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Edited Transcript of GSVC earnings conference call or presentation 14-Mar-19 9:00pm GMT

Q4 2018 GSV Capital Corp Earnings Call

WOODSIDE Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Gsv Capital Corp earnings conference call or presentation Thursday, March 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allison Green

GSV Capital Corp. - Senior VP of Finance, Treasurer & Secretary

* Jackson Stone

* Mark David Klein

GSV Capital Corp. - President & CEO

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Conference Call Participants

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* Alexander Peter Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst

* Jon Robert Hickman

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst

* Nicholas Brown

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSV Capital's Fourth Quarter and Annual 2018 Earnings Call Conference. (Operator Instructions) This call is being recorded today, Thursday, March 14, 2019.

I would now to turn the conference over to Jackson Stone with GSV Capital. Please go ahead.

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Jackson Stone, [2]

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Thank you for joining us on today's call.

I'm joined today by the President and Chief Executive Officer of GSV Capital, Mark Klein; and Senior Vice President and Controller, 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. A replay information is included in our press release issued earlier today. This call is a property of GSV Capital Corp, and any 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.

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Mark David Klein, GSV Capital Corp. - President & CEO [3]

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Thank you, Jackson.

We are pleased to share the results of GSV Capital's fourth quarter 2018. 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 the portfolio. To conclude, I'll hand the call over to Allison Green for a brief financial overview, and then we will open the call for questions.

Let's start with Slide 3. At the end of the fourth quarter, which was the worst quarter for the NASDAQ since the financial crisis in 2008, net asset value was $9.89 per share, down from $10.58 per share in the third quarter and up from $9.64 per share in the fourth quarter last year. Net asset value totaled approximately $195 million compared to $213 million in the third quarter.

The companies in our portfolio continue to demonstrate strong growth, and we anticipate that the growth will be rewarded by private and public investors in the coming months. Accordingly, we're excited by both the near-term and the long-term drivers of our NAV.

As announced today, our Board of Directors has agreed with GSV Asset Management to 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 interest of our shareholders to eliminate the expense of the asset manager. This significant change to internally manage GSV Capital is consistent with our commitment to increase shareholder value through shareholder initiatives. In the past 2 years, we have implemented our share repurchase program under which we have retired nearly 11% of our shares outstanding. Additionally, we reduced operating expenses, which declined 33% year-over-year in the fourth quarter, not including management and incentive fees. We are extremely excited about this initiative and believe this will create tangible near-term and long-term value for our shareholders. Primarily, an internally managed structure will eliminate both the management fees, which are reflected in our income statement, and the incentive fees which are currently accrued as a liability on our balance sheet.

As of December 31, 2018, our accrued incentive fee was approximately $4.7 million, and given the performance of our public securities and events in our private securities, we expect that if we had, had -- if we were to have an accrual in Q1, it would be meaningfully higher. We expect there will be an immediate uplift to NAV from eliminating our accrued incentive fee and a long-term uplift to NAV from eliminating management fees. Each of these should be material.

Based on the past performance of internally managed BDCs, this shareholder-friendly structure -- of this structure has been rewarded in the public markets, and we believe this change will help drive NAV as well as help close the gap between share price and NAV. Additionally, this structural shift affords GSV Capital a greater degree of operating leverage as increasing AUM will not coincide with the proportional increase in operating expenses.

On behalf of the company, I would like to thank Michael Moe, who's served as the Chairman for nearly 8 years, for his vision and leadership since its founding. Michael and I launched GSV Capital as a unique fund designed to give public growth investors access to rapidly growing VC-backed private companies, including Facebook, Spotify, Twitter, Palantir, Dropbox, Lyft and others. The investment portfolio we have developed over these years validates this vision and positions GSV Capital for long-term success. Going forward, the company will have a more targeted approach on our core strategy of investing in high-growth, later-stage companies not as a lead VC but as a partner. We will also be focusing on harvesting the maximum value of existing investments and will return value to our shareholders.

Later in the call, Allison Green will discuss other developments outside of the portfolio and further explain the steps we are taking to increase overall shareholder value.

With last year's public listings from Spotify and Dropbox, 2 of our top 5 positions, and this year's expected public listing from Lyft, our fifth largest position, the second key area of focus is selecting and adding new names to our portfolio. As a general rule, given the present size of our portfolio, we are targeting $10 million to $15 million positions in premier 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.

