Safeguard Scientifics Inc (SFE) 2009 Q2 法說會逐字稿

Greetings and welcome to the Safeguard Scientifics 2009 second quarter conference call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Shave, VP of Business Development and Corporate Communications for Safeguard Scientifics. Thank you, Mr. Shave. You may begin.

Good morning and thank you for joining us for Safeguard Scientifics' second quarter 2009 conference call. Joining me on today's call are Peter Boni, Safeguard's President and Chief Executive Officer, and Steve Zarrilli, Senior Vice President and Chief Financial Officer.

During today's call, Peter will review the quarter's highlights. Following, Steve will discuss financial results and strategies for Safeguard. Then, we will open the lines for your questions.

Before we begin, I must remind you that today's presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties including, but not limited to, the uncertainty of future performance of our portfolio of companies, and the risks of acquisition or disposition of interests in portfolio companies; capital spending by customers and the effect of economic conditions generally, as well as the development of the technology and life sciences markets on which Safeguard focuses.

During the course of today's call, words such as except, anticipate, believe and intend will be used in our discussion of goals or events in the future. The Company cannot be certain that 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 are encouraged to read those filings. The Company does not assume any obligations to update any forward-looking statements made today. And with that, here is Safeguard's CEO, Peter Boni.

Thanks, John. And thank you all for joining us today in our Q2 progress report on Safeguard and on now our 18 portfolio companies.

For the Safeguard team, execution of our strategic game plan and focus on fundamental blocking and tackling led to solid performances during the three months ending in June. Despite a weak economy, we're encouraged and actually confident about our team's ability to put points on the board in the second half and beyond.

During the quarter aggregate revenue was up 40% from the same quarter last year. Our guidance on aggregate revenue for 2009 remains unchanged. We continue to expect total aggregate revenue in the range of between $200 million and $220 million for the year.

Our second quarter results validate Safeguard's game plan, which calls for the deployment of growth capital and the development of high-potential life sciences and technology businesses that exploit five strategic trends -- maturity, migration, convergence, compliance and cost containment.

We time our exits from portfolio company ownership positions to achieve maximum risk-adjusted returns on capital of 3 to 5X at a minimum. Exits may be realized through privately negotiated sales of securities or assets, public offerings of portfolio company securities, or in a case of a publicly traded portfolio company, the sale of securities on the open market.

Our deal teams are actively evaluating opportunities to deploy modest amounts of capital. Subsequent to the quarter's -- quarter ended, Safeguard deployed $6.7 million in a new technology company, MediaMath, a leading online media trading company based in New York City that enables advertising agencies and their advertisers unprecedented reach and performance through a powerful combination of algorithmic bidding and unique data integration, creating the efficiency of search with the branding impact of display advertising. The company serves billions of highly-targeted ads per month on behalf of over 20 top-tier agencies, including all of the major agency holding companies. So, we welcome MediaMath to the Safeguard team.

Our deal teams are also actively evaluating opportunities to realize value through well-timed exits. However, in the face of the current recession and the turbulent credit markets, this posses an issue. Potential partners are starved for growth capital. Transactions are possible at compelling valuations if they meet our strategic criteria. And since we're focused on maximizing cash-on-cash returns, this isn't an optimum time to achieve exits in most of our portfolio companies.

We've said this before and it bears repeating. We will remain disciplined and focused on enhancing value in our portfolio companies, rather than pursuing exits simply for activity's sake. Exit opportunities may arise from time to time but, in this challenging business climate, we're working every day to build value in our portfolio companies, drive their growth and keep their spending plans inline.

Now, let's drill down to the progress on Safeguard's now 18 portfolio companies during the second quarter. At the top of the list is the completion of the mid-May private placement of $40 million by portfolio company Clarient with Oak Investment Partners. This transaction benefits all parties, including Clarient, Oak and Safeguard for a whole variety of reasons.

For Clarient, which is traded on the NASDAQ under the ticker symbol CLRT, proceeds from the deal extinguish substantially all of the company's debt, except for accounts receivables facility.

