SuRo Capital Corp. (SSSS) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, thank you for standing by. Welcome to the GSV Capital's third quarter 2018 earnings conference Call. [Operator Instructions] This call is being recorded today Wednesday, November 7, 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 the Chairman of GSV Capital's 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 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'd like to turn the call over to Michael Moe.

Thank you, Ben. Good afternoon, everybody. We are pleased to share results of GSV Capital's third quarter 2018. First, I'll review the recent quarter, including key initiatives that we are executing to enhance shareholder value. Then I will provide update on the key developments in the portfolio. 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. At the end of the third quarter, net asset value is $10.58 per share, up from $10.46 per share in the second quarter and up from $9.69 per share in the third quarter last year. Net asset value totaled approximately $213 million, compared to $217 million in the second quarter. We anticipate that the strong growth of our portfolio companies that have been exhibited will drive NAV in the coming months, and we're optimistic about the future of our portfolio, as we've been in recent memory. As I've emphasized to varying degrees on previous earnings calls, we are focused on three core areas to drive GSV Capital's performance and investor returns. First, we have continued to execute key initiatives to systematically enhance shareholder value. In 2017, GSV Capital's board authorized a $10 million discretionary open market share repurchase program, and in May, the board authorized a $5 million expansion of this program, to an aggregate of $15 million. To date, we have repurchased approximately $14.2 million in shares of common stock under the program, including $4.1 million in the third quarter of 2018 and an additional $1.8 million subsequent to quarter end. We've retired nearly 11% of shares outstanding since the repurchase program was announced on August 8, 2017. We are pleased to announce today that our board has authorized a $5 million expansion of the program to an aggregate of $20 million, which leaves approximately $5.8 million for repurchases under the program. The share repurchase program complements the shareholder [indiscernible] adjustments we have made in our fee structure this year. During the quarter, we've also retired our 5.25% convertible senior debt, due September 15, 2018. We've also continued to reduce the operating expenses incurred under GSV Capital's administrative agreement, which declined about 25% year-over-year in the third quarter. Later in the call, Allison Green will discuss other significant developments outside the portfolio and a few additional steps we are taking to increase overall shareholder return. Second, we've continued to increase the size per position and reduce the number of companies on our investment portfolio. Please turn to Slides 4 through 7 for a view of notable developments in GSV Capital's portfolio in the third quarter and subsequent to quarter end. At the end of the third quarter, GSV Capital had positions in 26 portfolio companies, compared with 37 a year ago and 48 three years ago. During the third quarter, GSV Capital formally exited three portfolio companies, while invest in one new portfolio company for the first time in over two years. GSV Capital's top five positions as of September 30, 2018, were Spotify, Palantir, Dropbox, Coursera, and StormWind, which accounts for approximately 63% of the portfolio at fair value, excluding treasuries. Including Lyft, our sixth largest position, they account for approximately 70% of the portfolio. For context, GSV Capital's top 10 positions at the same time last year accounted for around 68% of the portfolio. As of September 30, 2018, our top 10 positions account for 88% of the portfolio. Consistent with the goal of concentrating our portfolio in the most promising emerging growth companies, GSVC will target investing $10 million in 15 companies and $15 million investments in 10 companies, so those will become outsized commitments, with $10 million being more or less normal. While this will provide a rough outlet for our strategy, we'll continue to be opportunistic about how much capital we deploy on each investment. To put the evolution of GSV Capital's portfolio into perspective, the combined fair value of our top five positions as of September 30, 2018, was $137 million. That's almost equal to GSV Capital's total market value, which is approximately $140 million to date. We believe this dynamic emphasizes significant risk/reward opportunity for investors. With this year's public listings from Spotify and Dropbox, two of our top three positions, a second key area of focus is selectively adding new names to the portfolio. As a general rule, given the present size of our portfolio, we are targeting, as mentioned, $10 million to $15 million positions in premier late-stage growth companies with a line of sight to an IPO or a significant liquidity event. At the same time, we'll opportunistically make [indiscernible] investments where we can underwrite equally compelling returns. As alluded to earlier, we are pleased to announce our new position in Nextdoor.com. Nextdoor.com is an outstanding platform that serves 200,000 neighborhoods across seven countries. Nextdoor.com provides the local social infrastructure for neighbors to communicate in order to facilitate commerce and community activity. We believe Nextdoor.com has tremendous upside, both with the ability to expand internationally and with the opportunity to further monetize its hyper-localized user base. With this investment, we join other top-tier venture capital firms invested in Nextdoor.com, including Benchmark, Kleiner Perkins, Greylock, and Tiger Global Management. Since we purchased approximately $6.3 million of common stock in the secondary market, Nextdoor.com has announced Sarah Friar will step in as the CEO of Nextdoor. Sarah was most recently the CFO of Square, is on the board of directors of Slack and Walmart and has an exceptional reputation in the technology community. We are extremely excited about everything that Sarah brings to the table and are optimistic about the future of GSV Capital's newest portfolio company. Beyond our new investment in Nextdoor.com, we are actively sourcing and evaluating investment opportunities in top VC-backed companies that demonstrate