GSV Capital Corporation (NASDAQ:GSVC) Q2 2017 Earnings Conference Call August 8, 2017 5:00 PM ET
Nicholas Franco - VP
Michael Moe - Chairman & CEO
William Tanona - CFO
Edward Woo - Ascendiant Capital Markets
Cynthia Boyle - Wells Fargo
Joseph Gardner - Emerald Advisors
Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSV Capital's Second First Quarter 2017 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. This call is being recorded today, Tuesday, August 8, 2017.
I will now like to turn the conference over to Nick Franco, Vice President of GSV Asset Management. Please go ahead sir.
Thank you for joining us on today's call. I'm joined today by GSV Capital Chairman, 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 Investor Relations, 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, 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, Nick. We are pleased to share the results of GSV Capital's second quarter 2017. First I'll review the recent quarter and share an update on our top positions as well as notable developments in the portfolio. Then I'll comment briefly on the market fundamentals that defines GSV Capital's opportunity moving forward, as well as the proactive steps we are taking on shareholder value. I'll then turn the call over to Chief Financial Officer, Bill Tanona, who'll provide a brief financial overview. At the end, we'll open up the call for questions.
Let's start with Slides 3 through 5. Net assets totaled approximately $202 million or $9.11 per share as of June 30, 2017 as compared to approximately $196 million or $8.83 per share as of March 31, 2017. Of our five key investment themes, education technology is the large commitment representing 36.7% of the total portfolio at fair value, cloud computing and Big Data is 32.7% of the portfolio, social mobile is 18.8% and marketplace represents 11.2% and sustainability is approximately 1%.
As of June 30, 2017 GSV Capital's top 10 positions accounted for approximately 63% of the total portfolio at fair value versus approximately 54% at the same time last year. Our three largest investments; Palantir, Spotify and JAMF Software represented approximately 50% of the total portfolio at fair value. At quarter end there were 38 companies in our portfolio compared with 47 a year ago, this all reflects our continued strategy of consolidating the top, the portfolio around top positions and leading names. So in other words we're going to put more money in fewer companies.
In the second quarter the net change in annualized depreciation investments was approximately $12.8 million. Secondary trade as Spotify in the $2,800 range increased GSV's second quarter valuation by $7.4 million at $27 million. Spotify is GSV's second largest position. As reported by Tech Crunch, Coursera raised over $60 million in a valuation of approximately $800 million resulting in the second quarter valuation increase at $3.9 million, Coursera is GSV's fourth largest position.
Chegg's stock price increase resulted in a $4.6 million write-up in the second quarter; the stock is up approximately 126% from 12 months ago. Chegg is GSV's sixth largest position subsequent to second quarter end, we sold 400,600 shares of Chegg at a weighted average price of $14.35 per share. We still own 782,000 shares of Chegg and remain bullish on the future potential of Chegg and upside. Last week Chegg raised $135 million on a million shares of stock at $13.50 per share. As I mentioned, we sold our 40,000 shares above $14.35 on average.
In 2017 GSV Lab has partially completed a Series B financing round at a higher valuation. At second quarter end we held our position slightly above our previous mark, essentially at cost which we will continue to do till the financing process is completed. Additionally, GSV labs is consummated to joint venture to launch a new center at Boston, allowing physicians to JV in Boston as terrifically higher than where we currently value the parent [ph] just to give a frame of reference in terms of potential value.
In April 2017, Lift announced the completion of $610 million financing at $6.9 billion pre-money value. Second quarter secondary trading activity resulted in evaluation increase of $1.1 million in our investment bringing it to $8.4 million of value. These write-ups were partially offset by $2.1 million write-downs in both Palantir with top position and Dropbox, our fifth largest position based on secondary trading activity. In addition, we had unreleased the depreciation of $2.6 million of GSV sustainability partners and $2.1 million in General Assembly, our seventh largest position.
Today shares of GSV Capital common stock closed at $3.86 or approximately a 42% discount -- 42% of NAV with a market cap of approximately $85 million. This for some context our Top 3 three positions are Palatir, Spotify and JAMF Software with values of approximately $85 million. Accordingly our Board of Directors has approved a $5 million discretionary share repurchase, additionally the board, as well as the management team of GSV Asset Management has committed subject to appropriate trading controls to purchase stock in open market.
