Q4 2023 180 Degree Capital Corp Earnings Call

Participants

Daniel Wolfe; President, CFO & Chief Compliance Officer; 180 Degree Capital Corp

Kevin Rendino; Chairman & CEO; 180 Degree Capital Corp

Presentation

Daniel Wolfe

Good morning, and welcome to 180 Degree Capital Corp's fourth quarter 2023 financial results update call. This is Daniel Wolfe, President and Portfolio Manager of 100 days and capital. Kevin Rendino, our Chief Executive Officer and Portfolio Manager, and I would like to welcome you to our call this morning. All participants are currently in a listen only mode. Following our prepared remarks, we will open the line to questions. If you would like to ask a question, please type star six on your phone or put the ask-a-question icon If you are participating via your computer, I'd like to remind participants that this call is being recorded, and I will be referring to a slide deck that we have posted on our Investor Relations website at ir.one injury capital.com under financial results.
Please turn to our safe harbor statement on Slide 2. This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are forward 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 uncertainty 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 our financial filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with IA degree Capital's 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.

Kevin Rendino

Thank you, Daniel, and good morning, everyone, and let me start with the conclusion before diving into the details of the quarter, I've been managing money for over 30 years, and I've been an investor or a portfolio manager since 1988 never in my life. I've been more convinced than we own a collection of companies that I believe have the potential to rise materially in value as much as the portfolio turn has put together as we start 2024. We're also at a point where I believe our constructive activism will make a difference in this value creation. While the last two years have been incredibly frustrating and disappointing. I'm grateful it's over and we are off to a flying start in 2024, but just look at what we own at the end of the quarter and look at the performance of those names, companies like synchronous, having had the 30-year experience of knowing that challenging performance periods happen during this periods, it is crucial that you don't shy away from talking about them. You don't become over emotional about them and you stick to your knitting and process no matter how painful the period can be somebody sent me a quote once and it said the one willing to look the stupidest, the longest wins over the last two years, we feel stupid on the one hand, the and on the other, we couldn't be more optimistic about what we all can see that significant value appreciation is possible in the next few years. The fourth quarter of 2023, we hope was a start of what we believe will be a return to risk asset classes, including the micro-cap stocks in which we invest our 7% gross total return in our public portfolio was the primary contributor to the growth of our NAV per share from $4.91 to $5.02. Our assets on our balance sheet are now almost 100% comprised of investments in public companies and cash. You can see those slides that we posted them on our website for details of the sources of change in our portfolio during Q4 2023, the full year and inception to date on the macroeconomic front, the resilience of the U.S. economy, combined with the apparent end of the Fed's tightening cycle and potential future reductions in interest rates should be one tailwind for our investments in general in 2024. For OneEighty, we believe 2024 will be a year defined by our constructive activism and by long awaited catalysts at certain of our portfolio companies that together could lead to material value creation for one 80 degree Capital's stockholders on Slide 4. This will be the very last time we show you this chart. Seven years ago, we embarked on a program designed to recreate ourselves, and we did just that. Just to remind everyone, when we started, 75% of our assets were in private companies during the last seven years through good markets and bad, we incurred losses from that private portfolio of $25 million, while at the same time generating $31 million in gains from our public portfolio as we start 2024 that headwind is gone no longer.
I have to sit on pins and needles at the end of a quarter, hoping our VC investments in the markets we take wouldn't offset good public stock performance. We worry no more that chapter is shut. And in 2024, we're off to a great start where pure play markets small-cap Actavis in terms of what helped and hurt in the quarter.
Please turn to Slide 5. Potbelly had the biggest positive effect as the company delivered yet another strong quarter of same-store sales growth and record weekly sales per store.
On the franchising side, the company has announced nearly 200 new shop commitments to date. Comscore went up by 36% in the quarter because although missing the top line. The Company did exceed estimates for EBITDA. We have continued our activism there, and we'll have more on that in a few minutes. Despite selling its noncore messaging and digital assets. Synchronous stock declined in the quarter by 28%. We joined the board late in the year. And as you can see, the performance of the stock since that time through yesterday has been stupendous. We're very excited about the potential to work with the management team and the Board there, and we'll talk about that involvement shortly.
Also arena reported weaker than expected results due to softness in the advertising market and changes in search display and from display information that reduced click-through rates subsequent to the record B. Riley sold its stake in arena to the owner of bridge media networks who previously announced an agreement to buy 65% of the company. There's been a series of management changes, delays in completion of the S4 and the potential and the partnership with ABG to license the Sports Illustrated brand. This has become a work in progress all over again, but one with significant opportunities to create value.
