SuRo Capital Corp (SSSS) 2015 Q4 法說會逐字稿

Welcome to the GSV Capital's fourth-quarter 2015 earnings conference call.

(Operator Instructions)

This call is being recorded Thursday, March 10, 2016.

I will now turn the conference over to Mr. Nicholas Franco, Vice President of GSV Capital.

Thank you for joining us on today's call. I'm joined today by GSV Chairman, CEO and Chief Investment Officer Michael Moe, and Chief Financial Officer William Tanona. Please note that a Slide presentation that corresponds to today's prepared remarks by management is available on our website at www.gsvcap.com under Investors, Events and Presentations.

Today's call is being recorded and broadcast live on our website, www.gsvcap.com. Replay information is included in our press release issued earlier today. This call is the property of GSV Capital Corporation and the unauthorized reproduction of this call in any form is strictly prohibited.

I would also like to call your attention to customary disclosures in today's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or future performance or financial condition.

These statements are not guarantees of our future performance or future financial condition or results, and involve a number of risks, estimates and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including, but not limited to 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 our website at www.gsvcap.com, or the SEC's website at SEC.gov.

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

Thank you Nick.

We are delighted to share the results of a very good quarter for GSV Capital on top of an excellent year, which included paying a $2.76 per share distribution on December 31, 2015, comprised of approximately 50% cash and 50% common stock to our stockholders of record as of November 16, 2015.

First I will review our portfolio as of December 31, 2015. Then I will give some highlights and recent developments and update you on several investments. I'll then turn it over to Chief Financial Officer, Bill Tanona, who will provide a brief financial overview, discuss the dividend distribution and election results, and lastly, open it up for questions.

Let's start with Slides 3 and 4. As of December 31, 2015, our net assets were approximately $268 million, or $12.08 per share. A notable highlight from GSV's portfolio activity subsequent to the fourth-quarter end was the monetization of portion of our position of Lyft at the average net price of $25 per share, recognizing approximately $1 million net realized gains, resulting in a 62% IRR.

We also exited our position of Bloom Energy at an average net place of $14.75 per share, generating $3 million of proceeds and approximately $900,000 of net realized losses. We will continue to monetize our public and private positions as opportunities emerge.

Please turn to Slide 5. For the fourth quarter, our top 10 positions accounted for 55% of our total portfolio and fair value. GSV's two largest investments, Palantir and Dropbox, represented 23% of the total portfolio at fair value.

Palantir, the disruptive big data, analytics and security company, remains the largest position in our portfolio. Palantir's platform is changing the way organizations use their data, and is deployed at critical government, commercial and nonprofit institutions around the world. In December, Palantir publicly disclosed that it raised an additional $129 million on top of financing that was bringing it to $880 million to date.

The latest round valued the Company at $20 billion. According to the Wall Street Journal and Fortune, Palantir's $20 billion valuation makes it the third most valuable VC-backed private company in the United States, behind Uber and Airbnb. We are excited about the Palantir's strong momentum and believe it will continue to transform the landscape of smart data.

Dropbox, the leading cloud-based file sharing, storage and collaboration platform, is GSV's second-largest position. Last week, Dropbox announced it surpassed 500 million users, adding over 100 million users in the last nine months alone. Over 1.2 billion files are saved to Dropbox every day.

The Company continues to be propelled by powerful network effects; over 44% of new accounts were opened as a result of referrals, and 75% of Dropbox users now reside outside the United States. The Company has coupled viral user growth with dedicated enterprise strategy, announced in November, that over 150,000 paying business customers. We anticipate that this strategy will accelerate as Dropbox continues to target and convert the 8 million businesses that use it platform.

Now, Lyft: the San Francisco-based ridesharing platform, and GSV's eighth largest position, announced a new $1 billion Series F funding round in early January. The financing valued the Company at $5.5 billion, according to Bloomberg. General Motors led the round, with $500 million investment, announced a partnership with Lyft to create a network of on-demand, self-driving vehicles that will make transportation more affordable and accessible.

GM also announced that it would create a series of national rental hubs, where Lyft drivers can access short-term vehicles, unlocking new ways for people to earn money without having to own a car. The GM relationship adds to a stable of high-value strategic partnership Lyft has established in recent months, including alliances with Didi Kuaidi, GrabTaxi and Ola, the leading ridesharing platforms in China, Southeast Asia and India, respectively.

Well, with the awful beginning of the year for stocks overall and with NASDAQ, even with three big weeks of rebounding, still being down 7% year to date, it's not a shock that we've had a very slow IPO environment for 2016. If you look at year to date, there's been just five IPOs and with none of those IPOs priced above the range. The average first-day pop was 1% where you would consider to be. If we were in a good environment, kind of a 10% to 15% pop would be expected.

