180 Degree Capital Corp (NASDAQ:TURN) Q1 2019 Earnings Conference Call May 2, 2019 9:00 AM ET
Daniel Wolfe – President and Chief Financial Officer
Kevin Rendino – Chairman and Chief Executive Officer
Conference Call Participants
Good morning, and welcome to 180 Degree Capital Corp’s First Quarter 2019 Financial Results Call. This is Daniel Wolfe, President, CFO and Portfolio Manager of 180 Degree Capital; Kevin Rendino, our Chairman and CEO and Portfolio Manager. And I would like to welcome you to our call this morning. [Operator Instructions]
I would like to remind participants that this call is being recorded and that we will be referring to a slide deck that we have posted on our investor relations website at ir.180degreecapital.com under financial results.
Please turn to Slide 2 that contains our safe harbor statement. This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are for looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to inherent uncertainties in predicting future results and conditions. These statements reflect the company’s current beliefs. And a number of important factors could cause actual results to differ materially from those expressed herein.
Please see the company’s filings with the SEC for a more detailed discussion of the risks and uncertainties associated with our business that could affect our actual results. Except as otherwise required by federal securities laws, 180 Degree Capital Corp. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
I would now like to turn the call over to Kevin.
Thanks, Daniel, and good morning, everyone. I apologize in advance if you happen to hear jackhammering in the background, we didn’t account for PSE&G coming to take telephone poles down outside our office.
Flipping to Page 3 of our presentation, we grew our book value by 5% in Q1. The entirety of that gain was achieved by our performance of our public holdings. This level of outperformance from our public market stock-picking has been a regular theme since the inception of 180 back in 2017, and this quarter was no exception.
This quarter, Adesto, TheStreet and Airgain led the way. We’ll have more on the public portfolio in just a few minutes. Our private portfolio was flat this past quarter. If you recall last quarter Q4 2018, the Russell Microcap index was down 22%. Our public market holdings were down just 12% and our private portfolio was flat. Because 60% of our assets were invested in the private companies, our NAV declined just 6% versus the same 22% decline for the Russell. This quarter, the cushion the private portfolio provided last quarter turned into a headwind this quarter as our NAV rose 5% against the market up 13%.
Next slide, please. Here is a historical trend of our NAV since 180 became a company. Three things to note: one, 90% of the gains in this growth have been generated in our new strategy of investing in public companies; second, our 18% NAV growth has been achieved against the backdrop of an 8.6% increase for the Russell Microcap; and third, we have more than doubled the return of that index despite only having the ability to actively work with an average of 30% of our balance sheet, given that 70% of our balance sheet historically has been in the private companies.
Next slide, please. Every quarter, we show you the source of change in our NAV. You’ll see on Slide 5, we have a starting $2.64 NAV at the end of last year. We generated $0.14 of gains in the public portfolio. You don’t see a bar for the private portfolio because the performance was almost at flat. Adding $0.02 of normal expenses leads to a quarter end NAV of $2.76.
On Slide 6, this shows our NAV change over the course of time we changed our strategy. As I said, 90% of our gains of $0.60 per share came from the public portfolio. $0.07 added from the private portfolio. Adding that to the starting NAV of $2.34 and then deducting $0.19 of normal expenses and $0.06 of restructuring expenses leads to a $2.76 NAV at the end of Q1.
On Slide 7, you see a snapshot of our performance of the public companies on a weighted average basis. This correlates directly to our NAV. On that basis, we achieved a 14.4% increase or $4.4 million in the last quarter. No surprise that 7 of the 8 stocks achieved positive absolute performance this quarter given the snap back in the market in Q1.
Let’s talk about some of the individual names on the next slide. Page 8 shows our three biggest contributors from our public holdings. Adesto was up 37% and added $0.06 a share to our NAV. The company had a solid Q4 report and then outlook was viewed favorably for the balance of the year. Of course, you know Q4 market was – Q4 market meltdown had dislocation that was felt the greatest in the semiconductor space due to China trade war fears and oversupply issues in the memory space. That reversed itself this past quarter.
