Q1 2021 GSE Systems Inc Earnings Call
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With that I'd like to turn the call over to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE systems. Kyle. Please proceed.
Thank you Robert I would like to welcome everyone to GSE first 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 Dot GSE Es dot com under the new section.
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 and then talk a bit about the status of each of our divisions, including performance improvement solutions. What we also call our engineering segment.
Workforce solutions also known as nuclear industry training consulting around OTC.
Our SaaS based software solutions.
I'll also provide some industry commentary and then I will give a recap of the financial results. Finally, we will then open the call to any questions at the end.
Overall I was pleased with the quarter on several fronts, new orders for the quarter were $13 million up 67% sequentially from $7 8 million in the fourth quarter and at their highest level since the first quarter of last year.
Revenues increased three 6% sequentially to $13 1 million led by an 18% sequential sequential increase in workforce solutions.
Further total backlog remained solid at the end of Q1 at $40 2 million, while still below pre pandemic levels, we see signs that our backlog has leveled out and we expect to see improvement throughout 2021 as expected contract wins begin to appear.
To that point, we received a number of new orders during the first quarter, including three contracts for our work Force solutions Division with a combined value of $8 7 million to provide specialized training and staffing support services for large energy companies.
These wins show the basket the abilities of GSE can offer to its clients as well as beat out tough competition.
It is important to note that these orders were with Blue chip clients and we were able to win this business by offering our elite nuclear expertise personalized approach to customer service and proven track record of providing the best people available to industry something that GSE has vast experience in providing.
I would note that due to the way we account for backlog and orders not all of this $8 7 million was booked in Q1, rather the orders will appear in backlog as revenue is committed <unk> generated.
The performance improvement segment predominantly saw meat and potatoes type of orders for our core business.
Just as the segment was slower to be impacted by the pandemic relative to work force solutions due to the long running nature of projects. This segment has been slower to ramp back up to pre pandemic levels with that said, we have seen an uptick in bidding activity for this segment and we are eager to see them convert to awards and wins.
Additionally, we received an order from a major energy company in Canada, the contracted with GSE to upgrade their on Prem trading platform to our new envision software as a service subscription solution, which included 10 comprehensive operational courses.
This too is an instrumental win on a few on a few levels not only was this another order with a major blue chip customer. It was for our new SaaS solution that can be accessed via the cloud will expand into the software side of our business later in my prepared remarks.
Beyond the orders as I mentioned earlier bid activity is up significantly from the last few quarters well bid activity does not mean, new orders or revenue. It does provide us with added optimism that the market is rebounding in the short term we are seeing a light at the end of the tunnel following the impacts from COVID-19 throughout 2020.
The market overview and dynamics, while we are focused on rebounding in the near term.
<unk> II and beyond historic levels levels as they look longer term I believe the opportunities for GSE are significant the.
The trends towards improving power supply in general something I referred to as quote stable grid.
Nearly at the forefront and are emphasized by events like what happened in Texas earlier, this year and what type of havoc a disruption in the power grid can pause.
Well I've talked about de carbonization in the past the theme of stable growth is also key tailwind for GSE services and offerings as our customers and the government find ways to not only decarbonize and deliver clean power, but also deliver power and a stable and consistent manner in order to accomplish these two requirements of de carbonization and stayed.
Grid nuclear has to become a major focus we are now seeing this focus right at the top of the U S government proposed policy personnel.
And department of Energy Secretary Granholm are openly advocating for federal level subsidies to recognize the value of the U S nuclear commercial reactor fleet.
Achieving a zero carbon grid that is stable requires a healthy nuclear ecosystem. It is terrific to see this discussed in EMS.
Braced openly across the political spectrum.
The year end call I discussed the heavy investment into next generation nuclear facilities called SMS and a small modular reactors in October 2020 to USD, we awarded $160 million to build working models of small scale advanced nuclear reactor design and then December announced another 32 million of initial funding under its new advert.
<unk> reactor demonstration program.
She is per.
Other investment into advanced nuclear as highlighted in the American jobs.
While all of this is very exciting news for the industry in the interim there also been a major refocus on existing facilities, which can act can act as a key catalyst for us until the newer <unk> where commissions.
