SuRo Capital Corp (SSSS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSV Capital's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) This call is being recorded today, Wednesday, August 8, 2018.

I will now turn the conference over to Ben Fife. Please, go ahead, sir.

Thank you for joining us on today's call. I'm joined today by Chairman and GSV Capital Board of Directors, Michael Moe; and Senior Vice President and Controller Allison Green. 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, www.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 releases regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relates 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.

Hi, thank you, Ben. Good afternoon. We're pleased to share the results of GSV Capital's second quarter of 2018. First, I will review the recent quarter, including key initiatives for our effort to enhance shareholder value. Then I'll provide an update on key developments in the portfolio and to conclude, I'll hand the call over to Allison Green for a brief financial overview. And then we'll open up the call for questions. Let's start with Slide 3 through 5. The second quarter

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$10.46 per share. This is up from approximately $211 million or $9.99 per share at the end of the first quarter and $202 million or $9.11 per share at the same time last year. As an advance of funds to varying degrees on previous earnings calls, we have three core initiatives to drive GSV Capital performance and investor returns. First, we'll continue to increase the size per position and reduce the number of companies in our investment portfolio. At the end of the second quarter, GSV Capital had 28 portfolio companies compared to 38 a year ago. And the reason why this is important is we feel to get our shares closer to NAV and hopefully, above NAV, having fewer companies in the portfolio, we believe, allows investors to accurately analyze what the worth of the companies are, recently what we listed NAV and again, we think that will give investors increasingly comfort and confidence about what the state of NAV is.

Our top time -- 5 positions account for approximately 62% of the portfolio at fair value, excluding treasuries. For context, that's about the same way as GSV Capital's top 10 positions at the same time last year, which account for just 63% of the portfolio. Again, back to our strategy of increasing the size of our positions and reducing the number of the positions held. To put the evolution of GSV Capital's portfolio into perspective, while our stock is up approximately 80% year-over-year, we still sell at a -- on a 35% discount to our NAV of $10.46 and if you add up our top 5 positions, you can see that, that's approximately where the total market cap is today of approximately $145 million. So in other words, we think if you look at the top 5 positions in GSV Capital's portfolio, that gets you to approximately where our stated market cap is and then, obviously with other cash that we have. So not to over-promote what our stock is selling at, we think that gives a lot of confidence to say that there's tremendous upside from here, we believe. With the recent public listings from Spotify and Dropbox, 2 of our top 3 positions, the second key piece of focus is hopefully adding new names to the portfolio.

And a general rule, given the size

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[space], we're looking to target positions being -- kind of the normal position being $10 million of the capital commitment and $15 million to an outsized position in the premium and late-stage growth companies, with a line of sight to an IPO or significant liquidity in that -- in the not so distant future.

As of June 30, 2018, GSV Capital had approximately $93 million of cash resulting from the price of the $40 million in a convertible senior note due in 2023 as well as the proceeds generated by the monetization of various portfolio positions for fourth quarter of 2017 through the second quarter of 2018. We also have [almost] $68 million in marketable securities.

We intend to use the $50 million of our cash on hand to repurchase and pay the maturity of GSV Capital's $50 million of outstanding 5.25% convertible senior notes which mature September 15, 2018. [In addition to that], we are actively sourcing and evaluating investment opportunities in top VC-backed companies that demonstrate strong operating fundamentals. We are targeting businesses that have crossed the chasm of initial businesses risk and have the opportunity to generate scale valuation growth before potential IPO or strategic exit. To frame the opportunity, CB Insights has identified 355 IPO -- 355 companies that have the characteristics that can go public anytime they pick to choose. Obviously, we're in an environment that is supporting new issues. Importantly, we are agnostic in terms of whether we invest in secondary or primary shares, our goal is simply to address the top growth companies in the world at a fair price. While primaries offer certain benefits, including broader information rates, our deep experience with secondaries creates unique opportunities and advantages and in terms of access, diligence, timing and pricing. Similar portfolios, the most recognizable names including Dropbox, Spotify, and Palantir were secured almost entirely through secondary shares. And historically, great investments that we've been able to access and do well for our shareholders include Facebook and Twitter and [2U], which are all secondary purchases and, obviously, we had very positive outcomes for our shareholders.

Our third and final area of focus is continued proactive steps to enhance shareholder value. In 2017, GSV Capital's Board authorized a $10 million discretionary open market repurchase program to November 6, 2018. In May, the board operated the $5 million expansion of that program to aggregate 15 million. To date, we repurchase approximately 10 million shares of common stock under the program, including 3.3 million in the second quarter of 2018 and subsequent to quarter end.

The repurchase program complements the shareholder-centric adjustments we've made to our fee structure in recent months. Later in the call, Allison Green will discuss a few additional steps we are taking on this front. We've also continued to reduce the operating expenses incurred under GSV Capital's administration agreement, which equated to about 12% year-over-year in the second quarter.

