Safeguard Scientifics Inc. (NYSE:SFE)
Q1 2010 Earnings Call
May 6, 2010; 09:00 am ET
Peter Boni - President & Chief Executive Officer
Steve Zarrilli - Senior Vice President & Chief Financial Officer
John Shave - Vice President of Business Development & Corporate Communication
Bob Labick - CJS Securities
Good morning ladies and gentlemen, and welcome to the Safeguard Scientifics first quarter 2010 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)
I would now like to introduce your host for today’s conference, John Shave, Vice President of Business Development and Corporate Communication.
Good morning. Thank you for joining Safeguard Scientifics conference call and update. Joining me on today’s call are Peter Boni, Safeguard’s President and Chief Executive Officer; and Steve Zarrilli, Senior Vice President and Chief Financial Officer.
During today’s call, Peter will review highlights from the first quarter of 2010 and subsequent events. Then Steve will discuss financial results and strategies for Safeguard. After that we will open the lines for your questions.
Before we begin, I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies, and the risks of acquisition or disposition of interests in partner companies, capital spending by customers, and the effect of the economic conditions generally, as well as the development of technology and life sciences markets on which Safeguard focuses.
During the course of today’s call words such as expect, anticipate, believe, and intend will be used in our discussion of goals or events in the future. Management cannot be certain that the financial outcomes will be as described today.
We encourage you to read Safeguard’s filings with the SEC which describe in detail the risks and uncertainties associated with managing our business. The company does not assume any obligations to update forward-looking statements made today. Also as a reminder, the earnings release and presentation are available at our website.
Now, here is Safeguard’s President and CEO, Peter Boni.
Thanks John, and thank you all for joining us today for this Q1 update on Safeguard Scientifics and our partner companies. Our study progress in building value at Safeguard is generating increased awareness and traction with investors. As a result we expect there are several newcomers on today’s call, so let’s first start by reviewing Safeguard’s business model.
We typically deploy up to $25 million in growth capital for the company to develop high potential Life Sciences and Technology businesses that exploit five strategic themes: maturity, migration, convergence, compliance and cost containment.
Now Safeguard has 17 partner companies; 10 in Life Sciences and 7 in Technology. We time our exits from ownership positions to achieve the aggregate targeted risk adjusted returns on capital of three to five times at a minimum.
Exits maybe realized through privately negotiated sales of securities or assets, public offerings of partner company securities or in the case of publicly traded partner companies, the sale of securities on the open market.
Now discipline is the hallmark of Safeguard’s strategy. We’ve said this often and it bears repeating. We remain focused on enhancing value in our partner companies rather than deploying capital or pursuing exits, simply for activity sake.
Our deal teams evaluate many hundreds of investment opportunities throughout the year as potential progress to seek growth capital. On the other side of this equation, exit opportunities may arise at any time and in different forms. If an opportunity clears our strategic growth and return hurdles, we’ll respond appropriately.
In the meantime, we continue to work everyday to build value in our partner companies, drive their growth and keep their static plans in line. So during the first quarter we were encouraged by the continued growth and improved performance of Safeguard’s partner companies.
Aggregate revenue increased 46% year-over-year. We remain on track with our guidance for aggregate partner company revenue in 2010 to between $300 million and $325 million.
Another source of encouragement during the quarter was the continued improvement in the U.S. economy. Not all indicators are running to the upside, but job losses, a lagging indicator of economic growth are beginning to show signs of reversing, consumer confidence is trending up, and capital markets are healthier and actually more active.
Nine venture backed companies have joined successful IPOs during the quarter, nearly matching the number of IPOs that occurred in all of 2009 according to Thompson Reuters and the National Venture Capital Association.
In addition, 111 companies were either merged or acquired during the quarter, and 43 venture backed companies have filed for an IPO offering with the SEC. So 2010 is shaping up to be an active year.
With this economic backdrop, we are optimistic about Safeguard’s prospects in 2010 for continued growth throughout our Life Sciences and Technology partner companies, and for continued value creation for our shareholders.
Let’s take a look at some of our partner companies that illustrate the power Safeguard’s business model. With our Diagnostics Companies, Clarient trading on the NASDAQ under the symbol CORT has made great progress exceeding $100 million of run rate in annual revenue from its cancer diagnostic testing services, which the company recorded in the first quarter on April 29.
Clarient reported revenues of $26.6 million, that’s a 14.8% increase over Q1 last year, and test volume increased 18% for the same period. In addition, Clarient signed up 52 new clients, 12 of which are on Clarient A-target list, each with a potential to generate more than $500,000 annual revenue. This improvement is inline with Clarient’s quarterly targets to retain at least 95% of its customers.
The combination of new account acquisition, same-store sales to current clients, and an increased adoption of recently launched tests drove growth and test volumes in all of Clarient’s primary categories, providing solid momentum to the start of the New Year.