Our largest position is Palantir, the disruptive Big Data analytics and security company which accounts for approximately 13.1% of our total portfolio fair value. Palantir products are deployed by leading government, commercial and non-profit institutions around the world to solve the most complex problems they face. Applications raised from cyber security to disaster preparedness, capital markets intelligence, healthcare deliver, industrial operations and defense. In February CEO, Alex Karp indicated that he expects the company to be breakeven by end of 2017 knowing that Palantir's cash burn rate has decreased by approximately 60% versus 2016. Palantir's operation in the UK are profitable today as European revenue has roughly tripled over the past three years. Earlier this year, the financial times reported that Airbus has tapped Palantir to help accelerate production of it's new A350 aircraft, potentially saving the European Airspace Group hundreds of millions of dollars over the coming years. This adds to a bluechip list of corporate clients that includes Merck, AXA, BP, Credit Suisse, Duetsche Bank, Glaxo SmithKline, Standard Chartered and [indiscernible] Group.
Today Palantir has raised $1.9 billion of equity funding from a syndicate of investors that include Founders Fund, INQTEL [ph] and Tiger Global. As we've noted on recent calls, Palantir remains on our IPO watchlist at the Wall Street Journal's globally technology conference in October 2016. Alex Karp indicate that Palantir has positioned itself to go public. We believe that opportunity has been validated by the company's continued demonstrative of the strong operated and growth fundamentals.
Our second largest position is Spotify, the leading global music streaming platform that now reaches over 140 million users with 30 million songs across 60 international markets. The Financial Times reports that Spotify has surpassed $60 million pain subscribers, more than doubled it's key competitor Apple Music and the lead is widening. Spotify has added about 10 million subscribers over the last four weeks. Apple Music has added just 8 million subscribers over the last six months. At the same time Spotify is making important headway to improve it's margins by negotiating more favorable wealth agreements with direct tables [ph].
Global music sales are growing through fastest pace since 1997 driven by the rising popularity of streaming music that leveraged for Spotify. In 2017 Spotify lowered it's royalty rate, paid to Universal Growth by 5 percentage points and recent agreement with Sony Music at similar terms. It's also finalizing new deal with Warren Music which is expected to be signed in Q3. According to multiple reports, Spotify is considered a direct listing on New York Stock Exchange just to have a traditional IPO, a process that underwriters lock-up from the typical infusion of capital associated with the traditional public offering. We'll continue to monitor the development to optimize returns for GSV Capital stockholders.
Today Spotify has raised $1.6 billion from the syndicate of investors including Accel Partners, Founders Fund, Technology [indiscernible] and Goldman Sachs.
GSV Capital's fifth largest position, Dropbox, continues to demonstrate strong growth fundamentals becoming the fastest software to service business to reach $1 billion of revenue run rate which it achieved in January 2017 according to a report by IDC. It hits up market eight years beating SaaS leaders like Salesforce and Work Day. On July 27, Bloomberg reported the company is expected to hire Goldman Sachs as a lead advisor for potential IPO which could come at 2017. Impressively CEO, Drew Houston, announced in April that the company has become profitable on EBITDA basis, this filed with June 2016 announcement that Dropbox has achieved positive free cash flow.
Today Dropbox counts over 500 million users and 200,000 business customers including a majority of the Fortune 500 companies. Dropbox has raised over $600 million from a syndicate of investors including Sequoia, Benchmark, Accel, Goldman Sachs, Blackrock, Greylock, Morgan Stanley at key roll [ph] price.
In July GSV Capitals portfolio company Lyft announced it completed over 162 million rides in the first six months of 2017 surpassing it's full year markets in 2016. To-date the ride sharing platform has launched in over 150 new cities and in March 2017 Lyft reported it's growth was accelerating in every market across the country. To-date Lyft has raised over $2.6 billion from investors including [indiscernible], General Motos, Founders Fund, KKR, Alibaba, Alliance Bearstien, KO2 [ph] and others.
A couple of additional quick updates for the portfolio; first, on Coursera, our first largest position, announced in June 2017 that it had hired Jeff Maggioncalda to succeed Rick Levin, the CEO. Rick had done a phenomenal job as the CEO bringing just in as a transition preparing the company to go public sometimes in the future. Jeff previously serves the 18-year stint as the CEO of Financial Engine, the largest independent investment advisor in the United States. He co-founded the company with Economics Nobel Prize winner, Bill Sharp, and took the company public in 2010. Outside of Coursera, Jeff serves in the Board of Directors of Silicon Valley Bank.