Look at chart look at this chart on slide 6. This quote, unquote recession, which has been one of the drivers of capital away from risk assets to proceed. Safer assets has been the most fun and off someone ever every recession should look like the one that everyone has called for. And we've said we're but sargassum aside persistent predictions of a return to arguably more normal interest rates have absolutely not led to an economic calamity. Instead, GDP rose 3.1% in 2023. Wages and salaries grew 4.4% -- 4.7%, which is good for consumer spending. Real private fixed investment in manufacturing structures reached all-time highs and employment remains strong. I didn't live through the 1929 recession, but I did experience 1990, 1998, 2000 and the near depression in 2008 as well as 2020 and 2023. I'm comfortable saying, Look, absolutely nothing like those recessions despite strong macro economic trends in 2023, it's somehow a basket of micro-cap companies that comprise the Russell Microcap Index underperformed the NASDAQ 100 by over 4,600 basis points in our last your shareholder letter, we incorporated a plethora of chart showing that microcap companies are historically inexpensive and undervalued relative to larger sized companies. While substantially all of this data and charts remain applicable today, I'm not going to regurgitate them. You can see them from my last letter and you can visit that on our website instead, I'll note commentary regarding Q4 2023 from Royce Investment Partners. So we hold in very high regard. They talked about the valuations for small caps and how highly attractive they are versus large-cap. We think, quote it bears repeating that even with a terrific Q4 '23 and a positive return in 2023. The Russell 2000 finished the year well shy of its 11821 peak. While LargeCap continued to establish new highs in the fourth quarter of '23. In fact, it's been 563 days into the current cycle low for the Russell 2000, the third largest spend without recovering the prior peak on record fallout from the investment bubble. Internet bubble saw small-cap need 456 days from their trough to match their previous peak. While it took 704 days for small caps to recover their prior peak following their trough in the 2008-2009 financial crisis. Each of these periods saw dramatic developments. The implosion of high-flying technology stocks in 2000 and a global financial catastrophe in 2008. This current period has seen ample uncertainty for sure, but at a record pace of interest rate increasement increases, yet it lacks the existential threats that characterized the Internet bubble and even more so the financial crisis, the latter period also saw less buy for vacation between small and large cap returns yet based on our preferred index valuation metric of enterprise value to earnings before interest and taxes or EBIT EV to EBIT, the Russell 2000 finished 2024 three, not far from its 25 year low relative to the Russell 1,000 on slide 7, even with the increases in small and micro-cap stocks that we saw in Q4, AIWMS. and P. ratio remains at historical lows. We continue to believe that the ratio says nothing about the fundamentals of the businesses that comprise these each index, given those fundamentals have held up better for many microcap companies than the index performance would suggest. We think we're at the end of the Fed hiking cycle we are not in the camp that the Fed will be cutting rates anytime soon, because we believe the economy will continue to show the resilience that it showed last year that in our view is a positive, not a negative. Our portfolio companies do not require lower rates to execute and build value for shareholders. They benefit from the types of positive economic trends we saw in 2023 and continue to see in the beginning parts of 2024. And against that backdrop, we expect many of our holdings, which are trading at historically low valuations have a long runway to rise in value and help us increase our net asset value per share.
Let's look at a few of our current games, but before that, I thought I'd do something a tad different this call and review what we believe is a distinct part of our investment process. That is our constructive activism turn to slide 8, few investors are willing to spend the time and energy identifying conducting diligence on and actively engaging with companies to unlock intrinsic value. We believe the opportunity for value creation in U.S. micro capitalization, publicly traded stock exists because management teams and boards often prioritize revenue growth over operating profits, favor the status quo versus change lack the understanding of buy-side investors in the workings of the public markets in general, I do not appreciate the impact of flawed capital structure on shareholder returns and entrench themselves to protect their jobs and positions to be clear, we are not corporate raiders. Our ultimate goal is to engage constructively with the existing boards and management teams to unlock value through resolution of capital structure or other overhangs that we believe inhibit growth were shareholder value, shareholder value, the realignment of financial performance to achieve growth of an operating profits, not just revenues, the improvement, event, investor relations strategies and outreach, the evaluation of strategic options, including M&A, sales, divestitures, the identification of complementary talent and expertise and the alignment of interest with and support from large shareholders. There's many ways that we can add value. We're not averse, however, to pursue changes through other routes, including private and public shareholder communications, proxy solicitation and or joining Boards of Directors of our portfolio companies all efforts, however, will be grounded. And based on our fundamental research and diligence, we have different levels of activism. As you can see on slide 9, level one doesn't require substantial time or involvement Level two, our suggestions started to become active and Level three. We work directly with management teams on specific outcomes, whether that's Board seats or specific overhangs that exist that are hurting stock or the stock price of that company.
