Suro Capital Corp. Q3 FY2024 Earnings Call

Hello, and welcome to SuRo Capital's Third 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 on listen-only. However, you will have the opportunity to ask questions at the end of the presentation. I'll now turn the call over to Willie Lee. Please go ahead.

Awesome. Thank you. Thank you for joining us on today's call. I'm joined today by the Chairman and Chief Executive Officer of SuRo 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 www.surocap.com under Investor Relations, Events and Presentations. Today's call is being recorded and broadcast live on our website, www.surocap.com. Replay information is provided in our press release issued today. This call is the property of SuRo 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 and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance or future financial condition or 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 with the SEC. Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of SuRo Capital's latest SEC filings, please visit our website at www.surocap.com or the SEC's website at sec.gov. Now I'd like to turn the call over to Mark Klein.

Thank you, Willie. Good afternoon, and thank you for joining us. We would like to share the results of SuRo Capital's third quarter 2024. Before discussing the exciting events that have occurred in the past few months, I would like to take a step back and share the SuRo Capital vision and discuss a bit about what differentiates our firm from other investment alternatives. From inception, our goal has been to democratize curated access to venture capital opportunities. Over the last 14 years, we have invested in and exited from investments in companies like Facebook, Twitter, Lyft, Spotify, Dropbox, Corcera, and Palantir. We believe our ability to access these opportunities provides our shareholders with access to an asset class that is typically excluded from the average investor. Presently, we are confident that we have redeployed capital into the next wave of exciting private companies with investments in market-leading businesses like OpenAI, CoreWeave, Canva, Service Titan, Loop, and Liquid Death, to name a few. Between our ability to access attractive opportunities or rigorous analysis and investment process and our continued commitment to shareholder value, we are confident that we are providing unique value in the market that others may not. Fostering this differentiation is important given the alternatives investors have. The last few months have been among the most exciting for our firm in our history. With the exponential growth of AI, a new crop of some of the world's most valuable companies has emerged. We have identified and invested significant capital in a few of the market's leading players. Just in the second half of 2024, we have invested approximately $65 million into some of the largest and most sought-after private companies globally. Of that amount, we've invested approximately $55 million into AI companies. AI investments now represent a significant portion of our portfolio comprising 18% of our gross assets at the quarter's end. Inclusive of the $17 million of investments we have made into AI companies subsequent to quarter-end, the percentage of gross assets allocated to AI is approximately 23% of our portfolio. AI is attracting tremendous venture capital interest. According to Crunchbase, funding of AI start-ups made up 31% of the third quarter's total global venture funding, including OpenAI's $6.6 billion financing, which closed subsequent to the quarter's end. According to the same source, to give those figures some context, Fintech accounted for about 20% of all venture funding in 2021, while Crypto never reached more than 6% of venture funding even at its peak. During this surge in demand for AI investment, we believe we are highly differentiated on the basis of our AI investment criteria. Unlike many other investors, we have taken a thoroughly intentional approach that prioritizes the industry-agnostic picks and shovels infrastructure with proven traction and scale over the industry-specific applications with unproven product-market fit. Our AI portfolio companies are later-stage businesses that have multibillion-dollar enterprise customers or already have massive consumer adoption. Looking at the broader portfolio, we have several portfolio companies that are well positioned to drive shareholder value upon the reopening of the IPO market. We believe our late-stage portfolio of companies such as Service Titan, Canva, WOP, and Liquid Death, among others, along with our AI portfolio companies create a balanced portfolio offering our shareholders access to some of the most exciting private technology companies ahead of their potential IPOs. Additionally, many of these portfolio companies have even publicly discussed their IPO plans or have been the subject of recent reports about their upcoming IPOs. According to Bloomberg, CoreWeave has hired Morgan Stanley, Goldman Sachs, and JPMorgan to lead its planned IPO next year. This follows the information report that CoreWeave is aiming to file confidentially next month. Additionally, according to the information, Service Titan may go public as soon as next month after generating approximately $360 million of revenue in the first half of this year. Finally, according to the Times, Lime's CEO, Wayne King said, the company is ready for an IPO under the right