SuRo Capital Corp (SSSS) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the GSV Capital Q1 2013 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, May 8, 2013. I would like to turn the conference over to Tricia Ross with Financial Profiles. Please go ahead.

Thank you for joining us on today's call. I'm joined today by Michael Moe, GSV's Founder and CEO; Steve Bard, the Company's Chief Financial Officer; and Dave Crowder, EVP.

Please note that a slide presentation that corresponds to today's prepared remarks by management available on the Company's website at www.gsvcap.com under investors events and presentations. Today's call is being recorded and webcast on GSC.com. Replay information is included in our press release that was issued today. This call is the property of GSV Capital Corp. and the unauthorized rebroadcast of this call in any form is strictly prohibited.

I'd also like to call your attention to customary disclosure in our press release today regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or for future performance or financial condition. These statements are not guarantees of our future performance, condition, or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time-to-time in the Company's filings with the SEC. Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of GSV Capital's latest SEC filings, please visit the website at gsvcap.com.

Now I'd like to turn the call over to Michael Moe. Michael?

Thanks, Tricia, and good afternoon. I'm going to begin today with a review of our portfolio as of March 31, 2013. I will make some comments about some of the key developments of the quarter. Then I'm going to highlight some of the highest conviction areas of portfolio to talk about how value is being created at these companies. Then we will turn over to Steve Bard, who will provide a brief financial review and then we will turn it over to questions.

As Tricia mentioned, new to this quarter we prepared a slide presentation to go on with our prepared remarks which is available on our website. So let's start on slide 3.

First of all, just in terms of the state of play in terms of how we are focused and what we see is an opportunity, there is dramatic growth in value creation that's taking place among private companies today. And GSV's value proposition creates access to many of the world's most dynamic, fastest growing venture-backed companies, what we call the stars of tomorrow.

We think this is a very compelling value proposition and with a healthy activity we see in that tail market lately, we think there is a number of portfolio companies that are the size, scale and growth rate that will allow them to access the public markets, if they so choose.

Just a few stats on the IPO market to put some meat on the bones, in terms of year-to-date, IPOs, there's been 41 IPOs. And 12 of those 41 have been VC backed. More importantly the average first day pop is 17% and the aftermarket performance is 19%. 29% of all IPOs have priced above the range year-to-date, 46 within the range and 24% below the range.

Pricing has even been stronger on average for the VC-backed private companies with 42% of those companies pricing above the range. Why that's relevant is when companies and VCs are looking at taking a Company into the public market, they are seeing what's the overall health of the market. And when companies are pricing well, a normal IPO market, by the way we said normal IPO market in a decade, but a normal IPO market, you basically would expect 20% or so the IPOs pricing above the range, 20% below and the first day pop of 10% to 15%.

So the fact we are seeing better numbers in that is very constructive, as is the fact that NASDAQ in the first of four months is up over 13%. All that is great encouragement to have companies go out in the market.

And one thing obviously with the quiet filings we are not going to see that until we are actually on the road, but we do know both anecdotally as well as specifically that we are in good shape as it relates to activity amongst our portfolio.

At GSV our fundamental investment philosophy is supported by decades of research and experience on growth companies. And what this proves is that there's an extremely high correlation between the growth of the Company's business and the value creation that takes place by the Company over time.

So with that, investors and GSV should understand that our overall portfolio today the aggregate annual revenue growth for those companies, the 45 companies we have invested in is well north of 80% in terms of 2013 revenue compared to 2012.

And we look at the correlation that we believe that we are going to see in the long run with the growth in strong fundamentals. Undoubtedly we are going to have some very positive outcomes for our shareholders in the long run.

As of March 31, our portfolio was comprised of 45 companies. The fair value of the portfolio was $222.2 million cash. And short-term investments totaled $22.8 million as of March 31st. This equates to an NAV of $12.69 per common share.

Turning to slide 4, as of March 31st, our top-10 investment represented 67% of invested capital. And our top-3 investments, Twitter, Palantir and Dropbox, represented 29% of net asset value. Twitter continues to be our largest investment and approximately 14% of deployed capital in a fair value of approximately $35.2 million.

