Safeguard Scientifics Inc (SFE) 2013 Q4 法說會逐字稿

Good morning, and welcome to Safeguard Scientifics fourth-quarter and year-end 2013 financial results conference call. All participants are in a listen-only mode. After the presentation, we will open up the call for questions. Instructions will be provided at that time. Please note that this call is being recorded today, Thursday, March 6, 2014 at 9 am Eastern time.

I would now like to turn the meeting over to John Shave, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

Good morning and thank you for joining us today for Safeguard Scientifics fourth-quarter and full-year 2013 conference call and webcast.

Joining me on today's call are Steve Zarrilli, Safeguard's President and Chief Executive Officer, and Jeff McGroarty, Safeguard's Senior Vice President and Chief Financial Officer. During today's call, Steve will review highlights of the quarter and full-year as well as other developments at Safeguard and our partner companies. Then Jeff will discuss Safeguard's financial results and strategies and after that we will open up the line for questions.

Something to note for those of you are attending this call via webcast, we have upgraded our capabilities to optimize the viewing experience. You will now be able to access our webcast from your smartphone, tablet or computer. We hope you enjoy this new user-friendly experience and welcome any feedback you may have.

As always, 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 partner companies; the risks associated with our acquisition or disposition of interest in partners companies; risks associated with our decisions about the deployment of capital and the effect of regulatory and economic conditions generally; as well as the development of the healthcare and technology markets and other uncertainties that are described in our SEC filings.

During the course of today's call, words such as expect, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot be certain that final outcomes will be as described today. We encourage you to read our filings with the SEC including our Form 10-K which describe in detail the risks and uncertainties associated with managing our business. The Company does not assume any obligation to update any forward-looking statements made today.

Now here is Safeguard's President and CEO, Steve Zarrilli.

Thank you, John, and good morning and thank you all for joining us today for an update on Safeguard and our partner companies.

2013 was a tremendous year of progress strong growth and steadfast focus on our core business. We deployed $34.1 million of capital and six new partner companies and in other early-stage enterprises. In addition, we deployed $15.3 million of additional capital to support the growth of the partner companies in which we already had an interest at the beginning of the year.

We recently announced four completed exit transactions for Alverix, Crescendo, NuPathe and ThingWorx, generating aggregate initial cash proceeds for Safeguard of $114 million with an aggregate cash on cash return of 2.1 times.

For NuPathe and ThingWorx, we have the opportunity to realize an additional $24.2 million and $6.5 million respectively based on certain milestones achieved over future periods. Based in part on the cash which these exits have contributed to our balance sheet, in late February 2014, our Board of Directors approved an increase in our share repurchase program bringing the total authorization to $25 million. Share repurchases will be made from time to time based on the capital needs of the business, the market price of our common stock and general market conditions.

No time has been set for the completion of the repurchase program and the program may be suspended or discontinued at any time. Thus far under the share repurchase program, we have repurchased 56,000 shares for a total of $1.1 million.

As we continue into 2014 and plan for the years ahead, we anticipate that our momentum will continue to build and we will have further consistency in the amount of capital deployed and capital realized.

We also continue to align our interest with the interest of our shareholders and our incentive to create and maximize shareholder value. At the beginning of 2013, Safeguard announced initial aggregate partner company revenue guidance of $250 million to $270 million for 2013. And at the end of the third quarter, we increased aggregate partner company revenue guidance to a range of $285 million to $295 million.

2013 actual partner company aggregate revenue was $292 million, up from $197 million in 2012 and $143 million in 2011. For 2014, partner company aggregate revenue is projected to be between $345 million and $365 million. 2014 aggregate partner company revenue guidance includes revenue for partner companies in which Safeguard has an interest as of today. Aggregate revenue for the same partner companies for prior years was $288 million for 2013 and $202 million for 2012.

Aggregate revenue guidance for 2014 in prior years reflects revenue on a net basis. Revenue figures utilized for certain companies pertain to periods prior to Safeguard's involvement with said companies and based solely on information provided to us by such companies. Safeguard reports the revenue of its equity and cost method partner companies on a one quarter lag basis.

Safeguard remains well-positioned for continued progress and growth. We are encouraged by the improvement in the broader domestic economy and we aren't alone in the sentiment. A recent survey of capital providers with whom we compete indicates that there is a steady increased confidence in the macroeconomic environment especially for exit transactions and IPOs.

