GSV Capital Corp. (NASDAQ:GSVC)
Q1 2013 Earnings Conference Call
May 8, 201317:00 pm ET
Tricia Ross - Financial Profiles, Inc.
Michael Moe - Founder & CEO
Steve Bard - CFO
Dave Crowder - EVP
Louis Margolis - Select Advisors
Casey Alexander - Gilford Securities
Ladies and gentlemen, thank you for standing by. And welcome to the GSV Capital Q1 2013 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today May 8, 2013.
I’d now like to turn the conference over to Tricia Ross with Financial Profiles. Please go ahead.
Thank you for joining us on today's call. I'm joined today by Michael Moe, GSV's Founder and CEO; Steve Bard, the company's Chief Financial Officer; and Dave Crowder, EVP.
Please note that a slide presentation that correspondence to today’s prepared remarks by management available on the company’s website at www.gsvcap.com, under investors events and presentations.
Today's call is being recorded and webcast on gsvcap.com. Replay information is included in our press release that was issued today. This call is a property of GSV Capital Corp. and the unauthorized rebroadcast of this call in any form is strictly prohibited.
I'd also like to call your attention to the customary disclosure in our press release today 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, condition, or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements, as a result of a number of factors, including 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.
Now, I’d like to turn the call over to Michael Moe. Michael?
Thanks Tricia and good afternoon. I’m going to begin today with a review of our portfolio as of March 31, 2013. I will make some comments about some of the key developments of the quarter. Then I’m going to highlight some of the highest conviction areas of portfolio to talk about how value is being created at these companies. Then, we will turn over to Steve Bard, who will provide a brief financial review and then we will turn it over to questions.
As Tricia mentioned, new to this quarter we prepared a slide presentation to go on with our prepared remarks which is available on our website. So let’s start on slide 3.
First of all, just in terms of the state of play in terms of how we are focused and what we see is the opportunity, there is dramatic growth in value creation that’s taking place among private companies today and GSV’s value proposition creates access to many of the world’s most dynamic fastest growing venture backed companies, what we call the stars of tomorrow.
We think this is a very compelling value proportion and with a healthy activity we see in the tail market lately, we think there is a number of portfolio companies that are the size, scale and growth rate that will allow them to access the public markets, if they so choose. Just a few stats on the IPO market to put some meat on the bones.
In terms of year-to-date, IPOs has been 41 IPOs and 12 of those 41 have been VC backed more importantly the average first day pop 17% and the aftermarket performance is 19%. 29% of all IPOs have priced above the range year-to-date 46 within the range and 24% below the range. Pricing has even been stronger on average for the VC backed private companies with 42% of those companies pricing above the range. That’s relevant is when companies and VCs are looking and taking the company into the public market, they are seen with the overall health of the market and when companies are pricing well, a normal IPO market, by the way we said normal IPO market in a decade, but a normal IPO market, you basically would expect 20% or so the IPOs pricing above the range 20% below in the first pop of 10% to 15%.
So, the fact that we are seeing better numbers in that is very constructive as is the fact that NASDAQ on the first four months is up over 13%. All that is great encouragement to have companies go out in the market. And one thing obviously with the quiet filings, we are not going to see that until we are actually on the road, but we do know both anecdotally as well as specifically that we are in good shape as it relates to activity amongst our portfolio.
At GSV, our fundamental investment philosophy is supported by decades of research and experience on growth companies, and what this proves is that there is an extremely high correlation between the growth of thecompanies business and the value creation that takes place by the company over time. So, with that, investors and GSV should understand that on our overall portfolio today, the aggregate annual revenue growth for those companies -- 45 companies we have invested in is well north of 80% in terms of 2013 revenue compared to 2012.
And we look at the correlation that we believe that we are going to see in the long run with the growth in strong fundamentals, undoubtedly, we are going to have some very positive outcomes for our shareholders in the long run. As of March 31, our portfolio was comprised of 45 companies. The fair value of the portfolio was $222.2 million. Cash and short-term investments totaled $22.8 million as of March 31. This equates to NAV of $12.69 per common share.