TheStreet advanced 15% and added $0.05 to our NAV. This past quarter, the company closed the sale of its B2B business to Euromoney for $87 million, announced $1.77 special distribution that was paid in April. The last piece of work to do is to conclude on looking for strategic alternatives for the B2C business. But I think all of you know, this has been a home-run investment for our shareholders.
Finally, Airgain was up 30% and netted us a positive $0.02 on a solid Q4 earnings report and positive outlook for the year.
Next slide, please. We show some notable events on some of our other holdings on this page. Emcore had an okay Q4, generally okay outlook. The problem with the company is it needs an Investor Relations overhaul. It’s just a very sleepy company these days.
Intermolecular had an okay Q4 but provided a muted outlook in Q1 – or for Q1 2019. The most significant item on this page is the announcement that we joined the Synacor Board of Directors in March of this past year. While the overhang of AT&T continues, the stock is absolutely priced – is absurdly priced relative to its EBITDA and the absolute level of its recurring software business. A matter of fact, the entire enterprise value equals the recurring software revenues, and that’s just not how software recurring businesses are valued normally. So either the rest of the market has a negative $70 million valuation or the company’s equity price at $1.47 is incredibly undervalued. We think the latter.
On Lantronix, one CEO left, another one entered, really no change to our view there.
On Slide 10, the next set of slides will show our weighted average return of our public companies over a longer period of time in the same format we showed you for this past quarter. What you’ll see on this slide, 13.2% return over the last year, and on the next slide, 48.3% since the end of 2016. How does that relate to the notable comparative indices that we compete against? On Slide 12, here it is. We – this is a snapshot of both total returns and weighted-average returns. Total returns take into consideration reinvestment and would be how the Lipper fund universe world would look at us if we were standalone fund. Weighted returns relate straight back to our NAV. In both cases, we have significantly outperformed the Russell Microcap index. And for those keeping score, we’ve actually outperformed the S&P 500 again – the S&P 500 as well, and in the case of the Russell, by a significantly wide margin.
On the next page, you’ll see our NAV growth versus the Russell Microcap index. For as long as we have a private portfolio, this slide will always be apples and oranges discussion, meaning NAV is the sum of our private and public stock performance less expenses. This quarter, when 60% of your balance sheet is flat, your NAV growth won’t track the market. Last year, as I said, flat performance in our private portfolio actually helped our NAV relative to the declines in the Russell Microcap index.
On the next Slide, you’ll see our progress that we have made in remaking ourselves. We had a nearly 50% increase in our public holdings as a percentage of our total assets. Starting at just 26% at the end of 2016, we have nearly 42% of our assets in public companies today. Clearly, the more liquid our balance sheet becomes, the more narrower our stock price will trade relative to our NAV. I’ll have more to say on our share price in just a little bit.
Next Slide is just a quick snippet update on the quarter-to-date. We’re up close to $0.07 a share when looking at our public portfolio performance Q2 to-date, and also the carried interest we’ll get from the TST distribution that we report this quarter. The distribution of $8.3 million from TheStreet gives us dry powder to find some interesting new names. I’ll say we have nearly 3% of our holdings in what I will call undisclosed assets. These are two positions that we are currently building and we don’t want to disclose those names until we’re done building those positions. Daniel?
Thank you, Kevin. Please turn to Slide 16.
As we’ve said in prior calls and letters, we continue to believe our private portfolio contains companies that can generate meaningful returns on invested capital. As of the end of this quarter, our most mature private portfolio companies, D-Wave, AgBiome and ORIG3N were valued in aggregate at $26 million or just over half of the total value of the entire private portfolio comprised of 24 positions.
I should note that 18 of these 24 positions that are collectively valued at $47.5 million are in actively operating businesses. The remaining positions that are collectively valued at $2.7 million are primarily ones that represent rights to potential future payments. The remaining are basically companies that are in the process of shutting down.