For Oak, a multi-stage venture capital firm with more than $8 billion in committed capital, this transaction now gives Oak a meaningful stake in a fast-growing, well positioned leader in cancer diagnostic services. Oak owns approximately 21% of Clarient outstanding shares on an as-converted basis.

For Safeguard, the private placement directly strengthened our balance sheet. The transaction released $12.3 million in cash that guaranteed Clarient's third-party borrowings and distinguished a $30 million mezzanine debt facility with Clarient, which allowed us to recapture $19.5 million of that amount in cash previously advanced to Clarient. Lastly, the transaction also eliminated our commitments for future funding.

Now yesterday, Clarient reported its 20th quarter of sequential revenue growth. Clarient also raised their 2009 revenue guidance to $96 million to $101 million. Safeguard now owns approximately 47% of Clarient's outstanding shares, down from 50% at year-end 2008. The market value of Safeguard's holding in Clarient was $180 million on June 30th. And at market close on August 4th, it stood at $192 million.

You may be aware that Clarient recently filed a registration statement on Form S-3 relating to our holdings of approximately 46.5 million shares and 2.8 million warrants at various strike prices. The filing, which is not yet effective, is intended to facilitate possible block sales of our Clarient shares to institutional investors from time to time.

The filing was routine, replacing a registration statement that expired in February, 2009. The filing does not represent a change in plans for our Clarient stake. Proceeds from any block sales would further enhance Safeguard's balance sheet strength.

Moving on, let's highlight some of our developmental stage companies that are proving out technology, developing prototypes, refining their business models and building partnerships.

Avid Radiopharmaceuticals is a leader in the development of molecular imaging products to enable early diagnosis and prognosis of neurodegenerative diseases. Avid remains on track with FDA Phase III trials for its lead compound for imaging amyloid plaque in the brain for Alzheimer's disease, all with positive Phase II results. Avid's Parkinson's Disease imaging compound is currently in Phase II trials.

Their CEO, Dan Skovronsky, was recently named the 2009 Ernst & Young Entrepreneur of the Year in the Emerging Company category for the Greater Philadelphia area. Congratulations to Dan. Safeguard has deployed $10 million in capital in Avid since May of 2007 and we have a 14% ownership position.

Molecular Biometrics applies novel metabolomic technologies to develop accurate, non-invasive clinical tools for the use in personalized medicine. During the quarter, the company's non-invasive process that increases the probability of pregnancy and reduces the incidence of multiple births from in vitro fertilization, was rolled out in Asian, European and Australian markets. In the US, Phase III clinical trials remain on track.

In addition, the company recently received the 2009 Canadian BIOQuebec Genesis Award, given annually to the leading bio company that's determined by independent industry criteria. Safeguard deployed $6 million of capital in Molecular Biometrics since September of 2008 and we have a 38% position.

And Swaptree, the online platform for trading books, CDs, DVDs and video games continues to grow its user base and enjoy positive media attention. Recent accolades for Swaptree include two Massachusetts Innovation & Technology Exchange Awards for top honors in the 2009 Social Media category and the Best Overall Solution. Congratulations to Swaptree. Safeguard deployed $3.4 million of capital in Swaptree in July of last year and we have a 29% ownership position.

Garnet BioTherapeutics, NuPathe and Tengion all are on track with their respective Phase II or Phase III trials as planned.

Five of Safeguard's 10 life sciences portfolio companies are at the revenue stage. Three are at the initial revenue stage -- Alverix, Cellumen and Rubicore Medical. Four of our eight technology companies are at the expansion stage. They include Authentium, Beyond.com, now MediaMath, and Portico Systems, which are all growing revenue consistently with solid management teams.

I'd like to highlight one of our technology healthcare IT companies, which could very well move into the high traction phase by or before the end of this year. Portico Systems offers software and services to health plans to help them reduce administrative, medical and IT costs. Portico continues to grow revenues at double-digit annual rates.

