SuRo Capital Corp. (SSSS) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GSV Capital's third-quarter 2015 earnings conference call. [Operator Instructions] This call is being recorded today, Thursday, November 5, 2015. I will now turn the conference over to Mr. Nick Franco, Vice President of Strategic Communications. Please go ahead, sir.

Thank you for joining us on today's call. I'm joined today by GSP Chairman, CEO, and Chief Investment Officer 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 Investors, Events & Presentations. Today's call is being recorded and broadcast live on our website, GSVCap.com. Replay information is included in our press release issued earlier today. This call is the property of GSV Capital Corporation, and the unauthorized reproduction of this call in any form is strictly prohibited. I'd also like to call your attention to customary disclosures in today's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance or future financial condition or results, and involve a number of risks, estimates, and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors including, but not limited to, those described from time to time in the Company's filings with the SEC. Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of GSV Capital's latest SEC filings, please visit the 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, and good afternoon. We're delighted to share the results of a strong quarter for GSV Capital, including achieving our highest per share NAV since inception for the third consecutive quarter in a row. We're also pleased to announce that our Board of Directors has declared a dividend in the amount of $2.76 per share, comprised of approximately 50% cash and 50% common stock and payable on December 31, 2015, to the Company's stockholders of record as of the close of business on November 16, 2015. To learn more, you can refer to our press release filed as an exhibit to our Form 8-K. First I'll review our portfolio as of September 30, 2015; then I'll highlight some recent developments and update you on several investments. I'll then turn it over to Chief Financial Officer, Bill Tanona, who will provide a brief financial overview, discuss our dividend distribution plans, and lastly open it up for questions. Let's start with slides 3 and 4. As of September 30, 2015, our net assets were approximately $312.5 million or $16.17 per share. This is an increase from the previous NAV per share high last quarter of $15.72, and $14.80 at December 31, 2014. A notable highlights from GSV's portfolio activity during the quarter was the sale of our total position in 2U at an average net price of $35.77 per share, recognizing approximately $37.2 million of net realized gains, which resulted in a 65.1% IRR. 2U is a leader in digital education and was GSV's second-largest position at the end of the second quarter. We also sold 375,000 shares of SugarCRM at an average net price of $5.00 per share, recognizing approximately $500,000 in realized gains, which resulted in a 17.8% IRR. We will continue to monetize our public and private positions as opportunities emerge. Please turn to slide 5. For the third quarter, our top 10 positions account for 54.7% of our total portfolio. Our three largest investments, Palantir, Dropbox, and Twitter, represented 29% of the total portfolio. Palantir, the disruptive Big Data analytics and security company, remains the largest position in our portfolio. Palantir's platform is changing the way organizations use their data and is deployed at critical government, commercial, and nonprofit institutions around the world. In October, Palantir publicly disclosed it had raised $105 million of additional capital on top of the $450 million private round disclosed in July, which valued the company at $20 billion. According to the Wall Street Journal and Fortune Magazine, Palantir's $20 billion valuation makes it the third most-valuable VC-backed private company in the United States, behind Uber and Airbnb. We are excited about Palantir's strong momentum and believe it will continue to transform the landscape of smart data. Coursera, the third – the world's fastest-growing learning platform and GSV's fourth-largest position, raised additional $61 million in Series C financing during the quarter. Investors to date include New Enterprise Associates, Kleiner Perkins, the International Finance Corporation, The Times of India, EDBI, the investment arm of Singapore's Economic Development Board. Coursera partners with top universities – over 120 universities around the world – to offer more than 1,400 courses to over 16 million students in every country that exists. With its additional funding, Coursera will accelerate its impressive global expansion strategy, particularly in Asia, where there is an insatiable demand for education and where high-quality Web-based education continues to be in high demand. Lyft, our eighth-largest position, announced several key strategic partnerships over the past few months. A deal with Didi Kuaidi, Chinese's largest ridesharing company, will enable Lyft to operate in China. Didi Kuaidi, which controls approximately 80% of the overall ridesharing market in China according to The Wall Street Journal, also invested $100 million into Lyft's latest round, alongside Chinese e-commerce and social media leaders Alibaba and Tencent. In July, Starbucks announced that it had partnered with Lyft as part of its customer loyalty program, highlighting the companies' aligned values and brand. Additional new partnerships include Hertz, where Lyft drivers are offered lower car rental rates, and Shell, where drivers can access exclusive discounts on gas. These are great wins for Lyft, and we are optimistic about the company's continued hypergrowth and expanding market share. Another noteworthy financing for our portfolio involved General Assembly. General Assembly is a global education company focused on high-demand 21st-century skills, enrolls over 14,000 students in key cities around the world. In September, General Assembly raised additional $70 million in a Series D which was led by Advance Publications and Wellington Capital Management. To date, it's raised $110 million from investors including institutional venture partners Maveron and Yuri Milner. Looking at the IPO market year to date, the key takeaway with the 133 IPOs to date is really what has happened is a reversion back to the IPO market that we've seen for much of the past decade-plus, which is a slower number of new issues than the volume of private companies. But it shows that there is investor cautiousness as it relates to new issues. I think when you look at even more recently, 133 IPOs, that