180 Degree Capital Corp. (NASDAQ:TURN) Q4 2023 Earnings Call Transcript

180 Degree Capital Corp. (NASDAQ:TURN) Q4 2023 Earnings Call Transcript February 21, 2024

180 Degree Capital Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Daniel Wolfe: [Call starts abruptly] And welcome to 180 Degree Capital Corp’s Fourth Quarter 2023 Financial Results Update Call. This is Daniel Wolfe, President and Portfolio Manager of 180 Degree 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. [Operator Instructions] I would like to remind participants that this call is being recorded and that we will be referring to a slide deck that we have posted on our Investor Relations website at ir.180degreecapital.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 uncertainties 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 filings with the Security and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with 180 Degree Capital’s business that could affect our actual results.

Except as otherwise required by Federal Securities Laws, 180 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. Let me start with the conclusion before diving into the details of the quarter. I’ve been managing money for over 30 years and have been an investor portfolio manager since 1988. Never in my life I have been more convinced that 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 2 years have been incredibly frustrating and disappointing, I’m grateful it’s over and we are off to a flying start in 2024. Just look at what we own at the end of the quarter and look at the performance of those names, companies like Synchronoss.

Having had the 30-year experience of knowing that challenging performance periods happen, during these 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 2 years, we feel stupid, on the one hand, yet, on the other, we couldn’t be more optimistic about what we own, 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 microcap stocks in which we invest.

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Q&A Session

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 and 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 180, 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 180 Degree Capital’s stockholders.

On Slide 4 — this will be the very last time we show you this chart. 7 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 7 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 do I have to sit on pins and needles at the end of a quarter hoping our VC investments and the marks 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. We’re a pure-play markets small-cap activist.

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, Synchronoss 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 information that reduced click-through rates. Subsequent to the report, 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 S-4 and the potential end of the partnership with ABG to license the Sports Illustrated brand. This has become a work in progress all over again but one with significant opportunity to create value. Look at this chart on Slide 6.

This “recession” which has been one of the drivers of capital away from risk assets to perceived safer assets has been the most fun and awesome one ever. Every recession should look like the one that everyone has called for or said we’re in. But sarcasm 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 4.7% 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 comfortably saying looks absolutely nothing like those recessions.

Despite strong macroeconomic trends in 2023, somehow a basket of microcap companies that comprise the Russell Microcap Index underperformed the Nasdaq-100 by over 4,600 basis points. In our last 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, who we hold in very high regard. They talked about the valuations for small-caps and how highly attractive they are versus large caps.

We think “it bears repeating that even with the terrific fourth quarter ’23 and a positive return in 2023, the Russell 2000 finished the year well shy of its 11/8/21 peak, while large caps continue to establish new highs in the fourth quarter of ’23.” In fact, it’s been 563 days since the current cycle low for the Russell 2000, the third largest span without recovering the prior peak on record. Fallout from the investment bubble — Internet Bubble, saw small-caps 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 — and a record pace of interest rate 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 bifurcation between small and large-cap returns, yet based on our preferred index valuation metric of enterprise value to earnings before interest and taxes, or EV to EBIT, the Russell 2000 finished 2023 not far from its 25-year low relative to the Russell 1000. On Slide 7; even with the increases in small and microcap stocks that we saw in Q4, the IWM to SPY ratio remains at historical lows. We continue to believe that the ratio says nothing about the fundamentals of the businesses that comprise 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 names. 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. A 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. microcapitalization [ph] publicly traded stocks 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 and the workings of the public markets in general, 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 existing boards and management teams to unlock value through resolution of capital structure or other overhangs that we believe inhibit growth or shareholder value — of shareholder value; the realignment of financial performance to achieve growth of operating profits, not just revenues; the improvement in 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 adverse, however, to pursue changes through other routes, including private and public shareholder communications, proxy solicitations 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 1 doesn’t require substantial time or involvement. Level 2, our suggestions start to become active. And Level 3, we work directly with management teams on specific outcomes, whether that’s board seats or specific overhangs that exist that are hurting the stock price of that company. On the next slide, you can see the types of specific ways we have utilized our activism.

The companies we own and the type of activism that we have utilized are listed on this slide. Sometimes our activism is outward and apparent like 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 is the opportunity. It could be suggested improvements to presentations and transparency; recommending various potential paths 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 alternative processes for companies that have led to the sale of the company or certain of its assets.

