Safeguard Scientifics, Inc. (SFE)
Q2 2012 Earnings Call
July 26, 2012 09:00 am ET
Peter Boni – President & Chief Executive Officer
Steve Zarrilli – Senior Vice President & Chief Financial Officer
Jim Datin – Executive Vice President & Managing Director
John Shave – Vice President, Business Development & Corporate Communications
Jim Macdonald – First Analysis Securities
Paul Knight – CLSA
Greg Mason – Stifel Nicolaus
Matt Dolan – ROTH Capital Partners
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Good morning, and welcome to Safeguard Scientific’s Q2 2012 Results Conference Call. Please note this event is being recorded. (Operator instructions.) I would now like to turn the conference over to John Shave, Vice President of Business Development and Corporate Communications. Please go ahead.
Good morning, and thank you for joining us for Safeguard Scientific’s 2012 Conference Call and Update. Joining me on today’s call are Peter Boni, Safeguard’s President and Chief Executive Officer; Steve Zarrilli, Senior Vice President and Chief Financial Officer; and Jim Datin, Executive Vice President and Head of the Safeguard Deal Team.
During today’s call Peter will review Q2 2012 highlights as well as other developments, then Steve will discuss Safeguard’s financial results and strategies. After that we will open the line for your questions.
Before we begin I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involves certain risks and uncertainties including but not limited to the uncertainty of future performance of our partner companies and the risks of acquisition or disposition of interests in partner companies, capital spending by customers and the effect of regulatory and economic conditions generally as well as the development of the life sciences and technology markets and other uncertainties that are described in our SEC filings.
During the course of today’s call words such as “expect,” “anticipate,” “believe” and “intend” will be used in our discussion of goals or events in the future. Management cannot be certain that final outcomes will be as described today. We encourage you to read Safeguard’s filings with the SEC including our Form 10(k) which describe 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.
Now here is Safeguard’s President and CEO, Peter Boni.
Thanks, John, and thank you all for joining us today for updates on Safeguard Scientifics and our partner companies. Results for Q2 ending June 30 were distributed earlier today. Our 16 partner companies continue to grow strategically and operationally, and we are therefore increasing our 2012 aggregate partner company revenue guidance to the range of $170 million to $175 million. That’s up from our previous guidance range of $160 million to $165 million. This is evidence that we are continuing to build genuine value in our businesses.
Safeguard’s platform expansion initiative with the partnership with Penn Mezzanine is producing interest and fee income. We believe this now small but growing Mezzanine lending activity is a natural expansion of Safeguard’s strategic strengths and can be an important long-term activity for us. Safeguard’s deal pipeline is also full of exciting opportunities in our target markets in the life sciences and technologies sectors. With a challenging exit environment we remain cautious and disciplined in pursuing new capital deployments. Additionally, with fewer venture firms actively investing deal syndicates are supporting more selectively. We also continue to monitor the impact of Obamacare on our healthcare IT deployment strategy and thesis. Furthermore, we’ve set a high bar on our return expectations and we remain firm on our valuations we will pay for new opportunities.
We’re encouraged by Safeguard’s performance in the short term and optimistic about our long term despite the ongoing volatility and uncertainty in the economy and capital markets as well as in the political landscape. Our optimism stems from this team’s execution of a focused and disciplined strategy. During the team’s tenure we’ve focused Safeguard’s strategy, broadened our business model, boosted the company’s financial strength and flexibility and we’ve driven value for shareholders. Today we’re prepared for the vagaries of capital markets, politics, and the economy.
Safeguard continues to push forward as the preferred catalyst to build great companies, grooming companies of substance for growth and ultimately an exit transaction remains our path to ongoing financial strength and flexibility, as well as improved shareholder value. There are always listeners on the call who are new to Safeguard’s story, and as a result I’ll review the hallmarks of our strategy which is built on three pillars: focus, discipline and execution.
Focus is the first pillar of Safeguard’s strategic foundation. We deploy capital in high-potential businesses and specific segments of life sciences and technology industries that exploit five strategic growth driving themes: maturity, migration, convergence, compliance, and cost containment. In life sciences we target opportunities in the areas of lower technological and regulatory risk in molecular and point of care diagnostics, medical devices, specialty pharma and selected healthcare services.
In technology, we pursue transaction-enabling applications with recurring revenue business model in internet and new media, financial technology, healthcare, IT and other selected business services. Safeguard’s discipline compliments our focus. We will not deploy capital or pursue exits simply for activity’s sake. If an opportunity clears our strategic growth and return hurdles we will respond appropriately.
Our Deal Teams evaluate more than 1000 proposals annually. We typically deploy up to $25 million in growth capital per company and then time our exits from ownership positions in these companies to achieve aggregate targeted risk adjusted returns on capital of 2x to 5x over a three to five year period. For all non-legacy partner companies capital deployments since January, 2006, that have been realized or written off, Safeguard had realized aggregate growth returns of 2x cash on cash.