SuRo Capital Corp (SSSS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the GSV Capital's Fourth Quarter 2017 and Fiscal Year 2017 Earnings Conference. (Operator Instructions) This call is being recorded today, Tuesday, March 13, 2018.

I would now like to turn the conference over to Nicholas Franco, Vice President of GSV Capital. Please go ahead, sir.

Thank you for joining us on today's call. I'm joined today by GSV Capital Executive Chairman, Michael Moe; Chief Financial Officer and President, William Tanona; and CEO, Mark Klein.

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 Corp. 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 would like to turn the call over to Michael Moe.

Thank you, Nick, and good afternoon, everybody. We're pleased to share the results of GSV Capital's fourth quarter and fiscal year 2017. To start, I'd like to review the key initiatives we undertook in 2017 and subsequent to fourth quarter end to systematically enhance shareholder value. We are pleased to report on the impact of these initiatives to date, which is summarized on Slide 3. But more importantly, we believe that we represent -- that they represent a strong foundation for GSV Capital in 2018 and beyond.

First we announced comprehensive adjustments of GSV Capital's fee structure to benefit shareholders. Key elements of the adjustments are as follows: GSV Asset Management will forfeit $5 million of its previously accrued but unearned incentive fee. This action will be reflected on our first quarter 2018 earnings report. GSV Asset Management has also agreed to achieve certain high watermarks before receiving any incentive fee. Specifically, no incentive fee will be paid until GSV Capital's stock price and its last reported net asset value per share are equal to or greater than $12.55.

Additionally, effective February 1, 2018, management fees will be reduced from 2% to 1.75%. GSV Asset Management voluntarily waived its management fee by 25 basis points in 2017 as well. Finally, effective February 1, 2018, GSV Asset Management has agreed to waive management fees on cash balances until GSV Capital's 5.25% convertible notes are retired or repurchased. Further details about the fee structure adjustments are included in GSV Capital's Form 8-K filed with the SEC on February 5, 2018.

Beyond fee structure, a second key 2017 initiative was GSV Capital's launch of a discretionary open market share repurchase program. We initially announced the $5 million share repurchase program on our second quarter 2017 earnings call. Subsequently, our Board of Directors authorized an expansion of the program to an aggregate of $10 million and an extension through November 6, 2018, whichever comes first. To date, GSV Capital has repurchased an aggregate of approximately $6.2 million in shares of its common stock under the program.

A third initiative we launched was a convertible debt tender for GSV Capital's outstanding 5.25% convertible senior notes due in 2018. At the time of the tender offer announcement on December 15, 2017, there was $69 million in aggregate principal of notes outstanding. As of the expiration of the tender offer on January 17, 2018, approximately $4.8 million aggregated principal amount or 7% of the outstanding notes were tendered.

Finally, on December 14, 2017, GSV Asset Management announced a strategic investment from a group led by HMC Capital, a leading Latin American advisory investment firm with more than $9 billion of assets under management. We believe the alliance with HMC will enhance GSV Asset Management's investment capabilities. HMC's team includes over 80 investment professionals across 5 countries with deep experience in private markets and alternative investments. Additionally, we believe that HMC's global network of institutional investors and strategic relationships will expand our capital access and provide valuable connectivity for GSV Capital portfolio of companies.

Moving forward, as these initiatives continue to take effect, we remain focused on finding additional opportunities to proactively enhance shareholder value.

With that, please turn to Slides 4 to 6 for a review of the portfolio and key developments of the fourth quarter and subsequent to quarter end.

Following my remarks, I'll turn the call over to our CFO and President, Bill Tanona, who will provide an in-depth financial update as well as a summary of recent GSV Capital transactions. We'll conclude with questions from call participants.

At the end of the fourth quarter, net assets totaled approximately $205 million or $9.64 per share. This is down from approximately $209 million or $9.69 per share at the end of the third quarter of 2017 and up from approximately $192 million or $8.66 per share at 2016 year-end. I'd like to note several developments subsequent to the end of the fourth quarter 2017 that could have significant impact on GSV Capital's NAV moving forward.

