SuRo Capital Corp.

Q1 2024 Earnings Conference Call

5/8/2024

spk02: Hello and welcome to Sero Capital's first quarter 2024 earnings call. My name is Melissa and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call your lines will be in a listen only mode. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now turn the call over to Adam Bates. Please go ahead.
spk03: Thank you very much for joining us on today's call. I am joined today by the Chairman and Chief Executive Officer of Sero Capital, Mark Klein, and Chief Financial Officer, Allison Green. Please note that a slide presentation corresponding to today's prepared remarks by management is available on our website at .serocap.com under investor relations, events, and presentations. Today's call is being recorded and broadcast live on our website .serocap.com. Replay information is included in our press release issued today. This call is a property of Sero Capital and the unauthorized reproduction of this call in any form is strictly prohibited. I would 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 webcast may constitute forward-looking statements which relate to future events or future performance or financial condition. These statements are not guarantees of our future performance or our future financial conditional results and involve a number of risks, estimates, and uncertainties including the impact of any market volatility that may be detrimental to our business, our portfolio companies, our industry, and the global economy that could cause actual results to differ materially from the plans, intentions, and expectations reflected in or suggested by the forward-looking statements. 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 of the SEC. Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of Sero Capital's latest SEC filings, please visit our website at .serocap.com or the SEC's website at sec.gov. Now I would like to turn the call over to Mark Klein.
spk04: Thank you, Adam. Good afternoon and thank you for joining us. We would like to share the results of Sero Capital's first quarter, 2024. As most of you know, for over 13 years, Sero Capital has provided public equity investors access to late-stage venture capital-backed private companies such as Facebook, Twitter, Snap, Lyft, Dropbox, Spotify, PoundTar, and Coursera, just to name a few. We are excited to see the renewed and accelerating public investor interest in later-stage venture capital as an asset class. We believe our current portfolio, including recent investments -to-date, will continue to drive shareholder value. We are pleased to share that we have deployed more capital in the last four months than any period in the last two years. In addition to our previously announced $10 million investment in Liquid Death, we are excited to share that subsequent to quarter-end, we invested $10 million in Canva, a leading productivity and design software company, and invested $15 million in CoreWeave through an SPB named CW Opportunity. CoreWeave is a cloud infrastructure provider for artificial intelligence and machine learning use cases. CoreWeave is our single largest investment since 2020. I will go into more detail on each company later in the call. As many of you know, from late 2020 through 2021, we liquidated a large portion of our portfolio and paid out approximately $9 per share in dividends. We consistently stated we would be patient in redeploying our capital in the belief that we would be able to deliver shareholders access to compelling opportunities. We began redeploying in the middle of last year with investments in Service Titan and CoreKites and continued into this year with Liquid Death, Canva, and CoreWeave. Over the last four months, we deployed half of our cash that was available at year-end and we are actively engaged in potential additional investments. Given the strong performance in the public equity markets coupled with the encouraging performance of recently minted IPO's such as Reddit, Rubrik, Ibotta, and AsteroLabs, we believe these are indicators of a renewed investor enthusiasm for high growth technology companies. Turning to our first quarter results, we ended the quarter with a net asset value of $181.7 million or $7.17 per share.
spk00: This NAV
spk04: compares to a net asset value of $7.99 a share at year-end and $7.59 per share at the end of Q1 2023. Please turn to slide 4. Turning to our top 5 positions, I first want to highlight our cash position. As of quarter end, our cash and short-term US Treasuries available for investment were approximately $80.4 million, representing 31% of our gross assets. Serial Capital's top 5 positions as of March 31st were Lernio, Service Titan, Blink Health, Locust Robotics, and Stormwind. These positions accounted for approximately 51% of the investment portfolio in fair value. Additionally, as of March 31st, our top 10 positions accounted for approximately 78% of the investment portfolio. Subsequent to quarter end, we made a $10 million investment in Canva on similar terms as the reported company tender. According to Bloomberg, the valuation of that tender came at a significant discount to Canva last primary financing. Canva is an online productivity design software and collaboration platform with a mission to empower everyone in the world to design. Featuring a simple -and-drop user interface, the company provides a cloud-first browser tool to create presentations, social media posts, videos, and more. 2023 was a momentous year for Canva. The information reported to Canva finished the year with $2 billion in annualized revenue. Additionally, according to its annual report, Canva surpassed 170 million monthly users in 190 different countries. Canva also surpassed 20 billion designs created and over 6 billion of these designs created in 2023 alone, equivalent to 1 million designs per hour. Over the course of the year, Canva significantly scaled its enterprise segment. At the end of 2023, more than 90% of the Fortune 500 companies were using Canva and 135,000 teams and companies of more than 1,000 employees were designing on the platform. According to Canva's annual report, these companies include Starbucks, FedEx, Salesforce, Johnson & Johnson, PayPal, and many more. Lastly, Canva greatly bolstered its AI-powered product offerings in 2023. In October, Canva launched Magic Studio, a suite of AI design tools including -to-image and -to-video generation, file