Pharma and three minority held partner companies, NextPoint Networks, Neuronyx, and ProModel Corporation through a transaction with the Saints Capital.

We previously reported that we expected to receive gross cash proceeds from the bundled sale of $100 million and expected to record a gain of approximately 16 million. However, in late April certain shareholders at NextPoint Netword decided to exercise contractual co-sale rights that will allow them to participate in the sale to Saints and that will reduce the gross cash proceeds we'll receive to $78.1 million. In addition, saints will relieve Safeguard of an aggregate of $31.5 million in debt guarantees concerning certain companies being sold. During the first quarter we wrote down an aggregate carrying value of the bundled companies by $500,000 to the total of the anticipated gross proceeds net of the cost necessary to complete the transaction. As previously reported $10 million of cash proceeds will be held in escrow through April 2009. Safeguard will now retain an ownership interest in NextPoint Networks of 10.5%. Upon closing this bundled sale, Safeguard will have is 14 partner companies that are tightly aligned with our strategy to focus on specific high growth segments within technology and life sciences. The transaction will provide Safeguard with additional flexibility to pursue exciting new growth opportunities.

Now let's review Safeguard's first quarter highlights. Consolidated revenue adjusted for discontinued operations for the first quarter was $15.9 million. That is an increase of 80% from the first quarter of 2007. This is entirely from Clarient. Their performance in Q1 was quite strong. Our consolidated net loss for the first quarter was 11.5 million compared to 8.9 million in the first quarter of 2007, excluding discontinued operations. Those discontinued operations represent results from Safeguard's majority held partner companies, Acsis, Alliance Consulting, and Laureate Pharma. In Q1 2007 that also included the results of Pacific Title and Arts Studio as well as Clarient Technology Group.

In looking at the majority held partner company performance, including those companies reported in discontinued ops, from a revenue standpoint the life sciences sector continues to outperform technology. Combined first quarter of our prebundled transaction majority held life sciences companies Clarient and Laureate Pharma was 22.9 million, now that is up 66% from a year ago. Combined revenue for our prebundled transaction majority held partner companies Acsis and Alliance Consulting Group was 26.7 million in the Q1, and that is up 4% compared to a year ago. Alliance was basically flat while Acsis showed good growth. Now, as you know, we are a holding company not an operating company. Our strategy as a holding company is to deboy capital in exciting high growth life sciences and technology companies, build value in those companies and then realize the value through strategically timed exits.

When we deploy capital we look to five broad strategic themes that we believe are creating opportunities for entrapenurial businesses in both the technology and life sciences sectors. Those themes are maturity, migration, convergence, compliance and cost containment. Maturing population, the impact that will have, or the maturing technology infrastructure in a consolidating industry. There is migration in both technology migration such as analog to digital and business model migration such as the move from perpetual software licenses to the on-demand subscription licenses. Convergens, such as devices, diagnostics, and therapeutics, or the information technology converging within life sciences technology in both products and services. Compliance from agencies that act such as HIPAA, Sarbanes-Oxley, the FDA, the Patriot Act, the FCC and so on. Cost containment driven by trends to reduce costs by improving efficiencies and effectiveness while reducing redundancies in IT as well as in healthcare environment. These are the themes that we keep in mind when we look to acquire interests in new partner companies. We are looking for businesses that have identified a sizable market and opportunity that is poised to fill an emerging need.

Now, as I mentioned in the fourth quarter call, we are evaluating a number of opportunities that would represent investments at the lower end of our stated $5 to $50 million range. In doing so, the over profile of our partner companies may shift to be more weighted towards equity of cost method companies verse consolidated companies. Unlike private equity firms Safeguard is not reliant upon heavy debt loads to acquire stakes in partner companies. Therefore, there is no large debt load to handle. Our strategy is to partner and build value rather than to take over management operations. In addition, Safeguard's strategy does not include acquiring stakes in distressed, ailing, or troubled companies that are too difficult or time coming to fix. Instead, Safeguard seeks growth situations that are amplified by the major trends that I just outlined. Our pipeline of investment opportunities is very robust right now. We are pleased at the level of discussion with an impressive list of quality opportunities.