Our expectation is that as we go through the year and people get more confidence, both on the economy and other variables, such as the election and commodity prices, we'd anticipate to see a pick-up in the IPO market. But I think it's also important to make note that whether the IPO markets open or not, we've been able to consistently demonstrate that we're able to monetize positions in the private market, as well.

Next, turn to Slide 6, where we break our portfolio mix across the globe themes as of December 31. Of the five key investment themes we've identified Cloud Computing and Big Data is our largest commitment, representing 35% of the total portfolio and fair value. Education Technology represents 28% of overall portfolio; Social/Mobile is 17% ; Marketplaces represent 13%; and Sustainability is 7% of the total portfolio and fair value.

Next, please turn to Slides 7 through 11 for highlights on recent investment activity. In the fourth quarter, GSV made $13.8 million in new investments, including a $10 million follow-on investment in Spotify, the disruptive social music streaming platform.

Spotify continues to see strong momentum, in fact, accelerating momentum, with over 75 million users and 28 million subscribers who pay approximately $10 per month, according to The Financial Times. In 2015, CEO Daniel Acker revealed that more than 50% of Spotifiers are under the age of 27. Remarkably, given these very young demographics, 70% of Spotify's initial 2010 subscribers are still paying customers. College kids would rather have their electricity shut off than their Spotify account.

Spotify recently announced that it's going to expand its offerings to include video content for smartphones in the United States, the United Kingdom, Denmark and Sweden. It also acquired start-ups Soundwave and Cord Project in January to enhance its social and sharing capabilities. To date, Spotify has raised over $1 billion in funding from a syndicate of investors that includes Accel Partners, Founders Fund, Technology Crossover Ventures, and Goldman Sachs.

In December, GSV made $2 million follow-on investment and Declara, a social learning platform that uses artificial intelligence to accelerate the way people discover and exchange knowledge. In August 2015, Declara and its CEO Ramona Pierson participated in the White House's first-ever Demo Day, which highlighted game-changing start-ups tackling global challenges.

President Obama specifically praised Declara for applying advanced technology and innovation to help people learn faster and smarter. Declara's investors to date include Founders Fund, and EDBI, the investment arm of Singapore's Economic Development Board.

As mentioned on our third-quarter earnings call, we made a $1.2 million exit follow-on investment in GSV Sustainability Partners in October and November. GSV Sustainability Partners is a transformative finance company that leverages the rapid global adoption of proven sustainable products and technology, thereby delivering meaningful customer savings through a more effective use of energy, water and waste. GSV Sustainability Partners: led by former Kleiner Perkins Partner, John Denniston, and industry veteran Tom Cain.

Subsequent to the fourth-quarter end, GSV invested an additional $5 million, including $2.5 million follow-on investment in Lytro, a pioneering light-field imaging platform.

Lytro is redefined the way images are captured and created across a broad range of applications, from virtual reality, which is -- really, the area of virtual reality is exploding in terms of interest, and our view, opportunity to photography and filmmaking. Investors in Lytro, besides GSV include Andreessen-Horowitz, NEA and Greylock Partners.

We also made a $2 million follow-on investment in Curious.com, a lifelong learning platform that Forbes recently described as the Netflix for learning. As of today, you can download a very cool new Curious app from the Apple iOS store.

Curious helps people master new skills from how to play the banjo to business communications. It's a learning engine that's powered by leading cognitive science research, which demonstrates that people who stretch their brains for as little as 15 minutes per day are happier, healthier and more productive. In addition to GSV, Curious is backed by Redpoint Ventures. To conclude, I'd like everybody to join us at the 2016 ASU GSV Summit.

Please turn to Slide 12. GSV launched this partnership with Arizona State University six years ago, and what the summit does is convene key leaders from across the global innovation economy focused on education innovation, with the goal of improving educational outcomes through exponential ideas and accelerating those ideas.

Last year, we were pleased that the New York Times said that the ASU GSV Summit was The Must-Attend Event For Education and Technology Investors. This year, we expect over 3,000 attendees. We'll have over 350 presenting education technology companies and we will have a variety of entrepreneurs, investors, foundation leaders, educators, policymakers, CEOs from leading global companies. Keynote speakers this year include Bill Gates; former US Secretary of State Condi Rice; Khan Academy Founder, Salman Khan; and Business Strategy visionary Jim Collins; and many more.

