SuRo Capital Corp (SSSS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSV Capital's third-quarter 2016 earnings conference call.

(Operator Instructions)

This call is being recorded today, Monday, November 7, 2016. I would now like to turn the conference over to Nicholas Franco of GSV Capital. Please go ahead, sir.

Thank you for joining us on today's call. I'm joined today by GSV Chairman and CEO, 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 Investor Relations, Presentations. Today's call is being recorded and broadcast live on our website, 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'd 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 our 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 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're pleased to share the results of GSV Capital's third-quarter ended September 30, 2016.

First, I will review the macro dynamics that are creating opportunities for GSV Capital and then I will review our portfolio as at September 30, 2016 and update you on notable investments. I will then turn the call over to Chief Financial Officer Bill Tanona, who will provided a brief financial overview; and lastly, open up the call for questions.

Let's start with slides 3 through 5. On Tuesday, Americans finally go to the polls to elect the 45th President of the United States. Leadership always matters, but we are in particularly rough waters and the decisions by the captain of the ship can have Titanic-type implications. On one side of the coin, unemployment is less than 5% and 15.5 million jobs have been created since February 2010. On the other side of the coin, job growth has not kept up with even population growth. 17.5 million people added new during the same time period and there are 14 million people who have dropped out of the workforce. So really unemployment is closer to 10%.

Today, GDP per capita in the United States, the best measure for standard of living is $56,000 per person in the United States; that's the good news. The bad news is the median family income has been flat for 40 years and countries like Singapore and Ireland have soared past the United States in GDP per capita in the past 10 years. GDP growth hasn't even been above 3% in about eight years and corporate profit growth is negative for the past 12 months. The stock market reflects the confidence investors have in the future and, not surprisingly, stocks are behaving like many of us feel, nervous. Year to date the S&P 500 is up 2% and NASDAQ is up just 0.8% but there has also been also a heavy dose of volatility. In the first quarter the blue-chip barometer, S&P 500, experienced a frightening drop of nearly 10% from January 1 to February 11, followed by a 10% rise to the end of March. Brexit sparked another shock in June sending industry spiraling after the referendum, but since the Brexit lows, the NASDAQ and the S&P 500 have gained 10% and 4% respectively.

The IPO market is even more of an indicator of the state of mind of investors, that they are pessimistic, new issues shut down, and if they are optimistic investors treat IPOs like fresh oxygen they can't get enough of. Despite the news, noise, and predictions of an apocalypse, we are starting to see bullish signs from the IPO market with Twilio's June 23 offering act as a starting gun. Even with recent volatility, Twilio's created more than twice the $15 per share price of where it was priced. While there have been 95 IPOs in the United States to date, 55 have happened since the Twilio IPO; and while there has just been 17 VC-backed technology Companies over the past 12 months, almost all of them have come after the second quarter, including notable listings from technology companies like Line, Talent, and Nutanix, which popped over 27%, 42%, and 130% respectively. As a reference point, there were 371 technology IPOs in 1999 alone, with the normal range of approximately 80 to 100 technology IPOs per year, from 1980 to 2000.

The recent trend we are seeing with the number increase of new issues, and specifically technology new issues, points to a [borrow] opportunity for the best names to break through an IPO backlog that has been building up over the last 15 years. The supply of rapidly growing small companies with the potential for large IPOs is a fraction of what it would have been historically. From 1990 to 2000 there was an average of 406 IPOs in the United States per year. From 2001 through 2015, there has been an average of 111 IPOs per year, about an 80% reduction in the number of IPOs. Private companies are staying private much longer; the time from initial venture capital investment to monetization has gone from an average of three years on 2000 to approximately 10 years today. By the time a company chooses to go public, it is typically larger, more mature, with much of the growth and corresponding rapid value creation behind it.

From an opportunity standpoint, the digital tracks that have been laid over the past 20 years with 3.1 billion people on the Internet and 2.6 billion smart phone users with more than 226 billion apps downloaded in 2015. This allows technology entrepreneurs to go from an idea to reaching tens of millions of people at breathtaking speeds. Our portfolio company, Snap, for example, was founded in 2011; has reported that its users watch over 10 billion videos per day on the platform. Fortune reports that Lyft, a key position for GSV Capital as well, completed 17 million rides in October alone. It was founded in just 2012. By the way, Ben Horowitz, the co-founder of Andreessen Horowitz joined the board of Lyft today, which we think is a great sign.

