Q4 2019 Earnings Call
Good morning, and welcome to safeguard Scientifics fourth quarter 2019 financial results Conference call. Please note. This event is being recorded I would now like to turn the conference over to John Shades Safeguard Investor Relations. Please go ahead.
Good morning, and thank you for joining us for this update on safeguard scientifics fourth quarter 2019 financial results joining me on today's call and webcast start Brian Cisco safeguards, President CEO and Mark Herndon, safeguard senior Vice President and CFO.
During today's call, Brian will provide a corporate and strategic update review recent highlights and Mark will discuss our results afterwards, we'll open up the call to your questions.
As always today's presentation includes forward looking statements and those statements are subject to risks and uncertainties the risks and uncertainties that could cause actual results to differ materially include among others, our ability to make good decisions about the monetization of our ownership interest for maximum value or at all.
Oh, and the returned value to our shareholders the ongoing support of our existing ownership interest. The fact that our ownership interest may vary from period to period.
I wonder is to achieving liquidity from our ownership interest.
Actual patients in the market prices of any publicly traded ownership interest competition, our ability to attract and retain qualified employees market valuations in sectors with which our ownership interests operate our inability to control our ownership interests or need to manage our assets to avoid.
Registration under the investment active 1940 and risks associated with our ownership interest, including the fact that most of our ownership interest have a limited history and a history of operating losses face intense competition and may never be profitable the effect of economic conditions in the business.
Sectors in which safe guards ownership interests operate in other uncertainties described in our FCC filings.
Many of these factors are beyond the company's ability to bring to predict or control as a result of these and other factors that the company's past financial performance should not be relied on as an indication of future performance.
During the course of today's call words, such as expect anticipate believe and intend will be used in our discussions of goals or events in the future.
Management cannot provide any assurance that future results will be as described in our forward looking statements. We encourage you to read safeguards filings with the FCC, including our form 10, 10-K, which describes in detail the risks and uncertainties associated with managing our business. The company does not assume and.
Turning to update any forward looking statements made today with that here as Brian. Thanks, John Good morning, and thank you for joining us.
We continue to do in 2019, what we started to pursue early in 2018.
As we head into 2020, you want to thank you for your support we continue to diligently pursuing our goals to prudently managed and support our portfolio of private company ownership interests.
To maximize the value of our interests and to monetize and return the value of the portfolio to you in the most efficient manner possible.
Today, we want to reiterate our focus and convey to you the strong belief we have regarding current.
And the anticipated exit values of our remaining portfolio of companies.
We believe 2019 was a year full of important milestones that we would like to revisit as we look forward to the opportunities in front of us.
The most significant milestone in 2019 was the return of capital dividend that we paid in December.
That dividend was made possible by the successful completion of the first stage of our return of capital strategy.
[laughter] accomplishing a series of successful exits, including propeller and Transactis earlier in 2019, and the repayment of our 80 $85 million and debt.
Six major exit transactions that weve executed since the beginning of 2018 have allowed us to not only repay our debt, but also to continue to support our portfolio as an where appropriate as it has grown and mature.
In aggregate to date, we've returned over $187 million to our balance sheet, including over $104 million in 2019.
Exit.
Transactions since we began our new strategic direction in 2018.
The disciplined approach to managing our portfolio and realizing exit proceeds has not only resulted in safeguard being debt free and initiating our return of value transactions.
But also provided us with $25 million of cash today that is sufficient to fund our scale down operations and expected deployments.
Most importantly, safeguard continues to hold a valuable portfolio of ownership interest.
Representing approximately $230 million of the have deployed capital in 15 Tech enabled companies and our other ownership interests.
Our companies as a whole are growing and are being positioned for exits.
Six of our companies have run rates of between 5 million and $10 million of annual revenue. Another six have run rates of over $10 million and the average growth rate of the non digital media companies is 54%.
As with all growth stage portfolio is there remain challenges in obstacles that we will need to overcome before exits occur, but we are encouraged by our group of entrepreneurial companies.
On the progress they are each making towards their strategic goals.
Safeguards returning value to shareholders plan going forward continues to be straightforward.
Whenever we have cash and cash equivalents exceeding our minimum required capital currently 25 million, we will evaluate a return of value to our shareholders in the most efficient manner in the form of either share repurchases and our dividends.
We're also continually evaluating different opportunities to exit partner companies either through sale through thus sale of entire companies sale about the S&P Stakes recapitalization and other methods.
