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Edited Transcript of GSVC earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 GSV Capital Corp Earnings Call

WOODSIDE May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Gsv Capital Corp earnings conference call or presentation Wednesday, May 8, 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

* Benjamin Fife

* Mark David Klein

GSV Capital Corp. - President & CEO

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Conference Call Participants

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* Cynthia Boyle

* Jason Ringer

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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 First Quarter 2019 Earnings Conference Call. (Operator Instructions) 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.

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Benjamin Fife, [2]

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Thank you for joining us on today's call. I'm joined today by Chief Executive Officer, GSV Capital, Mark Klein; and Chief Financial Officer, Allison Green.

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, www.gsvcap.com. Replay information is included in our press release issued earlier today.

This call is the property of GSV Capital Corp., and 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 at 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, 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're executing to enhance shareholder value then I will provide an update on key developments in the 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 of companies gains scale, they are 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 on our call on March 14, we transitioned 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. We are excited about this initiative and believe this will continue to create tangible near-term and long-term value for shareholders. Primarily, in an internal managed 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 affords GSV Capital a greater degree of operating leverage as increasing AUM will not coincide with the proportional increase in operating expenses.

Later on 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 Slides 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 premier 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 100 cities, towns, company campuses, universities and communities throughout 15 countries across 5 continents. We view micro-mobility as shaping the future of transportation and are pleased with Lime's 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 demonstrate strong operating fundamentals.

While management previously communicated its intention to monetize public positions within 12 months of the expiration of any relevant lock-up period, it is now our intention to hold public securities through a lock-up period in 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 -- a portfolio of public companies. Accordingly, we sold our entire position in Spotify for a sizable gain. We have also served 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. Lyft priced their public offering on March 28 at $72 per share, and we carry our 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 have accomplished in positioning themselves as a leading transportation company. The lock-up on our Lyft position expires on September 25 of this year.

Coursera, now our second largest position, recently announced $103 million Series E fundraising. According to PitchBook, the round values the company at over $1.56 billion. For reference, GSV Capital valued Coursera at $828 million in Q4 or almost 50% below the Series E round's 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 this 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're thrilled to be part of their journey.

Another position we would like to highlight is Enjoy, which is now a top 10 position on our portfolio. Enjoy is focusing on reinventing the mobile retail store by sending an expert deliverer to your door to deliver and set up their technology product in only a few hours. We first invested in Enjoy in 2014 when CEO Ron Johnson, the ex-Macy's CEO and ex-Head of Retail at Apple, was raising Enjoy Series A round. Since we invested, Enjoy has formed partnerships with companies like Google, AT&T and Sonos, and it's 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 to quarter's end. GSV Capital's top 5 positions as of March 31 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 5 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 5 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 into themes we have historically had success in 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 a 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.

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

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Thank you, Mark. I would like to follow Mark's update with a more detailed review of our financial result as of March 31 and updates 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 a NAV per share of $10.75. A breakdown of the increase in NAV during the quarter is 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 appreciation 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 1/3 of our Spotify position as of March 31.

From an operations perspective, the internalization did result in an increase in onetime expenses. However, those expenses were offset by the onetime 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 BDC. 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 fee 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 the proportional increase in management fees and incentive fee accrual.

The immediate and long-term cost savings of the internalization builds upon 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 -- that have carried over to the new structure, including, but not limited to, the refinancing of our convertible debt, the renegotiation of our line of credit, the expiration of the built-in gain measurement period related to our status as a RIC and several other small operational changes.

General 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 induction of the share repurchase program in August 2017 to date, our Board of Directors has approved up to a $20 million allocation to repurchase shares of our common stock and we have repurchased nearly 11% of the then outstanding shares.

Next, I would like to review GSV Capital's current liquidity. We ended the first quarter with about $64.9 million of 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 Lyft 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, offset by sales 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 150,360 shares in Spotify for an overall approximate 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 of $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 of GSV Capital. Now I'll turn the call over to the operator to start the Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Cynthia Boyle with Wells Fargo Financial Network.

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Cynthia Boyle, [2]

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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.

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

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Thanks, Cindy, and thanks for listening to the call today and your kind words. As Allison stated 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 to NAV. Thanks.

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Operator [4]

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(Operator Instructions) Our next question comes from Jason Ringer with JSR Capital Partners.

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Jason Ringer, [5]

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

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Mark David Klein, GSV Capital Corp. - President & CEO [6]

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Well, a couple of things. Obviously both Q4 and then 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 is 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 our companies in Q1 had the benefits, especially some of our public names, to have an increase in value, but we had things like the Coursera financing, et cetera, that occurred that were also contributing to NAV. So I don't know that these 2 particular quarters were not just simply outliers because of the volatility of the markets in general not specific to our specific portfolio of companies. Hopefully, that's responsive to your question.

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Operator [7]

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

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Mark David Klein, GSV Capital Corp. - President & CEO [8]

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

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Operator [9]

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