On February 23, Dropbox, GSV Capital's fourth largest position, filed for its IPO of up to $750 million. It is poised to become the largest U.S. enterprise technology company to list since First Data Corporation went public at a market value of approximately $14 billion in 2015. On Monday, Dropbox announced an IPO pricing range of $16 to $18 per share. As of December 31, 2017, GSV Capital held Dropbox at approximately -- not approximately, exactly, $13.62 per share.

On February 28, Spotify, GSV Capital's second largest position, filed for a direct listing on the New York Stock Exchange, forgoing a traditional IPO. As expected, the company will begin trading without a formal share offering or lockup period for current investors. We expect the listing to occur in late March or early April. GSV Capital currently marks its position in Spotify at a price of approximately $5,200 per share, which is compared to the $5,400 price [or $0.10] acquired shares in the fourth quarter of 2017. Spotify will hold its Investor Day this Thursday, March 15, which will be publicly accessible by live stream.

From January 1, 2018 to February 20, 2018, GSV Capital sold 500,000 shares of Chegg at an average net price of $18.89 per share, exiting its position in the company and generated approximately $9.4 million of net proceeds and $3.4 million of realized gains. GSV Capital's Q4 valuation reflects Chegg's closing price as of December 31, 2017, which was $16.32. This was partially offset by the sale of GSV Capital's position in Avenues, which generated approximately $5.9 million of net proceeds and a realized loss of $4.2 million.

On February 28, 2018, GSVlabs closed a Series B financing round, raising $6.3 million from outside investors at a $25 million pre-money valuation. This represents a 2x premium to the company's enterprise value implied in GSV Capital's valuation as of December 31, 2017. GSVlabs indicated that they may extend the financing round for a close in later March.

Finally, as noted earlier, on February 5, 2018, we announced that GSV Asset Management would forfeit $5 million of its previously accrued but unearned incentive fee, which represents approximately $0.24 per share of NAV based on our December 31, 2017 NAV. The resulting positive impact on NAV will be reflected in GSV Capital's Q1 2018 earnings.

Our top 5 positions as of December 31, 2017, were Palantir, Spotify, Coursera, Dropbox and StormWind, which account for approximately 52% of the total portfolio at fair value excluding treasuries. Our top 10 positions account for 74% of the overall portfolio. By comparison, as of December 31, 2016, GSV Capital's top 5 positions accounted for only 39% of the portfolio's fair value, excluding treasuries. The top 10 positions accounted for just 60%. So this has been a purposeful direction where we've reduced the number of portfolio companies and have greater concentrations in our top names. What we're looking to do ongoing as a result of this objective, as of December 31, 2017, there were 31 companies in our portfolio. This compares with 45 as of the fiscal year-end 2016 and over 50 in 2015. Our largest position continues to be Palantir, a disruptive big data analytics and security company that works with leading government, commercial and non-for-profit institutions around the world. It accounts for approximately 16% of our total portfolio at fair value, excluding treasuries.

As of December 31, 2017, Spotify accounted -- excuse me, to date, the company has raised $1.9 billion from a syndicate of investors that includes Founders Fund, In-Q-Tel and Tiger Global. In February 28, in a CNBC interview, CEO Alex Karp indicated that Palantir continues to position itself for an IPO as it streamlines its operating model and product offering. Last February, Karp noted that he expected the company to breakeven by end of 2017. IDC estimates that Palantir operates in a sector that will grow from $150 billion in 2017 to over $210 billion in 2020. The company's applications range from cybersecurity to capital markets intelligence, health care delivery and defense. While Palantir launched with a focus on large government contracts, the company has announced its corporate customers now represent over half of its revenue. Key clients include Airbus, AXA, Merck, BP, Deutsche Bank, GlaxoSmithKline and Fiat Chrysler. Palantir recently signed a multiyear deal to expand its deployment of Fiat Chrysler. Over 1,500 of the company's employees from senior executives to assembly line managers will use Palantir's platform to identify production problems and potential safety issues.