As I mentioned earlier, Education Technology comprises nearly 30% of GSV Capital's portfolios and fair value. The summit provides a window to the future. Investment opportunities, I mentioned, is 350 companies presenting at the summit and it's the platform to accelerate the investments that we've already made. I think that we've seen that value displayed to portfolio companies.

All relevant GSV education portfolio companies will present at the conference, so again, we think it's a phenomenal way to add value to both the companies and add value to the shareholders, as well as new opportunities that can be game-changing. If you want to see more, please visit the summit website, ASUGSVSummit.com for additional details.

Thanks for your attention and with that, I will turn over to our CFO, Bill Tanona. Bill?

Thank you, Michael.

Today, I will discuss the results of our stockholder elections from our recent distribution, then I will briefly provide a financial overview, followed by an update on our current liquidity position. Please now turn to Slide 13 for the results of our distribution.

On November 4, 2015, our Board of Directors declared a distribution on the outstanding shares of common stock in the amount of $2.76 per share payable on December 31, 2015, to the stockholders of record as of the close of business on November 16, 2015. The dividend was paid in cash and/or shares of our common stock at the election of our stockholders, although the total amount of cash distributed to all stockholders was limited to up to 50% of the total dividend paid to all stockholders.

Approximately 50.6% of shareholders elected to receive stock as their distribution, while 49.4% elected cash. As a result of stockholder elections, the dividend consisted of approximately $26.4 million of cash and we issued approximately 2.9 million shares of common stock, or approximately 14.8% of our outstanding shares prior to the distribution. Importantly, none of the $2.76 per share distribution represented a return of capital.

Now turn to Slide 14 for the financials as of year end. We ended the quarter with a NAV per share of $12.08. As you can see on Slide 14, a year-over-year breakdown of the change in NAV is shown that is consistent with our financial reporting.

In sum, the change in NAV was driven by an increase of $2.11 per share due to the combined effects of net realized gains and changes in unrealized losses. The NAV was also positively impacted by a combined $0.85 net benefit per share, related to the reversal of tax accruals due to our election of RIC status for the 2014 tax year. The NAV was negatively impacted year over year by $2.52 of net investment losses, primarily operating expenses and $3.16 per share from the effects of distribution paid on 12/31/2015 resulting from the combination of cash, shares issued and dilution from issuing those shares.

Moving on to our liquid assets, our liquid assets ended the quarter at approximately $58 million, consisting of $13.3 million of cash, $18 million of unused borrowings under our credit facility, and $26.6 million of public securities not subject to lock-up agreements, approximately $100,000 of which are subject to periodic sales restrictions.

We appreciate our stockholders' support in GSV Capital and we continue to strive to add value for our stockholders. That concludes my comments and we'd like to thank you for your interest. Now, we will turn the call over to the operator to start the Q&A session. Operator?

(Operator Instructions)

Jeff Houston, Northland Securities.

Thanks for taking my questions. The question I had is looking at the exits after the quarter closed, it really seems like a phenomenal exit of Lyft, but maybe a bit of a subpar exit in Bloom Energy. Could you provide some color on what you think went right with your investment process, looking at Lyft. I understand it was a partial exit, not a full exit, and maybe what didn't quite go as planned with Bloom, even though I think that was a full exit.

Sure. Lyft, we are bullish on the long-term outlook for Lyft, yet from a portfolio management standpoint, we saw both the fact that we've had a significant increase in the price of Lyft shares in a short period of time and significant investor demand to prune some of the portfolio. So again, we're going to continue to monitor that position closely. The Company is growing extraordinarily fast.

I will also say and it's not a new story that the competition between Uber and Lyft is ferocious and I think that the competition would allow, we definitely believe that Lyft has unique product offering that appeals to the different demographic and all sorts of reasons that we think there's great long-term opportunity including, by the way, if the self-driving cars becomes a reality, it's a total game changer. That said, we just thought it was the prudent thing to take some game at the time that we did.

With Bloom, I think it's a situation where we -- it's not so much that I think we did -- we made a fundamental mistake in the business. I think we still have optimistic outlook in terms of how significant Bloom could be. I mean, it truly is a disruptive player in one of the largest industries in the world, energy.

But we just felt given opportunities that we see in other areas that we're quite enthusiastic about it. It was just a situation where we felt like the right thing to do was not have dead money and be waiting kind of for some more milestones but be able to take that money and more effectively allocate it somewhere else.

And so for example, and you didn't ask about Spotify. Spotify is a situation, a company that we've been an investor in for several years and what gets us really excited about Spotify is, here you've got this business that is actually quite sizable but the business is accelerating in terms of its metrics. And that is in the face of real competition, obviously, from Apple and its new music offering and even Google, with YouTube.