activity has slowed down somewhat, with pricing being weaker after market activities not being as strong. But if you look at the overall market, NASDAQ specifically in October, where NASDAQ was up nearly 10%, that is evidence that you have interest in the technology world. And traditionally the IPO market lags the overall market by 4 to 6 weeks, so we wouldn't be surprised if we saw a pickup in IPO activity going into the end of the year. Next, turn to slide 6 where we'll break out our portfolio mix across growth themes at September 30. Of the five key investment themes we've identified, cloud computing and Big Data is our largest commitment, representing 35.6% of the total portfolio. Education technology represents 29% of the total portfolio; social mobile represents 16.5%; marketplaces is 12.3%; and sustainability is 6.6% of the total portfolio. Next please turn to slides 7 through 10 for highlights on our recent investment activity. In the third quarter, GSV invested approximately $6.6 million, including a $4 million follow-on investment in Enjoy Technology as part of the company's $50 million Series B financing in July. Joining the round were Highland Capital Partners, Kleiner Perkins, Andreessen Horowitz, and Oak Investment Partners. Enjoy is a mobile e-commerce company led by Ron Johnson, the former head of Apple Retail Stores. It is effectively Uber meets the Genius Bar, bringing that kind of customized service to your home or to your office. The Company has launched operations in San Francisco Bay area and New York City and has raised approximately $80 million to date. We're quite excited about our investment in Enjoy. In August, we made a new $1.0 million investment in Aspiration, a next-generation financial services platform where you name your own fee. Highlighted by Entrepreneur magazine as one of America's 100 most brilliant companies, 90% of Aspiration's investment customers actually elect to pay the company under this structure, and the actual fee received is more than the suggested amount on average. We are thrilled to back this disruptive proconsumer model, and we were joined in the company's $15.5 million Series A financing by Chinese social networking leader Renren and Capricorn Investment Group. Additional investors are prominent finance and technology leaders including David Bonderman from TPG, Gordy Crawford from Capital Group, Joe Lonsdale from Formation 8, Steve Rattner, and Dan Rosensweig. In September, we made a $1 million follow-on investment in GSVlabs, a global innovation center connecting Silicon Valley to the world and the world to Silicon Valley. GSVlabs accelerates high-growth, high-impact startups across key verticals including education technology, sustainability, Big Data, mobile, and gaming. It houses over 150 startups, providing a broad range of support services and networking opportunities with over 130 mentors, advisers, and corporate partners. Last month, GSVlabs hosted the inaugural Pioneer Summit, which intends to be an annual gathering of leaders from the global innovation economy. It convened over 1,200 entrepreneurs, investors, and CEOs, including visionaries who have shaped companies such as Apple, Evernote, and Twitter. The event also featured the induction of the first class into the Global Silicon Valley Hall of Fame, a group that included Intuit Chairman and former Apple Board member Bill Campbell; Larry Sonsini, the founder and Chairman of the preeminent Silicon Valley law firm Wilson Sonsini; Dick Kramlich, the founder of NEA; VMware founder and Google Board member Diane Greene; and Mike Homer, the former Apple and Netscape executive, who was honored posthumously. We believe events such as the Pioneer Summit provides us better access to leading entrepreneurs and value to our portfolio companies. And as it relates to GSVlabs, GSV Capital owns approximately 70% of that Company. Our last investment in the quarter was in GSV Sustainability Partners, where we made a $600,000 follow-on investment in September. We made an additional $1.2 million aggregate follow-on investment in October and November. What has happened in solar in terms of alternative financing is now happening in other sustainable areas. GSV Sustainability Partners is a transformative finance company that leverages the rapid global adoption of proven sustainable products, thereby delivering meaningful customer savings through a more effective use of energy, water, and waste. It is led by former Kleiner Perkins partner John Denniston and industry veteran, Tom Cain. GSV's overall portfolio continues to exhibit strong fundamentals. We estimate the average year-over-year portfolio revenue growth in 2015 to be over 100% year-over-year, consistent with the strong revenue growth that we've seen in previous years 2013 and 2014. To conclude, I'd like to share some brief context about two recent GSV publications that may be of interest. Please turn to slide 11. Research is the foundation of our investment process. With that in mind, we recently released 2020 Vision, a History of the Future, GSV's seventh in a series of white papers focused on the future of human capital and education innovation. It provides in-depth analysis around transformational ideas, models, organizations, and companies including over 100 case studies and profiles. To download this white paper or order copies, go to GSV.com/2020-vision. Another publication that we recently published and we're excited about and excited to share is called the Global Silicon Valley Handbook, both a factual but also tongue-in-cheek guide to what you need to know and thrive in the startup scene, not only in Silicon Valley but the emerging Global Silicon Valley. What's exciting to us is the magic that has made Silicon Valley the epicenter of innovation and entrepreneurism has gone global and it's gone viral. The Global Silicon Valley Handbook maps out what you need to know in the hottest markets, not only Silicon Valley, but from Austin to Boston, from Chicago to Sao Paulo, to Mumbai to Shanghai to Dubai. The goal with the Global Silicon Valley Handbook is really to map out the attractive areas of opportunity to invest, and for GSV to be known to top entrepreneurs around the world. If you have an interest in seeing this, please visit GSV.com/handbook to order your copy of the handbook or to download it. Again, we are extremely excited by what's going on at GSV Capital in terms of the strength of our portfolio, being able to announce this $2.76 distribution, and with the prospects that we see in the marketplace that are really tremendous, we believe, for the benefit of our shareholders. With that I'm going to turn it over to our CFO, Bill Tanona. Bill?

