Safeguard Scientifics Inc (SFE) 2021 Q2 法說會逐字稿

Good afternoon, and thank you for attending the Safeguard Scientifics Second Quarter 2021 Financial Results Conference Call. (Operator Instructions)

I would now like to pass the conference over to your host, Matt Barnard with Safeguard Scientifics. Thank you. You may proceed.

Good afternoon and thank you for joining us for this presentation at Safeguard Scientifics second quarter 2021 financial results. Joining me on today is call webcast are Eric Salzman, Safeguard's Chief Executive Officer; and Mark Herndon, Safeguard's Chief Financial Officer. Following our prepared remarks, we'll open up 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 (inaudible) before our companies, fluctuations in the market prices of many of our companies 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 result of these and other factors, our past financial performance should not be relied on as an indication of future performance. During the course of today's call, words such as expect, anticipate, believe and intend will be 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 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.

I would now like to introduce Eric.

Thanks, Matt. Thanks for joining us this afternoon for our Q2 earnings call. We will cover the following topics on the call today. First, we'll update you on exits and our thinking around returning value to shareholders. Second, we'll provide you with the Q2 portfolio highlights for each of our positions. Third, we'll share the publicly listed comparable trading statistics. Fourth, we'll provide some commentary on our expected follow-on deployments for the balance of the year. Next, Mark will take you through the final review for the quarter. And last, we'll open it up for Q&A.

So I'll start with exits and return of value to shareholders. As we announced in July, Flashtalking entered into an agreement to be purchased by Mediaocean. The deal is expected to close in Q3 and Safeguard expect to receive approximately $43 million in cash at close. We're excited about this transaction. It's a good outcome for Flashtalking management and for Flashtalking investors.

Pro forma for this close, our cash balance will be substantially above our $18 million target for maximum liquidity cash that we need to operate. We have begun to explore the best ways to return value to shareholders. This generally falls into 2 buckets: one is a stock buyback, the other is a special cash dividend. Stock buyback can be done via open market or a 10b5-1 plan and/or stock buyback can be executed through our self-tender.

Some of the considerations on the stock buyback include the following: how much can we buy in the open market given our average daily trading volume, at what prices can we buy back stock that would offer a fair price to selling shareholders and also be accretive to the non-selling shareholders, and what specific disclosure requirements are required at the time of our self-tender that could negatively impact any of our companies. On the special cash dividend front, the priority reconsideration is whether we will be in an earnings and profit loss position to effectuate a return of capital dividend. We need to wait until later in the year to determine our earnings and profits position.

The next source of value returned to shareholders is our position in Bright Health Group, or BHG. BHG completed its IPO on June 23 and we own 1.3 million common shares. Our shares are locked up until the end of December. It's been a volatile ride for BHG as its IPO and Q2 results were disappointing to the market. The market seems to be viewing the company as a show-me story as it trades in line with traditional managed care providers. Our view is that management will have to deliver consistent results in the subsequent quarters to rebuild confidence of investors. From a Safeguard perspective, we're closely watching their results and we will have an opportunity to see Q3 earnings before we have any decisions to make post our lockup.

Next, I'd like to provide an update on other M&A in the portfolio. On our Q1 earnings call, we reviewed the strategic or M&A activity among our companies. On today's call, we want to give you an update on those names as well as other M&A activities in the portfolio. The company we mentioned in our last call that was in an M&A process and that we were cautiously optimistic about was Flashtalking. As mentioned, the deal signed in July and is expected to close in Q3.

On our last call, we also mentioned 3 other companies that we're exploring strategic options. One is moving forward, they launched a process earlier this month. The other one interviewed bankers and based on feedback, the Board and the management decided to put off any strategic process until late 2022 given the company's strong financial performance and robust top line growth. The third company we mentioned on last quarter's call had early strategic discussions with a couple of parties and decided it was not ready to go out at this time to maximize value. That could be a late next year event.

In addition to those companies that we talked about on the last earnings call, there are 2 other companies that are exploring strategic options. One is planning to launch a process in September, the other is in varying degrees of discussions with strategic partners.