According to the Silicon Valley Venture Capital Confidence Index, confidence levels are at the highest level since late 2007. This reading suggests a firmer foundation for the markets in which we participate in 2014 despite the volatility that has royaled capital markets early in the new year.

We are encouraged and enthusiastic at this juncture about the improving business climate and Safeguard's prospects for the rest of 2014 and beyond and we remain disciplined and focused on our core business as the key driver for shareholder value.

At Safeguard, our focus is on finding promising opportunities in new companies, structuring appropriate financial and governance relationships, developing those partner companies usually over three to five years and then monetizing our interest in those partner companies when the right opportunity present itself. By adhering to the touchstone of disciplined execution, we believe that we will consistently create value over time. The nature of Safeguard's evergreen business model allows for this patience.

Since December 2010, we have had eight exits in which our partner companies were acquired by highly respected global companies such as Shire Pharmaceuticals, Eli Lilly, GE Healthcare, McKesson, Becton, Dickinson, Teva Pharmaceuticals, PTC and Myriad Genetics. Clearly our partner companies are attracting the attention of leading global companies.

We continue to build a robust pipeline of new opportunities. We are equally focused on identifying well-timed exits to maximize value for our shareholders.

As a visionary for the development of growth stage healthcare and technology companies, Safeguard is a proven partner for entrepreneurs looking to accelerate growth and build long-term value in their businesses. Leveraging Safeguard's rich and colorful history of building market leaders along with our team's collective and operational expertise and successful entrepreneurial endeavors, Safeguard has built a powerful and actionable platform of resources to support our partner companies with strategies and relationships that are vital for success.

We provide value that extends beyond capital and we work as a team to foster growth. Our corporate staff of 30 employees is dedicated to creating long-term value for our shareholders by helping our partner companies build value organically and by acquisition activity. Our focus remains to deliver aggregate cash on cash returns of two times our cost at a minimum from a growing roster of partner companies in select verticals of the healthcare and technology sectors. Those verticals are medical diagnostics and devices, specialty pharmaceuticals and healthcare technology, and digital media enterprise software and financial technology.

We are working every day to execute that strategy and to deliver meaningful results. It is no secret our interests are closely aligned with our shareholders. The Company's current investor slide deck includes this slide outlining how equity incentive compensation is linked to achieving certain thresholds in market capitalization growth and cash on cash returns. In short, the Safeguard team won't take its eye off the ball.

We have grouped our current 19 partner companies into four stages based on revenue generation and their operational, financial and organizational maturity. A Safeguard partner company can be involved in a strategic or financial exit transaction at any stage of development as evidenced by our recent exit transactions. NuPathe was pre-revenue. Alverix and ThingWorx were initial revenue and Crescendo was expansion stage.

Here is a brief overview of the four stages. Development stages of pre-revenue business that are proving their technology through prototype development or beta product versions. We do not at this point have any partner companies in this stage. Initial revenue stage includes nine of Safeguard's partner companies. Businesses in this stage are building corporate infrastructure and management teams. They are beginning to penetrate target markets that have revenues of $5 million or less.

Our expansion stage category currently has four partner companies with characteristics of commercial grade solutions, growing market penetration, complete infrastructure and management teams and revenue in the range of $5 million to $20 million.

Partner companies in our high traction stage are characterized by rapid growth, significant commercial success and revenues in excess of $20 million per year. Six of our partner companies are in this stage. Most recently, Putney moved into this category since it surpassed the $20 million hurdle in 2013.

There are two high potential initial revenue stage partner companies that we deployed capital into in 2013 that I would like to focus on for this call. The first is Pneuron. Pneuron is led by a repeat successful Safeguard entrepreneur, Simon Moss, who has previously CEO of Safeguard partner company Mantis. In 2006, Mantis was acquired by i-flex Solutions, a subsidiary of Oracle Corporation for $112 million resulting in a gain of approximately $84 million for Safeguard.

Pneuron enables organizations to rapidly solve business problems through a disruption approach that cuts across data, applications and processes. By targeting the right information at the data source, companies are no longer faced with the complex integration and infrastructure requirements of traditional approaches.

Pneuron continues to secure contracts with insurance companies, financial institutions and advisory firms. As the company heads into 2014, it will continue to focus on these sectors as well as healthcare. Safeguard deployed $5 million in Pneuron in February 2013 and has a 28% primary ownership position.