Thank you, Michael. Today I will be providing you with a brief financial overview, an update on our current liquidity position, and an update on our dividend distribution plans. Now, would you please turn to slide 12 for the financials as of September 30, 2015? As Michael previously mentioned, our NAV per share increased by $0.45 or 2.9% quarter-over-quarter to a record high of $16.17 per share. As you can see in slide 12, a breakdown of the increase in NAV is shown that is consistent with our financial reporting. In sum, the increase was driven by $0.27 per share of combined net realized gains and unrealized losses; $0.50 per share of a net tax benefit; with these items partially offset by $0.32 per share of net operating expenses. As a result of our change in tax status to a RIC from a C Corporation, we reversed the accrued benefits and provisions for taxes from previous periods, which resulted in a provision for taxes on net investment loss, a benefit for taxes on net realized gains, and a provision for taxes on unrealized depreciation of investments for the quarter ended September 30, 2015, all of which is depicted on slide 12. Our liquid assets ended the quarter at approximately $105.2 million, consisting of: $56.8 million of cash; $18 million of unused borrowings under our credit facility; and $30.3 million of public securities not subject to lockup agreements, of which approximately $200,000 are subject to periodic sales restrictions. Of our cash balance, slightly over $26 million is earmarked for our recently announced cash distribution. Now turn to slide 13 for an update on our RIC status and dividend distribution plans. As previously announced we have elected to be treated as a RIC under subchapter M of the Internal Revenue Code for the US federal income tax purposes for our 2014 taxable year, and we intend to maintain our RIC status for the 2015 taxable year. On November 4, 2015, our Board of Directors declared a distribution on the outstanding shares of our common stock in the amount of $2.76 per share, payable on December 31, 2015, to our shareholders of record as of the close of business on November 16, 2015. The dividend will be paid in cash or shares of the Company common stock at the election of shareholders, although the total amount of cash to be distributed to all stockholders will be limited to approximately 50% of the total dividend amount to be paid to all stockholders – provided, however, that in no event will we distribute less than 20% of the total dividend amount in cash. The remainder of the dividend, approximately 50%, will be paid in the form of shares of the Company's common stock. We believe that distributing a dividend of 50% cash and 50% stock best aligns short-term, intermediate, and long-term objectives of our stockholders. In this manner, no stockholder is disadvantaged by lack of participation, and stockholders can either choose to keep or sell the new shares. Furthermore, this also provides GSV Capital with the liquidity that we need to participate in strong opportunities that provide the best access to leading private companies for our investors. We appreciate our stockholders' support in GSV Capital. It is our ongoing priority to add value and services to our stockholders. That concludes my comments, and we'd like to thank you for your interest. Now I'll turn the call back over to the operator to start the Q&A session.

[Operator Instructions] We’ll go ahead and take our first question from Andy Ellner with JMP Securities.