And here you've got Spotify with this significantly -- significant portion of revenue being recurring, very low churn, and lots of opportunity and upside and a valuation into what -- we didn't really discuss it but we're seeing interesting opportunities in the secondary market and the Spotify shares we bought were secondary shares. So, we think it's a really interesting time to be a buyer because you've got some businesses that have -- that continue to have really strong fundamentals but you don't have as much -- I think you're seeing it just being more attractive to be a buyer in the market today. Thank you.

(Operator Instructions)

Joseph Garner, Emerald Advisors.

Just had a couple of questions for you. First couple are just a few housekeeping. Bill, make sure I have my math correct here. So following the distribution, it looks like we have about 22.2 million shares outstanding? Does that number sound correct to you?

Correct.

Good and then I also want to make sure this is correct as well. There were no sales or exits during the fourth quarter; the two sales happened in Q1?

Correct.

Okay. Good. And then Michael, I'm just curious. We've seen a number of news reports about some of the crossover type funds that have been reporting significant declines in the valuation of some of the private company investments that they've made.

Doesn't seem to be the case here in your fourth-quarter results. I'm just wondering if you can talk about maybe how your approach may differ from those where we've seen those write-downs and why that might not be happening in your portfolio at this point in time.

Yes, so first of all, A, it's a good opportunity to explain the process that we go through on a quarterly basis, which I think you have a good appreciation for but maybe some others on the call don't. So on a quarterly basis, the -- we have a very rigorous process that we go through here.

We'll first, the GSV team goes through every single security in the portfolio and we've developed a process that is applied on a systematic basis to value the portfolio which includes: if a new financing is done, if there was a secondary trade where the terms were nulled, looking at comparables. You basically go over the different data points and so we come up with a number, which our auditor, Deloitte Touche, has gone through the process. They push on the process to make sure that we're doing everything both consistently and the best way possible.

But in addition to that, our outside evaluation firm -- excuse me, our independent Board hires an outside valuation firm which is Anderson, which I believe is the largest valuation firm in the world, that also goes through every single security in our portfolio on a quarterly basis and they go to their own independent process. And then from that, there -- it's looked at what we've come up with and what the valuation firms come up with and the independent Board valuation committee makes a determination of what the appropriate price to reflect in the terms of our NAV. So that's the process that is -- and obviously everybody is aware of how others, if it's publicly available, have marked a position.

And I'm not here to guess where the Fidelity or [Morgan Stanley] has done but certainly that information is information that is known. And there has been certainly since last Fall, so over the last six months you've seen and I've kind of alluded to it, from a standpoint of we're seeing opportunities to buy shares in companies that we think are very attractive prices because you have seen the secondary market cool off in terms of interest. You've seen these markdowns across the board. So for example, Palantir, which we keep on our books at $9.24 per share, the most recent financing that was done was $11.16. The information that we have BlackRock carries it at $11.38; Elder Funds carries it at $10.10, and the reason we carried at $9.24 is we have information on institutional secondary trades that were done that were below the number. And so that's impacted in our number and we also have some individual, we say anything below $1 million is an individual trade.

Dropbox, which we carried at $16.94, that's down almost 27% -- almost 28% from where we carried it last summer. And frankly, the fundamentals, we don't think have changed. What's changed is of course, the market's one of the biggest influencer, I think in what way, Morgan Stanley, T. Rowe Price and BlackRock have marked down their Dropbox positions because it's biggest comparable, Box.net, has obviously performed very poorly in the public market.

Now again, from a logic standpoint in that, that's truly a huge network effect business. It would make sense that actually, if one -- if a competitor was doing poorly maybe, in fact, the leader is doing well and in our judgment Dropbox is doing very well.

Spotify is a good example of a position that, again, the business -- we -- the business is doing very, very well. We are very bullish on the fundamentals of Spotify. We own Spotify and the financing that was done recently was at roughly $2,200 -- $12 to $2,200 a share. When we bought our secondary position at $1,700 per share and therefore, what's reflected in our books in $1,700, which is a 24% discount roughly from where the recent financing was done. Once again, the fundamentals of Spotify have accelerated.

They haven't gotten worse. They've gotten better. But the buy -- it's become more -- there's become more of a buyers' market for secondary so we took advantage of that to get a nice position of additional position in Spotify but as it gets marked in our NAV, it gets marked to what that lower price that we bought it at is.

