SuRo Capital Corp (SSSS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GSV Capital's Second Quarter 2017 Earnings Conference Call. (Operator Instructions) This call is being recorded today, Tuesday, August 8, 2017.

I will now turn the conference over to Nick Franco, Vice President of GSV Asset Management. Please go ahead.

Thank you for joining us on today's call. I'm joined today by GSV Capital Chairman, 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, 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 are pleased to share the results of GSV Capital's second quarter of 2017. First, I will review the recent quarters and share an update on our top positions as well as notable developments in the portfolio. Then I'll comment briefly on the market fundamentals and to define GSV Capital's opportunity moving forward as well as the proactive steps we are taking to enhance shareholder value. I'll then turn the call over to Chief Financial Officer, Bill Tanona, who will provide a brief financial overview. At the end, we'll open up the call for questions.

Let's start with Slide 3 through to 5. Net assets totaled approximately $202 million or $9.11 per share as of June 30, 2017, as compared to approximately $196 million or $8.83 per share as of March 31, 2017. Of our 5 key investment themes, Education Technology is the largest commitment representing 36.7% of the total portfolio at fair value. Cloud Computing and Big Data is 32.7% of the portfolio, Social Mobile is 18.8%, Marketplaces represents 11.2%, and Sustainability is approximately 1%. As of June 30, 2017, GSV Capital's top 10 positions accounted for approximately 63% of the total portfolio at fair value, versus approximately 54% at the same time last year. Our 3 largest investments, Palantir, Spotify and JAMF Software represented approximately [3%] of the total portfolio at fair value. At quarter end, there were 38 companies in our portfolio, compared with 47 a year ago. This all reflects our continued strategy of consolidating the top -- the portfolio around top positions and leading names. So in other words, we're going to put more money into fewer companies.

In the second quarter, the net change in unrealized depreciation investments was approximately $12.8 million. Secondary trade of Spotify in the $2,800 range increased GSV's second quarter valuation by $7.4 million, and $27 million, Spotify is GSV's second-largest position. As reported by TechCrunch, Coursera raised over $60 million in its valuation of approximately $800 million, resulting in second quarter valuation increase of $3.9 million. Coursera is GSV's fourth-largest position. Chegg's stock prices increase resulted in a $4.6 million write up in the second quarter. The stock is up approximately 126% from 12 months ago. Chegg is GSV's 6th largest position. Subsequent to second quarter end, we sold 400,600 shares of Chegg at a weighted average price of $14.35 per share. We still own 782,000 shares of Chegg and remain bullish on the future potential of Chegg and upside. Last week, Chegg raised $135 million selling 1 million shares of stock at $13.50 per share.

And as I mentioned, we sold our 400,000 shares about $14.35 on average. In 2017, GSVlabs has partially completed a Series B financing round at a higher valuation. At second quarter end, we held our position slightly above our previous mark, essentially, at cost, which we will continue to do till our financing process is completed. Additionally, GSVlabs has consummated a joint venture to launch a new center in Boston. Lab's position in the JV in Boston is valued significantly higher than where we currently value the parent, just to give a frame of reference in terms of potential value.

In April 2017, Lyft announced the completion of $610 million financing at a 6.9 billion pre-money value. Second quarter's secondary trading activity resulted in evaluation increase of $1.1 million in our investment, bringing it to $8.4 million of value. These write ups were partially offset by $2.1 million write downs in both Palantir, our top position and Dropbox, our fifth largest position, based on secondary trading activity. In addition, we had unrealized depreciation of $2.6 million of GSV's Sustainability Partners and $2.1 million in General Assembly, our 7th largest position.

Today, shares of GSV Capital common stock closed at $3.86 or approximately at 42% discount -- or 42% of NAV with the market cap of approximately $85 million. This, for some context, our top 3 positions are Palantir, Spotify and JAMF Software, value is approximately $85 million. Accordingly, our Board of Directors has approved a $5 million discretionary share repurchase program. Additionally, the board's wealth management team and GSV Asset Management has committed, subject to appropriate trading controls to purchase stock in the open market. Our largest position is Palantir, the disruptive Big Data analytics and security company, which accounts for approximately 13.1% of our total portfolio at fair value. Palantir products are deployed by leading government, commercial and nonprofit institutions around the world to solve the most complex problems they face. Applications range from cyber security to disaster preparedness. Capital markets intelligence, healthcare delivery, industrial operations and defense.