We are also very excited to report that on March 9, according to Bloomberg, Palantir was awarded an $876 million contract to revamp the U.S. Army's data intelligence infrastructure. The Department of Defense indicated that this is a 10-year project.

GSV's second largest position is Spotify, which accounts for approximately 14% of the portfolio at fair value. Spotify's recent S-1 filing reinforced our conviction in the company's outstanding fundamentals and long-term growth potential. 2017 revenues totaled approximately EUR 4.1 billion, up 39% year-over-year. Gross margin improved from 14% in 2016 to 21% in 2017, reaching 25% in the fourth quarter driven by favorable new deals negotiated with record labels. As of December 31, 2017, Spotify counted over 159 million monthly active users. It also had 71 million paying subscribers, a 46% increase over the previous year. Apple, by contrast, reported on March 12, they had 38 million subscribers for its paid music streaming service, which it launched in 2015. Spotify users consumed 40.3 billion content hours in 2017. That's up 51% from 2016. Importantly, this growth isn't simply a function of the expanding network. It reflects deepened engagement, which is the lifeblood of media platform. Since the beginning of 2015, Spotify reports that monthly listening hours per user are up 32% and the average number of hours each listener streams per month has increased 28% over the same period. Users are not only spending more time on the platform, they are engaging with a broader range of content. As we noted earlier, we expect Spotify's listing to occur in late March or early April. We'll continue to monitor the process as we shift our focus to monetizing the position at the optimal time for GSV Capital shareholders.

GSV Capital's third largest position is Coursera, the world's leading digital education platform. Today, Coursera reaches over 31 million learners with 2,600 courses from 149 premier global universities, including Stanford, Yale, Princeton, the University of Pennsylvania, Peking University and others. Coursera has the potential to democratize global access to high-quality education with certificates from leading academic institutions that cost as little as $29 and accredited degrees in high-demand fields like data science that start at $15,000. Last week, at its annual conference, Coursera announced 6 new online degrees with top universities from around the world, including a Master of Data Science program with the University of Michigan and the University of Illinois and the University of London and Arizona State University. This adds momentum from the popular individual courses. A recently launched artificial intelligence course taught by company's cofounder, Andrew Ng, for example, had over 100,000 learners enrolled in the first 30 days after its launch. Coursera also announced it now serves over 900 enterprise customers with an offering focused on developing high-demand skills in business leadership, data science tech and technology. Key customers include IBM, BNY Mellon, Boston Consulting Group, AXA, L'Oreal and PayPal. We believe that Coursera is just scraping the surface of a global corporate learning market that we estimate is worth over $300 billion today.

Earlier this year, Coursera kicked off a partnership with Google on a certificate program to train aspiring IT professionals on a range of career line skills including networking and systems and administration, also security. Coursera estimates that there are over 150,000 unfilled IT support jobs in the United States today. Coursera represents approximately 8% of the GSV Capital portfolio at fair value. In June of 2017, the company completed a $64 million Series B financing at a valuation of approximately $800 million as reported by PitchBook. Today, Coursera has raised $210 million from a syndicate of investors that includes NEA and Kleiner Perkins.

Dropbox is GSV Capital's fourth largest position, which represents about 8% of the portfolio at fair value. The company's recently filed S-1 is consistent with the strong operating growth fundamentals we've been tracking since we made our initial investment in the company in 2011. Dropbox is the fastest Software-as-a-Service business to reach $1 billion revenue run rate according to IDC. 2017 revenues were $1.1 billion, up from $845 million in 2016 and $604 million in 2015, a 35% CAGR for the period. While Dropbox has nearly doubled revenue since 2015, gross margins have improved from 33% to 67% over that same period of time. Dropbox counts over 500 million users across 180 countries, including 100 million new users added since the beginning of 2017. More than 400 billion files have been uploaded to the platform to date. There are over 11 million paying Dropbox customers, including 300,000 businesses and over half the Fortune 500. Remarkably, over 90% of the company's revenue originates from self-service channels, individuals who purchase a subscription through the app or website. Dropbox's competitive advantage is enterprise -- in the enterprise is like Apple's. Employees want to use a technology they use at home. If the network affects business and the network effects at Dropbox are disruptive and growing. As with Spotify, our focus with Dropbox now shifts to monetize the position at an optimal time for GSV Capital shareholders.