reformatting, instant animation, and more. According to Canva's annual report, these AI products have already been used more than 4 billion times. Canva has emerged as a leader in AI-facilitated content creation, having been selected as Apple's number two generative AI app for 2023. According to PitchBook, Canva has raised over $580 million in equity financing from investors including Bestmer venture partners, General Catalyst, Iconic, and more. We believe Canva is uniquely positioned to dominate the amateur and prosumer design market as it makes graphic design more accessible. Additionally, subsequent to Quarters N, we made a $15 million investment in CW Opportunity 2, an SPV that will invest in CoreWeave's preferred shares. CoreWeave is a specialized cloud provider delivering access to a suite of NVIDIA GPUs coupled with its fast and flexible cloud computing infrastructure. CoreWeave is a critical foundation for AI and machine learning use cases from the initial stages of training a model to ultimately producing a model's output for end users. During the training phase, a model takes in large data sets to develop the ability to generate responses and insights. In other words, during the training phase, a model learns how to address its end user's needs. To serve the training phase, CoreWeave offers distributed clusters or connected computers using NVIDIA's groundbreaking quantum, infinity-band network solution. During the inference phase, a model creates predictions and insights based on a user's live input. The inference phase occurs when, for example, a large language model or LLM writes a response based on a user's input. With spin-up times as short as five seconds, CoreWeave offers one of the most powerful inference solutions using NVIDIA GPUs. In fact, according to a company blog post, CoreWeave's inference service performs 8 to 10 times faster than a major generalized cloud provider. Over the last few months, CoreWeave has cemented itself as a leader in AI infrastructure. In March, NVIDIA unveiled its Blackwell GPU architecture, which according to a company press release will enable organizations to build and run generative AI at up to 25 times less cost and energy consumption than NVIDIA's predecessor. As a preferred cloud service provider of NVIDIA and as a company in which NVIDIA has made an investment, CoreWeave was named as one of the first companies expected to offer Blackwell-powered instances to the public. With relationships with such companies as NVIDIA, Mistral AI, and Datadot, CoreWeave is a major building block for advancements in generative AI. NVIDIA has seen monumental growth driven by generative AI development and adoption. According to its fourth quarter of fiscal 2024 results, its data center platform reached a record of approximately $18.4 billion in Q4 revenue, up over 400% year over year. In its prepared remarks, management described the tipping point of computing powered by data centers, stating that the data center infrastructure is rapidly transitioning from general purpose to accelerated computing. By offering distributed access to NVIDIA's GPUs, data centers are becoming a foundation element of generative AI. As an infrastructure provider, CoreWeave is strongly positioned to continue to benefit from NVIDIA's acceleration and broader acceleration in AI. According to PitchBook, CoreWeave has raised over $3.8 billion in debt and equity financing from investors such as Code2, Fidelity, Magnetar, and others. With its -in-class cloud infrastructure, we believe CoreWeave will continue its exponential growth and capitalize on accelerated AI adoption. Please turn to slide seven. One additional portfolio company we'd like to highlight is our investment in Alt-C's sponsored LLC, a SPAC sponsored by Sam Altman. Yesterday, Alt-C acquisition corps shareholders approved the business combination with Oklo, a fast-vision, clean power company backed by Sam Altman. While we are always happy when our SPAC-sponsored investments complete a business combination, this one is particularly exciting for a few reasons. Oklo is on the cutting edge of nuclear fuel recycling, which has many uses including the potential to add clean power to AI-related data centers. With Sam Altman as Oklo's chairman, the company has been able to create significant partnerships to further its clean tech product suite, most recently through a non-binding LOI with Diamondback Energy, the largest independent energy producer in the Permian Basis. Our investment thesis around AI has been delivered, first focusing specifically on the infrastructure of AI. Oklo's product has many use cases, however its ability to power the hypergrowth of AI gives us another entry point into AI infrastructure. Our new investment in CoreWeave, plus the business combination between Alt-C and Oklo, now gives us significant exposure to the picks and shovels of the AI universe. Building this part of our portfolio was deliberate and required a patient deployment of capital, but we are now seeing the results of that strategy play out. We cannot be more excited to have a creative portfolio that allows several capital investors access to the AI infrastructure landscape, an industry with limited opportunities for public investors to participate in to date. Transitioning to our public investments, as previously stated, it is our objective to sell our public positions when lockup restrictions expire and there is relative stability in a given public position trading. In line with this approach, we continue to monetize several of our public unrestricted positions over the course of the quarter. During the first quarter, we fully exited our remaining position in Nextdoor and reduced our position in public square warrants. I would also like to further reiterate Serial Capital's commitment to initiatives that enhance shareholders' value. Given that discounted stock is traded at compared to net asset value per share, we believe our recent modified Dutch auction tender offer was an efficient and creative deployment of capital. Allison will discuss the results of the tender offer in her prepared remarks. Given these recent investments coupled with our strong portfolio and the positive performances of high profile technology IPOs, we believe our portfolio is well positioned to drive shareholder return. Thank you for your attention and with that I would like to hand it over to Allison Green, our Chief Financial Officer.