Another exciting partner company in the initial revenue stage is Apprenda, a leading enterprise platform as a service company that is powering the next generation of enterprise software development in public, private and hybrid clouds. Apprenda reduces the complexities of building and delivering modern software applications, enabling enterprises to turn ideas into innovations faster. 13 of the world's top 20 financial institutions including JPMorgan have engaged Apprenda. In healthcare, AmeriSourceBergen, McKesson, Memorial Sloan-Kettering are using Apprenda to create new efficiencies and revenue streams.

Gartner recognized Apprenda as an early market leader for private cloud enabled application platforms. According to Gartner, the category has a potential market opportunity of $4 billion. Safeguard led a $16 million Series C financing deploying $12.1 million in Apprenda in November 2013 for a 22% primary ownership position.

Now let me provide you with a brief update on one of our partner companies in the high traction stage, MediaMath. As a result of a few successful IPOs in the digital marketing technology category, MediaMath is attracting tremendous attention. The advertising technology community viewed the September IPO of MediaMath's competitor, Rocket Fuel, as an important indicator of the growing value of sophisticated technologies that improve digital advertising performance.

MediaMath expects continued rapid revenue growth during 2014. Safeguard has deployed $18.5 million of capital in MediaMath since July 2009 and has a 23% primary ownership position.

I am certain that you will agree that despite four recent exit transactions, we have an exciting group of partner companies with tremendous value creation potential. We look forward to keeping you updated on future capital deployment and exit activity.

And with that I'm going turn the call over to our CFO, Jeff McGroarty, who will focus on our financial performance and ongoing goals.

Thanks Steve. Let's start off the review of key financial metrics for the quarter and year ended December 31, 2013. At year end we had $183.6 million in cash, cash equivalents and marketable securities. The total carrying value of outstanding debt was $49.9 million resulting in net cash of $133.7 million.

It is important to note that this cash balance does not include the proceeds from our recent exits, Alverix, Crescendo and NuPathe. During the quarter, primary uses of cash were $13.6 million of deployments in new companies including Apprenda and Dabo Health; a follow-on deployment of $0.2 million in our partner company Hoopla; cash used in operations of $3.5 million; and interest payments of $1.4 million.

For the full year, primary uses of cash were $34.1 million of deployments in new companies including Apprenda, Clutch Holdings, Dabo Health, Pneuron, Quantia and Sotera Wireless; follow-on deployments of $15.3 million in seven partner companies; cash used in operations of $18.3 million; interest payments of $2.9 million; and deployments in Penn Mezzanine loan participations of $2.3 million.

Safeguard is determined that we will not be making any further material capital deployments in connection with Penn Mezzanine lending. Instead as Steve mentioned earlier, we will be focusing on our core business as the key driver for building value in our partner companies and for our shareholders.

Consistent with Safeguard's focus on the core business, our primary intended uses the cash are as follows -- capital deployments in some the new partner companies; follow on funding to support our existing partner companies; returning capital to shareholders in the form of stock repurchases; and corporate operations.

Our roster of partner companies totaled 22 at year end. The cost of our interest in these companies totaled $215 million. The carrying value of those partner companies was $144 million.

Now taking into account our recent exits, we now have 19 partner companies. The cost and carrying value of our interest in these companies was $171 million and $113 million respectively as of December 31, 2013. Safeguard's financial strength, flexibility and liquidity are evident from the Company's balance sheet at year end.

Now it is time for Steve to lead us through the question-and-answer segment of the call.

Thanks Jeff. Now operator let's open the lines for any questions.

(Operator Instructions). Greg Mason, KBW.

Good morning gentlemen and congratulations on the recent exit activity. That is great. Steve, I know you did not give specific guidance about share buyback and when you might use it but could you just maybe frame the topic for us a little bit with just what your thought process in terms of what do you need to see from your balance sheet and cash flow to start utilizing the share buyback?

Good morning Greg. So a couple of key points. First, I don't think we would have increased the authorization if we weren't trying to meaningfully put some capital work in that regard. The Board and management are actively evaluating on a go-forward basis both excess cash as we define it and that is defined in a manner that will allow us to have sufficient operating flexibility to pursue the goals that we have laid out as well as making sure that we have a proper understanding of what we believe the intrinsic value per share of stock is for Safeguard. And when there is an amount of excess cash as we define and the value of the shares as they are traded are below intrinsic value, then we will be utilizing the repurchase program to take advantage of that disparity if you will.