On the next slide, you could see the types of specific ways we have utilized our activities, the companies we own and the type of activism that we have utilized are listed on this slide. Sometimes our activism as outward and apparent by comScore. In other cases, it's quiet and behind the scenes in no way. However, will we ever get involved in a company unless we have identified ways in which we think we can help a company and its share price recover that as the opportunity could be suggested, improvements to presentations and transparency recommended various paths, potential path towards improving financial performance, as I said, developing structures and providing financing that results in simplifying capital structures or joining boards. And in many cases, we've run strategic ballpark alternative processes for companies that have led to the sale of the Company or certain of these assets.
My point in all of this is never has the need been greater for the type of assistance assistance that we can provide.
And finally, on Slide 9 to two examples, our involvement with synchronous has been one of collaboration since our initial investments. Synchronous provides white label technology that enables large corporations to offer customers cloud-based storage of personal data synchronization platform powers their personal cloud offerings of a number of Tier one companies like Verizon, SoftBank, AT&T, Assurant, British Telecom and track phone under long-term contracts. We first invested in synchronous as part of an underwritten financing in June of 2021 that allowed synchronous to pay off its punitive preferred stock and recapitalized the Company with reduced interest expense while also providing flexibility going forward to execute on the strategic options for the business. The first of these strategic options or alternatives was completed in Q4 of 2023, with the sale of synchronous as noncore messaging and digital businesses. Synchronous is now a pure play cloud focused business with high margins and is on the cost of generating significant free cash flows. Our bullish view for 2020 for centered around a number of catalysts that we believe will improve synchronous balance sheet and demonstrate the operating leverage of the business.
First, synchronous has stated that it expects to generate free cash flow and have other cash flows in 2024, that inflow of capital will allow synchronous to de-lever. Second, synchronous is expecting to return to top line revenue growth after the runoff of its historical deferred revenue and its continued growth in subscribers as largest customer, Verizon and its newest customer, SoftBank.
Third, the end of nonrecurring charges related to restructuring and prior litigation and corresponding settlements, coupled with revenue growth and a material reduction in interest paid on this outstanding debt should lead to material free cash flow generation in 2024 that we will believe will grow substantially in 2025.
Lastly, we should note that in December of '23, we were asked to join synchronous Board of Directors to help with the Company's execution on its next phase of growth. We couldn't be more excited as we look at what that means for the stock price of synchronous. It ended last year at $6.21, which equated to a multiple of enterprise value to estimated 2024 EBITDA of approximately five points. Six times this multiple declines to approximately 5.2 times synchronous receives the kinds of inflows it should receive this year from its tax refund. We do not believe a cloud focused business with 85% to 90% recurring revenue, 70% to 75% gross margins and 25%-plus EBITDA margin that also generates positive free cash flows should command such a low multiple in our opinion, a more appropriate multiple would be in the double digits. And if so, the stock has a chance to go to a well north of $20 a share and approached $30 a share just based on that valuation change, we believe this is just the start of synchronous and 2024 will be a turning point for synchronous, both in terms of its business and how investors value the stock. While our investment with comScore started out as collaboration, the continued gridlock on the comScore board towards resolving capital structure issues and other governance issues has led to another level for us of activism as we embark on a potential proxy contest that we were 100% prepared to launch this spring our initial investment in comScore took place in 2021. Following its recap by Charter, Cerberus and Liberty. Our original thesis for our investment was centered on multiple factors, including our belief that comps were was a company with uniquely competitive media management offerings and proprietary data. Comscore's new investments would help with improved execution, financial performance and overall growth and comScore traded at a significant discount to its peers. While comScore business has improved dramatically under new management with 33% EBITDA growth over the last two years, the stock has declined precipitously we believe this is due to poor corporate governance and uncertainty around comScore's capital structure. As a result, we have ramped up our activism significantly through the nomination of Matt McLaughlin as a director nominee for consideration at comScore's upcoming annual meeting of stockholders. Matt, as a retired advertising technology executive naval officer, most recently served as Chief Operating Officer of double verify holdings a software and platform company for digital media measurement and analytics to serve there from 2011 to 2020 to see all double verify. Matt directed its product engineering sales operations activity, including managing managing over half the Company's employees, given comScore struggles with and focus on improving its digital offerings. We can think of nobody more useful to this comScore Board and management and that Key has been available to speak with comScore's stockholders. Ones that wish to speak with him can reach us directly. While we actively are preparing to run a competitive proxy campaign to support his candidacy. We certainly hope that comScore's Board will realize the complementary skill set that we believe he can bring to help build value for all of comScore's stakeholders and that a competitive proxy contest will not be required.
Let me stop there and turn it over to Daniel.

