Safeguard Scientifics, Inc. (SFE)

Q2 2010 Earnings Call

July 29, 2010 09:00 pm ET


John Shave - VP, Business Development and Corporate Communications

Peter Boni - President and CEO

Steve Zarrilli - SVP and CFO


Bob Labick - CJS Securities

Jonathan Bock - Stifel Nicolaus

Nick Halen - Sidoti & Co.

Bob Labick - CJS Securities

Greg Mason - Stifel Nicolaus



Good day ladies and gentlemen, and welcome to the Safeguard Scientifics second quarter 2010 results conference call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. John Shave, Vice President of Business Development and Corporate Communication.

John Shave

Good morning and thank you for joining us for Safeguard Scientifics conference call and update. Joining me on today's call are Peter Boni, Safeguard's President and Chief Executive Officer; and Steve Zarrilli, Senior Vice President and Chief Financial Officer.

During today's call, Peter will review highlights from the second quarter of 2010 and some subsequent events. Then Steve will discuss Safeguard's financial results and strategies. After that, we'll open the lines for your questions.

Before we begin, I must remind you that today's presentation includes forward-looking statements. Reliance on forward-looking statements involve 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 technology in life science markets on which Safeguard focuses.

During the course of today's call words such as expect, anticipate, believe and intend will be used in during our discussions of goals and 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 which describe in risk 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. And here's Safeguard's President and CEO Peter Boni.

Peter Boni

Thanks John and thank you all for joining us today for this quarterly update on Safeguard's Scientifics and our partner companies. The result for the quarter ending June 30 were distributed earlier today and as you can see, Safeguard continues to execute against its game plan to improve the strength of our balance sheet, increase our financial flexibility and ultimately build value for shareholders. In line with that, our partner companies continue to show steady growth and maturation.

Now before we get into the specifics of Q2 results I'd like to take a few moments to go through Safeguard's business model through new comers that are around today's call. We typically deploy up to $25 million in growth capital for the company to develop high potential life sciences and technology businesses that exploit five strategic themes; maturity, migration, convergence, compliance and cost containment.

Safeguard has 17 active partner companies today, 10 in life sciences and seven in technology. We time our exit from ownership positions in these companies to achieve aggregate targeted risk adjusted return on capital of 3 or 5 exit at the minimum. Now exit opportunities may arise at any time and in different forms, including privately negotiated sales of securities or assets, public offerings and partner company securities or in the case of a publicly traded partner company, the sale of securities on the open market.

The potential for several exit transactions over the course of this next year is very real. However, there are mixed signals regarding the momentum in this macro exit environment as evidenced by what's going on in the marketplace. While industry deal activity has been way up year-over-year, IPO and M&A's in their momentum were both down in Q2 versus Q1.

Furthermore several IPO's have been priced below their additional range or haven't priced at all. Now if an opportunity clears our strategic growth and return our growth, we'll respond appropriately. In the mean time, we will continue to work everyday to build value in our partner companies, drive their growth and keep their spending plans in line.

Now we set this open and (inaudible) repeating that discipline is the hallmark of our strategy. Our deal teams evaluate many hundreds of investment opportunities throughout a given year as potential partners seek growth capital. We remain focused on enhancing value in our partner companies rather than deploying capital or perusing exit simply for activity sake. We do have a pipeline of new potential opportunities however, and we continue to advance those opportunities through our selection process.

Now during the second quarter, we were really encouraged by the continued growth and improved performance of the safeguard partner companies. Aggregate partner company revenue increased 47% year-over-year. As a result, we've increased our projected guidance for aggregate partner company revenue in 2010 to be between $325 million and $350 million.

Now let's review some specific recent developments at some of our partner companies that illustrate the power of Safeguard's business model. I among our diagnostics companies, Clarient continues to deliver upon a strategic and operational vision and it's making great progress. Yesterday Clarient reported strong financial results for Q2; including a 21% increase in revenue, a 22% increase in test volumes, strong customer growth and an outstanding customer retention rate of 98%.

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