And I'm guessing you do not want to make public what those numbers are for excess cash or level of stock price?

That would be correct.

All right. Also can you talk about the pipeline for new deal activity? Obviously the exit environment is hot. Everybody is talking about that. What is the opportunity for putting capital to work in new opportunities?

So the good news is the opportunities for putting capital to work are as strong or stronger than we have seen in the past. Actually I think our successes have really put us on the map in a certain number of circles that allow us to see even more deals in certain areas than we had been seeing in the past. And I think our pipeline in the past was pretty robust.

So we are not going to be at a loss for opportunity to consider in 2014. Where we do need be careful and I think I mentioned this in 2013 as well, the exit opportunities have also demonstrated that the valuations out there are fairly substantial as evidenced by -- as an example, the ThingWorx transaction. We need to be very careful that we do our homework and that we don't overpay for opportunities and we are being very diligent around that process and we will continue to look at these great opportunities but with a proper lens around valuation and whether or not we can get in at the right price.

Great, and then one last question and I will hop back in the queue. Last year you gave guidance of expecting two exits in 2013. Obviously you were able to accomplish that. Do you have any willingness or desire to give any exit expectations in 2014?

It almost gave me a coronary last year, Greg. In all honesty, we believe that we have been on a very nice pace with regard to exits with 2013 seeing two. We count Alverix really as a 2013 exit and we saw two already in 2014. So right now that pace seems pretty healthy to us.

Will there be an opportunity for something else during 2013? Well we are going to continue to keep trying and we've got a number of companies as you know that could potentially be poised for something that could result in an exit or a monetization. But we are going to continue to make sure that we pay attention to what is going on in the marketplace and look for those well-timed risk adjusted exits.

Bob Labick, CJS Securities.

Good morning and congratulations on a very nice year and some good exits there. I wanted to start -- obviously with that and a question for Jeff, Jeff do you have an approximate number for the pro forma cash once you get all the proceeds in from the announced exits? And then can you give us a rough timing of when you would expect to get that cash?

Sure Bob. We ended the year with $184 million in cash. The proceeds for the three exits since year end is about $77 million. So the combined -- that is our pro forma cash as of today and all that cash has been received at this point time, the initial cash proceeds from all the exits.

Okay. That's great. And obviously that is a lot of cash and I know you don't want to give out your intrinsic value number but I will tell you certainly the stock is below our estimates for intrinsic value and I think there is real opportunity for you enhance shareholder value with that excess cash. So I think it is great that you have upped your authorization of your share repurchase.

Thanks Bob. We agree.

And then you talked about this just a little bit but maybe could you talk more about the expectations for the size of the portfolio and what you would target not specifically but broadly for deployments for new companies this year or over the next several years?

Yes Bob, first of all, we do recognize and still remain committed to the goal of having more than less partner companies. It provides stability in a whole number of ways. It provides opportunity and it helps us to provide diversification in the portfolio itself.

The team and I are working on putting hopefully six to eight new names up this year. We are looking to target capital deployment in a manner similar to last year in our guidance. We actually came in below the guidance last year, not because we didn't find the opportunities, we actually were more efficient in the way that we are putting capital to work.

So you will see similar goals for this year, six to eight new partner companies, capital that would be deployed on new opportunities in excess of $40 million, follow along capital for existing partner companies that most likely would be in excess of $30 million. There are some of the guideposts that we are working around for 2014.

Okay great. That is very helpful. And then as you said, you've already had a few exits counting in this year. Over the next -- without putting numbers to it -- over the next 18 months or so, what do you see as the roster of potential opportunities and knowing that ThingWorx was not on a lot of people's radars as a potential exit so they can come from anywhere. But how do you see the pipeline of potential exits over the next 12 to 24 months?

You know we have a lot of great companies that are doing a lot of great things and I think one of the biggest differences that we have today in 2014 that didn't exist necessarily in the second half of 2011 and 2012 when we had our last string of exits, was that we have near-term the opportunity for some other opportunities for monetizations. Will it be six or 12 or 18 months? That is all going to be determined based upon a whole lot of facts and circumstances some of which are in and many of which are out of our control.