We are pleased to announce our new position in Neutron Holdings, better known as Lime, which we entered into subsequent to quarter end. Lime is a leading on-demand electric scooter and bike company that serves over 100 cities, towns, company campuses, universities and communities throughout 15 countries and across 5 continents. We view micro-mobility as shaping the future of transportation.

McKinsey estimates that by 2030, the micro-mobility market could be worth as much as $400 billion globally, and we believe Lime, with 35 million trips already completed, is best positioned to dominate the market. This investment in the Series D round came alongside top-tier venture capital forms, including Andreessen Horowitz, Bain Capital Ventures, Google Ventures, IVP and Coatue.

We are similarly pleased to announce our follow-on investment in Nextdoor.com. With our $3.7 million investment in the fourth quarter, our total position is now equal to roughly $10 million. As we discussed on last quarter's call, Nextdoor.com is an outstanding platform that serves 200,000 neighborhoods across 7 countries. We believe Nextdoor.com has a tremendous upside with an ability to expand internationally with an opportunity to further monetize its hyper-localized user base.

Beyond our new investment in Lime and Nextdoor, we are actively sourcing and evaluating investment opportunities in top VC-backed companies that demonstrate strong operating fundamentals.

Our public positions, Spotify and Dropbox, continue to perform at or above Street expectations and have rebounded more than 27% and 11%, respectively, since quarters end. We believe both are outstanding businesses that will continue to deliver on key growth metrics.

As we had communicated in the past, our intention is to monetize public positions at a time that will maximize shareholder value within 12 months of any relevant lockup expiring.

As the strong tailwinds drive up the prices of our public positions, we will continue to closely track Spotify's and Dropbox' performance as we seek to exit the positions at a time that will maximize returns for GSV Capital shareholders.

Beyond Dropbox and Spotify, we are pleased to report noteworthy developments from Lyft and Palantir. Lyft has filed their S-1 and is expected to price their public offering by the end of this month or the first week of April. Reuters has reported that Lyft, which now has nearly 40% of the U.S. ridesharing market, expects to be valued at up to $25 billion in its IPO.

For context, we carried Lyft at an implied equity value of $16 billion in the fourth quarter. In Lyft -- in 2018, Lyft had $8.1 billion in bookings, $2.1 billion in revenue, and then -- and more than 1 billion total rides. We remain excited about our position in Lyft as they continue to grow and position themselves as a leading transportation company.

Palantir, our largest position, reportedly generated $1 billion in revenue in 2018 and has been in the news with plans to file for an IPO in late 2019 or early 2020. We are optimistic that a Palantir IPO will be well received in the public markets and anticipate this will continue to be a significant key driver of NAV moving forward.

Additionally, as we've discussed in the past, we have significantly reduced the number of companies in our portfolio. Please turn to Slide 7 and 8 for a review of notable developments in the GSV Capital portfolio in the fourth quarter and subsequent to quarters end.

GSV's top 5 position as of December 31, 2018 were Palantir, Spotify, Coursera, Dropbox and Lyft, which account for approximately 59% of the portfolio at fair value, excluding treasuries.

For context, GSV's top 10 positions at the same time last year accounted for 75% of the portfolio. As of December 31, 2018, our top 10 positions accounted for about 86% of our portfolio. To put the evolution of GSV Capital's portfolio into perspective, the combined value of our top 5 positions as of December 31, 2018, was $117 million. That's greater than GSV's total market cap at year-end which was approximately $103 million. We believe this dynamic emphasizes a significant risk-reward opportunity for investors, particularly as we move to an internalized structure.

Segmented by investment theme, the top allocation of our investment portfolio is Education Technology, which comprised approximately 32% of the portfolio at fair value, excluding treasuries. Cloud Computing and Big Data was the next largest category, representing 20% -- 26% of the portfolio. As we evaluate new investments, we are focused both on investing in the themes which we have historically had success and on identifying new trends which we believe represent compelling long-term opportunities.

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

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Allison Green, GSV Capital Corp. - Senior VP of Finance, Treasurer & Secretary [4]

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Thank you, Mark.

I'd like to follow Mark's update with a more detailed review of our financial results as well as an update on our share repurchase program, our expense reduction initiative and our current liquidity position.