Coursera continue to demonstrate strong momentum, today it serves over 27 million learners with more than 2,000 courses from 129 university partners including Stamford, Yale, Princeton, University of Pennsylvenia, Peking University, The Moscow Institute of Physics and Technology, and Hebel [ph] University. Little over formally known as DOGVK [ph] the peer-to-peer pet city marketplace announced to complete a $65 million financing last month led by spark capital, additional capital came from existing investors including technology Crossover Ventures, Memo Ventures and Founder Group. Megan Quinn, a partner of Spark, has joined the Board. This happens subsequent to quarter announced no impact to our NAV.
We're also excited by the continued progress of Course Hero, a peer-to-peer marketplace for educational resources and expert tutors, hart [ph] in the same network effects that platforms like Airbnb and Lyft. Course Hero is scaling quickly and profitably under leadership of CEO Andrew Grauer who founded the company in his Cornell dorm room. Course Hero is GSV's eight largest position as backed by Maveron, Great Oaks Venture Capital, SV Angel and IDG Ventures.
Please turn to Slide 6 through 8. According to Rennaissane Capital, just a 102 IPOs went public in 2016 and only 48 were ventured back; in fact, IPO proceeds ventured back companies dropped approximately 90% from 2014 to 2016. In 2017 to-date there have been 88 U.S. IPOs representing a 57% increase over the same period last year. IPO proceeds have surpassed $22 billion which compares to $18.8 billion in the entire year of 2016. In the first half of the year there was 24 VC backed IPOs which generated $5.9 billion of proceeds, this compares to 19 IPOs that generated $1.3 billion in the first half of 2016.
To-date 16% of the 2017 IPOs were priced above the range, about 65% was priced within the range which is more or less normal and the average one day pop [ph] is 11% which is more or less normal. Overall IPO performance is up 12% compared to 2016 which meres the positive movement in the broader markets in 2017. As August 7, S&P500 is up over 10%, NASDAQ has risen 18% and the GSV300 Index that is created by GSV Asset Management that represents the 300 fastest growing companies in the world has surged 41.3%. In history as any guide, the strong performance by growth names and technology names is a precursor to an IPO market that we think will become more robust as we go into the fall and into 2018. So we think that's great.
At the same time while you seemed as a strong performance in technology names and growth names, the market volatility is about half of what is considered normal, in fact while public stock performance is better than it's been in 100 years, the VIX, Voluntary Index is under 10, 20 is even par. So in addition to the supply and demand forces in the IPO world, we see continuation of expanded corporate M&A activity in technology which is a parallel force to the IPO market and it has created extra opportunities for venture back companies. JPMorgan reports that global deal volumes surpass $3.9 trillion in 2016, that's tied the third largest year on record, the top mark which stands at $4.7 trillion which was set just a year earlier.
Today U.S. corporate cash reserves have reached approximately $2.2 trillion according to Capital IQ and M&A focus has increasingly turned towards the merging technologies and disruptive business models. Leading technology companies in particular have continued to roll up the industry. Technology is all about disproportionate gains from leader in CAGR [ph] platforms involving rapidly filling the category and product maps. In 2010 to 2016 the Big 8 alphabet Google, IBM, Facebook, Microsoft, Oracle, Cisco, Apple and Amazon have completed approximately 480 acquisitions worth $170 billion.
So again, we think though [ph] are all present for positive activity for our portfolio but to borrow line from John Meter Kane's [ph] markets can stay irrational longer than we could stay solve it. So we have taken proactive steps to change the dynamics at GSV Capital to increase shareholder value. In the first quarter 2017 we announced the addition of two new members of the GSVC Board of Directors with significant investment and asset management experience. David Patrick is the former CEO of Charles Swabb, which he guided from a $4 million market cap to $45 million cap. Today David is the Chairman of Radical Ventures a he is a 19-year board member at Intel. Dave is also the Chairman of High Tower Advisors, a $35 billion wealth management firm he helped launch in 2008. He officially joined the board on May 31, 2017.
Mark Maser is the former CEO of Bravern Haward [ph], U.S. Asset Management, which is a large global hedge fund. Before that Mark was executive at Goldman Sachs in it's fixed income division for over a decade. And today he serves as Senior Advisor to Brentwood Capital Advisors, a multi-fund asset manager with over $3 billion of assets under management. Mark officially joined the board on March 17, 2017.
GSV Asset Management and it's Board of Directors of GSV Capital are highly focused on creating shareholder value. We believe this is achieved by strong investment performance which is driven by a very focus driven team, proactive clear communications leading to greater shareholder awareness and focus on continuous improvement to drive the company's share price towards intrinsic value. To that end we are pleased to announce that GSV Capital's lead director, Mark Klye [ph] will transition to the role of CEO where he will focus on enhancing shareholder value and the operations of the fund.