The second step in our game plan is to build value in our holdings. As I described last quarter, the 14 partner companies we will have remaining after the bundled sale are in various stages of maturity. The first of these four categories is development stage companies. These companies are proving out technology, developing prototypes and forming early partnerships. They could be in the FDA approval process. They have begun initial commercialization or they have BETA stage customers. Today, Avid Radiopharmaceuticals, new path and our stealth technology company are development stage companies. Avid should be entering Phase II clinical trials this year for two imaging compounds that aim to improve the diagnosis of Alzheimer's and Parkinson's Disease. Our stealth company is moving to alpha testing to beta testing as it gears up for a full blown launch in the social information management space.

The second group is initial revenue stage companies. These companies are gaining initial customer traction, early market penetration, and are building their management teams, their organizations and their infrastructures. Safeguard life sciences partner companies, Alverix, Cellumen, and Rubicor Medical fall into this category of initial revenue stage companies. Alverix continues to see early revenue from its points of care diagnostics device that's bringing lab quality diagnostics directly into the doctor's office. Cellumen has entered the market with its cellular level tool sold to pharmaceutical companies to reduce the cost of drug trials by quickly identifying winners and losers in drug discovery. Rubicor Medical, a producer of minimally invasive breast cancer biopsy and tissue removal technology is building relationships for potential partnerships. They will be featuring their newly configured biopsy device at the annual breast surgeon's conference held in New York City later this week, and they are expecting a good deal of fanfare.

Next, we have expansion stage companies. These companies have a commercial grade solution, are experiencing expanded market penetration. They have the management team and the infrastructure in place to generate revenue and manage rapid growth. Today Safeguard technology partner companies advantage healthcare solutions, Authentium, Beyond.com, and Portico Systems are considered expansion stage companies. Advantage healthcare is a technology based hospital physician's billing practice that's executing according to plan with its new CEO on board. Authentium recently launched its safe central identity protection technology for online transactions. Beyond.com, one of the largest networks of online niche career communities, renewed its partnership with Yahoo. Portico Systems, the software solution provider to [health] networks executed its plan in Q1 and it remains on track for strong growth in 2008.

Finally, there is our high traction stage partner companies including technology partner companies Bridgevine and NextPoint Networks and life sciences partner companies Advanced BioHealing and Clarient. These companies are experiencing rapid growth, are close to break even or are already profitable and have a high degree of commercial transaction. Bridgevine continues to experience robust growth ahead of its already aggressive plans in the first quarter. NextPoint continues to focus on aggressive revenue growth through top tier customers and partnerships while consolidating operations after its merger of NexTone and Reef Point. Advanced BioHealing, or ABH, is a leader in the science of regentive medicine. They recorded revenues over $7 million for Q1. They recorded their first $3 million month in March. Revenues were driven by transaction from its FDA approved Dermagraph product for diabetic foot ulcers, and revenue growth plans for 2008 remain aggressive. The company is evaluating the introduction of additional products offerings. Its aggressive growth plans are on track and publicly traded Clarient, a cancer diagnostics company, reported Q1 revenues of 15.9 million or 80% growth from the first quarter of '07. They also reported positive adjusted EBIDTA of $1.4 million. The company is expecting continued strong growth in 2008. Now, as you can imagine, the strategies we use to build value in our partner companies varies as they move from one stage to the next. Of course, realizing the value that we have helped building our partner companies is the third leg of the strategy. While our expansion stage and high traction partner companies would be the most obvious exit candidates, in reality we could realize exits at our partner companies at any one of those four staging during their growth. As you know, we have been hit by a steep decline in the public markets and continued uncertainty in the private equity markets.

Venture capital backed exits dropped significantly in the first quarter of 2008. A recent report from [venture] shows that merger and acquisition markets saw 80 deals valued at $7.78 billion in Q1 of 2008. That is a steep decline from 110 deals valued at over $15 billion in a previous quarter and 105 at $10 billion in the first quarter of 2007. It is the lowest M&A deals since the first quarter of 2003 when 77 deals took place in a year that this was the decade's worst for the market. Initial public offerings came to a virtual halt in the first quarter with only six venture backed companies managing to go public, raising just $391 million. That is down from $1.9 billion raised in 25 offerings in the fourth quarter of '07 and 1.2 billion and 13 offerings in the first quarter of '07. That being said, strategically attractive businesses can find a valuable exit even in tougher times.