If you could go to slide 4, our overall portfolio of over 46 companies are experiencing hypergrowth as a reference point to these digital tracks I talked about before, with the average growth of our portfolio of the 46 names up 124% in 2016. That's the estimate of the revenue growth from 2015. Despite the IPO market being weak for much of the past 15 years, venture capitalists haven't stopped investing. VCs invest in an average of 3,200 companies per year since 2001, including 3,709 companies in 2015. We estimate there are over 2,000 VC-backed private companies with a market value of $100 million or greater. That's a fertile and increasingly ripe environment for GSV Capital's strategy.

The new combination of fundamentals puts some context around the recent rise of unicorns, private companies that added $1 billion or greater, with some even becoming ubercorns, which are valued at $10 billion or greater. In 2000 there was one unicorn. Today CP Insights reports there are over 174 unicorns. The key megatrend behind the evolving nature of growth companies, and private versus public markets more broadly, is digital natives operate in a digital economy. Today, for example there are 56 million workers that are digital natives. This is up from zero 25 years ago. During that time we have rapidly shifted from a physical economy, with tangible goods to a virtual, digital economy; and increasingly it looks like a global Silicon Valley. So, there has been a dearth of technology IPOs; innovation is exploding, both in Silicon Valley and around the world.

Please turn to slide 5. 25 years ago the five largest market cap companies in the world manufactured and sold products, like General Electric, Phillip Morris, Exxon, and Walmart. They were built over many years. Today the five largest enterprises in the world and the five largest market caps in the world, are technology companies: Apple, Alphabet, Microsoft, Amazon, and Facebook. The oldest of these five largest market cap companies in the world is Microsoft, which was founded in 1975. The ninth, eleventh, and twelfth largest market cap companies in the world are Alibaba, Tenset, and China Mobile. Incredibly, none of these companies are even 20 years old. So, the point is, leading technology companies are transforming the global economy and the value creation is unprecedented; and that is what GSV Capital is focused on.

Let's turn to review the GSV Capital portfolio on slides 6 through 9. As of September 30, 2016, our net assets totaled approximately $223 million or $10.08 per share. Of the five investment themes we've identified and focused on, cloud computing and big data is our largest commitment, representing 34% of the total portfolio at fair value; education technology represents 33%; social mobile is 15%; marketplaces represents 14%; and sustainability is 5% of the portfolio. For the third quarter our top 10 positions accounted for approximately 55.3% of our total portfolio at fair value. GSV's three large investments, Palantir, Dropbox, and Spotify, represent an approximately 25.6% of the total portfolio at fair value. The point is that we have a barbell approach to our investment strategy where we've made outside bets to the companies that we think have the greatest potential and opportunity.

So first I want to talk about our four largest positions. Palantir, the disruptive big data analytics and security company, remains the largest position in our portfolio. Palantir's platform has changed the way organizations use their data and has deployed a critical government, commercial, and nonprofit institutions around the world. According to the CEO Alex Karp, Palantir will become profitable in 2017. Karp stated in the Wall street Journal's 2016 Global Technology Conference that the companies have positioned themselves to go public, which will create liquidity opportunities for its employees. This is a new statement, as previously Palantir has denied any interest in going public.

Dropbox, our second largest position, is a leading cloud-based file sharing, storage, and collaboration platform. Honored in the Forbes Cloud 100, Dropbox continues to be propelled by powerful network effects, surpassing 500 million registered users and 3.3 billion connections made. COO Dennis Woodside recently announced that Dropbox is adding 10 million users per month. The company is coupling viral user growth with a dedicated enterprise strategy. As of midyear 2016 it had over 8 million paying individuals and adding approximately 10 million new users per month. Additionally, Dropbox has approximately 200,000 paying business customers, including the majority of the Fortune 500 companies. Significantly, in late June, CEO Drew Houston, reported that the company has become cash-flow positive. Dropbox compares its advantage in enterprise is like Apple's. Employees want to use the technology they use at home. As the network effects business and the network effects at Dropbox are disruptive and growing.

Our third-largest position is Spotify, the disruptive music streaming platform that now counts over 100 million users. It recently crossed 40 million paying subscribers, up from 30 million subscribers in March of 2016. Spotify has over twice as many paying subscribers as competitor Apple Music, which recently reported it has 17 million subscribers. Spotify is disrupting the record labels, where over 50% of the music revenue goes today. In June, CEO Daniel Ek announced that Spotify now owns half of the global streaming music spend, with an expanding market share, despite recent competitive offerings from Apple, YouTube, and others. In the third quarter Spotify revealed a new original video series called Clarify, which integrates its music with politics to educate millennial voters on various political topics by featuring in depth, candid discussions with journalists, experts, and musicians. In addition, Spotify's Discover weekly playlist, which creates personalized 30-song playlists for its users, continued to be highly successful, with more than 5 billion tracks screened to date. Spotify has raised $1.6 billion from a syndicate of investors that includes Excel Partners, Founders Fund, Technology Crossover Ventures, and Goldman Sachs.