market conditions and noted that Lime's bookings grew by 32% to approximately $600 million last year. I would now like to discuss our recent investments in more detail. We are pleased to announce our significant new and follow-on investments into some of the largest and most compelling AI companies. During the quarter, we made a $17.5 million investment in OpenAI, one of the largest developers of generative AI models for consumers and businesses. Through the Class A interest of our Type 1 Deep Ventures Fund, LLC, a fund whose sole portfolio asset is the convertible equity of OpenAI. We also increased our position in CoreWeave, a leading AI cloud computing provider viewing follow-on secondary investments totaling $10 million. These follow-on investments bring our total capital investment in CoreWeave to $25 million, making CoreWeave the single largest initial investment in our firm's history. Lastly, subject to quarter-end, we made a $12 million investment in VAST, a data management solution for AI developers through the membership interest of IH10 LLC, whose sole portfolio asset is an interest in VAST Data's preferred B preferred shares. Together, our investments in OpenAI, CoreWeave, and VAST give our investors access to leading AI companies at each point in the AI value chain. I will discuss these investments in further detail later in my prepared remarks. Turning to our third quarter results. We ended the quarter with a net asset value of $157.4 million or $6.73 per share. SuRo's top five positions as of September 30 were CoreWeave, which includes CW opportunity to LP, the CoreWeave SPV, and our $5 million follow-on secondary investment in CoreWeave common shares, Learneo, OpenAI through the ARC Type 1 Deep Ventures Fund, Blink Health, and ServiceTitan. These positions accounted for approximately 47% of the investment portfolio at fair value. Additionally, as of September 30, our top 10 positions accounted for approximately 75% of the investment portfolio. As of the quarter's end, our cash available for investment was approximately $32.7 million, representing 14% of our gross assets. During the quarter, we made a $17.5 million investment in OpenAI through our Type D Ventures, a fund whose sole asset is the Class A interest and convertible equity of OpenAI. OpenAI is a leading developer of generative AI models using deep learning technology. According to Axios, OpenAI's $6.6 billion fundraising in which we participated was the largest venture capital deal of all time. The financing made OpenAI one of the most valuable private companies in the world. OpenAI offers its models via free and paid plans that suit the needs of consumers, small teams, and large organizations. Its fully released flagship models, GPT 4.0 and GPT mini are multimodal, meaning they accept both text and image inputs and output text. According to a company blog post, these models are part of OpenAI's ChatGPT Suite which is used by over 250 million people every week around the world. Additionally, according to the Wall Street Journal, OpenAI has 11 million paying subscribers and approximately one million paying business customers. For consumers, ChatGPT can quickly generate text with a human-like understanding of the user's input. For example, a user may prompt ChatGPT to write a cover letter based on the user's input work experience or come up with a workout plan based on the user's fitness goals. Within seconds, ChatGPT generates a relevant text response tailored specifically to the user's input. ChatGPT can also summarize more sensitive content such as a research paper or lease agreement, extracting details specific to the input. For small teams, ChatGPT acts as an assistant for tasks such as analyzing data, generating code, and writing emails. For example, the finance department of a small business may prompt ChatGPT to summarize financial data based on input from an Excel spreadsheet. ChatGPT can then visualize the data via chart and generate text that describes trends in debt over time. Additionally, the engineering team at a startup may prompt ChatGPT to find a bug in a set of code. One month later, ChatGPT can identify the bug, explain the mistake, and provide an appropriate correction. For large organizations, ChatGPT provides advanced data analysis capabilities, customized options, and large-scale content generation services, all with enterprise-grade security. Klarna, a global leader in consumer payments uses ChatGPT to power multilingual customer services. According to OpenAI blog post, Klarna AI assistance has 2.3 million conversations representing two-thirds of Klarna's customer service chats. This AI assistance is more accurate and expedient in Klarna's previous solutions leading to a 25% decrease in repeat inquiries and resolutions in less than two minutes on average compared to 11 minutes on average before. According to PitchBook, OpenAI has raised over $21.9 billion in debt and equity financing from investors, including Code 2, NVIDIA, Microsoft, Thrive Capital, Tiger Global, and others. We are excited about OpenAI's traction and positioning at the forefront of generative AI development. During the third quarter, we made a $5 million follow-on investment in CoreWeave's common shares via a secondary transaction. Subsequent to quarter's end, we made an additional $5 million follow-on investment in CoreWeave Series A shares again via a secondary transaction. These investments add to our previously