We are pleased to report that we ended the quarter with an NAV per share of $9.89. A breakdown of the decrease in NAV during the quarter is shown on Slide 9, which is consistent with our financial reporting. In sum, the $0.69 per share decrease in NAV during the fourth quarter was driven by approximately $1.13 per share of net unrealized depreciation of our portfolio investment. This decrease was offset most notably by a $0.27 per share increase from the reversal of a tax liability on unrealized appreciation of investments as the 5-year built-in gain-measurement period for our IRS RIC status recently ended. Additionally, we noted other offsetting increases to our NAV per share during the quarter, including $0.08 per share of net accretion from our share repurchase program, $0.08 per share of net investment income and $0.01 per share of net realized gain on investments.

Please refer to Slide 10 as I review the share repurchase program for the quarter.

During the fourth quarter, the company repurchased 412,308 shares of GSV Capital common stock under the share repurchase program for approximately $2.8 million. Based on corporate trading restrictions, we did not repurchase any shares subsequent to year-end.

As we've communicated during our third quarter earnings call, our board authorized an additional $5 million expansion of the current share repurchase program to an aggregate of $20 million, which leaves approximately $4.8 million for further repurchases under the program. Since inception of the share repurchase program in August 2017, to date, we have repurchased nearly 11% of the then-outstanding shares of GSV Capital common stock.

In addition to the share repurchase program, our management team continues to be focused on optimizing the company's current operating expense base. We have implemented several key expense-reduction initiatives throughout 2018 that will carry over to the new structure.

As Mark mentioned earlier, operating expenses before the management fee waiver and onetime incentive fee forfeiture declined 33% in 2018 as compared to 2017. We will remain diligent about managing our expense base moving forward.

Continuing these efforts to increase shareholder value, we believe the most impactful initiative to date will be the internalization of the management of GSV Capital. As an internally managed BDC, we will have a significantly reduced cost structure. We will no longer pay management fees each month as management will be employed directly by the BDC. Additionally, we will no longer have an accrued liability for our incentive fee, which was previously accruing for the terms of the investment advisory agreement.

Overall, we expect this to result in an annual run rate savings of approximately $2 million a year, exclusive of incentive fee savings, or roughly 20% of our expense base. Together, our continued diligence to reduce our operating expenses, in addition to the meaningful cost savings we will experience as an internally managed BDC, will have an immediate and long-term increase to NAV.

Next, I'd like to review GSV Capital's current liquidity. We ended the fourth quarter with about $72.8 million of liquid assets, including $28.2 million of cash and $44.6 million of marketable securities. In addition to the cash and marketable securities, we also have $12 million available to us under our undrawn credit facility.

Our cash balance of $28.2 million as of December 31, 2018, consisted primarily of remaining proceeds from the issuance of $40 million of 4.75% convertible senior notes due 2023 during the first quarter of 2018 as well as proceeds generated by the monetization of various portfolio positions from the quarter -- from the fourth quarter 2017 through the fourth quarter of 2018.

The $44.6 million in marketable securities includes our unrestricted holdings in Spotify and Dropbox.

Next, I would like to make a comment about the filing of our annual report on Form 10-K for the fiscal year ended December 31, 2018. GSV Capital is unable to timely file its annual report on Form 10-K for the fiscal year ended December 31, 2018, otherwise known as the Form 10-K, by the prescribed March 18, 2019 due date without unreasonable effort and expense. The company's independent directors have retained independent counsel to conduct a review of certain administrative and operational activities. The company requires additional time to complete the internal review.

The company expects to file the Form 10-K on or before April 2, 2019. We do not expect the findings of the internal review to result in any change to the company's financial statements or results of operations which we reported on March 14, 2019.

Finally, it has come to our attention that a technical issue with GlobeNewswire has delayed the distribution of our press release related to this call. The press release was distributed during the course of this call. Please refer to our filing on Form 8-K today for additional detail on items discussed during the call.

That concludes my comments. We would like to thank you for your interest and support of GSV Capital.

Now I'll turn it over to the operator to start the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Alex Paris.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [2]

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I'm stuck in Denver as a result of the bomb cyclone, so I did not get the press release prior to the call. I'll look at it as a follow-up, but I did want to kind of dive a little bit further into this plan to internally manage the fund structure, and we can have a follow-up call as well. But I guess just a little additional color, how did we get to this point? Obviously, there's going to be an operating cost reduction. Who will manage the fund internally on a go-forward basis? Just any additional color you can give me there.

