GSE Systems, Inc. (GVP) CEO Kyle Loudermilk on Q2 2021 Results - Earnings Call Transcript

Aug. 16, 2021 10:08 PM ETGSE Systems, Inc. (GVP)
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GSE Systems, Inc. (NASDAQ:GVP) Q2 2021 Earnings Conference Call August 16, 2021 4:30 PM ET

Company Participants

Adam Lowensteiner - VP, Lytham Partners

Kyle Loudermilk - President, CEO & Director

Emmett Pepe - CFO & Treasurer

Conference Call Participants

Operator

Good afternoon, and welcome to the GSE Systems Inc. Reports Second Quarter Fiscal Year 2021 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Adam Lowensteiner, Vice President of Lytham Partners. Please go ahead.

Adam Lowensteiner

Thank you, Chad, and good afternoon, everyone. Thank you for all for joining us today to review the financial results for GSE Systems for the second quarter ended June 30, 2021. With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE Systems; and Emmett Pepe, Chief Financial Officer of GSE Systems.

Before we begin, I would like to remind everyone that statements made during this course of this call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended in Section 21E of the Securities Act of 1934. These statements reflect current expectations concerning future events and results. Words such as expect, intend, believe, may, will, should, could, anticipate and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. These statements are not guarantees for future performance and are subject to risks and uncertainties and other important factors that could cause actual performance or achievements to be materially different from those projected. For a full discussion of these risks, uncertainties and factors, you are encouraged to read GSE's documents on file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward-looking statements and Risk Factors section.

GSE does not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. On this call, management may refer to EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, which are not measures of financial performance under generally accepted accounting principles or GAAP. Management believes that these non-GAAP figures, in addition to other GAAP measures provide meaningful supplemental information regarding the company's operational performance. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies.

These measures should be considered in addition to and not as a substitute for or superior to any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with SEC Regulation G can be found in the company's earnings release. With that, I'd like to now turn the call over to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE Solutions. Kyle, please proceed.

Kyle Loudermilk

Thank you, Adam. I'd like to welcome everyone to GSE's Second Quarter 2021 Financial Results Conference Call. Earlier today, we issued a press release detailing our financial results. Hopefully, you've had a chance to review this news release, but if not, a copy can be found on our website at www.gses.com, under the News section.

To lay out the agenda for today's call, let me first summarize a few key events of the quarter, including some brief commentary on the numbers. I'll then talk a bit about the status of each of our divisions, including our engineering segment, Workforce Solutions segment, also known as Nuclear Industry Training Consulting, or NITC and our SaaS-based software solutions, which as we have discussed in the past, is an exciting and rather distinct key component of our business.

Emmet Pepe will then give a recap of the financial results, and we will then open the call to any questions at the end. Overall, the second quarter produced solid results and demonstrated that the business has stabilized, with sequential improvements in revenue and year-over-year improvements in new orders.

The quarter also highlighted efficient management of the business and our balance sheet, which saw net cash increase by $0.3 million when excluding the PPP loan, which has indeed been forgiven. While the new orders were not at the levels they were relative to the first quarter, they were relatively stable given the current business environment. I think most of us were optimistic that the end of the pandemic's impact on our business was here, but clearly, the industry we serve is still a bit cautious with regards to spending.

As a reminder, Q2 is also highlighted by normal seasonality, where we've seen that during peak energy consumption months, which coincide with the summer when air conditioning is at peak use, our industry customers are focused on meeting our customers' peak energy demands. While we were still filling the remnants of the global pandemic, we continue to make strides within each of our divisions showing that we are a highly diversified enterprise and able to be in a stronger position when our customers are ready to pursue projects and upgrades as they reestablish traditional spend activity in support of those projects and upgrades.

To put a fine point on that comment, as many of you know, we just came back from the American Nuclear Society's Utility Working Conference, which is the industry's largest conference. Back in person this year, the event was focused on the current challenges facing the U.S. nuclear industry and practical approaches the industry needs to survive and thrive in a rapidly changing environment.