Through recent acquisitions, Portico now serves 33 healthcare systems with 42 million members nationally. During the quarter, the company was included on the Healthcare Informatics 100 List of top healthcare IT companies in the world for the second consecutive year. Congratulations to Portico. Safeguard has deployed $9.3 million of capital in Portico since August of 2006 and we have a 46% ownership.

Safeguard's high-traction stage portfolio of companies, Advanced BioHealing, Advantedge Healthcare Solutions, Bridgevine and GENBAND and Clarient, all reporting solid growth, nearing breakeven or driving further bottom-line profitability and gaining additional commercial traction.

I've already talked about Clarient, but let me highlight ABH, AHS and Bridgevine.

AHS, or Advantedge Healthcare Solutions, uses a proven proprietary software platform to deliver medical billing solutions to physician groups. AHS moved into this high-traction stage as a result of its continued organic growth, as well as its strategic acquisitions, having recently announced its acquisition of Physicians' Service Center, a premier medical billing company in the Midwest with primary operations in Lombard, Illinois. This acquisition makes AHS one of the top 25 medical billing firms in the US. Safeguard has deployed $11.5 million of capital in AHS since November of 2006 and we have a 39% ownership.

Now ABH, or Advanced BioHealing, is a leader in regenerative medicine and it's on a tear during the quarter. Demand is surging for the ABH FDA-approved Dermagraft for diabetic foot ulcers. Annual cases of diabetic foot ulcers in the US are estimated at nearly 1 million, costing our healthcare system over $1 billion annually due to lower extremity amputations. ABH is aggressively expanding its US commercial sales force, and exploring new applications for its products in both domestic and international markets. We deployed $10.8 million of capital in ABH in February and May of 2007 and have a 28% ownership.

Bridgevine is the leading Internet marketing platform that allows consumers to compare and purchase digital services online, such as Internet, telephone, Voice-over-IP, TV, music and the like. Despite reduced activity in the housing markets, the company continues to expand its lineup of products and services, and continues to grow its merchant base and it continues to explore strategic opportunities. During the second quarter, Bridgevine also launched its consumer-facing comparison shopping and saving website, OfferWire.com. Safeguard has deployed $10 million of capital in Bridgevine since August of 2007 and we have a 24% ownership.

Now, I'll turn the call over to Steve Zarrilli, our CFO, and Steve will review the Safeguard financial strategies and our performance. Steve, take it away.

Thanks, Peter. Our second quarter earnings news release and financial statements were distributed earlier. I'd be happy to elaborate on those details during the Q&A period.

Peter outlined many of the key benefits of Safeguard that stem from Clarient's private placement. In addition, the transaction changes the accounting treatment of our retained interest in Clarient.

Safeguard's position in Clarient was reduced to approximately 47% upon the completion of the private placement with Oak Investment Partners. When Safeguard's position in Clarient exceeded 50%, we consolidated Clarient's results in our financial statements.

Effective May 14th, the date of the second traunch of the Oak private placement, we deconsolidated our Clarient holdings and recognized an unrealized gain in income from continuing operations of $106 million. The entire amount of that gain relates to remeasurement to fair value of Safeguard's interest in Clarient as of the deconsolidation date of May 14th, 2009.

In addition, since we had chosen to apply the fair value option to account for our interest in Clarient going forward, marking-to-market our holdings as of June 30th, 2009 resulted in an additional unrealized gain of $52.5 million. Previously, our Clarient position was accounted for on our balance sheet at its carrying value, which was $21.5 million prior to the deconsolidation.

As we mark our continuing Clarient holdings to market each quarter-end, investors will have better insight into the market value of our ongoing stake in Clarient. Our ownership in Clarient currently totals 46.5 million shares of common stock, plus an additional 2.8 million warrants at various strike prices.

At the market's close on August 4th, Clarient's share price was $3.96, making Safeguard's position worth approximately $192 million. We will recognize a gain or loss on such fair value accounting each quarter, depending upon the movement in Clarient's stock price during the quarter.