According to an April 2013 report published by Wedbush Securities, they estimate that Twitter's revenue growth for 2013 will be over 180% compared to 2012. That's consistent with our expectations. According to our own analysis of the top-10 positions in our portfolio, six of these companies are growing north of 100% in 2013 over 2012.

So in other words, these top companies are the ones that really have the ability to move the needle in terms of the overall impact to our portfolio and NAV, and our outsize commitments, these larger positions represent our highest conviction investments. So for example, the $35 million investment that we have in Twitter has over 10 times the impact of our portfolio in NAV than a $3 million investment that we have in our portfolio, which we have a number of $3 million, $2 million, $1 million investments.

The $15 million in Dropbox investment has a 15 times impact of a $1 million investment. And again Dropbox, we continue to be extremely pleased by the growth in fundamentals and what's going on in that market, a very competitive market, but Dropbox is absolutely dominating. We are killing it. We are extremely pleased with our Dropbox investment.

So during the first quarter, we made additional investments totaling $3.4 million, which is in four existing portfolio companies, SugarCRM, Fullbridge, CUX Inc. That's corporate executive exchange and [always on].

On slide 5 you can see the portfolio mix across the five growth themes that we invested in as of March 31st. Social mobile consists of 24% of our investments, cloud computing and big data 26%, Internet commerce 6%, green technology 12% and education technology 32%.

And then education technology is the biggest portion of our portfolio by sector. We think it's appropriate to spend some time talking about some of the disruptive head tech leaders in our portfolio and why we have such enthusiasm about our investments in this $4.5 trillion industry, by the way second largest industry in the world next to healthcare.

We think it's important to showcase our values being created in our portfolio companies by giving some color to have the companies look at the time of our investment and what they have achieved to-date. Each quarter going forward we intend to highlight a key area of our portfolio in a similar fashion to keep you apprised how these companies are changing in the playing field are making headlines as they key -- as they achieve key operating milestones.

And so one other comment as it relates to education and people are it's getting a lot of attention. The venture capital community is rushing to this marketplace. You have a 50% increase in terms of investment on a compound annual basis over the past five years, reaching $1.2 billion of investments in 2012. And why is this the case?

Well, first, our thesis is the biggest investment opportunities is often where there is a problem. The bigger the problem, the bigger the opportunity. In the knowledge-based economy that we are in, the global marketplace, education makes a difference, not only on how an individual does, but how a company does or and for that matter how well the country does.

And so we are seeing disruptive technology take over this $4.5 trillion market, obviously the Internet being the megatrend of all megatrends, democratizing access to learn an increasing access, lowering the cost and improving the quality. People reading probably every day now about these MOOCs, massively open online courses in the newspapers and the media. Just the growth that's going on is absolutely staggering. So we are excited about this space, three quick uber-trends that we are focused on.

One is called (inaudible), which is this continuous learning. No longer people fill up their mileage tank to age 25 and driving off through [let their] to continually to get this education. Again that's sort of the huge focus in terms of a theme for us. Another is what we call knowledge is a currency, where it's going to be less relevant where you go to college. It's all about knowledge. It's about what you know, not where do you go. And the third is ROE, looking at the companies that have a huge return on education.

Last, sort of to kind of carry off into specific investments, we will start on slide 6, focus on Chegg, which is the fourth largest holding that we have as of March 31st at 5.8% of the portfolio. Chegg's business is doing extremely well.

Chegg is a student hub that is transforming the way millions of students learn by connecting with other people and tools needed to succeed in education. Facebook has its social graph. LinkedIn has its professional graph. What Chegg is creating is a student graph with approximately 30% of all students in the United States now in the Chegg network and 40% of graduate and high school students using Chegg.

In terms of the opportunity here, college students spend tens of billions of dollars annually on education related services beyond just the courses and including and over $10 billion in textbooks. And Chegg is doing extremely well capturing that student provide a multiple services to it. Other investors in Chegg include Kleiner Perkins Foundation Capital and Insight Partners.