GSV's fourth-largest position is Coursera, the leading provider of massive open online courses, or MOOCs, that reaches over 21 million learners worldwide. Coursera partners with 147 of the world's leading Universities including Stanford, Yale, Princeton, University of Pennsylvania, and Peking University, to provide over 1,800 online courses in a freemium model, charging for certification of the programs' completion. Beyond credentialed monetization, Coursera's launched enterprise strategy targeted an estimated $325 billion in annual corporate training spending. Early customers include BNY Mellon, [Lost and Consolment] Group, L'Oreal, and Access Bank, who use the platform to provide low-cost, high-quality professional development and new higher on-boarding. In October 2016, Coursera announced over 60 new affordable courses and specializations that teach a spectrum of career-related skills, such as data analytics, user interface design, and beginner-level Chinese.

Coursera was founded in 2015, by Stanford professor's Daphne Koller and Andrew Ng, who serves as the Company's Chairman. Andrew Ng is also the Chief Scientist at Baidu. The Company is led by CEO Rick Levin, the former President of Yale University for 20 years. To date, Coursera has raised over $146 million from a syndicate of investors that include Kleiner Perkins, NEA, International Finance Corporation, which is the VC arm of the world bank, and Yuri Milner.

Next, please turn to slides 10 through 11 for highlights on our recent investment activity. GSV capital made a $2 million follow-on investment in Ozy Media in the third quarter. Led by Carl Swanson, a former CNN and MSNBC commentator, Ozy Media is a next-generation media business that delivers information about what's new and what is next to 20 million people per month. Just for some context, this is larger than The Economist and Politico. What is impressive to us about Ozy that is creating a powerful business model based on a three-legged stool: digital content, events, and TV, all focused on this change generation.

Over the summer, Ozy hosted its first annual Ozy Fest in New York City's Central Park, welcoming over 3,000 attendees and featuring keynote speakers such as Malcolm Gladwell. In September Ozy partnered with PBS in a premiere for new primetime television show called The Contenders, 16 for 16, which was a 16-part documentary series that dissects the most dramatic presidential campaigns in US history, including runs by Shirley Chisholm, John McCain, and Mitt Romney. Kind of like ESPN's 30 for 30 on sports. Today, Ozy investors include German media company Axel Springer, as well as Emerson Collective and SV Angel, which is Ron Conway, who was also an early investor in Google, Facebook, Twitter, and Pinterest.

We also made a $0.5 million follow-on investment in Lytro, the pioneering light field imaging platform, which is essentially basically selling picks and shovels to the virtual-reality miners. Virtual reality is coming into its own, evidenced by Pokemon Go sensation, which generated 500 million users and $500 million revenue in just three months. Lytro has redefined the way images are captured and created across a broad range of applications, from photography to film making. In August, Lytro released the short film, Moon, the first-ever live action, six degrees of freedom, virtual-reality experience in history. It was filmed with Lytro Immerge, a groundbreaking light field solution for cinematic virtual reality. Earlier this year, the company announced Lytro Cinema, a revolutionary, all-in-one solution that offers filmmakers and television producers the creative freedom and flexibility to customize scenes both on-set and in post-production. Investors in Lytro to date include Andreessen Horowitz, NEA, and Gray Lab Partners.

What is exciting to us is that we have a portfolio of some of the fastest-growing, top VC-backed private companies in the world. From Palantir to Dropbox, Spotify, Lyft, Coursera, Snap, and many others; and we are going into an environment that looks increasingly receptive for technology IPOs. Historically, leading names like Facebook and Twitter have been a positive catalyst for our stock. With GSV Capital currently selling less than 50% of NAV, we think there is a great risk/reward opportunity for our investors. Also, I would also like to point people to our updated GSV Capital website. Which our intent, from this website, and you go to gsvcap.com, our intent is to provide our shareholders as much information insight on a portfolio as possible; and we feel like this new iteration is a great step in that direction.

Thanks for your attention, and with that I'll turn it over to our CFO, Bill Tanona.

Thank you Michael. Today I will briefly provide a financial overview, followed by an update on our current liquidity position.