Balance sheet strength and prudent use of cash remain Safeguard's top priorities for 2009. We intend to continue to evaluate and pursue opportunities to reduce operating expenses where possible, retire convertible debt at a discount, manage cash deployments conservatively in our support of portfolio companies, and augment existing capital with well-timed exists for alternative pools of capital.

Our debt-to-equity ratio was approximately 1-to-1 on December 31st, 2008 and, today, is approximately 1-to-3. Our goal is to be debt free by or before the first quarter of 2011, where the put date for our converged exist as well.

At June 30th, 2009 we had $92.7 million in cash, cash equivalents and marketable securities, including cash held in escrow of $6.9 million. Our cash balance decreased $2.1 million from year-end 2008, primarily due to cash operating expenses for the period of $7.2 million, deployment of a combined $11.2 million during the period to support the capital needs of existing portfolio companies, and net receipts of $15.4 million from Clarient for the repayment of principal and interest under its mezzanine facility, and other payables with Safeguard.

The first priority in our use of cash continues to be the support of our current portfolio companies in their value-building activities. Given today's macroeconomic climate, we will remain nimble and flexible, changing as external conditions warrant.

On last quarter's call we reminded you that our expense control initiatives during 2008 reduced annual operating expenses by 19%. Through the first six months of 2009, corporate operating expenses were down a further 8% to $8.7 million in comparison to $9.4 million for the same period last year. The principal element driving this change included continued expense control related to professional fees.

Earlier, Peter noted that our revenue guidance for 2009 is unchanged. We expect aggregate revenue of Safeguard's continuing portfolio of companies to be in the range of $200 million and $220 million for the year.

For our life sciences portfolio of companies, 2009 aggregate revenue is projected to be within a range of $145 million to $155 million. For the technology group, we anticipate aggregate revenue to be between $55 million to $65 million.

GENBAND and MediaMath are not included in our revenue guidance. And portfolio companies Avid, Garnet, NuPathe and Tengion are pre-revenue companies and will not impact our aggregate revenue expectations. As you may recall, there is a one-quarter lag in reporting our interest in the results of minority-held companies.

And with that, I'll turn it over to Peter for any further comments.

Okay. Thanks a lot, Steve. Latonia, I think we're ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from Robert Labick with CJS Securities. Please proceed with your question.

Good morning.

Hi, Bob.

Hi. A couple questions. First, I wanted to ask -- you talked about it a little bit on the shelf registration on Clarient. Could you maybe give us a little more details? When would that become effective? And then, more importantly, if you could maybe help us outline your priorities with cash if you were to make some sales as it relates to debt pay-down, share repurchase, incremental investments in your current holdings and then new investments for the portfolio.

Why don't I ask Steve to pick that up for you, Bob.

Great.

So Bob, we're still in the process with the SEC so there's no further information at this time that we can share. As you know, we're going to -- as we've stated, we're going to use that registration statement to at times potentially sell blocks of shares of Clarient to institutional shareholders. And there is no defined plan as of yet for those types of transactions.

We will continue to explore ways in which to put capital to work in the future, if I understood the second part of your question properly, in the manner that we currently use today. We are going to also remain mindful of the obligations that we have under the convertible debt securities and ensure that that is a priority in the use of cash doing forward.

Okay. And then just going through your companies, you have I think three companies in Phase III trials. I was wondering if you could offer a little more color on kind of timing of when those trials might end. And then, specifically as it relates to NuPathe, you mentioned in the release that you expect an NDA in 2010. For the generalists among us, could you help us understand what that means as it relates to timing of revenues and maybe the opportunity for NuPathe in 2010?

We do expect that NuPathe would proceed in its Phase III trials. They'll be in a position to make their progress known when they're ready to do so, but they're progressing according to our plan and through Phase III. Then they'd go into a prospective revenue mode later in 2010. I'd say if that's later in 2010, it's likely to be 2011 revenue.

Okay, great. And could you remind us of the market opportunity for NuPathe?

There's a $500 million market opportunity for a migraine med that's just in the US alone.

Great. And then just moving to Rubicor. You mentioned in the release that you are petitioning to move into bankruptcy to recoup your investment there. Could you just explain the situation and tell us what's gone on there?