We're seeing power companies.
Seek long term permit renewals from existing nuclear facilities, primarily to meet their day organization targets, but also to continue to keep the stable power supply.
[laughter].
They're also looking at the age of the facilities and not just renewing for small time periods, but many are seeking longer term renewals in the range of 10 to 20 years. We recently saw the nuclear regulatory Commission back Dominion Energy's application to extend the operating lifetime. The Surrey reactors by 20 years. This is great news and part of a wave of lifetime.
Extensions that are moving through the reactor fleet, we're closer closely monitoring these renewals because we believe they will act as a bridge to the newer technologies <unk> offer and bode very well for the future opportunities from GSE for many years to come.
Another key growth driver for GSE is that U S energy industry is expected to lose a large percentage of its workforce as baby boomers retire that should prevent us present us greater opportunities for our business over the next several years as utilities look to vendor expertise to fill this gap.
At GSE, we're well positioned to take advantage of these industry wide trends through our two key divisions now let me take a moment to discuss some details on each of those divisions performance improvement solutions also notice engineering performance saw orders increase in the first quarter up 28% sequentially to $5 6 million up from $4.
$3 million in the fourth quarter of 2020.
Two major highlights in the corner in the quarter for performance solutions, where they order flow from DP engineering true North where orders improved sequentially by 66% and 43% respectively. This was a direct result of pent up demand of our core essential services that were delayed due to the COVID-19 pandemic.
Overall progress is being made.
To wrap up on performance solutions I will note that there were no single large orders that drove this uptick in demand we feel that this brought up tick as a sign that the deal volume overall is picking up from the bottom. We saw in 2020 as a result of the pandemic as the industry races to catch up on work that was delayed over the past year GSE is well positioned to benefit from this.
Brent.
Now moving to work force solutions or <unk> segment as mentioned in the press release orders in the first quarter increased 113% sequentially from the fourth quarter led by a combination of new customer wins as well as extension and continuation of current contracts.
Our Hyperscale division, which offers highly specialized industry specific expertise for staffing training and consulting services.
<unk> quarter orders in the first quarter were $4 2 million up from nearly zero orders in the fourth quarter the.
The increase in orders was attributable specifically to a sizeable order from one of our longtime customers.
Further in this segment in December 2020, we announced Master service agreements with a major U S utility for combined budgeted value $35 million over two years with multiyear extension options. We anticipate that work under these agreements, which is not yet reflected in our new order quarter end backlog will start to ramp as we approach the end.
With Q2 and continue to build in the second half of the year.
As I described earlier in the call workforce solutions is an on demand type of business. When the pandemic broke out last year with customers sending employees home. We saw this business quickly and dramatically scaled back as companies pause their demand for work force staff augmentation.
Just as we saw Swift contraction in this business now that we are emerging from the pandemic. We are seeing this ondemand business quickly ramp back up we are working hard to ensure this trend continues as our customers locked the skilled resources to conduct certain essential work at scale as a result of our retiring workforce from other macro trends GSE is poised.
To fill that gap as well as the surge in demand post pandemic with our access to highly skilled professional workforce.
The nature of this business is an effective dose of diversification to our engineering solutions performance improvement business line, which should see a longer ramp up due to prepayments up to pre pandemic levels of activity.
With COVID-19 hopefully subsiding, we are optimistic that this is just the beginning of continued strong order flow, which will ultimately convert to revenue growth.
Moving onto our cloud based SaaS solutions. While this is technically categorized in the performance improvement solutions and currently represents about 5% of total company revenues the recurring nature of this.
Of this revenue and 80, 90% gross margins make us an attractive and unique component of the business for.
For those not familiar with this offering are delivering technology and SaaS format was launched a few years ago and is a direct result of our strategy of packaging licensing and monetizing our IP for significant value added to industry, and then turn to GSE.
We now provide customers a flexible decentralized stimulation and workforce development solutions that are underpinned by robust technology and deep subject matter expertise.
Our SaaS customers require only a web browser and internet connectivity for the end user enabling the client corporation to eliminate the burdensome and costly management of on Prem technology.