Turning to slide 4 as of March 31, our top-10 investments represented 67% of invested capital, and our top-3 investments Twitter, Palantir, and Dropbox represented 29% of net asset value. Twitter continues to be our largest investment, and approximately 14% of deployed capital on a fair value of approximately $35.2 million. According to an April 2013 report published Wedbush Securities, they estimate that Twitter’s revenue growth for 2013 will be over 180% compared to 2012, that’s consistent with our expectations. According to our own analysis of the top-10 positions in our portfolio, 6 of these companies are growing north of 100% in 2013 over 2012.
So in other words, these top companies are the ones that really have the ability to move the needle in terms of the overall impact to our portfolio and NAV. In our outside commitments, these larger positions represent our highest conviction investments. So for example, the $35 million investment that we have in Twitter has over 10 times impact of our portfolio and NAV than a $3 million investment that we have in our portfolio, which we have a number of $3 million, $2 million, $1 million investments. The $15 million in Dropbox investment has a 15 times impact of a $1 million investment. And again Dropbox, we continue to be extremely pleased by the growth in fundamentals and what’s going on in that market, very competitive market, but Dropbox is absolutely dominating, we are killing it. We are extremely pleased with our Dropbox investment.
So during the first quarter, we made additional investments totaling $3.4 million, which is in four existing portfolio companies, SugarCRM, Fullbridge, CUX Inc., that’s corporate executive exchange and AlwaysOn.
On slide 5, you can see the portfolio mix across the five growth themes that we invested in as of March 31. Social Mobile consists 24% of our investments, Cloud Computing and Big Data 26%, Internet Commerce 6%, Green Technology 12%, and Education Technology 32%.
And the education technology is the biggest portion of our portfolio by sector, we think its inappropriate to spend some time talking about some of the disruptive head tech leaders in our portfolio and why we have such enthusiasm about our investments in this $4.5 trillion industry, by the say second largest industry in the world next to healthcare.
We think its important to showcase our values being created in our portfolio companies by giving some color to have the company’s look at the time of our investment and what they have achieved to-date. Each quarter going forward we intend to highlight a key area of our portfolio in a similar fashion to keep your price, how these companies are changing in the playing field are making headlines as they achieved key operating milestones.
And so one other comment as it relates to education and people are – its getting a lot of attention, the venture capital community is rushing to this marketplace, you have a 50% increase in terms of investment on a compound annual basis over the past five years reaching $1.2 billion of investments in 2012. And why is this the case?
Well, first, our thesis is the biggest investment opportunities often where there is a problem. The bigger the problem, the bigger the opportunity in the knowledge based economy that we are in the global marketplace education makes a difference not only on individual does but how a company does or in fact matter how well the country does? And so we are seeing disruptive technology take over this $4.5 trillion market obviously the internet being the megatrend of all megatrends, the marketizing access to learn an increasing access lowering the cost and improving the quality, the people reading probably everyday now of these looks, massively open online courses in the newspapers and the media. Just the growth it’s going on is absolutely staggering. So we are excited about this space three quick uber-trends that we are focused on.
One is called, (inaudible) which is a continuous learning no longer people fill up their (inaudible) 25 and driving off through. So, they continually need to get this education again that’s sort of the huge focus in terms of theme for us another is what we call knowledge is a currency, its going to be less relative where you go to college and talk about knowledge, its about what you know and now where do you go, the third is ROE looking at the companies that have huge return on education.
Last, sort of to connect into specific investments, we will start on slide 6, focused on Chegg, which is the fourth largest holding that we have as of March 31, at 5.8% of the portfolio. Chegg’s business is doing extremely well. Chegg is a student hub that is transforming the way millions of students learn by connecting with other people and tools needed to succeed in education. Facebook has its social graph, LinkedIn has its professional graph, what Chegg is creating is a student graph with approximately 30% of all students in the United States now in the Chegg network and 40% of graduate and high school students using Chegg.
In terms of the opportunity here, college students spend tens of billions of dollars annually on education related services beyond just the courses and clearly were $10 billion in text books and Chegg is doing extremely well capturing that student provide a multiple services to it. Other investors in Chegg include Kleiner Perkins Foundation Capital and Insight Partners.