Well, we have proceeded with other people to proceed to put Rubicor into the liquidation mode. Therein lies the opportunity, we think, to realize the greatest amount of value for the intellectual property that is there for all shareholders and debt holders alike.

And what would be the timing of any such events?

I can't predict.

Well, thank you very much. I'll get back in queue.

(OPERATOR INSTRUCTIONS.) Our next question comes from Bill Sutherland with Boenning & Scattergood. Please proceed with your question.

Thanks and good morning.

Hi, Bill.

Hey. Bridgevine, Peter. Can you give us some sense of, as the economy gets on its feet, kind of what you think their prospects will look like? I mean, they're doing a nice job here of leaning into the headwinds. I'm kind of interested to see what you guys think about the economic sensitivity there.

Actually, Bridgevine has done some interesting things to position itself from a revenue perspective. On one hand, activity for them really is based upon the number of people that move in this country. And when you move, you change your Internet service provider, you change your cable provider, you change many providers of digital services. And we all know that the moving machinery has been somewhat retarded in this country.

They have also positioned themselves with varying vendors with kiosks. I'll give you an example. At a Sears Roebuck store where they sell an awful lot of plasma TVs, after the purchase of a plasma TV, the consumer's walked over to a kiosk that can define all the varying services for the kind of TV that he has purchased in his particular area of geography and then makes the selections accordingly. So, it's a revenue stream that's coming about in several different ways.

So, they continue to grow on a year-over-year basis, whereas the economy overall is not cooperating for them. They're highly innovative and they continue to see growth.

But you would expect some acceleration, do you think, Peter?

Well, as the moving machinery gets back to work in the US, we think the headwinds that they face will become tailwinds and that could accelerate the existing growth that they're already seeing.

The other thing I wanted to ask you as far as portfolio companies was a little more color on MediaMath in terms of their economic model, or I guess I should say their financial model. In other words, are they like a media company in terms of how they make money?

They're doing to display ads what Google does to key words, if you will. They're revenue model is -- well, I guess they have top line that's gross revenue, which is the advertising itself, and then their piece of that, which is their net revenue.

I get it. Okay.

So Bill, this is Steve. Just as a further point of information, so MediaMath will, like many media-oriented companies, will report -- they'll focus on that net revenue number rather than the gross revenue number.

Right.

And all of our assessment of their business model and their opportunities for growth in the future have been driven around understanding how that net revenue model continues to build.

And Peter, you said that on a net revenue basis they fit into which of your buckets?

The third bucket, the expansion stage companies.

Okay. The -- I wanted to understand, Steve, a little bit more on the cash flow in the quarter. I think it was the quarter that you talked about was $7.2 million of cash expenses.

Well, there were -- for the year -- so let's just level set this. For the year, there's been a net decrease in cash of $2.8 million. During the quarter there was approximately $3.5 million of cash used for operating expenses and about $7.4 million used for follow-on investment in new -- I mean in existing partner companies.

Oh, that makes more sense. I was jotting down the first half numbers then. So, it was $3.5 million for OpEx and how much for deployment?

$7.4 million. Yes, just so -- for your notes, we're running at a pretty consistent rate now of about $3.5 million of cash expenses per quarter.

Yes. Okay.

And deployments obviously will be a variable number, depending on what the partner companies need and what we may be doing selectively with some new investments.

Are you looking to just shave kind of opportunistically on that cash expenses burn, or are there any significant things you have in mind at this point, Steve?

No. Now it's managing nickels and dimes and quarters, to be honest. And every quarter we seem to be finding some further efficiencies. In the last six months we were able to renegotiate and refine much of our cost structure around professional fees, as an example. So, that is adding further efficiencies in 2009.

So, we continue to look for ways to find these nickels, dimes and quarters, but there's -- but the big dollars I think we've been able to address and have that impact over the last 18 months.

And then the last one, again for you, Steve, is how -- give us a status update in terms of augmenting with alternative investment or capital. Thanks.

