GSV Capital (GSVC) CEO Mark Klein on Q1 2019 Results - Earnings Call Transcript

May 09, 2019 12:08 AM ETSuRo Capital Corp. (SSSS)
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GSV Capital (GSVC) Q1 2019 Earnings Conference Call May 8, 2019 5:00 PM ET

Company Participants

Ben Fife - Investment Professional, GSV Asset Management

Mark Klein - Chief Executive Officer

Allison Green - Chief Financial Officer

Conference Call Participants

Cynthia Boyle - Wells Fargo Financial Network

Jason Ringer - JSR Capital Partners

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSV Capital’s First Quarter 2019 Earnings Conference Call. During today’s presentation, all parties will be in listen-only mode. Following the presentation, the conference will be opened for questions. This call is being recorded today, Wednesday, May 8, 2019.

I will now turn the conference over to Mr. Ben Fife. Please go ahead, sir.

Ben Fife

Thank you for joining us on today’s call. I’m joined today by Chief Executive Officer of GSV Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation that corresponds to today’s 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 a 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 would like to turn the call over to Mark Klein.

Mark Klein

Thank you, Ben. We are pleased to share the results of GSV Capital's first quarter 2019. First, I will review the recent quarter, including key initiatives we are executing to enhance shareholder value. Then I will provide an update on key developments in portfolio. To conclude, I will hand the call over to Allison Green for a brief financial overview and then we will open up the call for questions.

Let's start with slide 3. At the end of the first quarter, net asset value was $10.75 per share, up from $9.89 per share in the fourth quarter. Net asset value totaled approximately $213 million compared to $195 million in the fourth quarter. As our portfolio companies gained scale, they're increasingly attracting the attention of private investors. We expect this trend to continue and to contribute to the growth of our net asset value.

Please turn to slide 4. As announced during our call, on March 14. We transition GSV Capital to an internally managed fund structure. At this stage in our development, given our unique portfolio of equity investments and established position in the market, we determined that it was in the best interests of our shareholders to eliminate the expense of the asset manager. We are excited about this initiative and believe this will continue to create tangible near-term and long term value for shareholders, primarily an internal manage structure eliminates monthly management fees as reflected in our income statement and incentive fees previously accrued as a liability on our balance sheet.

Based on the past performance of internally managed BDCs. The shareholder friendly nature of this structure has been rewarded in the public markets and we believe this change will help drive NAV and close the gap between share price and NAV.

Additionally, this shift – shift affords GSV Capital a greater degree of operating leverage, as increasing AUM will no longer coincide with a proportional increase in operating expenses. Later in the call, Allison will discuss other developments outside of the portfolio and explain the steps we are taking to increase overall shareholder value.

Please turn to slide 5 and 6, our key area of focus continues to be selectively adding new names to our investment portfolio. As a general rule, given the present size of our portfolio, we are targeting $10 million to $15 million positions in premiere mid to late stage growth companies with a line of sight to an IPO or a significant liquidity event. At the same time, we will opportunistically make follow on investments where we can underwrite equally compelling returns.

In Q1, we invested in Neutron Holdings, better known as Lime, Series D fundraising round. Lime is a leading on-demand electric scooter and bike company that serves over a 100 cities, towns, company campuses, universities and communities throughout 15 countries across five continents. We view micro-mobility as shaping the future of transportation and are pleased with Limes progress to-date.

Beyond our new investment in Lime and our investments in Nextdoor.com at the end of 2018, we are actively sourcing and evaluating investment opportunities in top VC-backed companies that demonstrates strong operating fundamentals.

While management previously communicated its intention to monetize public positions within 12 months of the exploration of any relevant lockup period, it is now our intention to hold public securities through a lockup period and the ensuing stabilization period.

We are tasked to identify source, diligence and invest in mid to late stage venture backed companies, not to manage a public -- portfolio of public companies. Accordingly, we sold our entire position on Spotify for a sizable gain. We have also started to monetize our position in Dropbox, which we plan to continue to do in the near future.

As stated, we have realized meaningful gains on our sales of Spotify and Dropbox. We expect to realize sizable gains on our remaining position in Dropbox as well as our position in Lyft. Given current price levels and the losses that we have carried forward from our legacy positions, we do not expect these exits will result in a meaningful if any distribution to shareholders this year.