So, it's a process but then again, what I would tell you is, it's very rigorous on our end and it's belted and suspendered by the fact that we have this Anderson outside valuation firm going through each position. And as you can imagine, there's such sensitivity on our Board in terms of making sure that we're doing everything as good as humanly possible. I think you can know that we're looking at everything and this is reflective of what we think is the best numbers into our NAV. So we feel very good that the NAV we reflect is a very solid and I won't use other words, but very solid NAV.

Joe, this is Bill. I'm just going to add one additional point. Again, if you look at NASDAQ for the fourth quarter, NASDAQ was up high single digits. But if you actually look at our earnings release, you'll see that we had actually marked down the portfolio in unrealized losses in the quarter of about $14 million, or $0.69 of NAV.

So despite the fact that the market was up, we still did mark down our portfolio there in the fourth quarter and as Michael highlighted, a bunch of the bigger names that we have, names like Palantir were 100% determined by secondary trades in the marketplace as well as in Spotify.

Dropbox was probably 50% of value was determined by secondary trade and so there is a secondary market that is out there and we use those as part of the inputs and just remember, obviously, this is as of 12/31 in the fourth quarter. And some of the marks that you're seeing out there that are being publicized reflect January and even, I think, February marks, too.

(Operator Instructions)

Merrill Ross, Wunderlich.

I would like to hear what you think the outlook is for investment activity in 2016 beyond the [assets] you mentioned in the press release. And particularly looking at the potential to liquidate some of your investments to make room for new or follow-on investments in entities you think will have better success?

Great. And I think -- it's just is really a follow-up almost to Jeff's question about Bloom. I mean in our view, there's nothing wrong with Bloom. But in terms of an investment philosophy that we have, we call it pigs at the trough. We like to [look] if there's so many companies that can basically be at the trough at one time.

And so if we're going to add a new company, we've got to say, what is the weakest position that we have and look at letting the strong company come in or add to the company while discarding something that we don't feel has as much potential, even though it could be doing perfectly fine. So we, again, on a very systematic disciplined basis are going through both our portfolio as well as opportunities and prioritizing the competition for capital.

So we're trying to get the -- we're trying to feed situations that we think have the strongest fundamentals, the greatest upside. And again, what I'd tell you from our seat here in Silicon Valley, while there's skepticism about the unicorns and about China and about the election and about 100 different things that people are worried about, when you actually get into the specific companies, the fundamentals of many of these companies are unbelievably strong.

And so when you look at the unbelievably strong fundamentals, coupled with an environment that pricing has gotten a little bit softer, we think that's going to reward our shareholders long-term and frankly, we are very active today trying to get involved with the very best companies at good prices. And so that's -- so finding out if there's ways to kind of shake the trees to get some liquidity in some names that we don't think have as great a potential as some of the ones we think do; that's what we're doing on an ongoing basis.

And what I'd also say, is we usually, is if you obviously look at the IPO market, I think, where the IPO market is a relevant factor as it relates to ways for us to monetize our portfolio and sort of the health, if you will, of growth investors. One of the things I'd say is, while there's only five IPO -- there's only been five IPOs year to date, there's been pretty -- still a pretty active financing and the very best names. So if you look at -- we made reference $1 billion that Lyft raised at a significant mark-up from its last raise. Magic Leap just raised $1.1 billion from Google and Alibaba; WeWork raised $430 million; Uber raised another $200 million.

Snapchat, one of the funniest ones, Snapchat was just reported in The Wall Street Journal, I think it was this week or last week, the $175 million that Fidelity put in it. Now what's funny is Fidelity, of course, had marked down its Snapchat position just a quarter or two before yet they just went and bought another $175 million of stock so I -- they must not be too worried about the fundamentals.

So I think the point is, we're -- we feel a little bit like we're kids in a candy store in terms of just, all of a sudden, you're seeing these bunch of great names that have gone -- a bit of a discount; and what history has shown that is if you can buy the very best companies at good prices, over time, that's a good formula and we hope to be able to do that. We think that, ultimately, will reflect in our stock-price.

Thank you. With no additional questions, I would like to turn the conference back over to our presenters for any additional or closing remarks.

Again, this is Mike Moe. I just want to thank our shareholders and the people that are paying attention to what we're doing at GSV Capital. I will tell you is I'm an optimistic person but I've never been more bullish in terms of what the opportunity is for us. We're working very hard to earn people's confidence and we think how that will be done is by delivering great returns in the portfolio which will ultimately be reflected in the stock price and be reflected in distributions that we'll be able to provide.

So we appreciate the interest. We appreciate the support and I guarantee that we will continue to work. We will redouble our efforts in terms of how hard we work to deliver returns for you. Thank you very much. We will talk soon.

Thank you. Ladies and gentlemen, once again, that does conclude today's conference. Thank you all again for your participation.