The conference provided a great environment to speak with customers face-to-face about GSE solutions current and new solution offerings and discuss customer strategies for decarbonization and supporting the stabilization of the power supply. During the event, we met with customers, competitors and overall vendors serving the industry. I can say with a high level of certainty that overall, vendors are experiencing what we are experiencing, that GSE is maintaining and likely growing our overall market share. And that GSE solutions are highly valued by our customers, that our SaaS-based solutions are leading edge and that there is pent-up demand on the horizon for the types of engineering staffing and technology that GSE provides.

To that last point, our belief that it is a matter - all a matter of when. So let's expand on that a bit more in detail and express what we are seeing and hearing out there. As I expressed in our last conference call, we continue to see bidding activity pick up. The chatter and banter about upgrading and maintaining facilities are out and about, but customers have remained cautious when it comes to signing new orders. It's clear that returning to prepandemic levels could take a few quarters.

Looking towards the longer term, our customers will have to focus on catching up on delayed central services that they incurred from the pandemic at some point. That said, they are not - we are not sitting idly by waiting for these opportunities to arise. Rather, we're being proactive to open new doors and provide services with customers all over the world.

In particular, we announced our first project during the second quarter in Japan with our strategic collaboration with ABB. This is the first project when resulting from the alliance between GSE and ABB Belly Japan, established in March of 2020. This significant project is to provide process simulation for the Nihonkai LNG Niigata terminal located in Niigata, Japan. The terminal, which has facilities for receiving, storing and supplying liquefied natural gas or LNG to the Niagatta and Tohoku area serves as an important energy source for power generation and city gas.

The project covers software and services, which will include modeling processes using GSE's JPro simulation tools, which will then be integrated with ABB's industry-leading automation system. This is a great win for GSE as it shows how we can leverage our know-how and services into the other power sources and into other geographies. With more organizations embarking on their digital transformation journey, this project pays the way to more opportunities, which the 2 companies have been developing together.

Another significant we announced earlier in the second quarter and after the second quarter ended. But in the second quarter was a new order for a simulation solution for a global energy utility based in Saudi Arabia. This order was valued at $1.2 million and highlights the potential for additional opportunities with this large global operator. In addition, like the order with ABB, this order demonstrates our global reach and capabilities to deliver our services beyond nuclear as this order was for a complete simulator solution for a combined cycle gas turbine or CCGT plants. It is important to note that this customer is committed to accelerating the transition towards net zero carbon by 2045.

The utility selected GSE as a simulation partner in order to boost their commitment to modernize and optimize operations while significantly enhancing their training capabilities and simulation systems. The 2 key catalysts we have discussed in the past, the need for a stable grid and decarbonization remains strong and are only going to gain momentum as we move forward.

Let's dive a bit further into each operating segment. The Engineering segment saw revenue down 17% compared to the year ago period, up 3% sequentially. Orders, however, were up sequentially by about 4%. True North Consulting operations was a bright spot in our Performance Solutions segment for the quarter that produced 23% sequential increase in orders and a 46% sequential increase in revenue.

DP followed up Q1's strong performance with another solid quarter in the first half of 2021 produced year-over-year orders increase of 68% and revenue increase of 10%. We continue to experience challenges, however, in the core GSE engineering operations, which is comprised of sales and upgrades of simulator solutions for nuclear and natural adjacencies, which highlights the longer recovery to pre-pandemic spend levels we are seeing in the industry. While the division still is not recovering at the same level as our Workforce Solutions segment, this is expected as the contracts are longer in duration. And as a result, the ramp back to prepandemic bid and award processes, therefore, takes longer as well.

That said, our pipeline opportunities overall for the segment has clearly improved. So our focus is working diligently with our customers and potential customers to convert these bids into orders.