The second investment I want to highlight in education technology basis 2U on slide 7, which is our number 6, holding 4.2% of the portfolio. 2U is reimagining what online higher education can be by partnering with world-class research universities to deliver a truly exceptional online education experience. They are defining what's called school-as-a-service, which is effectively the new Saa -- and new SaaS.

Our thesis for 2U is it's becoming the leading online educational platform in the world by being able to partner with schools like USC, Georgetown, Washington University, the University of North Carolina, Chapel Hill by creating unique graduate programs, online partners with these schools.

Additionally, 2U will soon launch what's called semester online partnering, creating a consortium among leading liberal arts school such as Boston College, Northwestern, Notre Dame, to allow students to take classes from anybody in the consortium when they are traveling abroad, or just want to take an additional class. And we think that's an extremely big idea.

Today, 2U teaches 1,146 live classes per week, and this year we will generate 230 million of tuition for its partners, and the company is just barely five years old. We are an investor in 2U with Bessemer, Redpoint, Highland Capital. We just finished a board meeting. I can tell you the company is doing exceptionally well.

Two other companies that we have in education space that are in the top 10, Avenues and Kno, we touched on both of those last quarter but just briefly because they are big positions and they do -- are in this education space. Avenues, the World School is creating a global network of elite private K-12 schools to take advantage of the demand and balance of access to premier education in the world's leading cities like New York, and London and Hong Kong and so forth.

Its first campus opened up in Chelsea with the world's leading, world's most famous kindergartener, [Sherry Cruz], this fall, but will be opening campuses in Beijing, Sao Paolo and London over the next couple of years. We have as a management team the former president of Yale University, former head of Philips Exeter, former head of Hotchkiss and so forth. Again, we are very pleased with this investment think it has enormous potential.

And then lastly just Kno, which is our number nine investment in terms of size, is digitizing textbooks, but more importantly they are really creating smart content by not only digitizing these textbooks, which is a $10 billion market, but making an interactive experience with the student on the iPad, having teachers be able to track what's going on, to having the interactive case studies connecting to other students and so forth. So that's a company that we think has enormous potential. We are an investor in Kno with Andreessen Horowitz, Goldman Sachs, Intel Capital to name a few other investors.

And lastly just turning to slide eight in terms of what we are doing to give our shareholders outsized opportunities in the space, in collaboration with Arizona State University, which is the United States largest public university, we recently held our Fourth Annual Education Innovation Summit in Scottsdale, which is known to many as Davos in the desert, the fantastic event that brought together the leaders in this industry, innovators, educators, social entrepreneurs, policymakers, investors, 170 companies, 1,500 people.

It was sold out for several weeks in advance. It's the second year in a row it's been sold out, and why that matters to GSV shareholders is it gives us extraordinary access to the leading companies in this emerging space and huge credibility. So we think that's going to benefit, continued benefit our shareholders in the long term as we continue to be able to participate in the game changing companies within the sector.

So again, education is 32% of our overall portfolio, and we continue to be extremely enthusiastic both what it's going on the market and what's going in our portfolio. So overall we continue to have tremendous confidence in the companies in our portfolio. We are very pleased with the growth and execution that they are delivering and have strong conviction about the long-term value that's being created, as I mentioned before. The overall revenue growth of the portfolio is north of 80%, well north of 80% and six of our largest -- 10 largest holdings, have growth rates in excess of 100% by our estimates.

We continue to carefully evaluate the opportunity to buy back shares. Based on our strategy for portfolio and our business, however, we don't feel great now is the right course of action to do. We like you are frustrated at our share price and that significant discount to NAV. And we appreciate the math and the immediate bump to NAV by buying back shares. And we also recognize that shareholders want us to do something, if not just make the statement that we appreciate the shares are undervalued and we have conviction in our portfolio.

However, as we look at this portfolio, and we look at the conviction that we have and the growth that's going on, and the opportunities in front of us and what value creation that we see going on, we don't believe it's in our interest of our shareholders in the long run to pursue this today. And again we continue to carefully evaluate this and look at this, but recognizing that the benefit in the long term we know we need to make progress in the short-term.