Now turn to slide 12 in the slide deck for financials as of September 30, 2016. We ended the quarter with an NAV per share of $10.08, a quarter-over-quarter breakdown of the changes in NAV is shown on slide 12 that is consistent with our financial reporting. In sum, the $0.14 per share decline in NAV was driven by a $0.19 per share of net investment losses, $0.06 per share in unrealized depreciation, and $0.04 of dividends per share. These items were partially offset by $0.12 per share of net realized gains and a $0.02 per share benefit from taxes on unrealized appreciation of investments, primarily coming from some of our blocker entities. As previously announced on August 3, GSV Capital's Board of Directors declared a per-share cash dividend of $0.04, which was paid on August 24 to the Company's stockholders of record, as of the close of business on August 16, 2016.

During the third quarter of 2016 we had approximately $18.7 million of net proceeds and $2.7 million in net realized gains. Notable highlights from GSV's portfolio activity included the monetization of a portion of our position in Lyft at the average net price of $24 per share, recognizing approximately $2.4 million of net realized gains resulting in a 43% IRR. In addition, we completed the exit of our position in Twitter with the sale of 800,600 shares of common stock at an average price of $18.21 per share, recognizing approximately $300,000 of net realized gains in the quarter. Subsequent to third quarter end, through November 7 we sold 25,159 shares of Upwork Global at an average net price of $4.31 per share resulting in a total liquidation of our Upwork position which resulted in approximately $78,000 of net realized losses in the fourth quarter.

Our liquid assets ended the quarter at approximately $37.8 million, consisting of approximately $11.4 million of cash, $18 million of unused borrowings under our credit facility, an $8.4 million of public securities not subject to lockup agreements, none of which were subject to periodic sales restrictions. We appreciate our stockholders' support in GSV capital and will continue to strive to add value to our shareholders.

That now concludes my comments and we would like to thank you for our interest. We will turn the call back over to the operator, who will start the Q&A session.

(Operator Instructions)

Merrill Ross with Wunderlich.

Hi, good afternoon. This question is really broader and about the industry and venture capital industry as a whole.

One company reported concerns that some sponsors were bailing out, if you will, or wavering is more accurate, in their support of some of their early stage companies. Are you seeing signs of this? I don't think it's systemic, I did find it to be of concern.

If you wouldn't mind giving me a little more flavor for the context in terms of what the question is, go ahead.

(Multiple speakers) -- he indicated that some sponsors were abandoning some of their portfolio companies because rather putting in another $2 million they are just letting it go. (Multiple speakers) -- long time to get to an exit.

I think when you look at the operating procedure of venture capital firms it is really a hit driven business and one of the disciplines that you see is that if a company is not on track to recognize its potential, often you see less of a support, if you will, in future rounds.

Again I think the typical MO for most venture capital firms is to continue to support and feed their winners and the businesses that are on track or when they have invested, they had one thesis and as things played, things didn't develop the way they had expected then you see less support. That's not to say that they wouldn't put in a pro rata or some support, but typically you see them bulk up there investments in the companies that are really looking like they could basically create the greatest returns.

(Operator Instructions)

Alan Head with Wedbush.

Michael could you give us some color on Upwork Global, what you saw in it going in and what made the decision to get out?

In terms of the investment, there is a megatrend going on in the future of work which is basically more and more free-agent workers. And in particular, Upwork focuses on creating a marketplace for technology workers and corporations that -- a need to augment their employees with other technical talent. So the trend and the theme that we are investing in, we think is very significant.

In the case of Upwork, one, we had a pretty modest position. After we made investment, there was basically a merger between the two leading players in the market with the team that we had been confident and then no longer remaining. And we have an overall strategy at GSV Capital which we have really been focused on over the last 12 month which is concentrating our capital and focus on fewer positions where we think we both have a greater level of confidence and we think can create better returns.

While we have this barbell of 46 positions you can expect the number of positions that we have to go down over time where you're going to see a more concentrated position, say the top 20, 30 companies as opposed to 46. So, with Upwork, again, we had a modest position, some thing's changed there. Again, I think the long-term Outlook could be good but as we focus on adding more to the companies that we're really concentrated on, it makes sense with our overall strategy.

So, if you look at the listing of portfolio holdings, one of the things that you can expect over the next 12 months is a continuation of us effectively looking to liquidate these positions so we have a more concentrated portfolio. We think that is going to create better returns for our shareholders.

(Operator Instructions)

At this time I'd like to call the turn the call back over to our speakers for any additional or closing remarks.

I appreciate people tuning in this afternoon. We do believe, we are very optimistic about the Outlook for our portfolio and we think the corresponding impact for GSV Capital stock. And so we appreciate your interest support and we're going to be working very hard to deliver the kind of returns people expect. With that, go vote. Thank you.

Thank you that does conclude today's conference thank you for your participation, you may now disconnect.