But when I look across the 19 companies that we have today, I think that there is probably some companies that many of you are looking at as obvious potential exit opportunities and we don't necessarily disagree. Timing will be the matter there.

I think that there is also a few that are probably like ThingWorx where they are not necessarily getting the attention that some of the other companies are but they also provide an opportunity for a potential exit at some point sooner rather than later in their life cycle.

So as I look across the 19 companies today, I'm feeling pretty comfortable that we are going to continue to manage our business to provide the consistency that I have been striving to put into the day-to-day activities of our business and that we have been trying to communicate over the last 15 months.

Jim Macdonald, First Analysis

Good morning guys and congratulations on all the exits. I wanted to investigate partner revenue guidance a little bit. Could you give some thoughts on that? I know you have been conservative in the past but specifically MediaMath said that they might expect to double revenue this year which could almost account for 100% of the growth you are expecting in partner revenue.

Sure Jim. We recognize that MediaMath has enormous potential. Compared to the numbers they might have provided you we tend to be a little bit more conservative in our early stages in the beginning of the year as far as a revenue guidance goes. So the range that we have given is 20% to 27% year-over-year growth compared to last year on an adjusted basis. And MediaMath is certainly a key driver of that growth.

And could we exceed it? Yes. But for now that is our view of what 2014 looks like. We have got other companies that are driving growth and we would expect that we will be at this point, our early indications would be we would be at least at the high end of that range.

Okay. And just a technical question, it looks like you lost a little money in Penn Mezzanine in the quarter. Anything specific there?

Yes, sure. That impairment charge you were referring to a $1.8 million for Penn Mezzanine, that relates to our decision to no longer participate in future Penn Mezzanine loans. So that is an impairment of the investment we made initially in the platform, the entity itself, Penn Mezzanine. We actually had a write-up in the quarter of about $1.2 million related to some of our participations in warrants that we acquired from Penn Mezzanine.

So net net, a slight adjustment downward. But that also doesn't reflect the interest income we continue to generate from Penn Mezz which was $1.5 million during the year and we would expect it will be similar in 2014.

So Jim, it is also important to note that when we take all of those components and add them up over what we consider to be the remaining life of our involvement with Penn Mezzanine, we expect that we will have a full recoupment of the capital that we had deployed against that initiative.

Great, thanks for the color. And if I could sneak in one more. It is good to see you initiating the repurchase program. Can you give us some thoughts on why you are doing -- returning major shareholders that way rather than maybe special dividends or something like that?

We looked at a number of alternatives. We had long and detailed conversations with our Board as you can imagine and we ultimately came to conclusion that at this moment in time that this is the most appropriate way from a capital allocation perspective to return capital to shareholders.

I think for many shareholders if not most it is probably the most tax efficient way. And for now we believe that that is the most appropriate thing for Safeguard to be doing.

Okay, thanks very much.

Ed Woo, Ascendiant Capital.

I want to give my congratulations again. I had a question, you know you guys obviously are getting a lot of cash near-term and you guys have had some success and you mentioned that. You guys are seeing maybe a little bit more deals than you guys had on the radar more. Have you guys considered either expanding your team, making bigger investments or possibly going into new areas?

Great question. And it's actually an opportunity for me to reinforce some of the core tenets of our strategy. There is a couple things that we have learned over the last couple of years. And that is we tend to succeed when we stay within our wheelhouse and our wheelhouse today and for the foreseeable future is where we are able to put initial capital to work in the range of $5 million to $15 million where we might have an opportunity to follow on.

But there is a certain size of a company or a stage of evolution that we think we are probably more skilled at than not. So we are not necessarily going to want to overreach and begin putting more capital to work in larger opportunities because we just don't believe that we succeed very well in those situations.

The team will continue to evolve and in fact if we make any investments in the organizational structure of this business, that is where is going to be made and that is where it is being made. We value a lot of the opportunity to continue to develop people internally for greater roles and responsibility but we also recognize that at times we are going to be able to bring in some other talented professionals to augment the skills that we currently have on the bench.

So it is going to be a continual evolution of that team. We have got four strong leaders focused on four areas of the market that we believe we have a level of expertise and domain knowledge and depth. And we are building our teams around those four cornerstones. Recognizing that we will continue to evaluate new areas of the market for opportunities for Safeguard and we do that in a very deliberate fashion through a number of different strategic reviews that take place throughout the year including a strategic development process that we go through with our Board at beginning of each year.