Moving on to our cloud-based software-as-a-service solution - solutions, rather. As I've mentioned in the past, while this is technically categorized under our engineering segment, it is a very exciting and unique component to our business and one which I believe warrants its own conversation. Revenue from our software solutions was $0.8 million for the second quarter. Most of this revenue is comprised of SaaS-based subscription revenue, which is recurring in nature while the remainder was for onetime licenses and annual maintenance associated with those licenses. While software revenue was slightly above last year's level, as I mentioned, most of the software revenue was converted over to SaaS-based revenue, which in the quarter increased by 129%.

This is an indicator of long-term growth and success for this business as it is recurring and highly sticky in nature. We continue to be excited about these offerings, which we believe have potential for continued above-average growth rates for the business and bring strong predictability to the business as well. I'm extremely pleased with the progress the division has built for GSE. Currently, it represents about 6% of total revenues, and we are focused on growing from those levels in our overall revenue mix. Aside from the recurring nature software it provides, it's also very high gross margins traditionally in the 80% to 90% range for GSE. Another positive is the way GSE recognizes the revenue as a sale of perpetual license upfront with recurring maintenance, which is annualized. We're making a significant push to convert our perpetual licenses to term licenses with customers and deliver that via cloud-based solution.

We've been successful in converting several of our largest clients to enter into the SaaS-based license agreements and are in discussions with several more clients and prospects about onboarding them with these solutions as well.

Now moving to Workforce Solutions, our NITC segment. Sales were up 10% year-over-year and 11% sequentially. Orders, however, were just $5 million, which compared to $7.4 million sequentially and a negative number in the year ago period, as we had to account for cancellations as we entered into the pandemic. So why the divergence from what we have seen going into the quarter and the order flow that came out of the quarter? Few things. We believe some of it can be explained by the fact that a few sizable orders that executed during the first quarter didn't continue into the second quarter.

But based on customer feedback, there continues to be pressure due to the pandemic and delays in deployments. Again, I don't believe we're losing any market share here and are capturing our fair share of quotation wins. Client decisions move forward are, however, certainly more cautious than they were a quarter ago.

To summarize, I'm proud of our team's resilience and ability to work through the industry-wide project delays and work stoppages caused by the pandemic this past year. We are holding our own and are well positioned to take advantage of bidding opportunities as customers reemerge with pursuing upgrades and other required maintenance.

While the second quarter experienced some seasonal and pandemic fatigue, we received a fair amount of new orders that we'll be able to work on, and we continue to make improvements in the company's financial stature. That said, while we are excited about the future, timing of closing new orders still remains a bit uncertain, which obviously can cause certain revenue shifts from quarter-to-quarter. Looking to the longer term, we are well positioned for success, especially as more of our customers reemerge from pandemic but also focus on making sure they are delivering clean and stable power for customers. Clearly, a national priority is expressed in the bipartisan infrastructure deal and in the American's Jobs plant, which is very exciting. I'll now turn the call over to Emmett Pepe, GSE's CFO, who will review the second quarter financial results. Emmett, please go ahead.

Emmett Pepe

Thank you, Kyle. With the numbers highlighted in detail in the press release, let me focus my comments on a few areas and provide added color where I can. Revenue during the second quarter of 2021 was $13.5 million, a slight increase of 3.2% compared to $13.1 million in the first quarter of 2021 and $14.3 million in the second quarter of 2020. The sequential improvement in revenues was driven by a 10.6% sequential increase in the company's workforce solutions, offset by a 3.1% decrease in the Engineering segment. The year-over-year decrease of $800,000 is due to continued impact from the pandemic, which continues to affect the power industry.

Engineering revenue was $6.9 million in the second quarter of 2021 compared to $7.1 million in the first quarter of 2021 and $8.3 million in the year ago second quarter. The sequential change was largely due to customers delaying certain upgrades. The year-over-year change was primarily due to orders on the simulator part of the business, but offset with improvements in specialized engineering and consulting services. Workforce Solutions revenue increased approximately 10% to $6.7 million in the second quarter, up from $6 million in the first quarter of 2021 and compared to $6.1 million in the year ago second quarter.