In February, CEO Alex Karp indicated they expect the company to be breakeven by the end of 2017, knowing that Palantir's cash burn rate has decreased by approximately 60% versus 2016. Palantir's operations in the U.K. are [profitable] today as European revenues roughly tripled over the past 3 years. Earlier this year, the Financial Times reported that Airbus has capped Palantir to help accelerate production of its new A350 aircraft, potentially saving the European Aerospace Group hundreds of millions of dollars over the coming years. This adds to a blue-chip list of corporate clients that includes Merck, AXA, BP, Crédit Suisse, Deutsche Bank, GlaxoSmithKline, Standard Chartered and Zurich Insurance Group. Today, Palantir has raised $1.9 billion of equity funding for syndicate investors that includes Founders Fund, In-Q-Tel and Tiger Global.

As we've noted on recent calls, Palantir remains on our IPO watchlist at The Wall Street Journal's global Technology Conference in October 2016, Alex Karp indicated that Palantir has positioned itself to go public. We believe that opportunity has been validated by the company's continued demonstrating of the strong operating and growth fundamentals. Our second largest position is Spotify. The leading global music streaming platform that now reaches over 140 million users, with 30 million songs across 60 international markets. The Financial Times reports that Spotify has surpassed 60 million paying subscribers, more than double its key competitor, Apple Music. And the lead is widening. Spotify has added about 10 million subscribers over the last 4 weeks, Apple Music has added just over 8 million subscribers over the last 6 months.

At the same time, Spotify is making important headway to improve its margins by negotiating more favorable royalty agreements with direct lables. Global music sales are growing at the fastest pace since 1997, driven by the rising popularity of streaming music, that's leverage for Spotify. In 2017, Spotify lowered its royalty rates paid to Universal Music Group by 5 percentage points and recent agreement with Sony Music of similar terms. There's also finalizing a new deal with Warner Music which is expected to be signed in Q3. According to multiple reports, Spotify is considered direct list in our New York Stock Exchange instead of traditional IPO. A process that [all those] underwriters lockups and typical [indiscernible] capital associates with the traditional public offering. We will continue to monitor the development to optimize returns for GSV Capital's stockholders.

To date, Spotify has raised $1.6 billion from a syndicate of investors, including Accel Partners, Founders Fund, Technology Crossover Ventures and Goldman Sachs. GSV Capital's fifth-largest position, Dropbox, continues to demonstrate strong growth fundamentals, becoming the fastest software as a service business to reach $1 billion in revenue run rate, which was achieved in January 2017, according to a report by IDC. It hit that market at 8 years beating SaaS leaders like Salesforce and Workday. On July 27, Bloomberg reported the company's expected to hire Goldman Sachs as a lead advisor for potential IPO, which could come in 2017.

Impressively, CEO Drew Houston announced in April that the company had become profitable on EBITDA basis. This follows a June 2016 announcement that Dropbox has achieved positive free cash flow. Today, Dropbox counts over 500 million users and 200,000 business customers, including a majority of the Fortune 500 companies.

Dropbox has raised over $600 million from a syndicate investors including Sequoia, Benchmark, Accel, Goldman Sachs, BlackRock, Greylock, Morgan Stanley and T. Rowe Price. In July, GSV Capital's portfolio company Lyft announced that it completed over $162 million rise in the first 6 months of 2017, surpassing its full year mark in 2016. To date, the ride sharing platform has launched in over 160 new cities, and in March 2017, Lyft reported its growth was accelerating in every market across the country.

To date, Lyft has raised over $2.6 billion from investors, including Andreessen Horowitz, General Motors, Founders Fund, KKR, Alibaba, AllianceBernstein, Coatue and others. A couple of additional quick updates for the portfolio.

First, on Coursera, our fourth largest position, announced in June 2017 that they had hired Jeff Maggioncalda to succeed Rick Levin as CEO. Rick had done a phenomenal job as the CEO, bringing Jeff in was a transition, preparing the company to go public sometime in the future. Jeff previously served 18 years stint as the CEO of Financial Engine, the largest independent investment advisor in the United States. He cofound the company with Economics Nobel Prize winner Bill Sharpe and took the company public in 2010. Outside of Coursera, Jeff serves in the Board of Directors of Silicon Valley Bank. Coursera continued to demonstrate strong momentum. Today, it serves over 27 million learners with more than 2,000 courses from 149 university partners including Stanford, Yale, Princeton, University of Pennsylvania, Peking University, the Moscow Institute of Physics and Technology and Hebrew University. Rover, formerly known as DogVacay, the peer-to-peer pet city marketplace announced it completed a $65 million financing last month led by Spark Capital.