Moving forward, I will continue to serve as Executive Chairman GSV Capital, and I will focus on investment strategy. For contact Mark has served on the board of GSV Capital since 2011 as consultant of GSV Asset Management since 2012. Mark has successfully run two significantly larger public financial service companies National Holding Corporation and Ladenburg Thalmann which - in both where he has created significant shareholder value. He has over 20 years of experience of alternative asset management, wealth management including launching with our earliest private equity of venture capital fund platforms in the 1990's.
A final update, before I turn the call to Bill Tanona, GSV Capital held annual Investor Day on June 7 at GSV Lab in Silicon Valley welcoming over 600 attendees and key note presentations with portfolio company's CEO including Ron Jonhson from Enjoy, Dan Rosensweig from Chegg, Andrei Cherny from Aspiration and others. You can access recordings from the event by following link provided on Slide 8 of the company presentation.
Thanks for your attention. And with that I will turn it over to Bill.
Today I have a few very brief comments providing a financial overview for our results, followed by an update on our current liquidity position. We ended the quarter with a net asset value per share of $9.11. A breakdown of the change in NAV during the quarter is shown on Slide 9 that is consistent with our financial reporting.
In sum $0.28 per share increased in NAV during the second quarter was driven by $0.58 cents per share of net changes in unrealized appreciation of investment that was partially offset by $0.03 of net realized losses and $0.27 per share of net investment losses or operating expenses. Our liquid assets ended the quarter at approximately $21.8 million consisting of approximately $2.6 million of cash $14.5 million of public securities not subject to lock up agreement and $4.6 million of public security subject to a lock up agreement. Our shares of staff became freely tradable as of July 31 of this year.
Subsequent to quarter end, we repaid the $8 million outstanding on our credit facility as of today we have $12 million available for borrowing under the credit facility. Additionally, subsequent to quarter end we sold over 400,000 shares of our unrestricted common stock in portfolio company Chegg for a total proceed of roughly $5.7 million which resulted in a net realized gain of nearly $1 million. We appreciate our stockholders support in GSV Capital. That concludes my comments and we'd like to thank you for your interest.
I'll now turn the call over to start the Q&A session. Operator?
Our first question is from Ed Woo with Ascendiant Capital.
Yes. Thank you for taking my question. Michael I've definitely, it's been great working with you and I wish you a best luck going forward hoping to stay in touch and Mark I definitely look forward to working with you going forward. Michael, I just have more of a high-level question in terms of what you're seeing out there in Silicon Valley? You guys are in touch with all the big deals that are going on it feels like 27 team seems to be in good share but what are people looking from some of the big teams that are going to be shaping up for the back half of this year and possibly into next year?
Yes. So one comment is that innovation is alive and well in Silicon Valley. If anything, you see in the pace accelerate start-ups and funding are in a very robust level. And I think, I think to see that continue frankly as much as you're seeing adequate funding in the private marketplace I think you're going to need to see an IPO market that opens up somewhat to see that continue its just a function of how much private - there is a ton of private capital, but the fact of matter is I think you see some realizations you got over 200 unicorns right now. And that's just - on the one hand it's going to be fun when the window opens but the same time I think you will have to see some of that come through, but very excited.
So some of the areas that are getting a lot of attention, clearly everybody is all over artificial intelligence and machine learning in every manner kind of applying to every industry there are a lot of things there is another huge, huge megatrend with a lot of interest and a lot of activity going on and just literally we've had a meeting with a fortune 500 company before this call and they are all over start-ups in Silicon Valley and lot of things, because they just believe it's going to be such a transformative wave of technology.
Block chain which has got a lot of attention with the digital currencies, I think you're starting to see the - multiple industries and I think that's going to be very exciting, very significant. Digital doctor, there is just a number of interesting things that are going on. I think something there but it's focused on - I do believe it's a huge opportunity, I think it's very positive for GSV Capital position. It's just all kind of future at work idea with all the automation going on and robots and so forth. People are seeing jobs being taken away from now only manufacturing jobs and warehouse jobs it's certainly the white color and - no color jobs. So people are saying what does that mean, you are seeing these companies are basically position themselves to provide the knowledge skills and so forth that people need to participate in the future. Lots of interest and activity. So we are very bullish on several of our holdings, that are position that overall share can be an obvious example effectively taking talent and network inti through knowledge to future opportunities.