In addition to improvements and key billing and collection metrics, continued diligence in expanse management led to improvement to the bottom line.
DSO’s continued to decrease and are now at 82 days as compared to 101 days in the first quarter of 2009. Safeguard’s position on Clarient was valued at $92.8 million at the close of trading yesterday, versus $79.5 million on March 31. So congratulations to Clarient. We really believe that everything is kicking in.
Another one of Safeguard’s diagnostic companies is Avid Radiopharmaceuticals, which announced positive interim Phase III clinical data last month, for its amyloid imaging agent for the early detection of Alzheimer’s disease. As a result of its positive traction, Avid was featured in the Wall-Street Journal on April 15, in an article about new tools to detect Alzheimer’s disease. Full trial data is expected to be available later this year, followed by the NDA submission.
With Safeguard’s targeted regenerative medicines companies, I’d like to highlight another exciting partner company, and that’s Advanced BioHealings or ABH. ABH is at the forefront of regenerative medicine, with a growing line up of engineered tissue product that uses living cells to repair or replace body tissue damage by injury, disease or ageing.
ABH revenue was $85 million last year, driven by sales of its FDA approved Dermagraft for diabetic foot ulcers. The company is on track to generate a 50% increase in annual revenue for 2010.
Annual cases of diabetic foot ulcers in the U.S. alone are approximately $800,000 annual, and the addressable market is more than a billion dollars. Now ABH has been aggressively expanding in U.S. commercial sales and marketing efforts and is exploring new applications for its products in domestic and international markets.
Going forward the company expends to execute its venous leg ulcer trial, launch Dermagraft internationally, and expands sales relating to the U.S. government’s disaster preparedness initiatives.
Safeguard deployed $10.8 million of capital in ABH in February 2007, and it has a 28% ownership position. NuPathe, Molecular BioMetrics, Quinnova Pharmaceutical Center, others will all continuing to progress in their respective businesses.
Switching gears to our technology partner companies, we are excited by the developments in our IT Health Care Company, Advantage Health Care Solutions or AHS. They continue to grow organically, and through acquisitions, making it one of the nations 15 largest medical billing providers now.
AHS’s proprietary software efficiently collects financial information and speeds reimbursement of third party claims and patient payments, enabling physicians to maximize revenue, decrease billing and management costs. We put $13.5 million of capital to work in AHS beginning in November of 2006, and have a 40% ownership position.
Within the internet and media companies, MediaMath acquired Adroit Interactive, which combines under one roof, the key components of successful banner advertising, including media, data and creative, to drive improved campaign results to advertise as an agency.
MediaMath is fulfilling its game plan to use proceeds from its financing which Safeguard read last year on technology research, product development, executive and staff recruitment, tactical acquisitions and geographic expansion.
Another one of Safeguard’s internet and media companies Swaptree.com is raising $6 million, of which Safeguard provided $4.7 million, allocating proceeds primarily to fund expansion and marketing initiatives. Swaptree’s innovative model continues to gain significant media attention, growing its registered user base more than 15x since becoming a Safeguard partner company.
Now Bridgevine, Beyond.com, Authentium, Portico and so forth, continued to advance in their value propositions; I could go on and on. There is plenty of exciting developments throughout Safeguard’s 17 partner companies, but in the interest of time I’ll stop now and turn the call over to our CFO, Steve Zarrilli, and Steve will give you an update regarding Safeguard’s financial strategies and our performance. Go ahead, Steve.
Thanks Peter. Our earnings news release and financial statements were distributed earlier this morning, and I would be happy to elaborate on any aspect of our first quarter performance during the Q-and-A period.
Today Safeguard is stronger, leaner and better positioned to execute our strategic game plan than at any other time in the last five years; the year that improves strength and flexibility to our discipline, and focus on solid financial fundamentals and principles. Our emphasis is on Safeguard’s cash balances, reducing our debt, and containing operating expenses, and those focuses will not diminish in 2010.
At March 31, 2010 we had approximately $77 million in cash, cash equivalents and marketable securities, excluding cash held in escrow of $6.4 million, and restricted cash equivalence of $19 million. The cash balance at December 31, 2009, was $106 million, excluding $6.9 million of cash held in escrow. The restricted cash equivalents primarily relate to the interest escrowed associated with our convertible debentures, and the related exchange transaction consummated in the first quarter.
During the quarter the primary uses of cash were one-cash operating expenses of $5.9 million for Q1 of 2010. This total excludes interest payments, non-cash stock base compensation, and depreciation expense, but reflects the cash used in the payment of 2009 incentive compensation. We project Safeguard’s 2010 annual operating expenses to be in the range of $14.5 million to $15 million.
Deployment of a combined $5.5 million to support the capital needs of existing partners also transpired during the quarter. The third item was the allocation of $19 million into a restricted account, to service interest on the 2014 debentures through maturity, and finally the receipt of $2.8 million from the sale of a legacy asset.