According to the investment banking communities firms with strong management, a large addressable market with attractive growth, a performance that is also growing rapidly, and defensesible positioning are the most desirable and also the most valuable. Now we at Safeguard will continue to work to find and build value in these opportunities and realize that value with well-timed exits. In order to provide you with more tools and transparency to allow you to better analyze and fairly value Safeguard, Ray will provide you with an update of our aggregate revenue and our growth expectations from our postbundled partner companies. On that note, let me turn to call over to Ray.

Thanks, Peter. I will first present Safeguard's first quarter 2008 results then discuss the aggregate revenue performance of the partner companies which should help you get a sense of value we are building in those companies. For the first quarter of 2008 Safeguard reported consolidated revenue of 15.9 million, up 80% from the first quarter of 2007. We reported a net loss excluding discontinued operations of 11.5 million compared to net loss of 8.9 million in the first quarter of 2007. As a result of the bundled sale definitive agreement Acsis, Alliance Consulting, and Laureate are now reported as discontinued operations. Therefore, Safeguard's reported revenues for the quarter ended March 31, 2008, result from the consolidation of our one remaining majority owned company, Clarient.

In the first quarter 2008, Clarient's revenue increased 80% to 15.9 million from 8.8 million in the comparable 2007 quarter. This increase was driven by a combination of improved (inaudible) service mix, higher Medicare reimbursement rates, and increased volume. The increase in volume reflects Clarient's successful efforts to expand their presence in the leukemia and lymphoma markets. Clarient's gross margins grew from 42% to nearly 62%. Clarient's loss from operations was reduced from 3.3 million to 200,000 by the combination of higher revenues and cost containment measures that Clarient put in place at the end of 2007.

As disclosed in the press release, Clarient reported $1.4 million in positive adjusted earnings before interest expense, income taxes, depreciation, and amortization and stock-based compensation. Equity losses for our minority owned partner companies in the first quarter were higher than the prior year by 4.6 million, mainly due to the change in our portfolio mix which included more equity method partner companies in 2008 than in 2007. In 2007 total aggregate revenue for our 14 postbundle partner companies was 115 million for the periods during which they were a part of the Safeguard's portfolio. In 2008 we expect that aggregate revenue from our 14 postbundle partners will be in the range of 175 million to 200 million.

Looking at life sciences and technology independently, aggregate revenue for the life sciences companies in 2007 was 52 million and we expect 2008 life science revenue in a range of 75 million to 82 million. Technology postbundle companies posted revenue in 2007 up 63 million. We anticipate their 2008 revenue to be in the range of 100 million to 118 million. Please keep in mind that minority companies are reported on a quarter lag basis. We will continue to update our four-year aggregate life science and technology company revenue expectations on a quarterly basis. Safeguard management is still evaluating potential uses of our cash. We will update you on the outcome of these discussions after we close the bundled sales transaction. Now let me turn the call back over to Peter before we open up the call for questions.

Thanks, Ray. While is there a lot of activity at Safeguard with our bundled sale, our overall strategy remains unchanged. We are executing on a strategy to identify and partner with high growth life sciences and technology companies. We continue to fuel the growth of these partners and seek well-timed strategic exits. We are excited about the opportunities ahead and we look forward to realizing their value. On that note, Christie, would you please open the lines up so that Ray and I can take any questions.

(OPERATOR INSTRUCTIONS) Your first question is from Bob Labick with CJS Securities. Bob your line is opened.

Can anyone hear me?

Hi, Bob. I hear you. I did hear you. I don't now. Christy, perhaps we can go back to Bob.

(OPERATOR INSTRUCTIONS)

Can you hear me now?

Yes, Bob.

Okay. First question I wanted to ask with regard to the bundled sale obviously you had to value each of the components separately, it becomes more relevant to the point where NexTone is coming back to you. You will maintain some ownership in that. It appears that you valued or somebody valued the entire NextPoint, NexTone company at 210 million just looking at your $22 million stake for 10.5%. Could you discuss with us how the valuation of NextPoint was created, what parameters and how we should think about that holding and position in the future?

I will let Ray address that. Essentially we sold a bundle of companies for some purposes that might have been broken out. We really sold a bundle for a bundled price.

At this point we are not disclosing the allocation and the fair market values of the individual bundle sale.

I am not trying to ask for the other five. Obviously you have disclosed the NextPoint to the extent that 10.5% equals $22 million. I was just trying to understand who came up with that determining value and what methodology was used.

The buyers set a price.

