Image source: The Motley Fool.
Safeguard Scientifics Inc (SFE -5.87%)
Q4Â 2019 Earnings Call
Feb 27, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to Safeguard Scientifics Fourth Quarter 2019 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to John Shave, Safeguard Investor Relations. Please go ahead.
John E. Shave -- Investor Relations
Good morning and thank you for joining us for this update on Safeguard Scientifics fourth quarter 2019 financial results.
Joining me on today's call and webcast are Brian Sisko, Safeguard's President and CEO, and Mark Herndon, Safeguard's Senior Vice President and CFO. During today's call, Brian will provide a corporate and strategic update and review recent highlights and Mark will discuss our results. Afterwards, we will open up the call to your questions.
As always, today's presentation includes forward-looking statements, and those statements are subject to risks and uncertainties. The risks and uncertainties that could cause actual results to differ materially include, among others, our ability to make good decisions about the monetization of our ownership interests for maximum value or at all and the return of value to our shareholders, the ongoing support of our existing ownership interests, the fact that our ownership interests may vary from period to period, challenges to achieving liquidity from our ownership interests, fluctuations in the market prices of any publicly traded ownership interests, competition, our ability to attract and retain qualified employees, market valuations in sectors which our ownership interests operate, our inability to control our ownership interests, our need to manage our assets to avoid registration under the Investment Act of 1940 and risks associated with our ownership interests, including the fact that most of our ownership interests have a limited history and a history of operating losses, face intense competition and may never be profitable, the effective economic conditions in the business sectors in which Safeguard's ownership interests operate and other uncertainties described in our SEC filings.
Many of these factors are beyond the Company's ability to predict or control. As a result of these and other factors, the Company's past financial performance should not be relied on as an indication of future performance. During the course of today's call, words such as expect, anticipate, believe and intend will be used in our discussions of goals or events in the future. Management cannot provide any assurance that future results will be as described in our forward-looking statements. We encourage you to read Safeguard's filings with the SEC, including our Form 10-K which describes in detail the risks and uncertainties associated with managing our business. The Company does not assume any obligation to update any forward-looking statements made today.
With that, here is Brian.
Brian J. Sisko -- President & Chief Executive Officer
Thanks, John. Good morning, and thank you for joining us.
We continued to do in 2019 what we started to pursue early in 2018. And as we head into 2020, we want to thank you for your support. We continue to diligently pursue our goals to prudently manage and support our portfolio of private company ownership interests, to maximize the value of our interests and to monetize and return the value of the portfolio to you in the most efficient manner possible. Today, we want to reiterate our focus and convey to you the strong belief we have regarding the current and the anticipated exit values of our remaining portfolio of companies.
We believe 2019 was a year full of important milestones that we would like to revisit as we look forward to the opportunities in front of us. The most significant milestone in 2019 was the return of capital dividend that we paid in December. That dividend was made possible by the successful completion of the first stage of our return of capital strategy, accomplishing a series of successful exits, including Propeller and Transactis earlier in 2019 and the repayment of our $85 million in debt.
The six major exit transactions that we have executed since the beginning of 2018 have allowed us to not only repay our debt but also to continue to support our portfolio as and where appropriate as it has grown and matured. In aggregate, to date, we have returned over $187 million to our balance sheet, including over $104 million in 2019 via exit transactions since we began our new strategic direction in 2018.
The disciplined approach to managing our portfolio and realizing exit proceeds has not only resulted in Safeguard being debt free and initiating our return of value transactions, but also provided us with $25 million of cash today that is sufficient to fund our scaled down operations and expected deployments. Most importantly, Safeguard continues to hold a valuable portfolio of ownership interests, representing approximately $230 million of deployed capital in 15 tech-enabled companies and our other ownership interests.
Our companies as a whole are growing and are being positioned for exits. Six of our companies have run rates of between $5 million and $10 million of annual revenue. Another six have run rates of over $10 million. And the average growth rate of the non-digital media companies is 54%. As with all growth stage portfolios, there remain challenges and obstacles that we will need to overcome before exits occur, but we are encouraged by our group of entrepreneurial companies and the progress they are each making toward their strategic goals.
Safeguard's return of value to shareholders plan going forward continues to be straightforward. Whenever we have cash and cash equivalents exceeding our minimum required capital, currently $25 million, we will evaluate a return of value to our shareholders in the most efficient manner in the form of either share repurchases and/or dividends.
We are also continually evaluating different opportunities to exit partner companies either through the sale of entire companies, the sale of SFE stakes, recapitalization and other methods. To preserve cash and in a continuing effort to downsize all facets of our cost structure and to further align interest with our shareholders, our Board will be reduced from six to four directors as of our 2020 Annual Meeting, and director compensation is now being paid entirely in Safeguard equity.