Additional capital came from existing investors including Technology Crossover Ventures, Memo Ventures, and Founder Group. Megan Quinn, a partner of Spark has joined the board. This happened subsequent to quarter end, so no impact to our NAV. We're also excited by the continued progress of Course Hero, a peer-to-peer marketplace for educational resources and expert tutors, harnessing the same network effects that have propelled platforms like Airbnb and Lyft, Course Hero is scaling quickly and profitably under the leadership of CEO, Andrew Grauer who founded the company in his Cornell dorm room. Course Hero's GSV's 8th largest position is backed by Mavron, Greydog ventures capital, SV Angel and IDG Ventures.

Please turn to Slide 6 through 8. According to Renaissance Capital, just 102 IPOs went public in the United States in 2016 and only 40 were venture backed. In fact, IPO proceeds of venture-backed companies dropped approximately 90% from 2014 to 2016. In 2017, to date, there have been 88 U.S. IPOs, representing a 57% increase over the same period last year. IPO proceeds have surpassed $22 billion, which compares to $18.8 billion in the entire year of 2016. In the first half of the year, there were 24 VC-backed IPOs which generated $5.9 million -- $5.9 billion of proceeds. This compares to 19 IPOs which generated $1.3 billion in the first half of 2016. To date, 16% of the 2017 IPOs are priced above the range, about 65% are priced within the range, which is, more or less, normal and the average one day pop is 11%, which is, more or less, normal. Overall, IPO performance is up 12% compared to 2016, which mirrors the positive movement in the broader markets in 2017.

As of August 7, S&P 500 is up over 10%, NASDAQ has risen 18% and the GSV 300 index, that is created by GSV Asset Management, represents the 300 fastest growing companies in the world has surged 41.3%. If history is any guide, the strong performance by growth names and technology names is a precursor to an IPO market that we think will become more robust as we go into the fall and into 2018.

So we think that's great. At the same time, while you're seeing strong performance in technology names and growth names, the market volatility is about half of what is considered normal. In fact, while public stock performance is better than it's been in 100 years, the VIX volatility index is under 10. 20 is even par. So in addition to the supply demand forces in IPO world, we see continuation of expanding corporate M&A activity in technology, which is a parallel force to the IPO market and it creates excellent opportunities for venture-backed companies. JPMorgan reports that global deal volumes surpassed $3.9 trillion in 2016. That's tied to the third-largest year on record. The top mark, which stands at $4.7 trillion was set just a year earlier.

Today, U.S. corporate cash reserves have reached approximately $2.2 trillion according to Capital IQ, and M&A focus is increasingly turning towards emerging technologies and disruptive business models. Leading technology companies, in particular, have continued to roll up the industry. Technology is all about disproportionate gains for leaders in the category of platforms, evolving rapidly still in the category of product maps. From 2010 to 2016, the big 8 Alphabet, Google, IBM, Facebook, Microsoft, Oracle, Cisco, Apple and Amazon have completed approximately 480 acquisitions worth $170 billion.

So again, we think those [categories] are all present for positive activity to our portfolio. But to borrow lines from John Maynard Keynes, markets can stay irrational longer than we can stay solvent. So we have taken proactive steps to change the dynamics at GSV Capital to increase shareholder value. In the first quarter of 2017, we announced the addition of 2 new members to the GSVC Board of Directors with significant investment and asset management experience. David Pottruck is the former CEO of Charles Schwab, which he guided from a $400 million market cap to $45 billion market cap. Today, David is the Chairman of Red Eagle Ventures and he is a 19-year board member at Intel. Dave is also Chairman of HighTower Advisors, a $35 billion wealth management firm he helped launch in 2008.

He officially joined the board on May 31, 2017. Marc Mazur is the former CEO of Brevan Howard, U.S. Asset Management, which is a large global hedge fund. Before that, Marc was executive at Goldman Sachs in its fixed income division for over a decade. And today, he serves as senior adviser to Brightwood Capital Advisors, a multi front asset manager with over $3 billion of assets under management. Marc officially joined the board on March 17, 2017. GSV Asset Management and its Board of Directors GSV Capital are highly focused on creating shareholder value. We believe that this is achieved by strong investment performance which is driven by a very focus-driven team, proactive, clear communication leading to greater shareholder awareness and focus on continuous improvement to drive the company's share price to its intrinsic value.