Please turn to Slide 6 to 7. GSV Capital's top 5 positions as of June 30, 2018 were Spotify, Palantir, Dropbox, Coursera and Starwood, which comprised 62% of the portfolio at value, excluding treasuries. Our top 10 positions accounted for over 85% of the portfolio. While we think that's really significant is because if you go to our top 5 positions, obviously, that gets you to nearly -- it gets you to 62% of the overall portfolio, which we think allows our investors to very rapidly get comfortable with the NAV that we've stated. And the fact that the top 10 position is 85%, we think that increases the confidence even more, which we think could be a catalyst to see that gap that we currently have of almost 35% narrow. And we think over time, we hope to actually exceed our NAV. Segments of our investments being the top allocations were to education, technology as well as cloud and Big Data companies, which comprised approximately 30% of the portfolio at fair value, excluding treasuries. Social mobile is the next largest category representing 22% of portfolio.

Our largest positions, Spotify, went public on April 3 and is up approximately 36% to date from $132 set by the New York Stock Exchange listing in advance of when the company was put forth. As of June 30, 2018, GSV Capital carries Spotify at fair value of $39.6 million. This translates approximately 18% of the portfolio, excluding secondaries. Our valuation reflects Spotify's closing share price as of June 30, which was approximately $168 per share. And obviously, the share price today is approximately $180. And CNN Money reports that Spotify's median analyst 12-month price target of $200.05 per share. And we continue to be very bullish on the fundamentals of Spotify in the long-term outlook. As we've communicated in the past, our intention is to monetize public positions at a time that will maximize shareholder value within 18 months of a portfolio -- company going public or 12 months after any relevant mark-up has expired. There are no restrictions on GSV Capital's Spotify holdings. On July 26, Spotify reported strong second quarter results, reinforcing our conviction that the company's near-term upside potential. Spotify has surpassed 180 million monthly active users and 87 million paying subscribers, up 30% and 40% year-over-year, respectively.

Revenue was up 26% year-over-year in the second quarter, which jumps to 34% after adjusting for the negative impact from changes in the foreign exchange rates. Gross margins improved 26%, which is the high end of Spotify's guidance. For context, Netflix operates approximately 35% gross margins and we believe Spotify's continued improvement in this area will be a catalyst of stock, which we think is the key thing for investors to focus on and we're very confident about the direction in the intermediate to long-term. We'll continue to closely track Spotify's performance as we speak -- as we seek to optimize our position at a time that will maximize returns for GSV Capital shareholders.

On a similar note, Dropbox, our third largest position, is set to report earnings on August 9. As of June 30, 2018, GSV Capital carried Dropbox at a fair value of $25.5 million, which represents approximately 12% of the portfolio. As with Spotify, our current valuation reflects Dropbox sharing -- closing sharing price as of June 30, which was approximately $32, discounted modestly for a lock out period that expires on September 19. Yesterday, the company shared at its close an approximately [$32] and CNN reports that the Dropbox median analyst 12-month price target is $35. Our expectation is for Dropbox Q2 earnings report will continue to demonstrate strong operating and growth fundamentals. On May 10, the company announced the first quarter revenue was up 28% year-over-year in the paying customers and surpassed [11.5 million], up 24% versus the same period in 2017.

Average revenue per paying user stood at approximately $114 compared to $111 a year earlier. Now both Spotify and Dropbox represent businesses that we view as very attractive from an investment opportunity standpoint. We love and we're focused on consumer-oriented businesses that have reoccurring revenue and high sales rates, low churn with the fact that businesses that are reoccurring, were basically customers are addicted that don't cause cancer, we think that very attractive characteristics and we think that both Dropbox and SharesPost represent those type of businesses. Beyond Dropbox and Spotify, we're pleased to report noteworthy developments from Lyft, Coursera and Greenbox Learning. On June 27, Lyft completed $600 million financing booked by Fidelity that valued the company at $15.1 billion. The round builds on the -- Lyft's strong momentum in 2018, headlined by a March 12 announcement that the company completed its 20th consecutive quarter with year-over-year revenue growth above 100%. On June -- excuse me, on July 2, Lyft announced that it acquired Motivate, the largest bike share operator in North America as part of its plan to provide a broader range of last mile transportation services.

The company has also indicated that it will launch an electric scooter service in the near future. Again, we see Lyft as a tremendous growth business that has month over month gaining share over Uber its nearest competitor but creating a brand that people don't want to support and embrace. Coursera, our fourth largest position announced in July that it was partnering with the University of Pennsylvania to launch its first accredited online Ivy League degree. The company will offer a massive program in computer and information technology at a price point of $26,000, a disruptive value proposition that checks in less than a third of U Penn's on-campus program. Today, Coursera reaches over 33 million learners with 2,700 courses from 150 premiere global universities. It also serves over 900 enterprise customers, targeting a segmented $300 billion global corporate learning market. With developments like the U Penn online degree, we believe Coursera is continuing to position itself as the world's leading learning platform. And we think that is incredibly exciting for GSV Capital shareholders.