strong growth and fundamentals. We are targeting businesses that have been shown to provide scaled valuation growth before a potential IPO or strategic exit. To frame the opportunity, according to Renaissance Capital, there were 179 IPOs year-to-date raising approximately $45 billion in proceeds. This represents a 37% increase in the number of IPOs year-over-year, and a 41% increase in proceeds year-over-year. Historically, we have participated in both primary and secondary investments. While I am increasingly confident in our ability to identify opportunities in the secondary market, our goal is simply to invest in the top growth companies in the world at a fair price. While primaries offer certain benefits, including broader information rights, our deep expertise with secondary's creates unique advantages and opportunities in terms of access, diligence, timing, and pricing. Some of our portfolio's most recognizable names, including Dropbox, Spotify, and Palantir, were secured almost entirely through secondary shares. Segmented by three investment themes, the top allocation of our investment portfolio is to education technology, which comprised approximately 29% of the portfolio at fair value excluding treasuries; cloud computing and big data was the next largest category, representing 27% of the portfolio. As we evaluate new investments, we are focused both on investing in the themes with which we have historically had success and identifying new megatrends which we believe represent compelling long-term opportunities. Our largest position, Spotify, reported positive earnings for the third quarter during their earnings call last week. Additionally, Spotify announced a $1 billion stock buyback plan earlier this week. As of September 30, 2018, GSV Capital carried Spotify at a fair value of $42.6 million, reflecting the closing price at the end of the quarter. This translates into approximately 19% of the portfolio at fair value, excluding treasuries. According to the Wall Street Journal research, Spotify's mean analyst 12-month price target is roughly $190, and its median is $200. On a similar note, Dropbox, our third largest position, is set to report earnings tomorrow, November 8. On August 23, 2018, our common shares of Dropbox became unrestricted. As of September 30, 2018, GSV Capital carried Dropbox at a fair value of $23.5 million, reflecting the closing share price at the quarter end. This translates to approximately 11% of the portfolio at fair value, excluding treasuries. According to the Wall Street research, Dropbox median analyst 12-month price target is above $35. The market value of Spotify and Dropbox have pulled back with the broader technology market since September 30. While we still have a significant [Indiscernible] investment, the movement to date translates to approximately $0.35 to $0.40 decrease in NAV. We're optimistic about [Indiscernible] for both of these companies and will remain diligent in monitoring these positions. 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 portfolio companies going public, or 12 months after any relevant lock-up has expired. Currently, there are no restrictions on GSV Capital, Spotify, or Dropbox holdings. We will continue to closely track Spotify and Dropbox's performance, as we seek to exit these positions at a time that will maximize returns for GSV Capital's shareholders. Beyond Dropbox and -- excuse me. Beyond Dropbox and Spotify, we're pleased to report noteworthy developments from Palantir, Lyft, and Coursera. First on Palantir, which is our second largest position, is reportedly in the process of hiring Morgan Stanley as their advisor for initial public offering, as reported by Bloomberg. According to the report, Palantir expects to turn a profit in 2018 and go file for an IPO in 2019 or early 2020. The Wall Street Journal has published that the investment banks have communicated a valuation for Palantir as high as $41 billion. For context, the current valuation of GSV Capital's position applies approximately $13 billion valuation of Palantir, approximately 1/3 of the reported public valuation. With 20 million shares outstanding at GSVC, if Palantir were to price in this range, it would contribute approximately $3 of accretion to NAV per share. We are optimistic that Palantir's IPO will be well received in the public markets and anticipate this will continue to be a significant key driver of our NAV moving forward. Secondly, The Wall Street Journal has also reported that Lyft hired JPMorgan to lead their public offering, which is expected in the first half of 2019. The Wall Street Journal report indicated that the public offering will apply a total valuation of Lyft of greater than $15.1 billion. This is above where GSV currently has it marked. A few days earlier, news emerged that investment banks gave IPO proposals to Uber, value them as much as $120 billion. Lyft has made several acquisitions that will allow them to grow their business. They recently acquired Motivate, the bike-sharing company that operates Citi Bike in New York, and Ford's GoBike program in San Francisco. Lyft also acquired Blue Vision Labs, a technology startup based in London, to push its driverless car plans. We remain excited about our stake in Lyft, as they continue to grow and position themselves as a leading transportation firm. Third, on 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 master's program in computer and information technology at a price point of $26,000, a disruptive value proposition that checks in at less than 1/3 of the price of UPenn's on-campus program. According to Forbes, Coursera reaches over 36 million learners, with 2,700 courses and 12 online degree programs. Coursera signs up more than 600,000 students every month. For context, this is larger than any university in the world. It also serves over 1,400 enterprise customers, targeting a fragmented $300 billion global corporate learning market. With developments like the UPenn online program, we believe Coursera is continuing to position itself as the world's leading learning platform. Looking ahead, we believe that GSV Capital is well positioned to deliver long-term shareholder value. We are executing against a disciplined growth investment strategy with strong tailwinds. We believe the fundamentals of the portfolio are very strong, and the IPO environment continues to show signs of strength, which has historically been a catalyst to our stock. Thank you for your attention, and with that, I will hand it over to Allison Green. Allison?