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Mark David Klein, GSV Capital Corp. - President & CEO [3]

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Sure, Alex, and thank you. A couple of things. As you are well aware, over the last couple of years, we have continued to try and create shareholder initiatives that significantly reduce the cost structure of our entity and -- as that goes to the direct benefit to our shareholders and whether be it share repurchases or fee reductions or fee forfeitures, et cetera. I know you're well aware of that. Obviously, internalizing a manager has significant implications on an income basis as the expense basis to our investors, both from a management fee basis and obviously an incentive fee basis. Those are quite material, and enure directly to the benefit of the shareholders. Over the last year, we have done a great deal internally to put ourselves in the position to do this. We have brought in a couple of investment professionals, several other financial professionals that were not here even a year ago. And we feel that we're in a very good position to continue to manage the fund. We do have an ongoing arrangement with GSVAM and Mike Moe to continue for some period of time as we transition. But we're quite comfortable with the team that we have in place, and we'll continue to add quality members of our team to continue to drive investment performance to our shareholders.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [4]

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Great. So when does this take effect? Is it retroactively effective to January 1 or does it happen later this year?

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Mark David Klein, GSV Capital Corp. - President & CEO [5]

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It's effective as of a couple of days ago.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [6]

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Okay. So there'd be some sort of incentive fee paid for the first 2.5 months of 2000 -- no?

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Mark David Klein, GSV Capital Corp. - President & CEO [7]

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No. No, Alex. The entire -- and we can talk further, but the entire incentive fee that was accrued at year-end is eliminated. So that's a direct benefit to the shareholders.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [8]

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Great. So we can talk more about that after the call. So the ongoing relationship with Michael Moe, obviously, a value-added relationship, will continue through a transition. How long do you foresee that transition -- transitionary period?

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Mark David Klein, GSV Capital Corp. - President & CEO [9]

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We provided for 18 months.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [10]

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Okay. And then, is a name change of GSV Capital sort of...

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Mark David Klein, GSV Capital Corp. - President & CEO [11]

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We're going to remain -- we will remain -- the intent is to remain as GSV Capital.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [12]

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Okay, because again, I think that name has a lot of value as well, certainly with other VC investors and you see that company looking at who's going to be their shareholders, so I'm glad to hear that.

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Mark David Klein, GSV Capital Corp. - President & CEO [13]

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Well, thank you. If you don't mind, Alex, let me let some other folks ask some questions, and I'll call you back after the call if you're going to be stuck in the airport for a little bit.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [14]

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Sure, thanks. That'll be fine. Looking forward to better performance going forward, especially with the IPOs and -- of Lyft and ultimately Palantir.

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Operator [15]

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We'll take our next question from Jon Hickman from Ladenburg.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [16]

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So from an IR point of view, who's the contact?

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Mark David Klein, GSV Capital Corp. - President & CEO [17]

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Allison Green.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [18]

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Okay. As -- my other question was asked and answered, though.

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Mark David Klein, GSV Capital Corp. - President & CEO [19]

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Okay, super.

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Operator [20]

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We'll take our next question from Nick Brown with Zazove Associates.

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Nicholas Brown, [21]

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Just have a couple of questions on the topic of the delayed 10-K. Did you issue any sort of 8-K? Or is that mentioned anywhere in the press release that you're not going to be able to file that on time? And then second, if you're just in the process of evaluating certain issues related to that. I mean how can you be confident that's not going to affect your reported financials?

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Mark David Klein, GSV Capital Corp. - President & CEO [22]

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Sure, and thank you for the question. We have -- we're mentioning it now, okay. It's not in our press release. We will mention it on filing on Tuesday. We are comfortable -- we really can't speak in any detail at all about it, but we're comfortable that the results will be as Allison discussed that there will be no change in our financials.

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Operator [23]

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At this time, there are no further questions. I'd like to turn the call back over to Mark Klein for any additional or closing remarks.

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Mark David Klein, GSV Capital Corp. - President & CEO [24]

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Thank you all very much.

This is an exciting new chapter for GSV Capital. We appreciate all your support, and would welcome an opportunity to speak to any of you if you want to speak after the call or in the foreseeable future. Thank you all very much.

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Operator [25]

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Thank you for your participation, you may now disconnect.