Second investment I want to highlight in education technology basis 2U on slide 7, which is our number 6 holding 4.2% of the portfolio, 2U is reimagining what online higher education can be by partnering with world-class Research Universities to deliver a truly exceptional online education experience. They are defining what’s called school-as-a-service, which is in fact to see the new SaaS -- new SaaS. Our thesis for 2U is becoming the leading online educational platform in the world by, being able to partner with schools like UFC, George-Shaw Washington University, the University of North Carolina, Chapel Hill by creating unique graduate programs online partners with these schools.
Additionally, 2U will soon launch was called semester online partnering creating the consortium among leading liberal arts school such as Boston College, Northwestern Norte Dame, to allow students to take classes from anybody in the consortium when they are traveling abroad or just want to take an additional class, and we think that’s a extremely big idea. Today, 2U teaches 1,146 live classes per week, and this year we will generate 230 million tuition for its partners in the companies just barely 5 years old.
We are an investor in 2U with Bessemer, Redpoint, Highland Capital, just finished a board meeting, I can tell you the company is doing exceptionally well. Two other companies that we have in education space that are in the top 10, Avenues and Kno, we touched on both of those last quarter but just briefly because they are big positions and they do or in this education space.
Avenues, the World School is creating a global network of elite private K-12 schools to take advantage of the demand and balance of access to premier education in the world’s leading cities like New York and London and Hong Kong and so forth. Its first campus opened up in Chelsea with the world’s leading, world’s most famous Kindergarten Cherry Cruise this fall that will be opening campuses in Beijing, Sao Paolo and London over the next couple of years. We have is a management team of former President of Yale University, former Head of Philips Exeter, former Head of Hotchkiss and so forth. Again, we are very pleased with this investment think it has enormous potential.
And then lastly just know which is our number 9 investment in terms of size is digitizing text books but more importantly they are really creating smart content, by not only digitizing these text books which is a $10 billion market, but making interactive experience with the student on the iPad having teachers be able to track what’s going on, tabular interactive case studies connecting to other students and so forth. A company that we think here is enormous potential, we are an investor know (inaudible), Goldman Sachs, Intel capital to name a few other investors.
And lastly just turning to slide 8, in terms of what we are doing to give our shareholders outsized opportunities in the space. In collaboration with Arizona State University, which is United States largest public university, we recently held our Fourth Annual Education Innovation Summit (inaudible) which is known to many as (divers) in the desert. The fantastic event that brought together the leaders in this industry, innovators, educators, social entrepreneurs, policy makers, investors, 170 companies, 1500 people were sold out for several weeks in advance, it’s the second year in a row its been sold out, and why that matters to GSV shareholders. As it gives us extraordinary access to the leading companies in this emerging space and huge credibilities, so we think that’s going to benefit, continued benefit of our shareholders in the term as we continue to be able to participate in the game changing companies within the sector.
So, again, education is 32% of our overall portfolio, and we continue to be extremely enthusiastic what it’s going on the market and what’s going in our portfolio. So, overall we continue to have tremendous confidence in the companies and our portfolio. We are very pleased with the growth and execution that they are delivering and have strong conviction about the long-term value that’s being created, as I mentioned before. The overall revenue growth of the portfolio is north of 89%, well north of 80% and 6 of our largest -- 10 largest holding to have growth rates in excess of 100% by our estimates.
We continue to carefully evaluate the opportunity buy back shares. Based on our strategy for portfolio and our business, however, we don’t feel great now the right course of action to do. We like you are frustrated at our share price and that significant discount to NAV and we appreciate the math and the immediate bump to NAV by buying back shares. And we also recognize that shareholders want us to do something if not just make the statement that we appreciate the shares are undervalued and we have conviction in our portfolio. However, as we look at this portfolio, and we look at the conviction that we have and the growth is going on, and the opportunity is in front of us and want value creation that we see going on.
We don’t believe it’s in our interest of our shareholders in the long run to pursue this today, and again we continue to carefully evaluate this and look at this. But recognizing that the benefit in the long term, we know we need to make progress in the short-term. We are doing things that we believe will help the short-term realities of our stock including the fact that we stepped up maturely our Investor Relations effort. We’re becoming much more active for the 10 investor conferences, and also and developing relationships with research and brokerage firms that should have an interest in our company and can provide ongoing support in terms of information insight and in terms of what’s going on at GSV Capital.