To preserve cash and in a continuing effort to downsize all facets of our cost structure and a further align interest with our shareholders. Our board will be reduced from six to four directors as our 2020 annual meeting.
And director compensation is now being paid entirely in safeguard equity.
While we are pleased with what we've accomplished over the last two years.
We realized that there was much work left to be done and significant value yet to be realized for our shareholders.
We remain committed to being good stewards of safeguards assets and continuing our pursuit of additional exit transactions that will monetize our ownership interests and return value to shareholders.
We continue the pursuit of individual company exits, while considering all alternatives as circumstances dictate.
Including the sale of individual partner company interests in secondary market transactions, the sale of entire companies or a combination thereof.
We will also continue to consider fund financing transactions, which could expedite the return value to our shareholders.
We are constantly dialoguing with our partner companies.
Other investors and board members of those companies concerning exit opportunities.
A significant number our companies have active banker relationships in place to assist in those discussions.
We remain bullish regarding our portfolio of companies and we continue to believe that the current value of our ownership interests.
And our cash and cash equivalent significantly exceed our current share price.
We've accomplished a lot under our new strategy, including streamlining our internal operations to reduce costs.
Repaying our debt and moving forward with strategic transactions involving our companies that have returned significant capital back to safeguard.
Which has also allowed us to retire our debt and implement our return of capital program.
We're pleased with what we've accomplished but much work is left to be done.
We continue to work with our other companies on potential exits and we hope to have more news to share in the coming months.
We believe that our companies will continue to mature and attract strategic and financial buyer attention as we continue to explore the exit alternatives we referenced above.
Now, let me turn the call over to Mark for review of the quarters and the years financial results.
Sure Brian for the year ended December 31st 2019, safeguards net income was 54.6 million or $2.64 per share as compared with a net loss of 15.6 million or 76 cents per share for the same period in 2018.
Our fourth quarter resulted in a net loss of <unk> point $7 billion or three cents per share as compared with a net loss at 16.6 million or 81 cents per share for the same quarter in 2018.
Two larger elements impacting the financial results and our financial position for the fourth quarter included the continued downward trajectory or general and administrative costs as compared to prior periods and of course, the one dollar per share return of capital dividend.
I will speak to those further later in the call. Let me first comment on our liquidity position.
Hey, current cash cash equivalents restricted cash and securities at December 31, 2019.
$25 million and we have no debt obligations.
As we've discussed on prior calls this is the initial targeted level of minimum capital we have determined necessary in order to fund follow on deployments to support our existing ownership interest and to fund our scaled down corporate structure for multiple years.
We are eager to continue our process of returning value to shareholders as soon as we have additional cash to do so.
As we've also had previously discussed at the board declared a $1 per share special dividend that was paid on December thirtyth.
Our year end results have confirmed our previous analysis that.
Our cumulative and year to date, our infer earnings and profits allow this dividend to be characterized as a return of capital for federal tax purposes.
Now moving back to our results of operations for the 2019 year, which include the previously disclosed successes such as at 35.1 million dollar gain from the exit of propeller and $50.7 million gain related to the exit from Transactis.
In addition, we have recorded aggregate gains 4.3 million for additional amounts received for Holdbacks and spares related to other prior transactions, including 2.6 million of which.
Occurred in the fourth quarter of 2019.
Our 2019 results also included the impairment we disclosed in the second quarter, a $3 million with respect to our interest in novus them.
Our general and administrative expenses were $2.1 million and $10 million for the three months and year ended December 30, Onest 2019, respectively.
Both of the compared favorably to the comparable prior year period, and we are the results of our scale down level staffing.
The decrease relative to the prior years, primarily due to a decrease in employee compensation from the lower lower overall level of staffing the absence of 3.8 million in severance charges and lower professional fees.
For the fourth quarter, corporate expenses, which represent general and administrative expenses, excluding depreciation stock based compensation severance and retirement costs and other nonrecurring or other items.
Were $1.4 million compared with $1.9 million in the fourth quarter of 2018.
For the year ended December 30, Onest 2019, those same expenses were 7.1 million as compared to 9.9 million in 2008.
The quarter to quarter production as a result of lower office costs, resulting from the relocation to the smaller office space lower compensation costs, lower professional fees and the reflection of director fees as a stock based compensation item.
The annual reductions similarly reflect the net benefit from our office move to lower cost facilities, lower overall compensation costs, lower professional fees and lower cash director fees during 2019 as well as the shift to equity based compensation that impacted the fourth quarter's results.
Note that we have also began to include the quarterly and year to date impact of accruals related to our LT program as an other item within the reconciliation to general administrative costs.