spk01: Thank you Mark. I would like to follow up Mark's update with a more detailed review of our first quarter investment activity and financial results of March 31st, including investment activity subsequent to quarter end, results of the modified Dutch auction tender offer announced during Q1 and executed subsequent to quarter end, and our current liquidity. First I will review our investment activity. During the first quarter we made a $10 million investment in liquid debt series F1 preferred shares. Over the course of the first quarter we sold our remaining public common shares in Nextdoor and continued to monetize our warrants in Public Square. Notably we sold 100,000 warrants in Public Square for approximately $103,000 in net proceeds resulting in a realized gain of approximately $60,000. As Mark mentioned subsequent to quarter end through today we completed a $10 million investment in Canvas common shares and a $15 million investment in the Class A interest of CW opportunity to LT, an FPV that will invest in Coreweave's preferred shares. Please turn to slide 8. Segmented by six general investment themes, the top allocation of our investment portfolio at quarter end was to education technology representing approximately 31% of the investment portfolio at fair value. The cloud and big data and marketplaces categories both accounted for approximately 19% of our portfolio. Approximately 17% of our portfolio was invested in financial technology and services companies. The social, mobile and consumer category accounted for approximately 13% of the fair value of our portfolio and sustainability accounted for less than 1% of the fair value of our portfolio as of March 31st. Please turn to slide 9. We ended the first quarter of 2024 with an NAB per share of $7.17, which is consistent with our financial reporting. The decrease in NAB per share from $7.99 at the 2023 year end to $7.17 as of March 31st was primarily driven by a 73 cents per share decrease resulting from unrealized appreciation of our portfolio investments during the quarter, in addition to a 13 cents per share decrease due to net investment loss and a 2 cents per share decrease due to net realized losses and net investment. The decrease in NAB per share was partially offset by a 6 cents per share increase due to stock based compensation during the quarter. As Mark mentioned earlier, zero capital is committed to initiatives that enhance shareholder value. Accordingly, on February 14th, our board of directors approved a modified Dutch auction tender offer, which commenced on February 20th, to purchase up to 2 million shares of our common stock at a price per share not less than $4 per share and not greater than $5 per share in 10 cent increments using available cash. The tender offer expired on April 1st. Pursuant to the terms of the tender offer and following its expiration, we repurchased 2 million shares at a price of $4.70 per share representing .9% of outstanding shares. The per share purchase price of properly tendered shares represented .6% and .8% of net asset value per share as of March 31st, 2024 and December 31st, 2023 respectively. We used available cash to fund the purchase of shares of common stock in the tender offer and to pay for all related fees and expenses. Because the tender offer expired subsequent to quarter end, it is not reflected in our financial statements for the 3 months ended March 31st and will be reflected in next quarter's financials. I would also like to note that the dollar value of shares that may yet be purchased by zero capital under the share of purchase program is approximately $20.7 million. The share of purchase program is authorized through October 31st, 2024. Finally, I would like to take a moment to review zero capital's liquidity position as of March 31st. We ended the quarter with approximately $84.6 million of liquid assets including $50.8 million in cash, $29.6 million in short-term US Treasuries, and approximately $4.1 million in unrestricted public securities. At March 31st, 2024, there were ,353,284 shares of a company of common stock outstanding. Presently, following the execution of the tender offer subsequent to quarter end, there are ,353,284 shares of a company of common stock outstanding. That concludes my comments. We would like to thank you for your interest in supporting zero capital. Now I will turn the call over to the operator to start the Q&A. Operator?
spk02: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad to register your question. To withdraw your question for any reason, you may press star 2. You will be advised when to ask your question. And as we have no questions coming through, I'd like to turn it back over to Mark Klein for any closing remarks.
spk04: Thank you all very much for joining us this afternoon. We are truly excited of how we have positioned the portfolio and our ongoing access to really great opportunities. Thank you again very much.
spk02: Thank you very much. That concludes today's conference. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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