While we are pleased with what we've accomplished over the last two years, we realize that there is much work left to be done and significant value yet to be realized for our shareholders. We remain committed to being good stewards of Safeguard's assets and continuing our pursuit of additional exit transactions that will monetize our ownership interests and return value to shareholders.
We continue the pursuit of individual company exits while considering all alternatives as circumstances dictate, including the sale of individual partner company interests in secondary market transactions, the sale of entire companies or a combination thereof. We will also continue to consider financing transactions which could expedite the return of value to our shareholders. We are constantly dialoging with our partner companies, other investors and board members of those companies concerning exit opportunities. A significant number of our companies have active bank relationships in place to assist in those discussions.
We remain bullish regarding our portfolio of companies, and we continue to believe that the current value of our ownership interests and our cash and cash equivalents significantly exceed our current share price. We've accomplished a lot under our new strategy, including streamlining our internal operations to reduce costs, repaying our debt and moving forward with strategic transactions involving our companies that have returned significant capital back to Safeguard, which has also allowed us to retire our debt and implement our return of capital program. We are pleased with what we have accomplished, but much work is left to be done.
We continue to work with our other companies on potential exits, and we hope to have more news to share in the coming months. We believe that our companies will continue to mature and attract strategic and financial buyer attention as we continue to explore the exit alternatives we referenced above.
Now let me turn the call over to Mark for a review of the quarter's and the year's financial results.
Mark A. Herndon -- Senior Vice President and Chief Financial Officer
Thank you, Brian.
For the year ended December 31, 2019, Safeguard's net income was $54.6 million or $2.64 per share. That's compared with a net loss of $15.6 million or $0.76 per share for the same period in 2018. Our fourth quarter resulted in a net loss of $0.7 million or $0.03 per share as compared with a net loss of $16.6 million or $0.81 per share for the same quarter in 2018. Two large elements impacting the financial results and our financial position for the fourth quarter included the continued downward trajectory of our general and administrative costs as compared to prior periods and of course the $1 per share return of capital dividend. We'll speak to those further later in the call, but let me first comment on our liquidity position.
Safeguard's cash, cash equivalents, restricted cash and securities at December 31, 2019 totaled $25 million, and we have no debt obligations. As we've discussed on prior calls, this is the initial targeted level of minimum capital we have determined necessary in order to fund follow-on deployments to support our existing ownership interests and to fund our scaled down corporate structure for multiple years. We are eager to continue our process of returning value to shareholders as soon as we have additional cash to do so.
As we've also previously discussed, the Board declared a $1 per share special dividend that was paid on December 30. Our year-end results have confirmed our previous analysis that our cumulative and year-to-date earnings and profits allow this dividend to be characterized as a return of capital for federal tax purposes.
Now I'll move back to our results of operations for the 2019 year, which includes the previously disclosed successes such as a $35.1 million gain from the exit of Propeller and a $50.7 million gain related to the exit from Transactis. In addition, we have recorded aggregate gains of $4.3 million for additional amounts received for holdbacks and escrows related to the other prior transactions, including $2.6 million of which occurred in the fourth quarter of 2019. Our 2019 results also included the impairment we disclosed in the second quarter of $3 million with respect to our interest in NovaSom.
Our general and administrative expenses were $2.1 million and $10 million for the three months and year ended December 31, 2019 respectively. Both of these compared favorably to the comparable prior year period and were the result of our scaled-down level of staffing. The decrease relative to the prior year is primarily due to a decrease in employee compensation from a lower overall level of staffing, the absence of $3.8 million in severance charges and lower professional fees.
For the fourth quarter, corporate expenses, which represent general and administrative expenses, excluding depreciation, stock-based compensation, severance and retirement costs and other nonrecurring or other items, were $1.4 million compared with $1.9 million in the fourth quarter of 2018. For the ended December 31, 2019, those same expenses were $7.1 million as compared to $9.9 million in 2018.
The quarter-to-quarter reduction is a result of lower office costs resulting from the relocation to a smaller office space, lower compensation costs, lower professional fees and the reflection of director fees as a stock-based compensation item. The annual reductions similarly reflect the net benefit from our office move to lower cost facilities, lower overall compensation costs, lower professional fees and lower cash director fees during 2019 as well as the shift to equity-based compensation that impacted the fourth quarter's results.
Note that we have also begun to include the quarterly and year-to-date impact of accruals related to our LTIP program as an Other item within the reconciliation to general administrative costs. We view that program as transactional cash costs rather than a measure of regular quarterly spending. Overall, we believe these results reflect the ongoing benefit from the significant cost reduction activities throughout 2018 and 2019 for our shareholders. We will continue to look for ways to continue cost reductions where possible.