We are doing things that we believe will help the short-term realities of our stock, including the fact that we have stepped up materially our investor relations effort. We're becoming much more active at attending investor conferences, and also in developing relationships with research and brokerage firms that should have an interest in our Company and can provide ongoing support in terms of information insight and into the terms of what's going on at GSV Capital.

We've been to three conferences so far this year, Citigroup, Piper Jaffray, and ROTH Capital. This month we will be at B. Riley's annual conference in Los Angeles on May 20th and the Raymond James Internet Software Crossover Conference May 29th. By the way these would be webcast live and available on our website.

So we are also within a few a days of launching a newsfeed on our portfolio companies as a feature on our corporate website, gsvcap.com. This is something that we talked about on our conference call last quarter and we think it will benefit to our shareholders to be as transparent and to provide as much information as we can on our portfolio companies. This marks another step forward in our commitment to enhancing this transparency for our investors.

So thanks for your attention, I'm going to ask Steve to make some final comments on our financials, then open up the call for questions. Steve?

Thanks, Michael. As Michael indicated, as of March 31, 2013, the total value of the portfolio investments was $222.2 million. Net assets as of March 31st were $245.1 million, which includes cash and money market securities of $22.8 million and translates to a net asset value per share of $12.69. This compares to net assets of $252.6 million or $13.07 per share as of December 31, 2012. Since inception, we have invested approximately $239.9 million excluding transaction costs.

Net investment loss, which is compromised of operating expenses, was $2.6 million or $0.13 per share for the first quarter. And that compares to a net investment loss of $2.8 million or $.014 per share for the fourth quarter of 2012. The net change unrealized depreciation, which is comprised of transaction costs and mostly importantly any fair value adjustments, was approximately $1.6 million or $0.08 per share for the first quarter.

That compares to $4.5 million or $0.23 per share of unrealized depreciation for the fourth quarter of 2012. The net realized loss on investments, which is related to our exit from our Groupon and Zynga investments, was $3.3 million or $0.17 per share during the quarter. And that compares to zero gain, essentially no gain or loss on investments for the fourth quarter of 2012.

Net-net the result was a decrease in net assets from operations of $7.5 million or $0.38 per share for the first quarter. And that compares to a net decrease in net assets from operations of $7.3 million or $0.38 per share for the fourth quarter.

With that, I'll turn the call back over the operator and we can start the Q&A session. Operator?

Thank you, sir. (Operator Instructions). Our first question comes from the line of Louis Margolis from Select Advisor. Please go ahead.

Thank you very much for taking the call. I was an enthusiastic shareholder before this call, but after listening to you describe the portfolio, it's just fantastic. I just love the whole idea. In fact, I'd really liked to own more of these individual companies. Now I -- you say that this is not the right time to buy the stock.

Just a quick review, you raised $296 million at face. You've got 245.1 left. From it over the last 24 months there has been no net appreciation in any of your investments. You can buy stock at eight and immediately set it to $12.69 taking a $4.69 immediate profit. It is unconscionable for you not to do this. I believe it's an abdication of your fiduciary responsibility not to buy in some stock. You said this is not the time to do it. You didn't give one reason why not.

Other than the -- I'll give you one reason. You are drawing a lot of money and fees. All this company has done as you are saying you have invested $239 million ex-transaction fees. I don't even want to think about what those transaction fees. It is immoral for you not to be buying in some of the stocks. You made four stock sales, 19.33 million shares at an average price $15.35 before paying out of lot of fees.

All you have done is spent about $50 million to get where we are and you can't bring yourself to spend $5 million to buy the stock and take an immediate 50% gain. It's outrageous. Thank you very much for taking my call.

Hi, Louis. And I don't know if there was a question in that statement but --

I will give you -- wait, I will give you a question. Why is this not the time to buy the stock?

Yes. No and I appreciate that. And you and I obviously had a conversation about this and you have had other conversations with people of our team and so you appreciate. And this is when all is said and done, we take our fiduciary responsibility extremely seriously. And we look at what is the best interest of our shareholders.