As we have indicated with previous portfolio companies that have gone public, our objective is to exit position within 18 months of IPO or 12 months after any relevant lockup has expired.

GSV Capital's fifth largest position is StormWind, which represents approximately 6% of the portfolio at fair value. Launched in 2009, StormWind is disrupting the $20 billion global IT training market by delivering world-class live instruction through deeply immersive, rich digital environments. We believe that StormWind is transforming online technical training in the same way that Pixar redefined expectations for traditional animation. StormWind offers courses at a fraction of the cost of traditional instructor-lead online training programs, and employees typically master concepts in half the time. Today, the company serves over 15,000 clients across a range of industries including Cisco, Microsoft, AT&T, Kraft, DHL, Bain & Company, the U.S. Navy and many others.

Outside the top 5, I'd like to call your attention to Lyft, which has positioned itself as one of the world's fastest-growing technology companies in 2018. According to Bloomberg, Lyft recorded well over $1 billion net revenue in 2017, more than doubling the company's 2016 performance. In its 2018 economic impact report released in January, Lyft reported they completed over 375 million rides in 2017, up from 163 million the previous year, a 130% annual increase. Today, Lyft passengers rose 92% in 2017 to 23 million while the number of Lyft drivers doubled to 1.4 million. Entering 2018, Lyft controlled an estimated 1/3 of the U.S. ridesharing market, up over [50%] year-over-year. In December 2017, Lyft announced that raised $1.5 billion at $11.5 billion valuation or $39.75 per share. By comparison, as of December 31, 2017, GSV Capital held with shares in Lyft at a price of $33.21 per share. Now the financing round that was done in December for Lyft was led by CapitalIG, the venture investment arm of Alphabet. Other notable investors include Fidelity, KKR, AllianceBernstein and the Ontario Teachers' Pension Plan. Lyft has raised approximately $4.1 billion to date.

Please turn to Slide 7. On a relative basis the U.S. IPO market rebounded in 2017 as 153 companies listed a 50% increase over 2016. There were 64 VC-backed IPOs in 2017 versus 40 in 2016 according to Renaissance Capital and our research affiliate, GSViQ. Set against the backdrop of an IPO backlog that has been building for the last 15 years, we believe there could be plenty of rebound yet to come. According to the data from National Venture Capital Association, from 1990 to 2000, there was an average of 406 IPOs per year in the United States. From 2001 to 2016, it dropped 108 per year, almost an 80% reduction, yet venture capitalists have continued to invest at a healthy pace, averaging over 3,000 investments in new companies every single year. The early returns in 2018 indicate the momentum is continuing to grow around new issuances. There have been 29 IPOs to date, a 53% increase over the same period last year. IPO proceeds stand at $11 billion, a 28% year-over-year improvement. Nasdaq, which is approximately up 10% year-to-date, reflects this positive sentiment. We believe that the IPO market is even more of an indicator of the state of mind of investors. If they're pessimistic, new issues shut down. If they're optimistic, the investors treat IPOs like fresh oxygen they can't get enough of.

Looking ahead, we believe that GSV Capital's positioned as well today as it's ever been. The fundamentals of the portfolio are very strong, and the team remains committed to taking proactive steps that will enhance shareholder value. We look forward to building on this momentum in 2018. Thanks for your attention.

And with that, I'll hand it over to our President and CFO, Bill Tanona.

Thanks, Michael. Today, I'm going to provide a financial overview of our results, followed by an update on our share repurchase program, our expense reduction initiatives and our current liquidity position. We ended the quarter with an NAV per share of $9.64. A breakdown of the change in NAV during the quarter is shown on Slide 10 that is consistent with our financial reporting.