While we have historically sold this is an on prem solution with one time perpetual license, we're making a significant push to convert our perpetual licenses to term licenses with customers and deliver those solutions via a cloud based solution.
We have been successful in converting several of our clients to enter into these ongoing software solutions agreements. A key example of this was the contract Doha might it a moment ago. This contract was for a three year term license and highlights the value add we provide true this cloud based solution.
Several additional customers that we were seeking to convert to software solutions on demand, which could in turn develop into a highly sticky and growing annuity stream for us in future to come.
To put a fine point on this recurring focus revenue from SaaS based term licenses increased 166% year over year and roughly stayed flat sequentially I am extremely pleased with the progress. This division has built for GSE.
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 with the vaccine rollout in COVID-19 cases, coming down dramatically GSE is well prepared to take advantage of bidding opportunities as customers re emerge pursuing upgrades and other required essential services.
Forward looking components of orders and increased recurring software agreements as a sign of green shoots for GSE. We're clearly optimistic that 2021 will be a much stronger year as our industry project project activity rebounds, and we execute on our very exciting organic growth strategy.
Looking to the longer term, we are well positioned for success in helping our customers deliver clean stable power for their customers.
Before I move on to discuss the first quarter financials I want to extend our condolences to Emmett who is not able to attend today's call due to the recent lawsuit as mother.
Additionally, I want to commend and his team for their diligent efforts during the last year.
As I will detail subsequent to the first quarter, we were able to secure an employee retention credit from 244 million, which will enhance our operating cash flow and capital structure in the coming quarters I wanted to acknowledge our appreciation to Ms team for their efforts.
So now covering financials, but the numbers highlighted in detail in the press release I'll focus my comments on a few areas and provide added color where I can.
Revenue during the first quarter of 2021 was $13 1 million an increase of three 6% compared to 12, 7% in the fourth quarter of 2020 and.
17, 7% in the first quarter.
2020.
The sequential improvement on revenues was driven by the 18% growth in workforce solutions offset by a 5% sequential decrease in net engineering solutions the year over year decrease of $4 6 million was due to the overall impact of the pandemic, which began to impact the company's operations net.
Good way to the end of the first quarter of 2020.
Performance solutions revenue was $7 1 million in the first quarter compared to $7 6 million in the fourth quarter and $9 7 million in the year.
Year ago first quarter.
Sequential change year over year was.
It was primarily due to several significant projects ending in prior periods and delays and commencing new contracts remotely due to the COVID-19 pandemic as mentioned earlier, we are working diligently to turn our opportunity pipeline into orders, but this business line has a longer lead time to ramp up our workforce solutions segment.
This is illustrated in our Q1 results with workforce solutions revenue of $6 million in the first quarter compared with $5 1 million in the fourth quarter of 2020.
And $8 million in the first.
In the year ago first quarter, the sequential improvement is predominantly due to new business secured during the quarter.
The year over year change was primarily due to an overall decrease in activity due to COVID-19 pandemic as I described earlier.
Gross profit margins in the first quarter were 22, 3% of revenue as compared to 23, 2% of revenue in the first quarter of 2020, and 29, 9% from the fourth quarter of 2020.
Yeah.
As.
We have said in the past gross margins can be impacted.
The mix of business from quarter to quarter, and how much resources need to be dedicated to certain projects typically our margins increase over the course of the year as our payroll burdens lessen those employer tax caps are exceeded.
While the quarterly performance of performance solutions showed improvement gross margins in the first quarter were below that division's typical levels. This was due to additional preparatory service from recent order flow that we anticipate to work on in the near future. While this hurt the gross margin in the quarter. We believe the expenditures will be beneficial over the course of the year and we anticipate a more normalized growth.
Margin from the division.
Operating expenses, including restructuring and impairment charges decreased 27% year over year in the first quarter of <unk>.
Two $4 3 million compared to $5 9 million in the year ago first quarter.
There were $3 8 million in the fourth quarter of 2020 expenses are typically higher in the first quarter due to some additional corporate expenditures of our annual audit.
Overall, I believe we've done a good job managing the business through the pandemic.