I am sorry.

Saint set a price for NextPoint.

Saints allocated the amount of money per company. We negotiated a bundle transaction and did not consider putting a value on any individual company. We sold them in a bundle.

Okay. Moving on to Clarient. Obviously they reported blow out results, significant growth and sequential growth. I haven't had a chance yet to go over their call from last night. I was hoping you could maybe just expand a little bit upon your comments, obviously, in terms of the primary drivers. You mentioned Medicare imbursement there too. The main question is were there any one-times in the quarter or is this a sustainable growth rate, not rate but starting point going forward, the 16 million in sales.

First of all, Clarient has given guidance for the year that they continue to see robust opportunities for them. They have put together an enormously strong sales and marketing engine with a powerful product offering. A while back they were focused on breast cancer. Now they have a product offering that goes to the five major causes of cancer, not only breast but prostate, lymphoma, lung and colon cancer. It is that growth in all of those areas and the product mix that helped generate higher gross margins, number one. Certainly the price increments in Medicare assisted that, number two. Number three, because of the increases in volume that they have and the magic of Dr. Michael [Polini] in the operational role that he has taken in Clarient, we have more operational efficiency. It is not one, it's not the other, it's not the third. It is really a composite of all of those that have helped grow gross margins from 42 to 62% and gave them their first EBIDTA positive performance. Not only EBIDTA positive, but it was seven figures of EBIDTA positive. Clarient has been executing this game plan for some time. You know to old adage if you keep pounding away eventually the breaks come. They have kept pounding away and those results are evident of that focus in intensity that they have been working upon. We are pleased with Clarient and we're proud of their accomplishments.

Thanks very much. I'll get back in queue.

Your next comes from the line of Bill Sutherland with Boenning and Scattergood.

Good morning. This is actually [Bill Detulio] for Bill Sutherland. Just add on to the previous question about the Saints capital deal. Could you give us a little more color as to why the terms were changed and why you have decided to keep it 10.5% stake?

[Bill], first of all the terms were not changed. Part of the terms in our arrangements with the other share holders of the other company was a co-sale right. The other shareholders in NextPoint opted to participate in the rights of the co-sale. So, in essence, that is how we retained the 10%.

The 10.5% was kind of --

That is a standard term and condition in any deal. Most companies have these deals when there is a syndication. There is no magic in that.

Okay. Great. Thank you. One final question. Could you also explain why the carrying value for Acsis changed from this quarter to previous quarter?

I will ask Ray to comment on the carrying value.

The carrying value changes depending on the amount of losses or cash in that is given to each of our partner companies. As you know, Acsis is now being reported in discontinued operations.

Right. I guess it was a pretty significant increase from previous quarter.

Increase from -- when you say increase. If you look at our partner company financial data schedule, we had a net loss of $2.6 million for the three months ended March 31, 2007, for Acsis. That was reduced to 655,000 in the three months ended March 31, 2008. It is a significant reduction, not increase.

Okay. I just have a carrying value for Acsis at year end of 15 million year net worth showing 16.5. Maybe I have the wrong numbers.

We will get back to you, [Bill].

Okay. Those are my questions. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from John Gibbons with Oden Partners.

Good morning, gentlemen. My question is you talk about the standard terms of this right to participate on the co-sale. Does that create sort of a tripwire if you are going to bundle other deals embedded in the portfolio or is that just the facts of that particular transaction?

That is the standard term that is found when one syndicates with other investors.

These are the existing investors?

That's correct.

That is actually quite positive that they want to do this, right? Should we interpret that as positive?

I think that is just a fact of life. We recognize this was the secondary sale as well. It is not a "tripwire," to use your terminology, if the whole company were packaged up and sold. It is a shareholder right that's often times granted during syndication.

It has nothing to do with total sales, it just has to do with the syndication.

That's correct.

Okay. Thank you very much. I just had not seen that before.

Okay. It is a standard term, John.

Thank you.

(OPERATOR INSTRUCTIONS)

Okay. Ladies and gentlemen, thank you for your interest. As a reminder, Safeguard will be attending and presenting the JMP Securities 7th annual conference on May 19 in sunny downtown San Francisco. That will be live web cast and that will be available on safeguard.com as well. Thanks for your interest. Thanks for participating. We look forward to keeping you abreast of our progress.

This concludes today's conference call. You may now disconnect.