We’ve been to three conferences so far this year, Citigroup, Piper Jaffray, and ROTH Capital. This month we will be at B. Riley’s annual conference in Los Angles on May 20th and the Raymond James Internet Software Crossover Conference May 29th. By the way these would be webcast live and available on our website. So, we are also within a few a days of launching a newsfeed on our portfolio companies as a feature on our corporate website gsvcap.com. This is something we have talked about on our conference call last quarter and we think we will benefit to our shareholders to be as transparent and to provide as much information as we can on our portfolio companies. This marks another step forward in our commitment to enhancing this transparency for our investors.
So, thanks for your attention, I’m going to ask Steve to make some final comments on our financials then open up the call for questions. Steve?
As Michael indicated as of March 31, 2013, the total value of the portfolio investments was $222.2 million. Net assets as of March 31 were $245.1 million, which includes cash and money market securities of $22.8 million and translates to a net asset value per share of $12.69. This compares to net assets of $252.6 million or $13.07 per share as of December 31, 2012. Since inception, we have invested approximately $239.9 million excluding transaction costs.
Net investment loss which is compromised of operating expenses was $2.6 million or $0.13 per share for the first quarter that compares to a net investment loss of $2.8 million or $.014 per share for the fourth quarter of 2012. The net change unrealized depreciation which is comprised of transaction cost and mostly important any fair value adjustments was approximately $1.6 million or $0.08 per share for the first quarter.
That compares to $4.5 million or $0.23 per share of unrealized depreciation for the fourth quarter of 2012. The net realized loss on investments which is related to our exit from our Groupon and Zynga investments was $3.3 million or $0.17 per share during the quarter and that compares to zero gain, essentially no gain or loss on investments for the fourth quarter of 2012.
Net-net the result was a decrease in net assets from operations of $7.5 million or $0.38 per share for the first quarter that compares to a net decrease and net assets from operations of $7.3 million or $0.38 per share for the fourth quarter.
With that, I’ll turn the call back over the operator and we can start the Q&A session. Operator?
Thank you, sir. (Operator Instructions) Our first question comes from the line of Louis Margolis, Select Advisors. Please go ahead.
Louis Margolis - Select Advisors
Thank you very much for taking the call. I was an enthusiastic shareholder before this call, but after listening you describe the portfolio, it’s just fantastic. I just love the whole idea. In fact, I’d really like to own more of these individual companies. You say that this is not the right time to buy the stock.
Just a quick review, you raised $296 million at face. You have got 245.1 left. From it, over the last 24 months, there has been no net appreciation in any of your investments. You can buy stock at $8, and immediately set it to $12.69 taking a $4.69 immediate profit. It is unconscionable for you not to do this. I believe it’s an abdication of your fiduciary responsibility not to buy in some stock. You said this is not the time to do it, you didn’t give one reason why not?
Other than the – I will give you one reason, you are drawing a lot of money and fees, all this company has done as you are saying you have invested $239 million ex-transaction fees, and I didn’t even want to think about what those transaction fees. It is immoral for you not to be buying in some of the stock. You made four stock sales, 19.33 million shares at an average price $15.35 before paying out of lot of fees. All you have done is spent about $50 million to get where we are, and you can’t bring yourself to spend $5 million to buy the stock and take an immediate 50% gain, it’s outrageous. Thank you very much for taking my call.
Hi, Louis. I don’t know if there was a question in that statement but --
Louis Margolis - Select Advisors
I will give you – wait I will give you a question, why it is you are not trying to buy the stock?
Yeah, I appreciate that. You and I obviously had a conversation about this, and you have had other conversations with people of our team, and so I appreciate. And this is when all set and done, we take our fiduciary responsibility extremely seriously, and we look at what is the best interest of our shareholders, and obviously it’s something that we have continued and will continue to carefully consider, and if we feel it’s the right thing and we feel like that’s the way that’s going to optimize the long-term value for our shareholders., we will absolutely do it.