Our quarterly results also included $2.2 million of other income that was primarily the result of the removal of the estimates of our liabilities under the previous commitments to our former CEO, Mr. Musser who passed away in late 2019. Other income for the 2019 annual period also included previously disclosed non-cash gain from the credit derivative of $5.1 million and $4.5 million of observable price changes from a variety of our ownership interests.
I should also note that our annual results included interest expense of $14 million related to the credit facility that was repaid in July of 2019. We do not expect to incur any interest expense during 2020. We also benefited during 2019 from the recognition of $2 million of interest income from our cash, marketable securities and convertible loans. This income was primarily the result of short-term securities held during the first half of 2019 and earnings from a money market account. We expect this income to decline in 2020 due to our lower overall level of investable assets and due to the low interest rate environment. As a reminder, our priority related to our cash and marketable securities assets is focused on capital preservation and liquidity.
With respect to our ownership interests at December 31, 2019, we have a carrying value of $77.1 million, which is a reduction from 2018 primarily from exits, impairments and the application of equity method accounting. During the fourth quarter, we limited deployments to $2.2 million to three existing companies, bringing 2019 follow-on funding to $16.7 million. We expect that we will make additional deployments in 2020 so that we can continue to support our ownership interests, but in the aggregate, we expect those deployments to be between $5 million and $10 million.
Our share of the losses of our equity method ownership interest for the three months ended December 31, 2019, was $4.2 million as compared to $8.9 million for the comparable period in 2018. The decrease is the result of less companies being accounted for under the equity method due to exits, impairments or changes in the basis of accounting as well as lower losses net from our equity method ownership interests. Similarly, for the annual 2019 period, we experienced a reduction of $20.6 million related to our losses from our share of the losses of our equity method companies. We are also pleased that a number of our companies have reduced their operating losses, which contributes to these improvements in our results. We believe this is an illustration of the health of our overall group of ownership interests.
Aggregate annual revenue for 2019 of Safeguard's 15 remaining ownership interests, which we have previously referred to as partner companies, was $357 million. Aggregate revenue for the same companies was $330 million for 2018, representing a growth 8% for the group. We have continued to see slower growth in the digital media category. Excluding those digital media companies, the aggregate year-over-year revenue of Safeguard's portfolio of partner companies grew at 41%. Note that the revenue from other ownership interests that you may see in the summary table, including our release, are excluded from this total.
Within the context of that overall performance and portfolio statistic you may also have noted from our press release this morning that a number of companies within the portfolio advanced to a higher revenue stage in 2019. So we remain optimistic about the portfolio, as Brian indicated earlier in the call. Also with respect to our aggregated revenue disclosures, we will no longer provide estimates of the projected revenue amounts. We believe that by highlighting our ownership interests that are progressing through each of the revenue stages that we have defined provides investors with better indications of the relative size and growth across our ownership interests. Also, this allows us to retain an appropriate level of confidentiality with respect to individual companies as the portfolio continues to get smaller.
Now here's Brian to lead us through the Q&A segment of the call.
Brian J. Sisko -- President & Chief Executive Officer
Thanks, Mark. Operator, let's open the phone for a few questions, please.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Bob Labick with CJS Securities. Please go ahead. Your line is open.
Brian J. Sisko -- President & Chief Executive Officer
Hey, Bob.
Peter Lukas -- CJS Securities -- Analyst
Hi, good morning. Hi, good morning. It's Pete Lukas again for Bob. Just a quick question. It sounds like everything is proceeding along according to schedule. Just had a question, something you've touched on on other calls before in regard to return of capital. In terms of looking at dividends for share buybacks, if you could just kind of touch on again how you look at share buybacks. I know previously you had mentioned issues with liquidity and blackout periods kind of hampering that a bit. And then in terms of the dividend, would you still expect any dividend if there was one to once again be classified as a return to capital as you're looking at it now?
Brian J. Sisko -- President & Chief Executive Officer
So, to answer the easier question first, our ability to do a return of capital dividend is so highly dependent upon where we are at a particular point in time. We'll always be looking at it. And there are certainly we would hope the opportunities to do that. But it's virtually impossible for us to answer that. Now, at the end game, some different rules apply. But as we proceed through individual exits, it's very difficult to predict what might be the added possibility on that front.
Regarding buybacks, whenever we have capital we will always consider if our view of intrinsic value differs from what prices are prevailing in the market, use that as a return of capital mechanism. From a legal standpoint, we will often have to deal with the issues that result from material nonpublic information, kind of, restrictions that will apply to us. But once again it's impossible to predict until we are in the specific situation and have the cash in hand to consider doing something. But we'll always want to do it where the intrinsic value and the stock price aren't lining up.
Peter Lukas -- CJS Securities -- Analyst
Fair enough. And last one for me. In terms of your work with Evercore at present, is there anything new that they've presented to you or anything different that you're working with them on?