We have been very active in that regard in talking to a number of parties. We've spent a fair amount of our internal resources gathering data to be used credibly in that process. We would expect that, by year's-end, we will have chosen a partner to help us with that endeavor and then begin in earnest our activities around potential targeting of alternative pools of capital in 2010.

So, we have actually increased our momentum internally. And one of the things that seems to be playing very nicely for us from a strength perspective is, as our balance sheet improves and as we are able to provide further visibility on our cash flow for the next two to three years, this evergreen funding model is being well received by the parties that we're having conversations with as a signal of strength and viability and sustainability. And that's actually working to our advantage in this marketplace.

Well, thanks again.

Our next question comes from Colin Gillis with Brigantine Advisors. Please proceed with your question.

Hi, everybody.

Hi, Colin.

Hey, Peter, just given the quantity of deal flow that you see, can you make some comments in terms of valuation trends and also velocity of the deals that you're seeing?

Well, we have a very active pipeline, Colin, number one. And the private company valuations are beginning to catch up with the public company valuation metrics. There's always a little disparity there but -- especially on the technology end of the world. We're seeing those valuation metrics more inline now with what's gone on in public markets.

This is an extraordinarily opportune time for companies like Safeguard. This is an environment where only the very best companies will achieve financing, and that'll happen at very attractive price points.

So, if you would just kind of look back over the last 12 months, when did you start to see the valuations pick up?

How quick -- last year we saw, especially in the technology arena, a real decline in the metrics of public companies. There was a several-month lag between the catch up of the private company evaluation metrics and the public company evaluation metrics.

And frankly, we've had a few companies on our radar screen for a bit. And we chose not to do some technology deals last year because we just didn't like the valuations. Those valuations are more inline now with the opportunity that we see to have fun and make some money for our shareholders.

And then, just looking forward, how long do you think this window really lasts in terms of being able to ignite deal flow at more advantages terms?

When it comes to being predictive on valuation metrics and public markets, Colin, I leave that to other people.

Fair enough. Alright. Thanks, Peter.

Our next question comes from Sam Rebotsky with SER Asset Management. Please proceed with your question.

Yes. Good morning. Congratulations, Peter and Steve.

Thanks, Sam. How are you?

Good. This is sort of a watershed. I guess this is something everybody's been waiting for a long time and gives you a lot more flexibility to do things, assuming the market sort of cooperates.

Do you see in the next year either taking any of these entities public or what is your -- I mean, how much longer do you think -- is it the very earliest stage with your investments, the 17, 18, beside Clarient or what's your thoughts there?

Well, we put our money to work, Sam, with a target of a three to five-year exit. We started on the refurbishment of the Safeguard portfolio in 2006 and we have an environment right now that isn't particularly conducive to the best exit outcomes. So, it's hard to be predictive on that.

But one would think, based upon the timeframes that we have in mind when we put our money to work and how long we've been working on this particular strategy, that we're nearing that time in plus or minus the next year or so. But it's very difficult to be predictive on a quarterly basis as to when an exit will be realized.

Well, you're doing very well. And I guess the attraction of Oak to Clarient sort of -- would sort of hopefully bring other people like Oak, or Oak into some of the other investments at the opportune time. Good luck.

Thank you, Sam.

This concludes our Q&A session at this time. If there are any other questions, please call Mr. Shave directly at 610-975-4952. And I will turn the call back over to management for closing remarks.

Okay. Thanks so much, Latonia.

I want to remind all of you that Safeguard will be presenting at a multiple of conferences throughout the remainder of the summer. Next week we're both in New York City at the Wall Street Research Small Cap Conference and in Boston at the Canaccord Adams Annual Global Growth Conference.

And in September, I believe there will be three opportunities to see Safeguard -- at the Rodman & Renshaw Annual Healthcare Conference in New York in the beginning of September, the middle of September in San Francisco with ThinkEquity, and at the end of September with the Maxim Group's Annual Growth Conference.

So on that note, I sure appreciate everyone's interest and we look forward to keeping you up to date as to our progress.

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