discussed $15 million investment in CW opportunity to LP, which is an investment in CoreWeave's Series C preferred shares, bringing our total investment in CoreWeave to $25 million. CoreWeave is a specialized cloud provider delivering access to NVIDIA GPUs and the fastest cloud computing infrastructure tailored for AI and machine learning. It supports end-to-end AI workflows from model training to deployment by offering distributed clusters powered by NVIDIA's Quantum InfiniBand network solution. With spin-up times as short as five seconds, CoreWeave provides one of the industry's fastest inference solutions using NVIDIA GPUs. According to the company, its infrastructure service is 8 to 10x less than those of leading generalized providers. CoreWeave's momentum has accelerated in recent months. According to the Financial Times, it now operates more than 35,000 NVIDIA GPUs, making it the largest private operator in North America. Additionally, according to Bloomberg just last month, Cisco invested in CoreWeave as part of a transaction valued at $23 billion. Also last month, CoreWeave announced the close of a $650 million credit facility led by JPMorgan Chase, Goldman Sachs, and Morgan Stanley, building on the close of its $7.5 billion credit facility led by Blackstone and Magnetar in late May. Later in the month, Core Scientific, a leader in digital infrastructure for Bitcoin mining announced that CoreWeave exercised its final contract option to deliver approximately 120 megawatts of computing infrastructure to Core Scientific data centers. According to Core Scientific's press release, this contract exercise expands CoreWeave's contracted infrastructure to approximately 500 megawatts across six core scientific sites. The information reported that Microsoft plans to invest $10 billion between 2023 and the end of the decade to use CoreWeave's data centers. According to the information, Microsoft's contract will be a key driver of CoreWeave's significant revenue growth. According to the information, the estimated revenue for CoreWeave is $500 million for 2023, $2 billion for 2024, and $8 billion for 2025. According to Bloomberg, this scale positions CoreWeave for a major IPO with bankers already hired for a 2025 listing. According to PitchBook, CoreWeave raised over $9 billion in debt and equity financing from investors such as CO2, Fidelity, Magnetar, and more. With its best-in-class cloud infrastructure, we believe CoreWeave will continue its exponential growth and capitalize on accelerated AI adoptions. Subsequent to quarter's end, we made a $12 million investment in VAST Data through a membership interest in IH10 LLC, an entity whose sole portfolio asset is an interest in VAST Series B preferred shares. VAST Data is a data management solution for leading AI companies that has emerged due to the inability of legacy data management solutions to serve customers building complex AI applications. For several decades, enterprise data solutions were built around the concept of tiers. Tiered storage is the idea that data is segmented based on its importance to daily operations. However, AI applications need access to all data at once, rendering the tiered storage system increasingly obsolete. VAST Data collapses the tiered storage model by offering all-flash storage; this allows all data in a pipeline as opposed to data in a specific tier to be accessed instantly. This is especially valuable for companies that train AI models. Leading companies at the forefront of AI development use VAST Data. Pixar, a globally recognized animation studio, uses VAST Data for its data-intensive media productions. For example, in its 2023 film, Elemental, Pixar used this custom edge animation method that created several times the data for computational demands than other previous movies. Even during the film's peak rendering usage, VAST Data delivered fast, uninterrupted performance. Pixar continues to use VAST Data to employ new animation techniques using machine learning models for improved media production. According to VAST Data blog, Zoom, a leader in live video conferencing, uses VAST Data to assist in training its AI models. To build and refine features like speech-to-text transcription and language translation, Zoom requires a data management solution that can efficiently process audio quickly, even in real-time during video conferencing. VAST Data has quickly cemented itself as a dominant AI infrastructure provider; it reached over $200 million in annual recurring revenue at the end of 2023 and has been cash flow positive for the last three years. We believe VAST Data is poised for growth as a leading data management provider for the AI universe. Over the last few months, we've been deliberately focusing on deploying capital into companies offering critical AI infrastructure solutions. Today, with nearly $55 million invested in AI infrastructure, we believe our portfolio is well positioned for upside given the AI tailwinds. We would like to highlight recent developments in our portfolio company, Canva. According to a Forbes article as of late October, Canva crossed 200 million active daily users and $2.5 billion in annualized revenue. Additionally, the company reported several transactions completed at a $32 billion valuation, up from the $26 billion valuation it received in its larger company tender in April. Canva continues to gain traction with enterprise companies having added names such as HP and