In sum, the $0.05 per share decrease in NAV during the fourth quarter was driven by $1.18 per share of net realized gains, $0.13 per share benefit from changes in taxes related to our investments and $0.07 per share accretion from our share repurchase program, all of which was offset by $1.26 per share of net changes in unrealized depreciation of investments and $0.17 per share of net investment losses or operating expenses.

There was a lot of portfolio activity in the fourth quarter. And if you look on Slide 8, we highlight the fourth quarter sales and write-offs during the quarter and the respective realized gains and losses for each of those transactions. As you'll see, we had significant realized gains in both Jamf and Spotify in the quarter and we also had a significant realized loss in Handle Financial, which is formerly PayNearMe. The one thing I would note with PayNearMe is that this was previously written off in a prior quarter, and so the loss was just realized here in the fourth quarter.

In the fourth quarter, the company repurchased 360,549 shares of GSV common stock for approximately $2.1 million. After quarter end, the company repurchased an additional 179,807 shares of GSV Capital common stock for approximately $1.2 million, leaving us with approximately $3.8 million remaining on our share repurchase programs.

As previously highlighted by Michael, the management team implemented several expense reduction initiatives that will benefit our shareholders, including adjustments to the management fee and incentive fee calculations. We expect the recently announced $5 million incentive fee waiver should have a positive impact on our net asset value per share in the first quarter. We have made meaningful progress in reducing our operating expenses, and we will continue to manage our expenses diligently in the future.

I'd like to move over to liquidity and convertible notes. As we ended the first quarter with about $60 million of cash on the balance sheet and as you'll see in our 10-K, which will be released later this week, we also had a few subsequent events that will result in net increases in our overall cash position in the fourth -- first quarter. These transactions include the sale of our residual shares of Chegg, the sale of our entire position in Avenues Global Holding and the maturity of one of our notes with GSVlab, all which resulted in approximately $16 million in net proceeds and a realized net loss of approximately $800,000. As many of you are aware, our 5.25% convertible senior notes mature in September of this year. As Michael previously indicated, we announced a tender offer to purchase all of the outstanding notes. At expiration of the tender offer in January 17, 2018, $4.8 million of aggregate principal of the notes or 7% of the notes outstanding had been validly tendered. Since the company is currently carrying a larger cash balance than it typically would in the ordinary course of business, our adviser, GSV Asset Management, has agreed to waive its base management fee on any cash balances effective as of February 1, 2018, until the 2018 notes mature or the date that all the 2018 notes have been repurchased or redeemed, whichever is earlier.

That concludes my comments, and we'd like to thank you for your interest in GSV Capital. Now we'll turn the call over to the operator to start the Q&A session.

(Operator Instructions) We'll hear first from Alex Paris with Barrington Research.

This is Chris Howe sitting in for Alex Paris. I had a question in regard to the cash balance, and I didn't see it in the press release, but what is the current segment mix? Or how would you divide that up in regard to the investments? And I guess, looking into 2018, maybe some general overview on where you think that segment mix could shake out. Perhaps what opportunities are you currently seeing in the first quarter and how do you see it playing out for the remainder of 2018?

Great. I'll let Bill handle the cash question, and then I'll talk about the diversification of portfolio as well as what we see on the road ahead.

So Chris, as you know, we've got the notes that are coming due in September. And so our cash balance that we currently have is obviously earmarked for the retirement of that debt coming in September. And so right now, our cash position -- which is why we've decided to waive management fees on that cash position. I think that's what your question was. I wasn't sure exactly what you were asking as it related to our cash, but I thought that's what you had asked.