We view that program as transactional cash costs, rather than a measure of regularly regular quarterly spending.
Overall, we believe these results reflect the ongoing benefit from a significant cost reduction activities throughout 2018, and 2019 for our shareholders. We will continue to look for ways to continue to continued cost reductions where possible.
Our quarterly results also included 2.2 million of other income that was primarily the result of the removal of the estimates of our liability under the previous commitments to our former CEO Mr. Master who passed away in late 2019.
Other income for the 2019 annual period also included previously disclosed noncash gain from the credit derivative of 5.1 million and 4.5 million observable price changes from a variety of our ownership interest.
I should also note that our annual results included interest expense of $14 million related to the credit facility that was repaid in July 2019.
We do not expect incur any interest expense during 2020.
We also benefited from during 2019 from the recognition of $2 million of interest income from our cash marketable securities and convertible loans.
This income was primarily the result as short term securities held during the first half of 2019 and earning from a money market account.
We expect this income the decline in 2020 due to lower our lower overall level of investable assets and due to the low interest rate environment.
As a reminder, our priority related to our cash and marketable securities assets is focused on capital preservation and liquidity.
With respect to our ownership interest at December 30, Onest 2019, we have a carrying value of $77.1 million, which is a reduction from 2018, primarily from exits impairments and the application of equity method accounting.
During the fourth quarter, we limited deployments to 2.2 million to three existing companies.
Bring in 2019 follow on funding to $16.7 million.
We expect that we will make additional deployment in 2020. So we can continue to support our ownership interest but in the aggregate, we expect those deployments to be between five and $10 million.
Our share of the losses of our equity method ownership interest for the three months ended December 30, Onest 2019.
With $4.2 million as compared to 8.9 million for the comparable period in 2018.
The decrease is the result of less companies being accounted for under the equity method due to exits impairments or changes in the basis of accounting.
As well as lower losses net from our equity method ownership interest.
Similarly for the annual 2019 period, we experienced a reduction of 20.6 million related to our losses from our share of the losses as our equity method companies.
We're also pleased with a number of our company to reduce their operating losses, which contributes to these improvements in our results.
We believe this as an illustration of the health of our overall group of ownership interests.
Aggregate annual revenue for 2019 of safeguards 15 remaining ownership interest, which we have previously referred to as partner company was $357 million.
Aggregate revenue for the same company was 330 million for 2018, representing a growth of 8%.
The group.
We have continued to see slower growth in the digital media category, excluding those digital media companies you aggregate year over year revenue of safeguards portfolio partnered companies at 41%.
Note that the revenue from other ownership interest that you may see in the summary table, including our release are excluded from this so.
Within the context of that overall performance and portfolio specific may also have noted from our press release. This morning, the number of companies within the portfolio advance to higher revenue stage in 2019.
We remain optimistic about the portfolio as Brian indicated earlier in the call.
Also with respect to our aggregated revenue disclosures, we will no longer provide estimates of the projected revenue amounts.
We believe that by highlighting our ownership interests that are progressing through each of the revenue stages that we have defined provides investors with better indications of the relative size and growth across our ownership interest also this allows us to retain an appropriate level of confidentiality with respect to individual companies as the portfolio continues to get smaller.
Now here's Brian to lead us through the Q Nice segment of the call. Thanks, Mark operator lets open the phone for a few questions. Please.
At this time I would like to advise everyone in order to ask your question. Please press Star then the number one on your telephone keypad. Our first question comes from the line of Bob Labick CJS Securities. Please go ahead. Your line is open.
Hey, Bob Hi, Good morning, and good morning, it's Pete the gets again for Bob.
Just a quick question sounds like everything is.
Proceeding along according to schedule just had a question something you've touched on other calls before in regard to return of capital.
In terms of looking at dividends per share buybacks. If you could just kind of touch on again, how you look at share buybacks. I know previously you had mentioned issues with liquidity and blackout periods.
Kind of hampering that a bit and then in terms of the dividend.
Would you still expect any dividend if there was one to once again be classified as a return to capital.
As you're looking at it now.
So to answer the easier question first that the.
Our ability to to do return of capital dividend is so highly dependent upon where we are at a particular point in time, it's will always be looking at it.
And they are certainly we would hope the opportunities to do that but it's virtually impossible for us to answer that now at the at the end game.
You know some different rules apply but as we proceed through.
Individual exits, it's very difficult to predict what what might be the arctic possibility on that front.
Regarding buybacks.