Great, thank you and good luck.

(Operator Instructions).[Bruce Kellens] (inaudible) Partners.

Hi gentlemen. We are very happy with I guess what you guys given with the exits. We have one question regarding the buyback. The only thing that you have done we have been unhappy with is your new issue of the convertible. Why wouldn't you buy back the converts? Is there any restriction on buying back the converts? Do you have any interest saluting shareholders and we didn't feel you needed to have a convert when you borrowed money again. And we were wondering why wouldn't buy back those instead of buying back commons or as a part of it?

Yes, this is Jeff. I will take that question. We have looked at both buying back the converts as well as buying back shares. And the plan we have in place does not preclude us from buying back the convert. We cannot force redemption at this point time on the convert. We would have to make purchases in the open market. So the price at which we could buy those back compared to the price at which we can buy back the stock today we think our return is higher purchasing the stock.

Well, it might be but can I ask you a question, why were they issued in the first place? The original converts that were issued -- I understand that because years back, the Company was in a different financial position. But you recently (inaudible) converts at high interest rate at the bottom of the interest rate market and when you didn't have to, when you had $150 million of net cash. What was the thought process in issuing them in the first place?

So let me help you try to understand the sequence of events. So back in 2004, the original converts were issued with a maturity of 2011. In 2008, we began to seriously reduce that obligation through some opportunistic repurchases at discounts. We whittled that balance down to about $80 million to $85 million. We ultimately reduced that amount further to about $50 million and had the opportunity about two and half years ago to put a new convert in place which at the time we did have some cash on the balance sheet but again, we were looking at the business in its totality and one of the questions that we continually ask ourselves is what amount of leverage is appropriate for this balance sheet? And $50 million was deemed to be not inappropriate.

We went looking for traditional debt in order to refinance the remaining balance of this converts before entering into the new convert instrument and we found that most of those commercial lending opportunities were going to be such that there were going to be covenants put in place that would potentially restrict some of our activities. The cost of that debt was substantially different and we ultimately made the decision to go down the route of these current converts to provide for a covenant free borrowing capacity at a market or at an interest rate that was very favorable in relationship to other market terms that were out there at that time.

We are comfortable with the way that we have structured these converts. They are -- if they are put to us, we have the option to meet that obligation either with stock or in cash and our preference would be in cash. And we continue to evaluate how much leverage we think is appropriate for this balance sheet and in what form that leverage will be taken.

Paul Knight, Janney Capital Markets.

Hi Steve. Do you see the time from investment to liquidity event shortening within the healthcare space?

I don't know if I have enough information Paul to suggest that. I know that we have had a couple of scenarios play out recently that would suggest that the time has shrunk substantially. But I think we are still planning around and viewing the market in that three- to five-year period of time. Some are going to take a little bit longer and some are going to be a little less but on average I think three to three and half seems to be the midpoint that we are seeing across the board.

Are deals -- is the diagnostic side a pretty rich environment or is it too rich on valuation?

Valuation is always a concern. And you know as well as I that there is some really interesting things happening that are going to provide some real opportunity for value creation in the diagnostic space. If you can get in early enough which we are looking to do and you will see a little bit of us looking at some earlier stage opportunities if we think that they have the right growth opportunity, but Crescendo is a good example where you might be able to get in late under the right terms and be able to turn those dollars within a meaningful and reasonable period of time and with terrific returns.

I think Gary has -- Gary Kurtzman has done a phenomenal job in looking at opportunities like Crescendo and even Good Start Genetics and some of the things that he had his team are currently looking at. So valuations are creeping. We are doing a pretty good job of kind of getting through that discussion and determining whether or not we are going to want to dissipate in some new opportunities based upon valuation parameters. And we are also being very pragmatic about taking advantage of the market as it is presenting itself today.

So you know there is no complete answer to the question. I think the right question to be asking and we are asking ourselves those questions all the time. But we are not necessarily seeing a trend yet develop but we are seeing as you point out a lot of opportunity on both sides of the equation.

Are you seeing more pre-IPO deals like we had 10 years ago? And are you getting the chance to invest in them?

You mean kind of like a crossover deal where you invest in the later stages with the knowledge meant that is going to go public sooner than later? Is that what you referring to?