As I just mentioned subsequent to the first quarter's end the revenue became the company became eligible for the employee retention credit and has applied for refunds to four 4 million.
We believe we are eligible to take it from the second quarter and are currently reducing our payroll taxes as permitted under the coronavirus aid relief and economic Security Act. This should improve our cash flow moving forward.
One further point here as the PR highlights we recognized $808000 in non cash restructuring charge in the first quarter of 2021. The charges are mainly due to realization of the cumulative translation adjustment related to the Swedish liquidation, which is finally complete.
Reflecting the absence of the restructuring charge and other noncash items adjusted net loss was $1 million or <unk> <unk> per diluted share in the first quarter of 2021 compared to adjusted net loss of $9 million or <unk> <unk> per diluted share in the first quarter of 2020 on an adjusted EBITDA basis. It was pretty similar as we had a loss of 800.
And in the first quarter of 2021 compared to 600000 in the first quarter of 2020, adjusted EBITDA totaled $1 $1 million from the fourth quarter of 2020.
As I mentioned earlier backlog was $40 2 million of which $28 7 million was attributed to performance solutions and $11 5 million attributed to the work Force solutions segment as.
As a reminder, backlog was $40 4 million at the end of December I believe the level of the backlog from December.
The most recent quarter that we're discussing today show stability in the industry.
Turning to the balance sheet, we continue to prudently manage our balance sheet. Our total debt includes approximately $10 million that we received last year under the paycheck protection program. We've used these funds for payroll related cost rent utilities and other permitted uses as of March 31, 2021, we were in full compliance with all requirements in order to apply for forgive.
This under the PPP loans, we are applying for forgiveness of this loan in the first quarter in 2021, our application has been improved by the bank was currently awaiting approval by the SBA.
We're anticipating a response in the near future and plan to make an appropriate disclosure when we do assuming forgiveness of the debt. Our total debt will be just $2 5 million.
Before we open the call for questions I'd like to conclude that we believe the industry has turned the corner.
Hitting in recent months has improved and order wins reflect that.
Know that many of our customers that pushed beds. During 2020 are coming back to the table and the need for upgrades and I'll keep services.
While the timing on this business is still a bit hazy, we do believe that GSE is well positioned to win its fair share of opportunities as we go forward.
We couldn't get to this point without the commitment of our employees and patience of our shareholders, which I think you bought four this is an exciting time for GSE and the company is prepared for the future which is in our favor.
Given our very unique position as a heavily tech enabled provider of essential services to the de carbonization of the power sector in nuclear power industry, we remain very confident in our opportunity to create substantial long term value for employees and shareholders alike.
One final note, we will be attending Sidoti conference. This Wednesday and Thursday. Additionally, we're pleased to be participating in the life from partners conference coming up on June 2014 through June 16th if you would like to a range of one on one meeting please connect with the team at life and partners.
With that said operator, please open the floor for questions.
Thank you we.
We'll now begin the question and answer session.
So ask a question you May press Star then one on your Touchtone phone.
If you don't have to think about please pickup your handset before pressing the key.
To withdraw your question from the queue. Please press Star then Paul.
At this time, we will pause momentarily to assemble a roster.
Our first question comes from David Wright with Henry Investment Trust Paypal.
Good afternoon.
Hi, Henry.
Did the did you say the $808000 of restructuring charge in Q1 was the final.
Related to the Swedish wind down is that what you're saying.
That's correct, it's non cash related and it's entirely related to the.
The solution of the Swedish entity.
Great Okay.
Restructuring charges have played a recurring role in the financial statements for the last couple of years is it anticipated that there'll be any more in the next quarter were true.
It's the only element of restructuring charges that may come into play is related to.
The abandonment of unused real estate as a result of the pandemic.
It's not a firm thing yet, but that's the only thing that comes to mind right now.
Okay, Great and then just kind of a.
A technical question you talk about small modular reactors and.
Do we know or are those going to require.
Simulators for training purposes for there yeah.
I would point you to do some research on the Internet or on a company called new scale and U S. C. L E and they were just posting today in fact on.
Linkedin about their use of their commercial simulator to accelerate their design license from the NRC the simulator and factors based on Gse's technology.