There are other private companies within our portfolio that have the potential to generate future gains and future returns. However, these companies are in the early stages of development and the timelines of potential exit values for these companies remain highly uncertain.
As a reminder, we continue to look for opportunities to monetize our private portfolio investments in transactions that we believe are in the best interest of our shareholders. Towards this goal, we were able to sell our convertible bridge note in genome profiling to an unnamed investor in January 2019 for the principal amount of $230,000 plus unpaid accrued interest. And also, this quarter, actually in April, we sold $25,000 worth of our shares of Phylagen at a price per share equaling to that at which our valuation is based.
While not material – as material as the sale of our shares of HZO for $7 million last year, the sales are continued step in the efforts to monetize our private holdings so we have additional capital to put to work in our public investment strategy.
Please turn to Slide 17. As we have discussed in prior calls, we have greatly reduced our operating expenses, which will make it easy – far easier to grow NAV than in years past. For the first quarter of 2019, our operating expenses declined slightly to $775,000, from $800,000 in the same quarter of 2018, a 4% year-over-year decrease.
I note that these figures do not include sublease income of $60,000, which was the same as the first quarter of 2018 and 2019, nor the accrual of a portion of the deferred bonus pool from 2017 of approximately $14,000. Including these numbers, our total operating expenses for the quarter net of sublease income was approximately $730,000.
Please turn to Slide 18 and 19. As we’ve discussed on last quarter’s call, we currently anticipate that reduction in our operating expenses as a percentage of net assets will be based on growth in our net assets rather than further reduction in our expenses. We’ve also mentioned that we may make investments in our business by adding to our investment staff, which would increase our operating expenses.
While our current budget and the slight increase in our project operating expenses as a percentage of net assets reflects higher for the company, we will only pursue hiring someone if we believe that investment will help us grow 180’s net asset value. We remain committed to treating every dollar of shareholder money with the utmost care and consideration. It is much easier for us to grow NAV when the expense fill rate is where it is today.
Please turn to Slide 20. As we do each quarter, this slide presents the scorecard of our performance during the quarter on multiple metrics compared to the end of 2018. We are encouraged by our performance through the first quarter and are focused on continuing to work to build shareholder value each and every day.
I will now turn the call back over to Kevin.
Thanks, Daniel. On page – Slide 21, we do the standard sum of the parts analysis for you. Our cash and liquid securities equals $1.14 per share. Given our end of quarter stock price of $1.86, the market is ascribing $0.72 per share or $22.4 million of value to the $50 million of value the private portfolio is marked on our balance sheet. Essentially, TheStreet is paying us $0.44 on the dollar for those assets. Clearly, I don’t think that’s the right stock price. I should note that over my tenure at 180, I’ve become the fourth largest shareholder with almost every share but 2,000 of the 602,000 shares I own, built through open market purchases with money out of my pocket.
Collectively, the management team and our board have purchased over 400,000 shares of TURN in the last 5 quarters. We are certainly aligned with our shareholders.
Finally, our vision for 180 continues to be what it has been and what we want the investing world to know us by. We want 180 to be known as a prominent and dominant leader in the world of our public company constructive activism. We’ll continue to strive for excellence in investment performance. We want to be known as game changers and helping businesses generate positive shareholder returns. We think we’re well on our way towards achieving our vision.
I’ll stop there. Daniel, why don’t we open it up for questions.
Sounds good. [Operator Instructions] Please go ahead.
Q - Unidentified Analyst
Hey, Daniel. Hey Kevin. It’s Whitney. I just wanted to thank you for all the hard work and express my appreciation for Slide 15, which is the fourth – excuse me, the second quarter update. That’s all I’ve got.
Thanks, Whitney. I appreciate that. I have to go back to what 15 was. Oh, TheStreet.
Now that’s the second quarter update..
Sure. You got it, Whitney.
[Operator Instructions] I’m not seeing any additional questions.
Okay. Everyone, thank you very much for your interest in our Q1. We’ll be back to you in a few months to talk about Q2. In the meantime, happy investing. Thank you.
Thank you, everyone. You can now disconnect.