Safeguard Scientifics Inc (SFE) 2021 Q3 法說會逐字稿

Ladies and gentlemen, hello, and welcome to the Safeguard Scientifics Third Quarter 2021 Financial Results. My name is Maxine, and I'll be coordinating the call today. (Operator Instructions) I will now hand over to your host, Matt Barnard, Safeguard's General Counsel to begin. Matt, please go ahead when you're ready.

Good afternoon, and thank you for joining us for this presentation of Safeguard Scientifics' Third Quarter 2021 Financial Results. Joining me on today's call and webcast are Eric Salzman, Safeguard's Chief Executive Officer; and Mark Herndon, Safeguard's Chief Financial Officer. Following our prepared remarks, we'll open the call to your questions.

As always, 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 companies, our ability to make good decisions about the monetization of our companies, the ongoing support of our companies, our inability to unilaterally control our companies, fluctuations in the market price of any of our companies that are publicly traded and the effect of regulatory and economic conditions generally and other uncertainties described in our filings with the SEC. Many of these factors are beyond our ability to predict or control. As a result of these other factors, our past financial performance should not be relied on as indication of future performance.

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 provide any assurance that future results will be as described in our forward-looking statements. We encourage you to read Safeguard's 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.

With that, I would now like to introduce Eric.

Thanks, Matt. Thanks for joining us this afternoon for our Q3 earnings call. Today, we will cover the following topics: We'll review our major achievements for Q3. We'll provide an update on exit activities in the portfolio. We'll provide an update on capital raises by our portfolio companies. We'll share Q3 highlights for each company. We'll share publicly listed comparable trading statistics, and we'll provide some commentary on our expected follow-on deployments for the balance of 2021. Mark will then take you through the financial review for the quarter, and we'll open it up to Q&A.

I'll start with our Q3 achievements. We've had a productive third quarter with 2 notable achievements, which delivered on our strategy to maximize portfolio company value and return capital to our shareholders. Flashtalking completed a strategic sale in August, which delivered $45 million in cash to Safeguard. These proceeds provided us with the liquidity to launch a $35 million self-tender in September. We were able to upsize our self-tender to $39 million, which allowed us to buy back approximately 20% of our outstanding shares at $9 per share. We viewed $9 as an accretive price for Safeguard to repurchase its stock in a tender, and we continue to hold that view today.

We are excited about our remaining portfolio interest and, consistent with our strategy, we continue to work with our companies to find exits and return capital to Safeguard shareholders. To remind our shareholders, we have established $18 million as the target balance sheet cash threshold, above which we would look to return cash to our shareholders via buybacks and/or dividends. This target is based on our expectations of future operating costs, follow-on deployment requirements and a range of exit time horizons. Note that the $18 million threshold is subject to adjustments based on developments with our companies, so it could change up or down.

I'll next move to exit activities in the portfolio. During our Q2 earnings call in August, we shared that one company had just launched an M&A process, one company was planning to launch an M&A process in September and the third company was in varying degrees of strategic discussions.

The update from that August disclosure is as follows: the company that launched its process in August has now signed an LOI with a strategic buyer. This process moved along quickly, which is a positive sign. While we are not certain that the LOI will result in a signed purchase and sale agreement, we are now cautiously optimistic that this transaction should close, although the specific timing is harder to predict. And of course, there are always deal-specific risks involved in any transaction. If completed, the proceeds would be meaningful, and at that time, we would evaluate the range of options and timing to return capital to shareholders.

The company that was planning a September launch of its sale process delayed the launch until mid-October in order to complete its Q3. Outreach to prospective buyers is currently underway. It is too soon to assess the probability of a deal, but should one come together, we believe it would be a 2022 event.

The third company that was in varying degrees of strategic discussions did recently sign an LOI and is working through diligence. There is a fair amount of complexity in this transaction, and it is difficult to handicap the chances of a deal closing. On its current terms, if this deal were to close, the proceeds to Safeguard would not be meaningful relative to our aggregate portfolio fair market value.

In addition to what we said in August, a fourth company is engaged in early merger discussions with another private company. The discussions are at an early stage, and we cannot handicap the probability of this deal getting to the finish line. If this merger were to close, it would be a stock-for-stock deal, and Safeguard would retain a preferred equity interest in the combined company, meaning there would not be cash to Safeguard as part of this deal. Having said that, we believe that the upside of the combined companies could be superior to our company's standalone plan. We will provide you further updates as they develop.

Let's now touch on portfolio capital raises. Aktana raised capital this past quarter to fund its operations and growth, and Safeguard deployed $1.7 million in the transaction. Trice closed an equity round with strategic investor, Bioventus, and as part of that transaction, Safeguard and the other Trice shareholders converted their existing notes into the equity round. For Safeguard, this was the $1 million which we deployed in Q1 that was converted into the Bioventus-led round.

Three other portfolio companies have begun to explore capital raises to support their growth in 2022. It is too soon to determine whether Safeguard would be participating in these transactions. Also, as of now, we expect these to be primary capital raises so we would not expect an exit or partial exit opportunity for Safeguard as part of these financings. Of course, there is no assurance that any of these capital raises will occur.