To that end, we're pleased to announce that GSV Capital's lead Director, Mark Klein, will transition to the role of CEO, with a focus on enhancing shareholder value and operations on the front. Moving forward, I will continue to serve as Executive Chairman of GSV Capital and I will focus on investment strategy. For context, Mark has served on the board of GSV Capital since 2011 and he's serving in the GSV Asset Management since 2012. Mark has successfully run 2 significantly larger public financial services companies, National Holding Corporations and Ladenburg Thalmann, which, in both roles, create significant shareholder value. He has over 20 years of experience in alternative asset management, wealth management, including launching one of the earliest private equity and venture capital funded fund platforms in the 1990s. A final update before I turn the call over to Bill Tanona, GSV Capital held Annual Investor Day on June 7 at GSVlabs in Silicon Valley. Welcomed over 600 attendees and keynote presentations, the portfolio of the company's CEOs, including Ron Johnson from Enjoy, Dan Rosensweig from Chegg, Andrei Cherny from Aspiration, and others. You could access recordings from the event by following link provided on Slide 8 of the company presentation. Thanks for your attention.

And with that, I'll turn it over to bill.

Thanks, Michael. Today, I have a few very brief comments providing a financial overview for our results, followed by an update on our current liquidity position. We ended the quarter with a net asset value per share of $9.11. A breakdown of the change in NAV during the quarter is shown on Slide 9 that is consistent with our financial reporting.

In sum, $0.28 per share increase in NAV during the second quarter was driven by a $0.58 per share of net changes in unrealized appreciation of investments. That was partially offset by $0.03 of net realized losses and $0.27 per share of net investment losses or operating expenses. Our liquid assets ended the quarter at approximately $21.8 million, consisting of approximately $2.6 million of cash, $14.5 million of public securities not subject to lockup agreements and $4.6 million of public securities subject to a lockup agreement. Our shares of staff became freely tradable as of July 31 of this year.

Subsequent to quarter end, we repaid the $8 million outstanding on our credit facility. As of today, we have $12 million available for borrowing under the credit facility. Additionally, subsequent to quarter end, we sold over 400,000 shares of our unrestricted common stock in portfolio company Chegg for total proceeds of roughly $5.7 million, which resulted in a net realized gain of nearly $1 million. We appreciate our stockholders' support in GSV Capital. That concludes my comments, and we'd like to thank you for your interest.

I'll now turn the call over to start the Q&A session. Operator?

(Operator Instructions) Our first question is from Ed Woo with Ascendiant Capital.

Michael, I definitely -- it's been great working with you and I wish you best of luck on broad. We'll stay in touch, and Mark I definitely look forward to working with you on forward. Michael I just have more of [tier] level question in terms of what are you seeing out there in Silicon Valley. I think you guys are very in touch with all the big [deeds] that are going on. It seems that 2017 seems to be in good shape. What are people looking towards some of the big deals that are going to be shaping up for the back half of this year and possibly into next year?

Yes, so one comment is that innovation is alive and well in Silicon Valley. It's -- if anything you're seeing the pace accelerate, startups and funding are in a very robust level. And I think, I need to see that continue, frankly, as much as you seen adequate funding to -- in the private marketplace, I think you're going to need to see an IPO market that opens up somewhat to see that continue to just think it's a function of how much private is this total private capital, but the fact of the matter is I think you need to see some realizations, you got over 200 unicorns right now. And these are -- that's just a -- on one hand, that's going to be fun when the window opens. But at the same time, I think you had to see some of that kind of come through, but very exciting stuff. Some of the areas that are getting a lot of attention, clearly, everybody is all over artificial intelligence and machine learning in every manner, kind of applying to every industry. Internet of things is another huge, huge megatrend with a lot of interest and a lot of activity going on, I just literally was at a meeting with the Fortune 500 company before this call. And they're all over startups in Silicon Valley on Internet of things because they just believe it's going to be such a transformative wave of technology. Blockchain, which has caught a lot of attention with digital currencies, I think you're starting to see these being applied across multiple industries. And I think that's going to be very exciting and very significant. Digital Dr, we just -- there's a number of interesting themes that are going on. I think something that everybody's focused on and I do believe it's going to create huge opportunity, I think, it's very positive for GSV Capital how we're positioned, is this whole kind of future work idea with all the automation going on and robots and so forth. People are seeing jobs being taken away from not only manufacturing jobs and warehouse jobs, but it's happened to the white-collar and pretty soon it's going to happen to the no-collar jobs. So people are saying what does that mean? You're seeing as companies are basically position themselves to provide the knowledge, skills and so forth that people need to participate in the future. Lots of interesting activity, so we're very bullish on several of our holdings that are positioned in that world. Coursera, being the obvious example, effectively taking talent and networking it through knowledge to future opportunities. So those are a few. I'd say, on a footnote, we thought this year was going to be a major break out in virtual reality, augmented reality area, Pokémon Go last summer kind of was the starting gun going off in that world. And while you're seeing, still, a lot of interest in Cisco, it's not coming online as fast as we thought previously. I don't think that takes anything away from what the future looks like there. I just think it means, like a lot of things, that takes a little longer to get going. I think when it gets going, it's going to be huge. So those are a few of the observations I'd have in terms of what's going on in Silicon Valley. And just so you know, basically what we're doing here, from a management standpoint, is and my focus is going to be continue to identify opportunities and investment themes, seeing great businesses and networking so we have access to those businesses. And Mark Klein coming on board, he's working with us really from the beginning is really be focused on both the business of the business, but also what we did focus on specific things we're going to do on a daily basis to enhance shareholder value. So that -- the view of the board, the view of me is -- we're going, obviously, incredibly focused on what we do to have a share price that is consistent with the value of the portfolio and the value that's being created. Which we couldn't be more optimistic about where the portfolio sits in terms of positions that we have and the fundamentals of the positions.