Brian J. Sisko -- President & Chief Executive Officer
No. I don't want to sound as if there is nothing new. There is always new considerations. In fact, they were in here speaking to our Board as recently as this week to talk about some dynamics in the marketplace and what's going on out there to help influence the Board's view of how we're going about this. But we continue to use them in an advisory capacity, as a Safeguard mentor. They're not individually engaged with our partner companies, necessarily, although that can happen from time to time as well. So they're a well connected -- I think they're like top four M&A firms in the country at the moment. So they have an excellent perspective on all the things that impact on how we're going about exiting the portfolio.
Peter Lukas -- CJS Securities -- Analyst
Great. Thank you.
Operator
Our next question comes from the line of Jim McDonald from First Analyst. Please go ahead. Your line is open.
Brian J. Sisko -- President & Chief Executive Officer
Hey, Jim.
James Macdonald -- First Analysis -- Analyst
Good morning, guys. Could you characterize the state of your exit opportunities? Any way you could kind of characterize that in terms of potential for 2020, and specifically issues related to the softness in digital marketing, how that may affect it?
Brian J. Sisko -- President & Chief Executive Officer
Well, hopefully not to sound like I'm just repeating myself from prior calls, but in a large part I'll have to, it's very unpredictable when an exit will occur. We don't have anything under LOI or we would be in a different situation. But we have a lot of companies that are progressing through that revenue stage chart that we shared with everyone. And I think that's the best indicator of the companies that are our candidates for sooner rather than later exit.
Some subset of our portfolio is always engaged with bankers, whether informal processes or in advisory capacity kind of engagements. We've said before that the people around the table at these different companies with us are in complete alignment with our interest in considering earlier rather than later exits. So while I can't predict anything regarding 2020 activity, we certainly are always pursuing activity that quickly can happen in the medium term and can happen in the long term. So we certainly hope to in the coming months to announce some further exit activity throughout 2020.
James Macdonald -- First Analysis -- Analyst
And then on the digital marketing, is that slowing that part of the portfolio down?
Brian J. Sisko -- President & Chief Executive Officer
Well, it as an industry or it as a sector is certainly a challenge because of what's going on in that overall marketplace. But one of the things that Evercore has a good insight into is that marketplace, and while that overall conundrum regarding the digital media space, the ad tech space might lead one to believe that it would impact negatively our ability to exit some of our digital media assets, there is also a fair amount of activity going on in that market as well. The Roku-dataxu transaction of 2019 -- now, there is a lot of things going on. So I don't want to say it's going to negatively impact on our ability to exit those companies, but it certainly is worth noting too. It's not a flying high market.
James Macdonald -- First Analysis -- Analyst
Okay. And on partner revenue. I know you're not doing that in the future, but I think, Brian, in your prepared remarks, you said excluding digital marketing, it was growing 54% and then in the press release, it's 41%. Is one of them for the quarter and one for the year? What's the difference there?
Mark A. Herndon -- Senior Vice President and Chief Financial Officer
Yeah, let me address that one. So a slight difference in how we've talked about each of those. So one number relates to the aggregate portfolio size, right, so all of the companies added together gives you the one number. And the other one related to the average of the growth rates of each of the individual companies.
James Macdonald -- First Analysis -- Analyst
So 55% is the average of the growth rate of the individual companies?
Mark A. Herndon -- Senior Vice President and Chief Financial Officer
That's correct.
James Macdonald -- First Analysis -- Analyst
Okay. And just one more from me. So you've put a little bit of money into QuanticMind and WebLinc in the quarter which suggests sort of that they are being bridged. Any thoughts about -- are those moving toward a funding round or anything like that?
Brian J. Sisko -- President & Chief Executive Officer
I'll say that your instincts are correct, Jim, as a general matter, and leave it at that.
James Macdonald -- First Analysis -- Analyst
Okay. Thank you.
Operator
This concludes our Q&A session for today's call. I will turn the call back to John Shave for closing remarks.
John E. Shave -- Investor Relations
Thanks, everybody, for your questions. In closing, let me say that we are encouraged about the future for our Safeguard shareholders. We've got $25 million of resources in reserve to support operations, no debt obligations, a valuable portfolio and a clear plan to return capital back to you as soon as we can after we experienced further monetization events. We're always working toward monetization events, and that will always be the case. Thank you for joining us on the call today, and thank you for your continued interest and your confidence and support of Safeguard.
Operator
[Operator Closing Remarks]
Duration: 27 minutes
Call participants:
John E. Shave -- Investor Relations
Brian J. Sisko -- President & Chief Executive Officer
Mark A. Herndon -- Senior Vice President and Chief Financial Officer
Peter Lukas -- CJS Securities -- Analyst
James Macdonald -- First Analysis -- Analyst