But that’s -- we have carefully evaluated this, carefully evaluated this, and I understand what you are saying, we are also very confident in the portfolio that we have and we also appreciate the nature of emerging growth investing you are likely to see, you are going to see the – what happens, the natural J-Curve that we are experiencing, and so, as we look at what is the make up of the portfolio that we have and we that have always made significant commitments when we went through that.
We are confident that that’s going to bear great fruits in terms of the portfolio, and we are prudently managing the portfolio on a very active basis. So we appreciate your comment. We appreciate you as a shareholder. And we look forward to continue the dialogue with all of our interested lines. Thank you. Next question please.
(Operator instructions) Our next question comes from the line of (John Ray) with Raymond James. Please go ahead
Good afternoon. And I appreciate being inside of your call. I would like to note that some of your investments increased in value since the last report. Silver Spring, it was valued this December at $1.976 million, and today’s market value is $8.805 million. That was a gain of $6.828 million, and that compares to a decrease in net assets of $7.5 million, that’s a total swing factor of $14.3 million, can that be explained?
Yeah, I mean Dave, I don’t know if you want to (inaudible). I think the math there might be, I’m not sure that that’s accurate, but Dave, your – why don’t you give (inaudible) -- Silver Spring and kind of where things were at?
Well, the thing to notice as we mentioned on the last call is that there was a – right before the IPO, there was a 5 for 1 reserve split. So, we had approximately $5 million investment in Silver Spring, and that’s in the new 10-Q. It’s worth what it is today a little under $2 million. So, probably the best thing to do is to take that question offline, because you have to understand the 5 for 1 reverse split, understand what’s happening, the share price, our effective price before -- our effective price when buying the stock was $50 on a post split basis, and that was stated in the 2012/31 financials.
Okay. That answers it.
(Operator instructions) Our next question comes from the line of Casey Alexander from Gilford Securities. Please go ahead.
Casey Alexander - Gilford Securities
Yeah, hi and thank you for taking my question. I’m the Director of Research for Guilford securities, and I have been following the BDC group and following some of the venture capital groups, and one of your statements was there hasn’t been a normal IPO market for ten years, and I have been on Wall Street for thirty year,s and I would say that that thirty years have been four years where we have had top IPO market. What is it that makes you think that this isn’t a normal IPO market as opposed to the IPO market that satisfies needs of your business model the best.
Casey, thank you for your question. I made a point that what we are seeing is a healthy market vis-à-vis what we are seeing for a long time. I think, candidly one of the reasons why GSV Capital exists and why we are and we think we have such a great opportunity is because we do think what did happen last 10 years is the new normal. You know, we are not going to see an IPO market like we saw during the 1990s where you had 500 IPOs go public every year, 50% PVC back, $130 million market cap – median market cap going company and having public investors be able to ride the growth of small companies to big companies and create ability to value along the way. Those days are gone forever.
That said, as you are looking at VC portfolio and you look at it as a company, and you have been private for sometime looking for the right time to come in, there has been very few windows in the past candidly 10 years where you look at the data and you say boy, that’s a good environment to go in. And right now, and we are seeing these conversations and we live and work in Silicon Valley, and we are in all of these conversations on what’s going on, you have seen the noticeable shift in terms of how people are looking at the opportunity to go public today, and it’s primarily because companies are coming out as I mentioned before, over 40% of the VC backed IPOs year-to-date have priced above the ranks and they are trading up, and that all gives you confidence to take the company up. Thank you for your question.
Thank you. And it appears that we have no further question at this time, I would like to turn the conference back over to Mr. Moe, for closing comments.
Yeah. So, thank you very much for joining us this afternoon, and we do appreciate all your comments and questions. We also look forward to having conversations with you between now and our next conference call. And I do want to thank people for their support of us and I will tell you that we are going to continue work very hard to show that support is well – is well placed. And again, we are very confident with what’s going on. So, keep the faith and we will keep working really, really hard. Thank you very much.
Thank you. Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to our replay of today’s conference, you may do so at anytime by dialing 303-590-3030 or 1800-406-7325 and entering the access code of 4616073#. We thank you all for your participation, and at this time you may now disconnect.
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