Good afternoon and thank you for taking my questions. I wanted to start off by congratulating you guys on recently receiving RIC and for declaring your first dividend. As the largest holding in your portfolio, can you walk us through the thought process of monetizing portions of your investment in Palantir to provide further distributions to shareholders?

Sure. Palantir has been a great portfolio holding of ours for a long time, and we have taken the opportunity of both the increased value that Palantir shares have been given by investors and the fact that Palantir has some liquidity in the private market to monetize those positions periodically. We're very, very bullish on the outlook for Palantir as a company. We would expect that if the value of the shares appreciate we'll continue to look to monetize the position, just as good portfolio management. So, 15% of the portfolio today – just over 15% of the portfolio today is in Palantir. We'd look at that as a full position and, again, I think what we'd be looking to do if in fact the share price continues to rise, we'll look forward to monetizing those positions at attractive returns for our shareholders.

Thank you. And we will go ahead and take our next question. [Operator Instructions] And we will go ahead and take our next question from Jon Hickman with Ladenburg Thalmann. Please go ahead your line is open.

Hi, Michael, could you – are there other investors in GSVlabs besides you guys?

Yes. The only other material investor is Red Eagle Ventures, which is Dave Pottruck, who is the former CEO of Charles Schwab and Company. I think the – I don't know; I'll give you a little more background on GSVlabs. Unusual for our general strategy with GSV Capital, GSVlabs was a startup. The objective really is to get it to a place that we think it can bring in attractive partners to not only grow it in Silicon Valley but really to grow around the world. We've found there is a significant amount of interest in GSVlabs in different markets, and so we'd expect over the next 12 months with GSVlabs you will see a couple things. One, I think you'll see us bring in additional outside investors; and secondly, I think you'll see GSVlabs go beyond Silicon Valley.

Thank you. [Operator Instructions] And we will go ahead and take a follow-up question from Andy Ellner with JMP Securities. Please go ahead. Your line is open.

Thanks. I'd like to get your thoughts on the outlook for the education sector, as the for-profit sector continues to have issues. Where does the ed tech fit into your views for the allocation of new capital among your growth themes?

Sure. I think what you alluded to is, if you look at in the public markets, it's predominantly made up of post-secondary [indiscernible] college institutions like University of Phoenix, Apollo Group, or DeVry. Because of increased regulatory pressures and so forth that's been a challenged group over the last five, six years. That's not an area that we have an interest in. What we're really looking at in terms of opportunity is the education technology area. Really what gets us most excited is companies that are delivering significant what we call return on education, significant educational outcomes, but are able to get rapid scale. Which – education everybody appreciates is a large industry, second largest to healthcare. But historically it hasn't brought opportunities where you could see the kind of hypergrowth and scale that you see maybe in other industries. With 3 billion people on the Internet, 2 billion smartphones, you're now starting to see models where you're seeing what I call these weapons of mass instruction: companies that are able to go from idea to reaching millions and tens of millions of people very quickly. One of those companies we referenced on this call, Coursera, has 16 million students on its platform. It's not degree focused; it's certificate focused. It's basically people learning to get the knowledge or skills to give them the next opportunity. That company is growing very, very quickly; and again it doesn't have the issues with regulation that the for-profit degree-oriented companies have. So that's an example of that. So in terms of our outlook or our allocation to this space, we obviously just monetized our entire position in 2U with attractive returns. We do think there's going to be some huge important companies that are created there. We're also careful, as we see great opportunities in other sectors, to make sure that we are balanced in terms of the investments that we're making. So, education technology today is our second-largest sector behind Big Data and cloud computing. If we see opportunities that we think are attractive there, we could start a new position. But I think we're comfortable that we have great representation where we're at. And as we look at priorities today, as we speak, our top priorities in terms of new investments are probably not in that space.

Thank you. That does conclude our question-and-answer session for the day. I will now hand it back over to our speakers for any additional or closing remarks.

Yes, the only closing remarks I have is again we very much appreciate your interest in GSV Capital. We think we're making tremendous amount of progress here. We're very pleased with how the portfolio is doing overall in terms of fundamentals. We think that – we know that enterprise value drives – or growth drives enterprise value, and we think ultimately that will be reflected in our share price. So we're going to continue to focus very hard to create great investment returns, which we think will have a great positive impact on our stock. We'll continue to look forward to questions that you have and ways that we can provide better insight into what we're doing here. So we look forward to our next-quarter call to talk with you all, but we also hope we have an opportunity between now and then to have some interaction. Thank you again, and we'll keep it rolling. Thanks.