However, we have capital we will.
Always consider.
If our view of intrinsic value differs from the what what prices are prevailing in the market.
Use that as a risk as a return of capital mechanism.
From that from a legal standpoint, we will often have to deal with the issues that.
Result from material nonpublic information kind of.
Restrictions that olefin will apply to us, but once again, that's impossible to predict until we are.
In the specific situation and have the cash in hand to to consider doing something but we'll always want to do it where the intrinsic value.
And the stock price aren't lining up.
Fair enough.
Just one for me.
As for in terms of your work with Evercore at present is there anything new that they presented to you or anything different that you're working with them on.
No.
I I don't want to.
Sound as if there's there's there's nothing new there is always new considerations in fact, they were in here speaking our board as recently as this week.
Talk about some dynamics in the marketplace and.
What's going on out there that.
To help influenced the board's view of how we're going about this.
But we continue to to use them in an advisory capacity as a safe guard mentor, they're not individually engaged with with our partner companies necessarily although that can happen from time to time as well.
So they are there a well connected I think third like.
For M&A firms in the in the country at the moment so they they have an excellent perspective on.
On all the things that impact on how we're going about exiting the portfolio.
Great. Thank you.
Our next question comes from the line of Jim Macdonald from first Analyst. Please go ahead. Your line is open.
Good morning, guys.
Could you characterize the state of your exit opportunities any anything use.
Anyway to kind of characterize that in terms of potential for 2020 and specifically.
Issues related to the softness and digital marketing how that may affect it.
Yes, well the.
Hopefully not to sound like I'm, just repeating myself in prior calls, but I am I in large part will have to that it's very unpredictable when an exit will occur we don't have anything under all Hawaii or we would.
Being in a different situation, but we have a lot of.
Companies that are progressing through that revenue stage chart that we.
Shared with everyone.
And I think thats, the best indicator of the companies that are.
Hi.
Our candidates for sooner rather than later exit some subset of our portfolio has always engaged with bankers weather and formal processes or in.
Advisory capacity kind of engagements.
We said before that the people around the table at these different companies with us.
Pardon complete alignment with our interest in considering earlier rather than later exit exits so while I can't predict anything regarding 2020 activity we certainly.
Our always pursuing activity that.
That can happen.
Quickly can happen in the millions earn can happen and long term so.
We certainly hope to two in the coming months.
Announced some further exit activity.
Throughout 2020.
And then on the digital marketing is that slow in that part of the portfolio down.
Well.
It is it as an industry or it as a sector is certainly.
A challenge.
Because of what's going on on that overall marketplace, but.
One of the things that Evercore.
Has a good insight into is that marketplace and while that.
Overall conundrum regarding that digital media space the AD Tech space.
Mike lead one to believe that.
But it would impact negatively.
Our our ability to exit some of our digital media assets. There's also a fair amount of activity going on.
Yes.
That market as well the Dave is.
The Roku Dezhou.
Transaction of 2019 now there is things there are.
Theres a lot of things going on so I don't want to say, it's going to negatively impact on our ability to exit those companies.
But it certainly is worth noting too it's not a flying high market.
Okay and.
On partner revenue I know, you're not doing that in the future but.
I think.
[music].
Brian Your prepared remarks, you said.
Excluding digital marketing was growing 54% and then in the press release at 41%.
Is that one of them for the quarter and one for the year, what's the difference there.
Yes, let me address that one so slight difference in how we talked about each of those the one number relates to the aggregate portfolio size.
Right. So all of the company's added together.
The one number and the other one related to.
The average of the growth rates of each of the individual companies.
So 55% as the is the average in the growth rate of the individual companies.
That's correct.
Okay.
And just one more for me.
So you.
You put out a little bit of money and aquatic mind and Weblinc, Tim a corridor, which suggests sort of if they're being bridged any.
Thoughts about how those moving towards a.
Funding round or or anything like that.
I'll say that your instincts are correct Jim.
And as a general matter and leave it at that.
Okay. Thank you.
This concludes our culinary session for today's call I will turn the call back to John shape for closing remarks.
Thanks, everybody for your questions in closing, let me say that we're encouraged about the future.
For.
Our safeguard shareholders.
We've got $25 million of resources and reserves to support operations no debt obligations valuable portfolio.
And a clear plan to return capital back to you as soon as we can after we experienced further monetization events, we're always working towards monetizing it monetization events.
And that will always be the case. Thank you for joining us on the call today and thank you for your continued interest and your confidence in support of safeguard.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].