I'd like to make 2 comments on M&A. At a high level, there's lots of risk in M&A processes and getting deals done even in the current robust M&A process is hard and fraught with uncertainty. More specifically other than Flashtalking, we do not think that it is highly likely that we will have any other M&A processes closed by the end of this calendar year. To be clear, we're not talking about our Bright Health stock, which is coming off lockup. We're talking about the other in-process activities that I mentioned. While it is possible, we're not assuming so in our projections for this calendar year.

Let me now provide some portfolio highlights. I'll go name by name, as we've done in prior quarters. At Aktana, we're seeing post-COVID momentum picking up with pharmaceutical budgets. The company also had a major multimillion-dollar win at a top 10 pharma company for U.S., omnichannel and intelligence. This is where we believe the market is moving and Aktana is a leader in this area.

At InfoBionic, they've had accelerated deployments at the Mayo Clinic under its multiyear agreement. Their Q2 EBITDA came in ahead of plan and if you haven't had the opportunity, you might want to watch a replay of my fireside chat with InfoBionic CEO, Stuart Long, which can be found on the Investors section of our website under Past Events.

meQuilibrium posted record Q2 and first half bookings, and it is one of our fastest growing companies. At Moxe, their year-to-date June revenues is just shy of full year 2020 revenues and have a full pipeline of connections going live in the second half of 2021. Prognos continues to add data partners as its healthcare ecosystem evolves and they are on track for their 2021 forecast.

Syapse has experienced increasing market recognition as a leader in the real-world data and real-world evidence space. Its core data assets continue to grow substantially with a focus on differentiated cohorts such as bladder, ovarian, prostate and AML. At Trice, we mentioned last quarter that Trice completed an acquisition of Tenex. The integration between the 2 companies is going well. The combined company is well positioned for second half 2021 growth. Clutch had its largest bookings quarter in the company's history in Q2 and the company is seeing accelerated traction through its partnerships with NCR, Salesforce, Accenture, among others.

MediaMath is experiencing strength in Asia Pacific as well as in its retail segment and strong growth in its emerging CTV business. And lastly, Lumesis continues to grow its user base and product platform, which is leveraged to the municipal market. The company is tracking plan this year. I'll note that this is not a comprehensive assessment of each company and specific risks applied to each name.

I now want to turn over to portfolio metrics. These are the trading multiples that we've shared with you in prior quarters. We share these metrics with you on our publicly-traded comps, both because we use them in our internal valuation methodology as well as we follow these companies as part of our industry trends and exits. You can divide our portfolio into 3 broad buckets: [Second Abled] which is Otonomo, SIAS Prognos and probiotic and equilibrium; ad tech, which is Flashtalking and MediaMath; and marketing tech or MarTech, which is Clutch.

We look at enterprise value to forward revenue multiples and projected revenue growth. The stuff that I will cite are earlier this week. The median healthcare enterprise value to revenue multiples on 2021 and 2022 were 6.2x and 5.2x, respectively. That's down between 1.2 and 1.5 turns from our May earnings call. The median MarTech enterprise value to revenue multiples on 2021 and 2022 were 4x and 3.9x reflectively, flat to down 0.3 turns from May.

On revenue growth, note that the median analyst consensus revenue growth for these health care tech comps was 28% for 2021 and 20% for 2022. The median analyst consensus revenue growth for ad tech comps was 23% for 2021 and 21% for 2022. And lastly, the median analyst consensus revenue growth for MarTech public comps was 19% for '21 and 13% for 2022.

We provide the revenue growth information for a couple of reasons. First, this comp set is experiencing fast revenue growth and the valuation in the public markets is most correlated to revenue growth. Second, when we think about the applicability of these trading multiples to our portfolio, it is important to make adjustments for revenue growth as well as size, profitability, illiquidity, et cetera. We continue to project revenue growth for our portfolio to be between 15% to 20% up year-on-year. That's 2020 to 2021 on an aggregate basis, but note that not every company is experiencing that growth. Some are higher and some are lower.