Moving on to portfolio highlights. With the exit of Flashtalking, Safeguard's portfolio consists of minority stakes in: 7 private health care companies; our 1.3 million share position in publicly traded Bright Health Group; one adtech company, MediaMath; one marketing tech company, Clutch; and one fintech company, Lumesis. As we've done in past quarters, we'll provide a quick one bullet recap of Q3 highlights on each of these portfolio companies. Note that this is not a comprehensive assessment of each company and specific risks apply to each name.

For Aktana, Q3 represented its largest booking quarter ever. Syapse entered into a research collaboration agreement with Merck. Prognos continues to expand its health data marketplace, which is the largest real-world data marketplace with anonymized data on 350 million patients. Moxe continued to sign up new provider sites, Q3 was a record, and is on track to meet or exceed its 2021 goals. meQuilibrium is experiencing robust revenue growth, which was up over 50% year-on-year.

InfoBionic saw double-digit revenue growth in Q3, had positive EBITDA and accelerated its Mayo clinic deployments. Trice, as we mentioned, closed a strategic equity round led by publicly traded Bioventus and is partnering with them on an international distribution agreement for Trice's products. Clutch saw a significant early traction with NCR Hospitality and is executing on integrations with Fiserv to support a number of rollouts in early 2022. Lumesis is on plan for 2021 and is experiencing steady growth.

For Bright Health Group, we're looking forward to their Q3 earnings on November 11 to hear more about their progress as they build out their vertically integrated, tech-enabled health insurer. Note that our IPO lockup expires in late December. MediaMath released its new product platform to all clients, expanding its identity solutions, and have continued to experience strong momentum in APAC.

However, we want to note that MediaMath does not represent a material component of our total portfolio fair market value. Nor do we expect it to be a material part of our total exit values. Also note that this assessment was factored into our determination that $9 was an accretive price to buy back Safeguard's stock in our self-tender and has no meaningful impact on our calculation of the exit value or the upside potential of the portfolio. So on balance, our companies are making good progress toward executing on their business plans, and we are excited about their prospects to return meaningful value to Safeguard shareholders.

Next, we'd like to share relevant publicly listed comparable trading statistics. As we've done in prior quarters, we provide certain metrics on publicly traded comparable companies that we track against our portfolio. We use these, both quantitatively as part of our internal valuation methodology as well as qualitatively as we track company and industry developments. We look at enterprise value to forward revenue multiples and projected revenue growth as the 2 most important metrics to follow. The following stats are as of the end of October. I'll start with revenue multiples.

For publicly traded health care comps, the median enterprise value to revenue multiples on 2021 and 2022 were 5.3x and 4.1x, respectively, down 0.9 turns and 1.1 turns, respectively, from our August earnings call. For publicly traded adtech comps, the median adtech enterprise value to revenue multiples on 2021 and 2022 were 5.4x and 4.4x, respectively, down 0.8 turns and 0.3 turns, respectively, from our August call. For publicly traded marketing tech comps, the median enterprise value revenue multiples on 2021 and 2022 were 3.7x and 3.6x, respectively, down 0.3 turns from August.

Now I will turn to revenue growth expectations. For publicly traded health care comps, the analyst consensus for median revenue growth was 35% for 2021 and 24% for 2022. For publicly traded adtech comps, the analyst consensus for median revenue growth was 38% for 2021 and 25% for 2022. For publicly traded marketing tech comps, the analyst consensus for median revenue growth was 19% for 2021 and 15% for 2022. For comparison purposes, the aggregate revenue growth rate projected for Safeguard's portfolio, excluding Bright Health, is over 20% for 2022, although not every company is experiencing that growth rate, some higher and some lower.

Lastly, I want to comment on follow-on deployments for the balance of the year. As you read in our press release, we've deployed $2.7 million year-to-date in the portfolio, including $1.7 million in Aktana in Q3 and $1 million in Trice in Q1. We don't expect further deployments in the portfolio for the balance of the year. As a point of reference, the $2.7 million compares to our 2021 guidance of $5 million to $7 million. So we will come in meaningfully better than planned. We had budgeted $2 million into $3 million of additional deployments in 2 companies in Q4, which, if these were to happen, would occur in 2022.

At this time, I will hand it over to our CFO, Mark Herndon.

Thanks, Eric. For the quarter ended September 30, 2021, Safeguard reported net income of $18.3 million or $0.88 per share compared with a net loss of $4.3 million or $0.21 per share for the same period of 2020. This quarter's results were positively impacted by Flashtalking's acquisition that resulted in $45 million of cash proceeds and a gain of $32.3 million. The quarter's results were negatively impacted by the noncash unrealized loss on Bright Health's stock of $11.9 million, resulting from the market value changes in that company's publicly traded stock. Both of these transactions are reported as a component of other income or loss, net.