The sequential improvement was due to continued growth of new customers gained in Q1 2021. The year-over-year change is primarily due to an overall increase in activity due to the subsiding of the COVID-19 panic and the Workforce Solutions. Gross profit in the second quarter of 2021 was $2.7 million or approximately 20% of revenue. This compared to gross profit of $3.6 million or 24.8% of revenue in the second quarter of 2020 and $2.9 million or 22.3% of revenue in the first quarter of 2021.

Gross margin was affected by higher budgeted costs from a mid-contract review on certain existing projects. These additional expenses are expected to be considered onetime and the result of mid-contract review to ensure no additional expenditures are required to complete certain contracts. While this scenario is onetime in nature, as a reminder, the company's gross margin can be impacted by the mix of business from quarter-to-quarter and how much resources are needed to be dedicated to certain projects. That said, overall profitability of remaining and new smaller projects have had positive increases on profit margin.

Operating expenses, which excludes restructuring and impairment charges and amortization expenses in the second quarter of 2021 were $3.7 million compared to $4.9 million in the year ago second quarter. Operating expenses, excluding restructuring charges, was $3.9 million in the first quarter of 2021. These expenses were within our range and were due to continued tight expense controls, and we expect operating expenses for the rest of the year should be in line with the first half of the year.

Net income in the second quarter of 2021 was $3.2 million or $0.16 per basic and diluted share compared to a loss of $2.1 million or a loss of $0.11 per basic and diluted share in Q2 of 2020. The net loss was $2.2 million or $0.11 per basic and diluted share in the first quarter of 2021. The improvement in Q2 is due to a $5.1 million other income recorded from the employee retention credit.

As mentioned on the call last quarter, during the second quarter, the company became eligible for the employee retention credit and applied for a refund that we were eligible for under the Coronavirus Aid Relief and Economic Security Act. As a result, of recording the credit, we reported net income in the second quarter due to recording of this credit of $5.1 million as other income, of which $2.7 million relates to Q2 and the remaining $2.4 million is from Q1 as previously disclosed.

From a cash basis, we collected approximately $900,000 in the second quarter and the remaining balance of $4.2 million is expected to be received in future periods. Adjusted net loss of $600,000 or $0.03 per diluted share in the second quarter of '21 and compares to an adjusted loss of $1 million or $0.05 per diluted share in the first quarter of 2021. And this also compares to adjusted net loss of $700,000 or $0.03 per diluted share for the second quarter of 2020.

Adjusted EBITDA was a loss of $400,000 in the second quarter of 2021 and an improvement from a loss of $800,000 in the first quarter of 2021. The loss was $200,000 in the second quarter of 2020. As of June 30, 2021 backlog was $37.5 million, with $27.7 million attributed to the Engineering segment and $9.8 million attributed to the Workforce Solutions. This compares to a backlog at March 2021 of $40.2 million, of which $28.7 million was attributed to Engineering segment and $11.5 million was attributed to the Workforce Solutions segment.

These levels and backlogs show a slight runoff on existing contracts and allowing the movement forward on some newer contract. This is anticipated - that are anticipated to come in online later this year.

As we have stabilized the business, the balance sheet has benefited and should continue to demonstrate additional stability and improvement in the coming quarters. At the end of the second quarter, we had a net cash of $1.5 million, an increase of $300,000 from the prior quarter. We exited the quarter with $3.8 million in cash and $2.3 million remaining on our credit facility, which was lowered by $200,000 in the second quarter. These figures do not include the approximately $10 million that we received last year under the Paycheck Protection Program. And as we disclosed last week, has since been forgiven by the SBA and will be reflected in our third quarter results.