So those are a few. I'd say on a foot note, we though this year was going to be a major breakout in the virtual reality, augmented reality area Pokemon Go last summer kind of was a starting gun going off and if you were in that world and while you see still lot of interest it's just going, it's not coming online as fast as we thought previously. I don't think that takes anything away from what the future looks like there, I just think it means like a lot of thing takes a little longer to get going and I think when it gets going it's going to be huge.
So those are a few of the observations I have, though Silicon Valley and just so you know basically what we're doing here from a management standpoint is my focus is going to be continue identifying opportunities investment theme, seeing great businesses and networking so we have access to businesses and Mark Klein coming aboard he's been working with us really from beginning as we can be focused on both the business but also what we did focus on specific things we're going to do on daily basis to enhance shareholder value. So that's the view of the board of the view of me, we're obviously incredibly focused on what we do to have a share price that is consistent with the value of the portfolio and the value that's being created which we couldn't be more optimistic about the way the portfolio sits in terms of the positions that we have the fundamentals were positioned.
Our next question is from Cynthia Boyle with Wells Fargo.
Hello, first of all congratulations on the decision to buy back shares. Thank you. We're shareholders obviously and we're all very interested in getting a good return on our money. But I got a simple question, if in fact Spotify takes around of being a direct offering which would mean your shares would be freed up. Can you walk us through what the net impact would be to shareholders?
And that there would be no lock out and how it would work internally?
So there was no lock up, we'll be free to sell the shares immediately that we have. We'll be making decision at that point if the price reflected we've consider it to be properly valued for our shareholders and if it was we'd liquidate the position and a couple of pieces just to put in - One of the things that we've said was that after a company goes public, it would be our intent to sell the shares, I mean it's our intent to sell shares within 12 months after a company lock up is over and that is our intent. I mean that's absolutely our intent, in the case of Spotify, we'll see where it trades.
If you've followed the private market there's tremendous demand for Spotify shares today, so we're hopeful that we can continue to see that rise and if it does what we think is fair value it's likely we'd sell the business. Because we will make a major return for our shareholders and that's what we've been doing consistently since we --. But we do reserve the right as we did with Chegg where we held the position longer than that period and the reason was we felt what the shares were trading at versus what we viewed the value was significant, it was 10%, 20% or 30% of gap was literally with the multiples of where the price way.
So we made a decision to keep them and we did obviously with the stock performing as it has over the last 12 months, but we do want to make sure that people realise it whether it's our focus or goal that we'll liquidate shares within 12 months. And in terms of distribution, the policy is basically gains offset against losses and then that's the end of year calculation. Bill is there anything to add?
Our next question comes from Joseph Gardner with Joseph Gardner with Emerald Advisors.
Good afternoon, Mike. Just had a question regarding the portfolio activity for the first 6 months no, no new investments no divestitures just wondering if you can talk a little bit about that and kind of what you're seeing in the marketplace that has led to no activity on either side which is very unusual for GSV given kind of the history there. So if you could just talk a little bit more about that?
Hi Joe, thank you so much for the question. As it relates to our activity, there is a couple different pieces of it. One is that the liquidity that we have is pretty limited and what we've been focused on is frankly can we get liquidity at a good price for some of our names that we think it's the right thing to do even in the end up in the private well. What we've seen and it's changing by the way, but we saw for most of the first half of the year a private market where it was more of a buyer's market and we did, we were able to see the prices in the portfolio. As reflected in what we've marked the portfolio that we just weren't seeing the kind of prices that we think reflected fair value.
So we chose not to sell much of our portfolio and because of our limited liquidity it basically limit our ability to buy new issues. That said, every single Monday we have an active list of companies that we're focused on kind of our NFL draft and we're constantly looking that can we find these shares at attractive price or can we participate in a financing that gets done at attractive price.
And just with those opportunity the first six months, I think the market - I think the combination which I referenced before which is you have seen, we've seen a material pick up and just the action of growth names and I think that has sparked 2 things, one we're seeing the activity in the private mark pick up quite a bit, I mean significantly. We are also seeing, while we have seen like this floor of IPOs or the IPO market that's picked up the way we thought it would, I'd be very surprised if we didn't see that come into the fall through the year.
History has shown that when the public market starts acting well particularly in the growth names, the IPO market follows and that's what we'd expect and I think again that changes our dynamic given life opportunities relates to take advantage of selling positions that we think reflect our value and buying private companies that we're focused on.
Alright. Thank you very much. That does conclude our call for today. We appreciate your joining us.
Yes. Thank you very much for being on the call. If there are any follow-up questions, we're ready to answer them and again we're optimistic about our position that we have. Thank you.