Daniel Wolfe

Thanks, Kevin. Please turn to Slide 13. As we noted in our press release on February 1 in '24, the discount of our NAB to stock price was approximately 26% as of the end of January '24. This discount equates to a nav of at the end of January. That was approximately 8% higher than at the end of 2023. We established a discount management program to make it clear that the management board of IA Degree Capital, our serious about our intentions to narrow this discount at the end of each measurement period, our Board will consider all available options, including but not limited to a larger buyback than the $5 million current authorized currently authorized a cash distribution that would be considered a return of capital or a tender offer management and Board are completely aligned with our stockholders and that we collectively own about 12% of one degree Capital's outstanding shares. And this ownership continues to grow solely through open market purchases largely of after-tax. We are laser focused on creating value for all stockholders of OneEighty through growth of our Nav and the narrowing of this disconnect. Please turn to slides.
14 and 15. We provided similar slide last quarter and thought it would be useful to do so this quarter as well. Subsequent to the end of '23, many of our portfolio companies have issued press releases that provided updates on the firm's respective businesses. We summarized a number of these releases on these slides. Potbelly continued to report strong growth that exceeded expectations and announced new credit facility that provides meaningful interest savings and financial flexibility to fund growth initiatives.
Asynchronous announced completion of its cost removal program at the upper end of its initial target range, along with strong performance for the fourth quarter of '23. Manoj Barba is now the majority owner of Arena group through a $12 million investment at a substantial premium to the company's trading price at the day of when that investment was main arena also filed the Form S-4 registration statement for the merger with Mr. Barr gathers bridge media comScore announced a new agreement with Nexstar that we believe will be need to Nexstar being a top 10 customer for comScore. I sense is now focused on US chemicals business through the appointment of that division's President and CFO as the new CEO and CFO of the entire company, Brightcove announced a new streaming deal with this is the second largest TV network in Brazil, CVG. equipment under its new CEO is rationalizing its business through divesting non-core assets. Modest creations held an Analyst Day recently why you can't take advantage of sampling the food at the event in person, you can order products for him on his website and enjoy them at home. While listening to Adam Michaels and his team described what they believe will be substantial growth ahead. Even our legacy private holding that completed public listing D-Wave Systems announced new partnerships and the availability of a new quantum computer through its Quantum cloud offering. These announcements are just a sampling of what we believe sets up '24 as a year where multiple value-creating catalysts could occur. And if they do drive meaningful growth for turn and its shareholders.
Lastly, I would like to note that we included additional slides that contain metrics from the quarter year and inception to date in an appendix at the end of the slide deck on our website. We're not going to discuss the slides in the prepared remarks today, but we would be happy to answer questions on them. Any time we would now like to open the line for questions. If you have a question, please type star six on your phone or click the Ask a Question icon if you're participating via your computer.
We'll now give a few minutes for --

Kevin Rendino

While we're waiting for questions, one last comment for me now that essentially 100% of our assets are in public companies and most of you know that we're investors and not traders, you should be able to do the math and figure out what our NAV is at any given point in time. During the quarter by looking at what our holdings were at the end of last quarter. Now that's not going to be an exact science because sometimes we obviously trade in and out of quarters. And then, of course, you have to subtract some expenses as well. But you should have a much clearer picture of where we stand and how we're doing during the course of the quarter. And that's something that we couldn't have said it any time in the last seven years where now our NAV growth is now almost 100% aligned towards our public stock performance. And as you know, or can see given what's happened year to date, if we continue to own the stocks that we owned at the end of last quarter. Our NAV is materially higher than it was at the end of last quarter and approaching six from far away from five. So I'll stop there day on and see if we have any questions.

Question and Answer Session

Daniel Wolfe

(Operator Instructions)

Kevin Rendino

Excellent. No questions. I mean we gave a complete performance analysis and nobody had anything that when nobody was on the phone either way. I wish everybody a good day, a much better 2024 as I said, we're off to a very good start. We're excited about that. We're excited about the amount of stock that we own in turn, given the potential for us to increase our NAV and narrow that discount going forward. Have a great 2024. Thanks.

Daniel Wolfe

And if anyone has any questions, feel free to reach out to us at any time? Thank you very much and you can add.