As it relates to the portfolio mix, one of the things we did is give kind of a fresh look this quarter because we think that we captured some things, for example, big data and cloud, but the really the more appropriate would be security software, so we got kind of a fresh look. Basically, we still have a significant representation in education, which remains the largest category of our investment, which includes our investment in Coursera, which is our third largest position. And by the way, we are very, very encouraged by what we're seeing there, both in terms of the growth as well as the new degrees that I mentioned in our commentary. Also, a company, Course Hero, which is doing extremely well, growing really fast. So we've got a great mix there. The Social Mobile area has been an important category for us and remains that. Marketplaces, we love marketplace businesses. So arguably, if you look at our portfolio, we have a number that we categorize in different places, but are, in effect, marketplaces, which would include Coursera, Course Hero and a number of other -- one you could call Spotify a marketplace in terms of the kind of network effects business model. And so what you're going to see going forward and particularly as we continue to make progress with the portfolio is the themes and companies that we're -- I won't get into specific companies that we're focused on. But in terms of the themes, clearly, artificial intelligence is everywhere. It's ubiquitous. It's game changing in terms of businesses that are affected by it. By the way, just as an aside, you're looking at what's going on in the cloud between Amazon and Google and Microsoft and artificial intelligence is going to be a major differentiator in that ferocious battle that's going on. Blockchain is an area that we haven't invested in to date. And obviously, the cryptocurrencies and so forth has gotten a lot of attention. But we think the real transformative aspects of blockchain are going to be as it applies to effectively every industry from health care to real estate to education and obviously financial services. And I guess, the last theme that is bubbling up and something that we think is very, very important is the area of virtual reality and augmented reality. This has been an area that we've been focused on for some time. It hasn't come as fast as we would have hoped. But you're starting to see very powerful technology being introduced and some really revolutionary concepts that we're quite excited about. So that -- and the pipeline that we've created for future investments is very robust. We -- it will -- I will just make a point, something that we've been doing and articulating for really the last 3 years and you're starting to see it being very clear in the portfolio is we are focused exclusively on later-stage tech companies with a bigger concentration in the positions that we have. And again, fewer positions, so we've gone from over 50 portfolio holdings 2 years ago to 31 today. I think, optimally, we'll be at 25 to 30 focused on the growth themes that we've identified.

(Operator Instructions) We'll go back to Alex.

Sorry about that, just had one quick follow-up just in regard to your education comments and more specifically, Coursera. I didn't catch in the comments whether the expectation for 2018, whether an IPO is positioned for this next year.

Yes. So I mean, the company has reached a scale where I think it could go public if it chose to, but it's not our anticipation that Coursera will be public in 2018. We do think that -- we have a number of other -- we obviously have Dropbox and Spotify going now. But given the environment that I discussed before and the position of a number of our companies, we actually think this is going to be a really exciting year for our portfolio, but I would position Coursera to be unlikely in 2018.

We'll hear next from Jon Hickman with Ladenburg.

Michael, could you -- or I don't know if you want to take this, but could you go through the GSVlabs transaction again?

Yes. So GSVlabs, which is an innovation center that we have in Silicon Valley, which GSV Capital owns approximately 70% of, we have 200 start-ups at GSVlabs, many of which we have an equity position. And we have 25 corporate partners there, which include 3M and Google and Cisco and Intuit and Times of India and JetBlue Airlines. To date, we took very little outside capital really and funded by GSV Capital both with the model evolving as it has and the opportunity that we see beyond Silicon Valley. We just recently brought in the $6.2 million financing at a $25 million pre-money valuation. And it was referenced in the call as of December 31, 2017, we carry our position in GSVlabs at approximately less than half of that $25 million enterprise value, the $6 million was raised. Now what GSVlabs is doing is basically expanding to new markets. They opened up Boston this month. We have GSVlabs in Bangalore and Delhi in partnership with Times of India. We've got a program for autonomous cars going in Pittsburgh. So we're quite excited. We're very bullish on GSVlabs. And we think that, that will be a great catalyst for GSV Capital stock because we do think there's tremendous potential to finance, there's really growth capital to put some gas on.

(Operator Instructions)

Well, it sounds like there's no more questions. So if that's the case, again, we're very appreciative of the support that we've gotten from our shareholders. As I referenced in my comments, this is the most optimistic I've been since we started GSV Capital. We just think the portfolio is positioned extremely well. We think we have a very clear opportunity, and our focus is how we execute against that opportunity every single day. So we appreciate the support, and look forward to the follow-up questions people may have and keep rolling. Thank you.

And that will conclude today's conference. Again, thank you all for joining us.