Beyond Dropbox and Spotify, we are pleased to report noteworthy developments from Lyft, Coursera and Enjoy [ph]

Lyft priced their public offering on March 28 at $72 per share and we carry out position at approximately $72 per share or $22 million in aggregate. In Q1, Lyft generated $776 million in revenue, an increase of 95% year-over-year and reported $20.5 million active riders, an increase of 46% year-over-year.

We want to congratulate Lyft on their latest milestone and know that they've accomplished and positioned themselves as a leading transportation company. The lockup on our Lyft position expires on September 25th of this year.

Coursera, now our second largest position recently announced one $103 million Series E fundraising. According to Pittsburgh, the round values the company at over $1.56 billion. For reference, GSV Capital value Coursera at $828 million in Q4, or almost 50% below the Series E rounds valuation. Coursera currently offers 3,200 courses and 310 specializations with partners including Columbia University, Johns Hopkins University and the University of Michigan. Roughly 40 million people have now taken online classes through the start-up, a significant jump from 26 million courses that Coursera noted for their fundraising in 2017. Coursera has been instrumental in providing greater access to education globally and we feel to be part of their journey.

Another position we would like to highlight is Enjoy, which is now a top 10 position in our portfolio. Enjoy is focused on reinventing the mobile retail store by sending an expert deliver through your door to deliver and setup technology products not only a few hours. We first invested in Enjoy in 2014 when CEO Ron Johnson, the ex-nations CEO and ex-head of retail at Apple was raising Enjoy a Series A round. Since we invested, Enjoy is from partnerships with companies like Google, AT&T and Sonos and is on its way to creating a nationally recognized brand.

Please turn to Slide 7 and 8 for a review of notable developments in our investment portfolio in the first quarter and subsequent quarter's end. GSV Capital's top five positions as of March 31st were Palantir, Coursera, Lyft, Spotify, and Course Hero.

These positions accounted for approximately 57% of the portfolio at fair value excluding Treasuries. As of March 31, our top 10 positions accounted for approximately 85% of the portfolio.

To put the evolution of our investment portfolio into perspective, the combined fair value of our top five positions as of March 31 was $122 million or approximately 82% of GSV Capital's $150 million total market capitalization at the quarter's end. We believe this dynamic emphasizes a significant risk/reward opportunity for our investors.

Segmented by five general investment themes, the top allocation of our investment portfolio is to education technology representing approximately 34% of the portfolio at fair value excluding Treasuries.

Marketplaces is the second largest category, representing approximately 27% of the portfolio. As we evaluate new investments, we are focused on investing in themes we historically have successfully and on identifying new trends, we believe represent compelling long-term opportunities.

Looking ahead, we believe that GSV Capital is well-positioned to deliver long-term shareholder value. We are executing against disciplined growth investment strategy with strong tailwinds. We believe the fundamentals of our portfolio are 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.

Allison Green

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our financial results as of March 31 and update on our transition to an internally managed BDC, our expense reduction initiative, our share repurchase program and our current liquidity position.

We are pleased to report that we ended the first quarter with NAV per share of $10.75, a breakdown of the increase in NAV during the quarter as shown on slide 10 and is consistent with our financial reporting.

In sum, the $0.86 per share increase in NAV during the first quarter was driven by approximately $1.05 per share of net unrealized depreciation on our portfolio investments. This increase was offset most notably by a $0.21 per share net realized loss on the sale or exit of investments, driven by our previously announced loss on Declara and offset by gains realized on sales of over a third of our Spotify acquisition as of March 31.

From an operations perspective the internalization did result in an increase in one-time expenses. However those expenses were offset by the one-time reversal of the incentive fee accrual and resulted in a net increase to NAV of approximately $0.03 per share.

As mentioned the most significant and impactful change during the first quarter and to date from a shareholder value perspective is the internalization of the management of GSV Capital. As an internally managed BDC we will have a significantly reduced cost structure. As a result of the termination of the investment advisory agreement on March 12, we will no longer pay monthly management fees as management is now employed directly by the BBC.

Additionally, as of March 12, the $4.7 million accrual for potential incentive fees will no longer be a liability on GSV Capital's balance sheet. The reversal of the incentive fees accrual provided an immediate increase of over $0.23 per share to our NAV. We expect the internalization to ultimately result in an annual run rate savings of approximately $2 million per year exclusive of the savings attributable to the removal of an incentive fee or approximately 20% of our expense base prior to internalization.