(Operator Instructions) Our next question is from Cynthia Boyle with Wells Fargo.

First of all congratulations on the decision to buy back shares. We are shareholders, obviously, and we are very interested in getting a good return on our money, but I've got a simple question. If in fact, Spotify takes the route of being a direct offering, which would mean your shares would be freed up. Can you walk us through what the net impact would be to shareholders and if there would be no lockup, and how it would work internally?

Well, so if there was no lockup, we'd be free to sell the shares immediately that we have. We'd be making decisions at that point, if the price reflected what we've considered the appropriate value for our shareholders and if it was, we'd liquidate the position and -- but couple of pieces just to put in [kind of context.] One of the things we've said was that after the company goes public, it would be our intent to sell the shares and it's our intent to sell shares within 12 months after the company's lockup is over. And that is our intent. I mean that's absolutely our intent in the case of Spotify, we'll see where it trades and if you follow the private market, there's tremendous demand for Spotify's shares today. So we are hopeful that we can still continue to see that [rise] and if it does, and we think it's fair value, it's likely that we'd sell them as soon as we could because we'd make a nice return for our shareholders. And that's what we've been doing consistently since we stated that policy. But we do reserve the right, as we did with Chegg that where we held the position longer than that period and the reason was we felt that what those [tier] were trading at versus what we viewed, the value was, was significant. It wasn't the 10% or 20% or 30% gap. It was literally -- we got multiples of where the price was. And so we made the decision to keep it, we're glad we did, obviously, with the stock performing as it has over the last 12 months. But we do want to make sure that people realize that whether it's our focus and goals that we'll liquidate shares within 12 months of lockup. And in terms of distribution and the policy is basically gains offset against losses and then that's an end of year calculation. Bill, is there anything to add to this?

No.

Okay.

Our next question comes from Joseph Garner with Emerald Advisers.

Just had a question regarding the portfolio of activities. For the first 6 months, no new investments, no new divestitures. I was wondering if you can just talk a little bit about that and kind of what you're seeing in the marketplace that has led to no activity on either side, which is very unusual for GSV given kind of the history there. So if you could just talk a little bit more about that?

Yes, Joe. As it relates to our activity there is a couple of different pieces of it. One is that the liquidity that we have is pretty limited, and what we have been focused on is frankly, can we get liquidity at a good price for some of our names that we think is the right thing to do even in the private realm. What we have seen and its changing by the way, but what we saw for most of first half of the year, a private market where it was more of a buyers' market and we weren't able to see the prices in a portfolio and that's reflected in what we mark the portfolio at but we just weren't seeing the kind of prices that we think reflected fair value, so we didn't -- we chose not to sell much of our portfolio and because of our limited liquidity it basically limit our ability to buy new issues. That said, every single Monday, we have an active list of companies that we're focused on, kind of our NFL draft, and we're constantly looking at, can we find the shares at attractive price, or can we participate in the financing that gets done at an attractive price, and there just weren't those opportunities in the first 6 months, I think the mark -- I think the combination which I referenced before, which is, you have seen -- we've seen a material pickup just to action of growth names. And I think that is part of 2 things. One, we're seeing the activity in the private market pick up quite a bit, I mean, significantly. And we're also seeing -- and while we haven't seen like this flood of IPOs or an IPO market that's picked up the way we thought it would. I'd be very surprised if we didn't see that coming into the fall through the year, just I mean history has shown that when you have the public markets that are acting well, particularly the growth names that IPO market follows and that's we'd expect and I think again that changes our dynamics, gives us opportunities as it relates to take advantages of selling positions that we think reflects a fair value and buying the best private companies that we're focused on.

(Operator Instructions) All right. Thank you very much. That does conclude our call for today. We appreciate your joining us.

Thank you very much for being on the call. If anybody has any follow-up questions, we are delighted to answer them, and again, we are optimistic about our position going ahead. Thank you.