The last topic I'd like to comment on is our follow-on deployments for the balance of the year. As you read in our press release, we've deployed $1 million year-to-date in the portfolio and continue to maintain $5 million to $7 million guidance for 2021. This obviously means we expect to deploy $4 million to $6 million in capital in the balance of the year. This is explained primarily by 2 companies with which we are in discussions about deploying capital.

I'd like to remind our investors that our policy is to commit follow-on capital to situations where, one, the new capital has attractive risk-adjusted returns; and 2, the capital is either necessary to protect our existing position and/or better control the path to exit. These 2 situations meet those criteria and we'll update you further next quarter on the developments with them.

At this time, I'll turn the call over to our CFO, Mark Herndon, to walk you through our financial results. Mark will be having technical problems.

Eric, yes? Yes. We had a moment there. Okay. Okay. Well starting again.

Okay. Now we can hear you.

Okay. Good. For the quarter ended June 30, 2021, Safeguard's net loss was $0.3 million or $0.02 per share as compared with a net loss of $9.9 million or $0.48 per share for the same period in 2020. This quarter's results were positively impacted by non-cash gains -- non-cash and unrealized gain on Bright Health stock of $7.4 million and a $1.8 million realized gain resulting from Velano Vascular's acquisition. These events were offset by the non-cash impairment of $2.5 million at another ownership interest.

As you may recall, 2020's net loss was also included a variety of impairments totaling $5.7 million related to Sanofi and several other ownership interests. Safeguard's cash, cash equivalents and restricted cash at June 30, 2021, totaled $21.3 million and we have no debt obligations. Our cash flows for the quarter were primarily the result of the $3.4 million received from the Velano Vascular transactions, less the share repurchases of $1.6 million.

Our general and administrative expenses were $2 million for the 3 months ended June 30, 2021, which was slightly lower, but consistent with the $2 million reported in the comparable second quarter of 2020. Corporate expenses for the quarter, which represents general and administrative expenses, excluding stock-based compensation, severance expenses and non-recurring and other items, were $1 million as compared with $1.2 million in the comparable quarter of 2020, a 23% decline.

On a sequential basis, our quarterly corporate expenses were also down 20% from $1.2 million last quarter. We expect this approximate level of corporate expenses for the remainder of 2021 resulting in our outlook to be below the previously disclosed target of $4.4 to $4.9 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 and office costs, partially offset by higher insurance expenses.

The corporate expense measure continues to be -- to benefit from Director fees being paid in equity and a significant portion of management's compensation being paid in equity. Last year's and last quarter's severance actions are significant factors for our current reduced level of corporate expenses. I would also like to note that the corporate expense measure excludes an accrual that is set aside for the transaction bonus plan, commonly referred to as the LTIP which is included as a component of general and administrative expenses.

This quarter included the first payments under the LTIP since we began the LTIP plan in 2018, which was $0.4 million. We expect that the proceeds from Flashtalking transaction will result in additional layers to be met and will ultimately result in a $2.1 million worth of payments during the back half of this year. We continue to view the LTIP payments as fully funded by the proceeds of exit transactions. Since this plan was enacted, Safeguard has collected approximately $208 million of gross proceeds from asset sales, which resulted in the $0.4 million payment last quarter.

With respect to our ownership interest in 2020, we have an aggregate carrying value of $60.1 million as compared to $50.4 million at December 30 -- 31st, 2020, last year. The increase from the year-to-date period is a result of the additional Bright Health position valued at $22.7 million at June 30 as well as our disclosed quarter -- first quarter $7.3 million dilution gain recorded at Syapse and the $1 million deployed to Trice. These increases were offset by typical decreases that we've discussed before, resulting from the application of the equity method of accounting, the $2.5 million impairment this quarter as well as the exits associated with Zipnosis, T-REX Velano Vascular and WebLinc at each removed carrying value.