As the loan has now been forgiven, any related interest incurred under this mode will be subsequently also forgiven. As the business has been rightsized and our operating expenses have been tightly managed, we believe we have positioned ourselves for stability in the coming periods. I'll now turn the conversation back to Kyle.

Kyle Loudermilk

Thank you, Emmett. Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Kyle Loudermilk

Operator, if there are no questions. I'll say a few words, and then Adam, if you want to ask some questions, I know that you've received some from investors, but I would like to conclude that we believe the company has stabilized and continues to work on several projects as we wait for the industry to resume upgrades and maintenance on their facilities and workforce. We have seen bidding in recent months has definitely improved.

We know that many of our customers that push bids during 2020 are coming back to the table and a need for upgrades and upkeep services and solutions that we provide. While the timing on this is still in a lull, we do believe we're well positioned to win that's our fair share of these opportunities, and we certainly have a leaner cost structure today moving forward. So given our very unique situation as a heavily tech-enabled provider of essential services, to help the decarbonization of the power sector and nuclear power industry, we are very confident in our opportunity to create substantial long-term value for our shareholders alike.

So with that said, Adam, do you have any questions that have come in from investors since no questions on the call.

Adam Lowensteiner

Yes, I have a few here. Kyle and Emmet, excellent expense controls in the quarter. Are those levels sustainable? Or will they rise at some point? How should we look at those?

Emmett Pepe

I can take this, and Kyle - yes. Look, as I mentioned, we believe that our expenses are in line, our controls are in place. And as I mentioned, I believe the second half of the year would be similar to the first half of the year. That would be the expectation.

Adam Lowensteiner

Okay. Following up on gross margin, it was a little lower than traditional levels. How should investors look or understand that? And are there ways to avoid such issues going forward? For example, are you reexamining the types of or qualities of contracts you're bidding on?

Kyle Loudermilk

Emmett, do you want to take that or me?

Emmett Pepe

I can start and you can jump in, Kyle. Yes. Look, we're absolutely looking at a number of items, right? Value of the contracts, driving higher margins with higher bill rates. We look at utilization, the resources and types of resources we're putting on the contracts. So all of the above, how to run the projects more efficiently. So our view is that, yes, we're always looking for ways to improve margins and just stay focused on the cost to - part of these costs were part of a bid contract review. We'll look at contracts more frequently as well. Kyle, I don't know if there's anything you want to add to that?

Kyle Loudermilk

Yes. Only color I'd add is in addition to ensuring we're focused on the right mix and cycling to focus on the projects that are going to drive the margins we require and expect. Also explains the focus on our license revenue. The more license revenue that we grow as a percentage of our business. The overall that improves our margins. And with 80% to 90% gross margin on software has a big impact, just a few dollars of big impact. So we've seen that as we've grown year-over-year and continue to grow through the pandemic continues to grow in this year as we've been moving forward. So just a little more color on the mix of our business.

Adam Lowensteiner

So with the uptake on software and the high demand for highly specialized engineers, are there opportunities for margin expansion?

Kyle Loudermilk

Yes. There are. So again, by focusing on improving our ability of our software to provide significant value to customers, it means we'll sell more value-added software, which will in and of itself drive our margin expansion as well as the engineering services that we provide on our Engineering Services division are focused on very high-end unique engineering capabilities that are essential and that drives higher margin business as part of our mix as well. So through those 2 efforts, that's where we'll be driving margin improvement.

Operator

[Operator Instructions].

Adam Lowensteiner

In the meanwhile, I'll keep moving forward here with some questions. Kyle and Emmett, you've done a great job at stabilizing the business and improving the balance sheet. If the business can stay stable to maybe even return towards a pre-COVID level, there should be improvement in the company's capital structure. Any thoughts on next moves by management with an improved balance sheet?

Kyle Loudermilk

Like look, we're always focused on ensuring our balance sheet is as strong as it can be. And certainly, the PPP loan forgiveness has really been a help for the company. And to the extent we need some further help, we're always evaluating options that the company can take advantage of. So certainly, if there are updates in that regard, everyone will know. But this is something that we routinely and regularly focus on, and we've come through a very difficult global pandemic, we continue to focus moving forward. And Emmett, any other color you wish to add?