And obviously it's something that we continue and we will continue to carefully consider. And if we feel it's the right thing then and we feel like that's the way that's going to optimize the long-term value for our shareholders we will absolutely do it.

But that's we carefully evaluate this, carefully evaluate this and I understand what you are saying. We are also very confident in the portfolio that we have and you also appreciate the nature of emerging growth investing that you are likely to see. You are going to see the -- what happens the natural J-curve that we are experiencing.

And so as we look at what is the makeup of the portfolio that we have, and that we have made significant commitments, and we went through that, we are confident that that's going to bear great fruits in terms of the portfolio.

And we are prudently managing the portfolio on a very active basis. So we appreciate your comment. We appreciate you as a shareholder. And we look forward to continue the dialogue with all of our interests in line. Thank you. Next question please.

(Operator Instructions). Our next question comes from the line of [John Wright] with Raymond James. Please go ahead.

Good afternoon. And I appreciate being inside of your call. I would like to note that some of your investments increased in value since the last report, Silver Spring. It was valued in December at $1.976 million and today's market value is $8.805 million. That was a gain of $6.828 million, and that compares to a decrease in net assets of $7.5 million. That's a total swing factor of $14.3 million. Can that be explained?

Yes. Dave, I don't know if you want to handle it. I think the math there might be, and I'm not sure that's accurate but, Dave, the what happened in Silver Spring and kind of work things around?

Well, the things to notice as we mentioned on the last call there was a right before the IPO, there was a 5-for-1 reserve split. So we had approximately $5 million investment in Silver Spring, and that's in the new 10-Q it's worth what it is today, a little under $2 million.

So we probably what's that going to do is to take that question offline, because you have to understand the 5-for-1 reverse split to understand what's happening. We -- the share price, our effective price before our effective price at buying the stock was $50 on a post-split basis, not what it was stated in the 12/31 financials.

Okay. That answers it.

Thank you. (Operator instructions). Our next question comes from the line of Casey Alexander from Gilford Securities. Please go ahead.

Yes. Hi and thank you for taking my questions. I'm the Director of Research for Guilford Securities and I have been following the BDC group and following some of the venture capital groups. And one of your statements was there hasn't been a normal IPO market for 10 years.

Now I've been on Wall Street for 30 years and I would say out of that thirty years have been four years where we have had top IPO markets. What is that makes you think that this isn't a normal IPO market as opposed to the IPO market that satisfies needs of your business models the best?

Sure. And well and, Casey, thank you for your question. Yes I made the point that what we are seeing is a healthy market vis-a-vis what we are seeing for a long time, I think candidly one of the reasons why GSV Capital exists, and why we are and we think we have such a great opportunity is because we do think what's been happening the last ten years is the new normal.

We are not going to see an IPO market like we saw during 1990s where you had 500 IPOs go public every year, 50% BVC back, $130 million market cap medium market cap going company, and having public investors be able to ride the growth of small companies to big companies and create building to value along the way. Those days are gone forever.

That said, as you are looking at VC portfolio, and you are looking at it has a company, and you have been private for sometime looking for the right time to come in, there has been very few windows in the past candidly 10 years where you look at the date and you say boy, that's a good environment to go in. And right now, and we are seeing these conversations, and we live and work in Silicon Valley where in all these conversations what's going on, you have seen the noticeable shift in terms of how people are looking at the opportunity to go public today.

And it's primarily because companies are coming out, as mentioned before, over 40% of the VC backed IPOs year-to-date have priced above the range, and they are trading up. That's all gives you confidence to take the Company up. Thank you for your question.

Thank you. And it appears that we have no further question at this time, I would like to turn the conference back over to Mr. Moe for closing comments.

Yes. So thank you very much for joining us this afternoon and we do appreciate all your comments and questions. We also look forward to having conversations with you between now and our next conference call. And I do want to thank people for their support of us. And I will tell you that we are going to continue work very hard and to show that support is well placed.

And again, we are very confident with what's going on. So keep the faith and we will keep working really, really hard. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference, you may do so at any time by dialing 303-590-3030 or 1 800-406-7325 and entering the access code of 4616073#. We thank you all for your participation. And at this time you may now disconnect.