As a reminder, our carrying value of ownership interest where we apply the equity method accounting is a GAAP term, which we typically reduce the carrying value for our share of the losses of the underlying companies, and it generally does not represent the fair value or an expected exit value of those same ownership interests. If the fair value of any of our ownership interest declines below our carrying value, we would consider making a downward adjustment for the carrying value by recording an impairment.

We also have a few ownership interests that are not accounted for under the equity method and do not have a readily determinable fair value. Those interests can have a readily determinable -- excuse me, those interest can have an upward or downward adjustment from time to time resulting from observable price changes, if there are transactions in their securities. These observable price lanes are recorded as gains or loss in other income loss net section of our statement of operations.

The second quarter's other income included a $7.4 million unrealized gain resulting from Bright Health's IPO and the subsequent trading activity through June 30. Subsequent to the quarter, we have seen Bright Health stock decline substantially. As a reminder, the terms of the IPO require us to hold our 1.3 million shares, at least through December -- through late December 2021. This quarter also included a realized gain of $1.8 million resulting from the sale of Velano Vascular, as I mentioned earlier.

Our share of the losses of our equity method ownership interest for the 3 months ended June 30, 2021, was $5.4 million as compared to $3.1 million for the comparable period in 2020. This quarter's increase in loss is primarily the result of a benefit in the prior year related to the accounting change at one of our companies. For the remainder of the equity method entities, our share of the results were relatively consistent.

I would also like to remind everyone that we report our share and losses from the equity method companies on a one-quarter lag. So this quarter's share of losses reflect the calendar of first quarter. Many of our companies saw the initial impact of COVID-19 during the later stages of the first quarter of 2020. The results for the remainder of the year reflected full quarters of operating in that environment. We have also seen and expect to see again in later quarters some benefits to our companies resulting from PPP loan programs.

Also with respect to our ownership interest, we can update you to the total third-party debt at our 11 companies, which excludes Bright Health. That level of debt has increased to about $385 million. This is principally the result of additional debt raised at several companies to fund operations and growth. For cash, the amount held by those companies decreased slightly to about $135 million.

In terms of revenue performance, we reported a 10% decrease in our trailing 12-month disclosure, which again relates to the trailing 12-month period ended March 31, 2021, due to the 1/4 of [tangible] use. That decline was attributable to a few different aspects, including COVID headwinds throughout the later portion of 2020 for companies with retail and elective medical customers or other company specific issues. And in one case, a specific revenue increase in the fourth quarter of 2019 that did not recur in the fourth quarter of 2020, which comes into play due to the one-quarter lag of the reporting data.

As a result, you may continue to see that weakness in the trailing 12-month disclosure in upcoming quarters. However, we continue to expect that the calendar 2021 results for this group of companies will result in a 15% to 20% revenue growth. However, much of this occurs in the back half of the year.

So now this is time to turn to the Q&A portion of the call. So Hanna, I'll ask you is there -- can we -- and I know we have only a handful of folks participants right now. But can you check to see if we can get a question.

(Operator Instructions)

And so while Hanna has paused, I will note one aspect. So we've talked about it before, we're looking for ways to -- additional ways that we can provide shareholders of information and interact via the support to your evaluation of our investment opportunity here. So one thing I'll call your attention to as an example, we have added a disclosure in our press release table to be fully diluted ownership percentage for each company. In addition, we have a primary interest in that building it. So take a look at that. And I'm sure if you have questions about it, we'll be happy to talk about it.

There are no questions waiting in queue at this time.

This is Eric Salzman. I want to first apologize. We had a few technical issues on this. I will tell you that I had a lightning strike that I lost power and a tree fell about 15 feet from me while I was going through my prepared remarks. So if there's any clarifications, please feel free to reach out to us in any event. And we'll make sure that there's a clean transcript of the call available for our investors. And as always, please feel free to reach out to us at any time, to Mark or me, and we can answer any questions. And I want to thank you for joining us this evening. Take care.

That concludes today's conference call. Thank you for your participation and enjoy the rest of your day.