Thank you, Michael. I'd like to follow Michael's update with a more detailed review of our financial 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 $10.58. A breakdown of the increase in NAVs during the quarter is shown on Slide 8, which is consistent with our financial reporting. In sum, the $0.12 per share increase in NAV during the third quarter was driven by approximately $0.70 per share of net unrealized appreciation of our portfolio investments, inclusive of a related tax benefit, and $0.10 per share of net accretion from our share repurchase program. These increases are partially offset by $0.19 per share of net investment, or operating loss, and $0.49 per share of net realized loss on investments. Please refer to Slide 9 as I review the share repurchase program for the quarter. During the third quarter, the company repurchased 575,958 shares of GSV Capital common stock under the share repurchase program, for approximately $4.1 million. Subsequent to quarter end through today, an additional 259,954 shares were repurchased for approximately $1.8 million. To echo Michael's announcement earlier, our board has authorized a $5 million expansion of the current share repurchase program to an aggregate of $20 million, which leaves approximately $5.8 million for further repurchases under the program. Since inception of the share repurchase program in August 2017 to date, we have repurchased nearly 11% of the then-outstanding shares of GSV Capital common stock. We believe the share repurchase program complements the shareholder-centric adjustments we have made to our fee structure over the past year. In addition to the share repurchase program, 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 base management fee from 2% to 1.75%, and GSV Asset Management's February 2018 forfeiture of $5 million of then-accrued but unpaid incentive fees. Due to the large cash balance, we were carrying in anticipation of the maturity of our 5.25% convertible senior note, GSV Asset Management also agreed to waive its [reduced-based] management fee on the cash balance through the maturity and repayment of the note. Upon maturity of the 5.25% convertible senior note on September 15, GSV Capital repaid the remaining outstanding aggregate principal amount of these notes, including accrued but unpaid interest, or approximately $50 million. Through repayment of the note, the management fee waiver on the cash balance amounted to more than $800,000 in savings to our shareholders. In addition to the management fee waivers and incentive fee forfeiture, we continue to be focused on reducing our expenses. Our expenses related to costs under the administration agreement declined approximately 23% compared to the third quarter in 2017. This follows a 26% reduction for the year in 2017. We will remain diligent about managing our expense base moving forward. Next, I'd like to review GSV Capital's current liquidity. We ended the third quarter with about $102.6 million of liquid assets, including $36.6 million of cash on the balance sheet and $66 million of marketable securities. In addition to the cash and marketable securities, we also have $12 million available to us under our undrawn credit facility. Our cash balance of $36.6 million [indiscernible] 30, 2018 consisted primarily of proceeds from the issuance of $40 million of 4.75% convertible senior notes due in 2023 during the first quarter of 2018, as well as proceeds generated by the monetization of various portfolio positions from the fourth quarter of 2017 through the third quarter of 2018. The $66 million in marketable securities includes our unrestricted holdings in Spotify and Dropbox. As previously noted, the lack of restriction on our position in Dropbox expired on August 23. 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 Instructions] And we'll take our first question from Owen Libby with Wells Fargo.

So just really on the liquidity, the fair value of Spotify is $42.6 million and Dropbox is $23.5 million. You said that there was $66 million in liquid securities, including those two holdings, right?

Yes.

So are you going to tap the $12 million credit line to expand the buyback program, or where is that cash coming from?

No, we have, we believe, at the current time plenty of liquidity to execute against the buyback program. And frankly, we're also looking to actively -- we're actively involved with investment diligence and potential investments. So we have -- we have plenty of liquidity for the near term to do the different things, including the buyback, if we proceed.

[Operator Instructions] And there are no further questions on the line at this time. I'll return the program to Michael Moe for any closing or continued remarks.

We are very pleased with how GSV Capital is positioned going forward. We are working very hard, both in terms of sourcing and evaluating investment opportunities that we think are consistent with what will create the greatest performance, and we're working very hard to have our stock reflect what we think is going on with the portfolio, which we're very excited about. So thank you for your interest and time. We'd be pleased to hear from you for any follow-up questions, and we'll keep rolling. Thank you very much.

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.