Finally, Greenbox Learning announced on July 31 that it received a $130 million investment from TPG that will enable GSV Capital to monetize its position. The company is part of this transaction. We established our position in Greenbox learning in 2011, where we invested alongside of Reed Hastings, who is the CEO Netflix and John Doerr of Kleiner Perkins. And based on the terms of the deal, we expect to actually -- to exit -- to generate approximately $5.7 million in proceeds. This would translate to a net realized gain of $3.4 million for GSV Capital and an IRR approximately 18%. And we couldn't be more thrilled for the Greenbox team, which serves over 3 million students with primary adaptive learning platform. TPG's investment will enable the company to significantly accelerate the product development and scale.

Looking ahead, we believe GSV Capital is well positioned to deliver long-term shareholder value. We are executing against a differentiated discipline growth strategy. We are actively working on scaling various initiatives while we stated an objective of investing in late-stage permanent -- preeminent private technology companies. The fundamentals of the portfolio are strong and the IPO environment continues to show signs of strength which has historically been a great catalyst for our stock. Thanks for your attention and with that.

I'll turn over to Allison. Allison?

Thank you, Michael. I'd like to follow Michael's update with a more detailed financial overview of our results as well as an update on our share repurchase program, our expense reduction initiatives and our current liquidity position. We are pleased to report that we ended the quarter with an NAV per share of $10.46. A breakdown of the change in NAV during the quarter is shown on Slide 9, which is consistent with our financial reporting. In sum, the $0.47 per share increase in NAV during the second quarter is driven by $0.52 per share of net unrealized appreciation of investment, inclusive of related tax benefit; $0.16 per share of net realized gain on investment; and $0.05 per share of net accretion from our share repurchase program. These increases are partially offset by a $0.26 per share of net investment for operating loss.

Our management team continues to be focused on optimizing the company's current expense base and we have implemented a number of key expense reduction initiatives that we believe will benefit our shareholders, including the previously announced permanent reduction in the management fee to 1.75% and GSV asset management's wavier in February 2018 of $5 million in accrued but unpaid incentive fees. Due to the upcoming maturity of our 5.25% convertible debt, GSV Capital is currently carrying a larger cash balance than it would in the ordinary course of business. GSV Asset Management will continue to waive its base management fee on any cash balances until the convertible senior notes due on September 15, 2018 mature. In addition to the management fee and incentive fee waivers, we continue to focus on reducing our expenses. Our expenses related to costs under the administration agreement declined about 12% compared to the second quarter in 2017. This follows a 26% reduction for the year in 2017 and a 5% reduction for the year in 2016. We will remain diligent about managing our expense base moving forward.

In the second quarter, the company repurchased 315,625 shares of GSV Capital common stock under the share repurchase program for approximately $2.2 million or a net average share price of $6.87. Subsequent to quarter end through today, an additional 230,623 shares were repurchased for approximately $1.6 million or a net average share price of $7. Recent share repurchase activities leaves us with approximately $5 million authorized for future share repurchases under the program.

Finally, a brief comment on liquidity and our convertible notes. We ended the second quarter with about $158.6 million of liquid assets, including $93.5 million of cash on the balance sheet and $65.1 million of marketable securities, $25.5 million of which is subject to sales restriction. In addition to the cash and marketable securities, we also have $12 million available to us under the undrawn credit facility. As a reminder, we have approximately $50 million of our convertible notes maturing on September 15 of this year, for which cash will be used to satisfy those obligations. Despite the pending maturity of these notes, we believe we have ample cash to make opportunistic investments in the next generation of leading VC-backed growth companies. That concludes my comments, we would like to thank you for your interest and support of GSV Capital.

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

[Operator Instruction] Our first question comes from [Robert Bloom] who is a private investor.

I'm wondering if it's possible for shares to be distributed to shareholders of GSVC, if they would opt to receive shares instead of having them sold outright.

Robert, I'm not sure if I completely understand the question. Is the question, if and when we have a dividend that you receive shares as opposed to cash? Is that the question?

(Operator Instructions)

And also if you decide to, for example, liquidate your remaining Spotify shares, if shareholders of GS (sic) [GSV] Capital could opt to receive the shares themselves.

Okay. So thanks for the question, Robert. As it relates to the kind of the specific distribution as -- in companies that we monetize, such as Spotify, we monetize that position. No, we can't distribute shares in Spotify specifically, but when we have a distribution for the gains that we have, we can have done it in cash and in GSV Capital shares and the mechanics of that are something that -- we work through and historically what we did is give people options. Now I don't know if there's any -- Allison or [Buck Klein,] if you are on the phone, if you have anything to add to that.

(Operator Instructions) There are currently no questions in the queue.

Okay, great. Well listen, we're obviously very pleased with the quarter's results. We're very confident in terms of the strategies that we've articulated and what we are executing against. And we look forward to having an opportunity between now and the next quarter to talk to anybody that would like to engage with questions that we have or suggestions but again, we're very bullish on what's going on at GSV Capital. So thank you very much for tuning in for this quarter and we look forward to talking you in the future. Thank you. Bye.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.