If it is what you referring to, we are not necessarily seeing more of those. Maybe they exist, we are just not seeing those as much in our pipeline. Or if we are seeing them, they are valued at a level that doesn't make sense for us or at a size that doesn't make sense.

Ross Taylor, Somerset Capital.

Is there anything in the convertible indentures and the like that precludes you from paying special dividends to the common shareholders?

No there isn't but it would adjust the conversion price, any dividends that were paid.

Okay. It seemed to us that the problem that we see with the Company right now as a stock is that there is a rather substantial gap obviously between the underlying value of the business and the underlying share price. And we are not convinced honestly that the traditional buyback approach you are using links those two together in any way to close the gap.

And so we have had this conversation before but I would like to say that we are disappointed that something more creative isn't being put in place and instead you are kind of just opting for the buyback over time effectively at your leisure. Because we think that you need to create an event linked scenario so people start to see this more as a private capital fund as opposed to simply an ongoing business that will always trade at a substantial discount to its underlying value.

Ross, we appreciate the point of view. I am not necessarily suggesting that you're wrong in your point of view. I think what you need to do is acknowledge or at least understand that this is an evolutionary process for us and we are going to continue to have a conversation with our Board around a variety of different matters as we evolve.

2014 should provide a lot of opportunity for that conversation to continue to be had. And as we evolve in our thinking and as the business evolves, we are not wedded to any particular methodology. This is the one that we've chosen for now and we think it is the appropriate one given the way that we are looking at our resources, our opportunities and how we look at the value of the stock in relationship to what we think its intrinsic value is.

Okay. We look forward to further monetizations as to year develops. Thanks.

Thanks Ross.

(Operator Instructions). Jim Macdonald, First Analysis.

Just a couple of quick follow-ups. Sometimes you give expense, corporate expense guidance. Can you give us some thoughts on what that is for 2014?

Sure Jim, we would expect that our corporate expense would be in line with what it has been historically, roughly $17 million on a gross base, $16 million to $17 million on a gross basis excluding any interest income derived from Penn Mezzanine.

And Jim, there has been some organizational changes that were completed in 2013 that still allow us to in 2014 with the same budget dollars continue to build the deal team infrastructure.

Right. And just the other follow-up, Steve you mentioned a couple of times valuation. Maybe I'm trying to figure out -- does that mean that you are seeing higher valuations in the market or you think maybe you overpaid for some deals previously or both or where is that comment coming from?

I don't think we have overpaid for any deals and I don't say that lightly. We have exercised a lot of discipline in the way that we have created or we've assessed valuation. What I am suggesting is that we need to be careful that we don't fall into the wave that could be created with some of the other macroeconomic events that are stabilizing the economy and allowing for valuations to creep higher. And what we are trying to do, Jim, is be very disciplined in the way that we assess value and determining whether or not we want to participate in a particular company based upon the valuation that is being expressed.

There's some long conversations that take place with the existing investors and management teams of the targets that we are talking to and one of the things that we have gotten really good at quite honestly is walking away when we think that the opportunity is just too expensive and walking away sooner rather than later in the process so that we don't find ourselves spinning wheels or wasting time and therefore coming up during the year empty handed with regard to pursuing other opportunities that make sense.

And just following up on that. Any particular sectors that you referring to like maybe what are your thoughts on the cloud sector, the SaaS sector?

I think if Phil Moyer were in the room he would say that that sector you have got to be careful with. I think we've got to be careful around the diagnostic sector. I think we also have to be a little careful around the ad tech sector.

I think they all have -- you know when the economy begins to strengthen, all boats tend to rise. So valuations are going to rise naturally across all of these sectors. Some are moving at a pace that is a little bit quicker than the other. And all we are trying to do is suggest that -- the only message that I'm trying to get across is that we know that that is occurring and we want to be very disciplined in the way that we are looking at opportunities so that we feel that when we cut that check to make our capital deployment that we have done everything in our power to rationalize valuation and not put ourselves in a position to fail in the future. Because as you know if I get in at a higher number then to be able to turn, to create the returns that you all expect of us, is going to be just that much more difficult. And that just becomes a mouse wheel that we just do not want to participate in.

Great thanks.

I would now like to turn the conference back over to our presenters.

Well, thank you and thank you all for joining us today. And we look forward to keeping you apprised on the progress of Safeguard throughout 2014.

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