As Mark mentioned earlier, the change to internalization affords GSV Capital, a greater degree of operating leverage as increasing AUM will not coincide with a proportional increase in management fees and incentive vehicle.

The immediate and long-term cost savings of the internalization focus on GSV Capital management's continued focus on optimizing the company's current operating expense base.

We implemented several key expense reduction initiatives throughout 2018 and have carried over to the new structure, including but not limited to the refinancing of our convertible but the renegotiation of our line of credit. The expiration of the built in gain measurement period related to our status as a rate, and several other small operational changes, several recurring operating expenses declined approximately 33% in the first quarter of 2019, compared to the first quarter of 2018. We remain diligent about managing our expense base moving forward.

Together, we believe the meaningful cost savings we will experience as an internally managed BDC and our continued diligence to reduce our operating expenses will create immediate and long-term increases to NAV.

Based on corporate trading restrictions, we did not repurchase any shares in the first quarter of 2019 and have not made any share repurchases subsequent to quarter end. Since the inception of the share repurchase program in August 2017 to-date, our Board of Directors has approved up to $20 million allocation to repurchase shares of our common stock, and we have repurchase nearly 11% of the outstanding shares.

Next I would like to review GSV Capital's current liquidity. We ended the first quarter with about $64.9 million in liquid assets, including $25 million of cash and $39.9 million of marketable securities.

In addition to cash and marketable securities, we also had $22.1 million in restricted securities, representing our position in less and $12 million available to us under our undrawn line of credit.

Our cash balance of $25 million as of March 31, decreased slightly from $28.2 million at year end. The decrease was a result of our investment in Neutron Holdings Inc., better known as Lime and general operating expenses and onetime expenses related to the internalization of our positions in Spotify.

The $39.9 million in marketable securities represents our remaining unrestricted holdings in Spotify and Dropbox as of March 31. Subsequent to quarter-end, we sold our remaining 150,350 shares of Spotify with an overall proximate proceeds of $32.5 million realizing an overall gain on the sale of our Spotify position of $22.5 million.

We also sold 95,800 shares of Dropbox subsequent to quarter-end for proceeds a $2.3 million and realizing gains of nearly 800,000.

That concludes my comments. We would like to thank you for your interest and support a GSV Capital. Now, I'll turn the call over to the operator to construct the queue. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Cynthia Boyle with Wells Fargo Financial Network.

Cynthia Boyle

Hi. Congratulations on a great quarter and a very cogent presentation. The question, I have is what would you – have you anticipated or would you consider increasing your buyback to close the gap between the net asset value and the current market price which seems to be pretty big disconnect?

Ben Fife

Thanks, Cindy. And thanks for listening to the call today and your kind words. As Allison stayed before, because of corporate blackout periods et cetera. We didn't have the opportunity either as the company or as insiders to be in the market for the last few months. We do have about $4.8 million in our buyback before we need to expand it. But we recognize that the stock is trading at a significant discount currently. Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Jason Ringer with JSR Capital Partners.

Jason Ringer

Hi, there. Great quarter. I just had a quick question for you in terms of the way you think. I know you're concentrating more on fewer amount of – to top out the investments. You NAV seems to have gotten more volatile obviously. I mean, the only example, I can give you is last quarter to this quarter was down a bunch because the market correction last quarter and now you've bounced back. But like given you know since your 10% positions in some of these companies like lift where it's currently 25% below your mark. How do we think about that as investors going forward?

Ben Fife

Well, a couple of things. Obviously, both Q4 and in Q1 were extremely volatile in the equities market, right, unusually so. I mean Q4 was probably I think one of the worst quarters since the financial crisis and obviously there was a significant rebound in Q1. So the sort of macro picture we can't really do an awful lot about those were unusual. We were fortunate not only to have companies in Q1 had the benefits versus some of the public names to have an increase in value. But we had things like the Coursera Financing et cetera that occurred that were also contributed to NAV. So I don't know that these two particular quarters were not just simply outliers, because of the volatility of the markets in general not specific to our specific portfolio companies. Hopefully that – that's responsive to your question.

Operator

Thank you. That concludes today's question-and-answer session. I would now like to turn the conference back to Mr. Mark Klein for closing remarks.

Mark Klein

Well, all of us GSV Capital would like to thank all of you for taking the time to listen to our earnings call, and to be shareholders it's greatly appreciate appreciated. Thank you.

Operator

Thank you. This concludes today's conference. We thank you for your participation. You may now disconnect.

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