My point in all of this is, never has the need been greater for the type of assistance that we can provide. And finally, on Slide 9, are 2 examples. Our involvement with Synchronoss has been one of collaborations since our initial investment. Synchronoss provides white-label technology that enables large corporations to offer customers cloud-based storage of personal data. Synchronoss’ platform powers the personal cloud offerings of a number of Tier 1 companies like Verizon, SoftBank, AT&T, Assurant, British Telecom and Tracfone under long-term contracts. We first invested in Synchronoss as part of an underwritten financing in June of 2021 that allowed Synchronoss to pay off its punitive preferred stock and recapitalize 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 alternatives was completed in Q4 of 2023 with the sale of Synchronoss’ noncore messaging and digital businesses. Synchronoss is now a pure-play cloud-focused business with high margins and is on the cusp of generating significant free cash flows. Our bullish view for 2024 is centered around a number of catalysts that we believe will improve Synchronoss’ balance sheet and demonstrate the operating leverage of the business. First, Synchronoss has stated that it expects to generate free cash flow and have other cash flows in 2024. That inflow of capital will allow Synchronoss to delever. Second, Synchronoss 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 its outstanding debt should lead to material free cash flow generation in 2024 that we believe will grow substantially in 2025. Lastly, we should note that in December of ’23, we were asked to join Synchronoss’ 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 Synchronoss, it ended last year at $6.21 which equated to a multiple of enterprise value to estimated 2024 EBITDA of approximately 5.6x. This multiple declines to approximately 5.2x if 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 well north of $20 a share and approach $30 a share just based on that valuation change. We believe this is just the start of Synchronoss and 2024 will be a turning point for Synchronoss, both in terms of its business and how investors value the stock. While our investment with Comscore started out as a 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 are 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 Comscore 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’s business has improved dramatically under new management with 33% EBITDA growth over the last 2 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 is a retired advertising technology executive and naval officer. Most recently, he served as chief operating officer of DoubleVerify Holdings, a software and platform company for digital media measurement and analytics. He served there from 2011 to 2022. As COO of DoubleVerify, Matt directed its product engineering and sales operations activity, including managing over half the company’s employees. Given Comscore’s struggles with and focus on improving its digital offerings, we can think of nobody more useful to this Comscore board and management than Matt. He has been available to speak with Comscore 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 of ’24, the discount of our NAV to stock price was approximately 26% as of the end of January ’24. This discount equates to a NAV at the end of January that was approximately 8% higher than at the end of 2023. We established the Discount Management Program to make it clear that the management and Board of 180 Degree Capital are 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 will be considered a return of capital or a tender offer.

The management and Board are completely aligned with our stockholders and that we collectively own about 12% of 180 Degree Capital’s outstanding shares. And this ownership continues to grow solely through open market purchases, largely of after-tax dollars. We are laser-focused on creating value for all stockholders of 180 through growth of our NAV and the narrowing of this discount. Please turn to Slides 14 and 15. We provided similar slides 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 issued press releases that provided updates on their respective businesses. We summarized a number of these releases on these slides. Potbelly continued to report strong growth that exceeded expectations and announced a new credit facility that provides meaningful interest savings and financial flexibility to fund growth initiatives.

Synchronoss 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 Bhargava 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 made. Arena also filed the Form S-4 registration statement for the merger with Mr. Bhargava’s Bridge Media. Comscore announced a new agreement with Nexstar that we believe will lead to Nexstar being a top 10 customer for Comscore. Ascent is now focused on its 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 the second largest TV network in Brazil.

CVG Equipment under its new CEO is rationalizing its business through divesting noncore assets. Mama’s Creations held an Analyst Day recently. While you can’t take advantage of sampling the food at the event in person, you can order its products from Mama’s website and enjoy them at home while listening to Adam Michaels and his team describe 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, to 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 those 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 [Operator Instructions]

Kevin Rendino: While we’re waiting for questions, one last comment from 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 expenses as well. But you should have a much clearer picture of where we stand and how we’re doing during the course of a quarter. And that’s something that we couldn’t have said at any time in the last 7 years.

We’re 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 6 and far away from 5. So I’ll stop there, Daniel and see if we have any questions.

A – Daniel Wolfe:

Kevin Rendino: Excellent, no questions. I mean, we either gave a complete performance analysis and nobody had anything to ask, or 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 good 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 now disconnect.