Safeguard's cash, cash equivalents and restricted cash at September 30, 2021, totaled $64.2 million, and we had no debt obligations. However, subsequent to this quarter's end, we used $38.7 million to repurchase approximately 4.3 million shares in the Dutch option self-tender. Our purchases of stock under the prior open market plan were insignificant during the quarter.

Our general and administrative expenses were $1.6 million for the 3 months ended September 30, 2021, which was 31% lower than the $2.3 million reported in the comparable quarter of 2020. Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock-based compensation, severance expenses and nonrecurring and other items, were $0.9 million as compared to $1.3 million in the comparable quarter of 2020, a 32% decline.

On a sequential basis, our quarterly corporate expenses also continued to decline, this quarter was about 8%. We continue to expect this approximate level of corporate expenses for the remainder of 2021, which we indicated last quarter, so that our total corporate expenses for the calendar year will likely be below $4 million.

With respect to both general and administrative costs and the corporate expense amounts, we have continued to reduce the cash-based employee compensation costs, professional fees, office costs and insurance expenses. The corporate expense measure continues to benefit from Director fees being paid in equity and a significant portion of management's compensation being paid in equity.

This quarter's Flashtalking transaction resulted in certain LTIP thresholds being met, which resulted in $2.1 million of payments being made during the fourth quarter. We continue to view these LTIP payments as fully funded by the proceeds of the exit transactions. Since this plan was enacted in 2018, Safeguard has collected approximately $254 million of gross proceeds from asset sales and has paid an aggregate of $2.5 million under the LTIP plan.

With respect to our ownership interest at September 30, 2021, we have an aggregate carrying value of $36.3 million as compared to $50.4 million at December 31, 2020, last year-end. This decrease was the result of the application of the equity method of accounting, the $2.5 million impairment last quarter, as well as the exit of Zipnosis, Flashtalking, T-REX, Velano Vascular and WebLinc that were all removed carrying value.

Those decreases were partially offset by increases due to our $2.7 million of aggregate deployment at Trice in Q2 and Aktana this quarter, the addition of the Bright Health position and dilution gains aggregating to an unexpected exit value of the same ownership interest. If the fair value of our ownership interest declines below the carrying guidance, we would consider making a downward adjustment to the carrying value by reporting an impairment.

We also have a few ownership interests that are not accounted for under the FD method and do not have a readily determinable fair value. Those interests can have upward or downward adjustments from time to time, resulting from observable price changes, if there are transactions in the securities. These observable price changes are recorded in gains and losses and other income or loss, net.

Our share of the losses of our equity method ownership interest for the 3 months ended September 30, 2021, was $3.1 million as compared to $3.8 million for the comparable period in 2020. The quarter's decrease in loss is primarily the result of having 4 less companies in 2021 accounted for in the equity method, and also included lower level of losses at several companies. For the remainder of the equity method entities, our results were relative -- were consistent.

I also would like to remind everyone that we report our share of the losses from the equity method companies on a 1-quarter lag. So this quarter's share of losses reflect the second quarter of 2021. Many of our companies saw their initial impact of COVID-19 during the later stages of the first quarter of 2020. Their results for the remainder of the 2020 year reflected full quarters of operating in that environment. We've also seen this quarter and expect to see later in the quarters income statement benefit to our companies resulting from PPP loan program when those loans are officially forgiven.

Also with respect to ownership interest, we can update you, too, the total third-party debt and cash in our companies. With Flashtalking's exit during the quarter, we are now also excluding the other large company, MediaMath, from this disclosure. Also, as in other ownership interest, these disclosures also continue to exclude Bright Health. With those notes in mind, the third-party debt at this group of 9 companies was approximately $123 million, which is unchanged as compared to last quarter on a comparative basis. Cash at the same group of 9 companies was also essentially unchanged at about $97 million.

Within this group, the most notable changes relates to the conversion of insider notes to the equity at Trice as part of its recent equity capital raise. So overall, the net debt position did not change substantially across this group of 9 companies. The cash that did burn in certain companies was sourced from their prior capital raisings at those companies.

In terms of revenue performance, we reported an 11% decrease at our group of 10 ownership interest for the trailing 12-month period ended June 30, 2021, due to the 1-quarter lag. And again, just note that this excludes Flashtalking due to their exit transaction and Bright Health as well as other ownership interest.

The decline was attributable to a few different aspects, the most significant related to a single customer event that resulted in a nonrecurring revenue increase in the fourth quarter of 2019 that we've talked about previously. This was also impacted by the growth characteristics at our digital media ownership interest since late 2020. The rest of the company as a group, grew approximately 22%.

Now, it is time for us to turn over the call back to the Q&A segment. So I'm going to pause here and ask the operator, if you can open the line for a few questions.

(Operator Instructions) There are no questions on the lines at this time.

Okay. Thank you, Charlie. Thanks for joining us on the call today. Thank you for your continued interest. As always, we'll be following up for one-on-one calls. And if you have any follow-up questions on the quarter or about our strategy, feel free to reach out to us and sign up for a time for a one-on-one call. Thanks, and have a good evening.

This concludes today's call. Thank you for joining. You may now disconnect your lines.