the New York Stock Exchange to its platform. Transitioning to our public investments, as previously stated, it is our objective to sell our public positions when lockups and restrictions expire, and there is relative stability in public position trading. In line with this approach, we began to monetize our position in Public Square shares as their lockup restrictions expired during the quarter and have continued to do so subsequent to quarter's end. One additional portfolio company we'd like to highlight again is Oklo. Oklo has been positively received as a public company with stock closing in excess of $26.5 today, more than double where the stock initially listed. Oklo is on the cutting edge of nuclear fuel recycling, which can add clean power to AI-related data centers. According to a recent report from the U.S. Department of Energy, nuclear power has one of the lowest lifecycle emissions of any major generating energy source providing electricity to the grid with the lowest CO2 emissions per megawatt-hour of any currently available technology. Oklo is at the forefront of small modular nuclear reactors which have recently received significant commercial interest. According to an Oklo press release in August, Oklo established a preferred supplier agreement with Siemens Energy, leading manufacturer of steam turbine generated products and services. This partnership underscores Oklo's significant market traction with non-binding letters of intent exceeding 1,300 megawatts. Additionally, in September, Oklo announced the agreement with the U.S. Department of Energy's Idaho operations office allowing them to conduct site investigations as the only advanced formation company with a DOE site use permit. We are excited about Oklo's positioning as a leading nuclear energy provider. Finally, we continue to focus on our shareholder-friendly initiatives, including our recently executed note purchase agreement, note repurchase program, and the expansion and extension of our share repurchase program. Allison will discuss these initiatives during her prepared remarks in further detail. To conclude my remarks, I want to highlight why I believe this is an exceptionally promising time for our portfolio. Over the past five years, we prioritized sharing our perspectives on evolving market cycles and trends. In mid-2020, we expressed our belief in a significant increase in IPO activity and were strategically positioned to take advantage of this potential. Throughout 2021, we monetized over $258 million of our portfolio's assets, including two substantial monetizations of Palantir and Coursera, each exceeding $100 million in net proceeds. We also declared a total of $8 per share for over $212 million in distributions to our shareholders. In 2022, we conveyed our view that the market was a bit overextended, prompting us to considerably scale back on new capital investments. In the subsequent 1.5 years, we had ongoing dialogue with our investors about the disparity between private and public market valuations. As this year progresses, we have detailed our approach to judiciously deploying our available capital. I am confident that our current positioning is as strong, if not stronger, than it was in 2020. We believe that if the market remains robust, the IPO market will reopen. Given our recent investments and broader portfolio, we believe we are well positioned to drive shareholder return. Thank you for your attention. And with that, I will hand it over to Allison Green, our Chief Financial Officer.

Thank you, Mark. I would like to provide a detailed review of our financial results as of September 30 and our investment activity during the third quarter and after quarter end. Additionally, I will give more details on the 6.5% convertible note purchase agreement and related issuances during the quarter and following quarter end, as well as the Board's approval of the 6% notes due 2026 repurchase program. I will conclude with a brief update on the share repurchase program and our current liquidity. As Mark mentioned, during the quarter, we completed a $17.5 million investment in the convertible equity of OpenAI through the Class A interest of ARC Type One Deep Ventures Fund LLC, a fund that solely holds the convertible equity of OpenAI for Class A interest holders. We also invested $5 million in CoreWeave's common shares through a secondary transaction. After the quarter ended, we made an additional $5 million investment in CoreWeave Series A preferred shares through a secondary transaction, as well as a $12 million investment in VAST data through our investment in IH10 LLC, an entity whose sole asset is the preferred shares of VAST Data via an SPV. During the third quarter, we started selling our public common shares of Public Square after the lockup expired on July 19. We sold 359,845 shares of Public Square for about $1 million in proceeds, resulting in a realized gain of roughly $732,000. Additionally, we sold our remaining shares in One Valley Inc., formerly known as NGS, which generated $3 million in net proceeds and a realized loss of around $6.6 million. In the quarter, we also exited our position in STBRx, previously GSV Sustainability Partners, due to the business's dissolution, leading to a final distribution of about $375,000 and a realized loss of around $6.8 million. Finally, during the third quarter, we wrote off our investment in Churchill Sponsor 7 and UBET technology due to their