We've been working for them for at least a decade now.
So the answer the short answer to your question is yes.
Just a tremendous story behind just that so long before these plants are built they need to stimulate those plants as they design them and then prove they can operate them safely and that's where GSE can come into play just says we have from new scale.
So you are working with new scale now in that regard.
That's correct, we have been working with them for quite some time, they're very public about that.
So even though it may be a while before the reactors come along GSE could be earning revenue from simulator development well.
Well in advance of the plants.
Yes.
The plant is actually becoming operational.
That's correct not only could we have and will continue to do so okay. Great. Thanks very much.
Thank you.
But again, if you'd like to ask a question. Please press Star then one at this time.
While we wait to see if there's going to be any additional questions here Kyle I just had a couple here.
On the software solutions component to the business can you maybe add a little bit more color there.
What the opportunity is the size of that opportunity and what this can mean is in terms of the larger picture for GSE going forward.
Sure look when we came into the business from 2015.
We saw his part.
The deep value. This company can offer is packaging and licensing the IP and the contemporary fashion industry.
To add value to industry and create an ongoing annuity for GSE.
And you look at where we are today, you know a very significant SaaS based revenue increased to 160% year over year.
This is high value added very sticky, 80% to 90% gross margin and that's really a direct result of the strategy and hard work of the team and working with customers.
The growth potential is significant while I won't put a specific dollar estimate on it.
We certainly have the opportunity to go back into clients, who have spent millions of dollars on our solutions and convert them into a recurring annuity. We're working hard at that you know the example of the Canadian client that we highlighted is just one example.
Where we've achieved that conversion, but there are many others that.
We're working with to go through a similar conversion.
Value prop is obvious they don't want to have to support on Prem technology, the hardware and software they'd rather just supported internet connectivity in a web browser much cheaper for the client more effective and scalable for us and.
So its lower cost of ownership for the customer and higher value added for us that's very sticky and growth overtime. So significant opportunity ahead.
Alright, Great and then maybe just a couple more here obviously the company has been well entrenched in North America, particularly within our nuclear here.
Are there other geographies that are opportunities for the company both within nuclear as well as other power sources.
Yes for sure we've had a long standing robust business overseas really almost since the company was founded so over the past year, we've been delivering projects in the United Kingdom.
In Slovakia in the Ukraine, mostly by delivering those projects domestic from our domestic locations here in the United States.
And only with essential travel meeting together one of the silver linings of the pandemic, we've been able to deliver these solutions improve we can deliver these solutions.
With technology delivery versus having to fly over and remain entrenched se as we may have been passed so there's value added there we have a very extensive work that we've done in South Korea and continue to do work there and I'll note in Japan, Japan was.
Third of our business prior to Fukushima and obviously with Fukushima that was like a turning off the spigot, but we've seen that spigot cracked back to open three or four years ago, we started to get new order flow from Japan, its modest, but we remain engaged net in that country with very close ties and good relationships and look forward to see that growth.
As Japan starts up their fleet.
All right, maybe just one more here and the work Force solutions Division, obviously, the labor market is very tight how does the company make sure. It can supply the necessary work force or really the required engineers there.
Yes, it's a great question keto, our workforce solution value added as we have a robust and very proprietary database of highly skilled workers that are available for on demand work.
And we they are as much our customers as our end user utility customers are so we work really hard to build up great relationships with these professionals over the long term.
We reach out to them when projects become available and they have the option to work when they then they want to and need to so it's really a win win but it's that proprietary database and contacts with highly skilled workers that really differentiates us in the marketplace.
Thank you for that Sarah I will turn it back over to you.
Thank you showing no further questions. This concludes our question and answer session. So I'd like to turn the conference back over to management for any closing remarks.
Alright, well, thank you and I'd like to thank everybody for joining US. We appreciate your time and interest in GSE and we're very excited about what's ahead of us and here in 2021.
We look forward to speaking with many of you in the weeks ahead feel free to reach out for one on one discussions if you wish to follow up to that happy to happy to speak with you do you have any questions. Please reach out to our IR firm Lytham partners and we'd be happy to schedule. Those follow up calls again, thanks, everyone be well and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.