A year ago, our debt to equity ratio was approximately 1:1. Today the ratio is 1:2, achieved through our strategic initiatives to enhance Safeguard’s financial strength and flexibility, as well as to improve on our balance sheet.
Safeguard’s debt balance $31 million, of the 2.625% senior convertible debenture is due in March of 2024, and the $46.9 million in recently issued 10.18 senior convertible debentures due March of 2014, reflects the concerted efforts to improve our flexibility.
The balance of our original debentures have declined steadily since 2006, because of our ongoing campaign to repurchase nearly 50% of the original $115 million issuance at meaningful discount to face when possible. Holders of these notes have a right to require repurchase of the debentures at the face value, plus accrue an unpaid interest in March 2011, 2014 or 2019.
We recognized a non-cash loss of $8.5 million, in conjunction with the recent exchange transaction, but also recorded an $11 million credit to equity, resulting in an accounting for this transaction as relatively book equity neutral.
Safeguard gained flexibility by exchanging $46.9 million of the 2024 debentures for the 2014 debt, which can be converted to equity at $16.50 per share. Safeguard has the right to settle the conversion and start cash or combination thereof based on certain conditions. This feature allows us to manage potential solution advantageously for our shareholders.
In 2010 we intend to continue to evaluate or pursue opportunities to reduce operating expenses where possible, manage cash deployments conservatively in our supportive partner companies, selectively deploy capital in new and exciting growth companies, and alter any existing capital with well timed exits or alternative pools of capital.
We believe Safeguard and its partner companies remain well positioned for continued revenue and value equation during 2010. Our partner companies grew revenue in the aggregate by 46% year-over-year in Q1, and as a reminder Safeguard reports the revenue of its equity method and cost method partner companies on a one quarter lag basis. Our partners continued to execute aggressively, are conserving cash, and making strategic and opportunistic acquisitions.
With that I’ll turn it over to Peter to lead us through the Q-and-A.
Thanks Steve, nice summary. Shannon let’s open the phone lines up for any questions.
(Operator Instructions) Our first question comes from Bob Labick from CJS Securities; you may begin.
Bob Labick – CJS Securities
Good morning. Good start for the year. Thanks for taking my question.
Bob Labick – CJS Securities
Hi. First, the term loan market has really opened up a lot in 2010, increasing liquidity out there. I was just curious as to how this impacts your strategy as it relates to exits and potential investments. If you could tell us how you are seeing a liquidity environment and how it impacts you?
Well, I’ll let Steve make a comment and then I’ll supplement that.
Sure. Bob I want to make sure I understood your question; you started out saying that the term loan market?
Bob Labick – CJS Securities
Sure, I’m just saying that the liquidity in the term loans of increased materially over last year. So assuming that there is liquidity there, both on the private side and on the corporate side right now, I want to know how the increased liquidity in the market versus a year ago impacts your ability to make exits or your desires, and then conversely the ability to buy companies and if there is more competition for the things you are looking at?
So, let me touch on three matters as it relates to that question. First, as it relates to the overall debt market, we have seeing some loosening that’s occurring, and the big positive for our partner companies is that they are having success in attaining better terms on their own debt facilities or putting debt facilities in place to augment their capital, which actually has worked to their advantage and works to our advantage, and we are using that debt very prudently.
Two, as Peter mentioned earlier, it has been a lot more activity in the market generally, and we are seeing that as well. There are more inquiries around future opportunities as it relates to potential exits.
We are using the market and the potential use of debt to potentially augment our gross strategies for certain of our revenue and profit producing partner companies. There are a few specifically within the universe of our partner companies that have actively begun to look at the ability to use a modest amount of debt to augment capital to pursue an acquisition.
Then finally with regard to debt, we are also finding that there are other elements to our own balance sheet that we maybe able to pursue in the future as we continue to strengthen our balance sheet, both with cash, through the accumulation of cash through exits, as well as the way in which we are managing the right side of our balance sheet.
I’ll supplement that Bob to say that our pipeline is particularly robust, and a trend I think we are seeing is that many firms bunkered down in 2008 and 2009 because the environment was so hostile, and now they absolutely need growth capital and they are coming out of their bunkers.
Bob Labick – CJS Securities
Okay great; and then, could you also give us an update on new business initiatives. You’ve discussed in the past leveraging your existing infrastructure with potential JV Funds or other things like that. Where do you stand, and how are you thinking about that now?
Yes, well let me have something to report Bob, we’ll do it, but we don’t have something to report. We continue to stir around in those initiatives and when we have something we’ll tell you.
Bob Labick – CJS Securities
Okay great. Thank you very much.
Thank you. (Operator Instructions)
Okay. Thanks very much for everyone’s interest, and we look forward to a continued progress here with Safeguard, and we’ll keep you posted.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!