SVB Financial 1Q16 Earnings Call Notes

SVB Financial’s (SIVB) CEO Greg Becker on Q1 2016 Results

We believe that VC markets are experiencing a healthy shift

“In the simplest terms, we believe the VC markets are experiencing a healthy shift, one that comes with near term challenges for some companies but is positive overall. We have been talking about valuations and [indiscernible] for several quarters and we’re not really surprised about what we’re seeing. We believe there is still much to be optimistic about and we remain positive about our clients and our outlook”

Tech markets have calmed following the volatile first quarter, but valuations have pulled back and capital is tightening

“The economic landscape is unsettled. While concerns of a recession appear to have receded somewhat, market sentiment and the economic outlook seem to change day to day. The interest rate outlook is equally unclear and we’re not counting on help from rates this year. The tech markets seem to have calmed somewhat following a volatile first quarter, sparked by a long buildup of fears over a possible unicorn bubble. While those fears may have been overstated, valuations have pulled back and capital is tightening, especially for early-stage companies.”

The IPO market was all but closed

“The IPO market was all but closed in the first quarter for tech companies which had zero IPOs compared to only six life science companies, making this the slowest quarter for IPOs since the third quarter of 2011”

But there are bright spots as entrepreneurs focus more on profitability and slower burn rates

“but there are bright spots as well. First, entrepreneurs and investors are beginning to replace the growth at any cost mentality that led to high valuations of recent years with a focus on profitability and slower burn rates. This shift in focus, as well as more reasonable valuations, should make the private market healthier overall.”

VC have substantial amounts of capital to invest

“after a long period of robust fundraising, VCs have substantial amounts of capital to invest, alongside many new sources of non-venture capital. This is the opposite of the situation VCs and entrepreneurs faced in 2008. This ample capital should ensure good companies will still be able to get funding.”

Lower valuations could drive increased M&A even if IPO market remain weak

“while the IPO markets may remain weak for some time, lower valuations could drive an increase in M&A by corporates and private equity firms. This is a dynamic we saw emerge during the 2008 recession.”

We see healthy re-calibration, not material downturn

“In short, we see a healthy re-calibration and not the beginning of a material downturn. While the markets may slow for a few quarters as investors and entrepreneurs evaluate their next steps, we believe this is likely to be a beneficial period of adjustment.”

More investor dependent companies may fail

” More investor dependent companies may fail and we could see more early-stage charge-offs as a result, although these are not unusual in any environment.”

VCs are advising companies to lower burn rates

“we probably had more interactions with venture capitalists than anybody else. And obviously, in the first quarter, we talk to them a lot about, what is their outlook and what advice are they giving to their companies? And a lot of that advice came back that we’re hearing, it is focused on lowering cash burn, get to profitability, try to raise capital so you really don’t have to go to the market, if you have to, for 12 to 18 months and so we’re hearing that pretty consistently.”

New company formation hasn’t changed a whole lot, maybe down a little

“They haven’t changed a whole lot, Steve. I’d say if you look back over the last three or four quarters, our high water mark, on a quarterly basis, was just under 1300. So from that high water mark, you’ve definitely seen a noticeable difference. But it was a little low in the first quarter, then it ramped up in the second quarter and then it trickled down”

Expect charge offs to trend toward the higher end of the range driven by early stage

“we reiterated our expectations for net charge-offs in that 30 to 50 basis point range more toward the higher end of that and that will be driven by early-stage”

Michael Descheneaux