dissolution. After quarter end, we continued selling our public common shares in Public Square. So far in Q4, we have sold 822,305 shares of Public Square for about $2.5 million in net proceeds and a realized gain of around $1.8 million. I’d like to provide details on the note repurchase program for the 6% notes due 2026 and the executed note purchase agreement for the 6.5% convertible notes due 2029. On August 6, SuRo Capital's Board of Directors approved a discretionary note repurchase program, allowing the company to buy back up to 46.67% or $35 million of our 6% notes due 2026 through open market purchases. As of September 30, we had repurchased 1,010,136 of the 6% notes under this program. After quarter end and up to now, we repurchased an additional 201,446 of those notes. To date, we have repurchased a total of 1,211,582, or about $30.3 million principal amount of the publicly traded 6% notes for approximately $30 million. The remaining amount of 6% notes that may still be repurchased is about $4.7 million. On August 6, SuRo Capital also entered into a note purchase agreement with a private issuer, where we may issue up to a total of $75 million in 6.5% convertible notes due 2029. Following this agreement, on August 14, we issued and sold $25 million in aggregate principal amount of those convertible notes. Interest on these notes will be paid quarterly, starting September 30 of this year. The notes will mature on August 14, 2029, and can be redeemed in whole or part after August 6, 2027, under certain conditions. The 6.5% convertible notes can be converted into our common stock at a conversion rate of about 129 shares for every $1,000 principal amount, subject to adjustments as stated in the agreement. The proceeds from these convertible notes will be used for repaying debt, making investments aligned with our investment objective, and for other corporate purposes. The agreement contains standard representations, warranties, and covenants. Following the quarter end, on October 9, we issued and sold an additional $5 million in principal amount of 6.5% convertible notes. These additional notes are treated as part of the initial series and share the same terms. With the issuance of the additional notes, the total outstanding amount for the 6.5% convertible notes due 2029 has reached $30 million. This quarter, we reassessed the investment gains for categorizing the portfolio by industry to more accurately reflect our current portfolio since the original themes were established. As a result, the previous six investment themes were restructured for an accurate depiction of our portfolio. The new investment themes include artificial intelligence infrastructure and applications, Software as a Service, education technology, consumer goods and services, logistics and supply chain, and financial technology and services. The largest allocation in our investment portfolio at quarter end was to Software as a Service, accounting for about 26% of the fair value. Artificial intelligence infrastructure and applications and consumer goods and services were the next largest at roughly 21% and 16% respectively. Approximately 15% of our portfolio was in education technology companies, while logistics and supply chain comprised around 11%. Financial technology and services made up 9% of our portfolio's fair value. We concluded the third quarter 2024 with an NAV per share of $6.73, consistent with our financial reporting. The decline in NAV per share from $6.94 in Q2 to $6.73 on September 30 was mainly due to a $0.59 decrease from net realized portfolio investments during the quarter, a $0.14 dip from net investment loss, and a $0.01 fall from realized loss on the partial repurchase of our 6% notes due 2026. This decline was partially offset by a $0.50 increase from net unrealized appreciation of our investments and a $0.03 rise from the impact of stock-based compensation during the quarter. To conclude, I will touch on our share repurchase program and liquidity as of the quarter end. As Mark noted, SuRo Capital is focused on initiatives to enhance shareholder value. On October 29, our Board authorized a $4.3 million increase in the share repurchase program to a total of $64.3 million and extended the program through October 31, 2025. Since launching the program in August 2017, we have repurchased over 6 million shares of our common stock, totaling about $39.3 million of the $64.3 million authorized by the Board. About $25 million remains available under the program, set to expire on October 31, 2025. As for our liquidity at quarter end, we had approximately $39.5 million in liquid assets, which includes around $32.7 million in cash and about $6.7 million in unrestricted public securities. The $1.4 million in public securities under lockup restrictions was not included in this amount. As of September 30, there are 23,378,002 shares of the company's common stock outstanding. This wraps up my comments. Thank you for your interest and support for SuRo Capital. I will now turn it over to the operator for the Q&A session.

We have no questions in the queue, so I would like to return it to your host for any closing remarks.

Thank you all for attending our Q3 call. We appreciate your interest and support. If you have any further questions, feel free to reach out directly through our IR portal. Thank you all very much.

Thank you very much. Once again, that does conclude today's conference. You may now disconnect.