Emmett Pepe

Sorry. No. Yes. Look, I think again, we're focused on the business, strengthening the balance sheet. And I think we're still in the midst of a slow ramp-up post-COVID, right, as we've talked about. So I think until we're clear through that, our focus is really continuing to stabilize the business.

Adam Lowensteiner

Regarding the new infrastructure bill that the government is focused on passing, how will that affect GSE and its customers?

Kyle Loudermilk

Well, look, the bill, bipartisan infrastructure deal and American Jobs plan have clear focus on nuclear. It's been called out specifically. And at the federal level, certainly support for the nuclear power industry, the existing plants through a federal level credit really helps the industry and that and in turn, helps us because as the industry can know that these plants are going to be supported and not be undercut so dramatically by federal level, subsidies for wind and solar. And there's finally a recognition of the absolutely critical nature of nuclear for achieving the zero carbon grid.

Well, now our utility clients will see that there's commitment at a federal level to continue the lifetime of our existing fleet and extend the lifetime and ensure that it operates safely for the long term. And that's where JSE comes in. So once that confidence is there in assurances with industry, the spend, there's going to be spend to support the operations just as those plants move forward. And that helps us. That helps us quite significantly. So we're glad to see progress on that legislation.

Adam Lowensteiner

Small modular reactors, also known as SMRs. They continue to make serious progress. Even today, Xcel Energy announced an MOU with NuScale Power to explore partnering and operating SMRs with the potential for Xcel as the main operator of NuScale's nuclear plants. That's great for the industry. Can you comment on this and how it will affect GSE?

Kyle Loudermilk

Sure. Well, first of all, it is great for the industry. As there was a lot of buzz at the American Nuclear Society Conference that I had mentioned earlier in the transcript and a lot of buzz around SMR specifically and how close they are to coming to fruition. So GSE has been a partner to NuScale for quite some time for many, many years, going on a decade now.

And so the use of our technology for the development of SMRs is used well in advance of deployment SMRs. And once they are deployed, the use of our technology and our engineering services only increases, and it will increase quite significantly. So for instance, our software use was used on the front-end engineering design of reactors, help expedite the licensing process for new scale. They're very public in support of our partnership with them, and we're grateful for that. And that's only going to continue. So the more plants that get built, the more engineering services will be required to support those plants as well as to staff those plants on our workforce solutions. So the more plants, the better for the environment, the grid and zero carbon and better for us.

Adam Lowensteiner

One more question, then we can conclude. Great work on capturing the employee retention credit. Are there additional opportunities for GSE to see more credits?

Emmett Pepe

For the program, Adam, like, yes, we will assess Q3 and Q4. And based on our projections for those quarters, we will have potentially an opportunity to have more credits.

Adam Lowensteiner

Thanks, Kyle and Emmett. I'll pass the call off to Kyle to conclude.

Kyle Loudermilk

Well, thanks very much. In conclusion, just a few words, we appreciate the time and interest in GSE. We're very excited about what lies ahead of us for the remainder of 2021 and beyond. There's a lot of advancement on these initiatives that we've discussed. That's going to help us, and we're really excited to see that move forward.

We also look forward to speaking with many of you in the weeks ahead. I would like to note that we will be at the Lytham Partners Conference - Virtual Conference, October 5, 6 and 7. So I'd encourage folks to consider registering for that to speak with us as well as at the AGP Energy Conference on September 21. So a lot of opportunity to get our exciting story out there to new and existing investors and hope to see a lot of you there.

I'd like to wish you all to have a great rest of your evening. If there are any questions, reach out to Adam from Lytham Partners, and we'll be happy to schedule a follow-up call. So thanks again, everyone, and have a great day.

Operator

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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