Q2 2021 GSE Systems Inc Earnings Call
To review the financial results for GSE systems for the second quarter ended June 32021.
With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE systems, and Emmett Pepe, our Chief financial Officer of GSE systems before we begin I would like to remind everyone that statements made during this course of this call maybe considered forward looking statements within the meaning of section 27, a of the Securities Act of one nine.
133, as amended and section 21 E of the Securities Act of $19.34. 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 materially different from those projected for 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 companys operational performance.
Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These.
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. Ocado, Loudermilk, President and Chief.
Executive Officer of GSE solutions Carlo. Please proceed.
Thank you Adam I would like to welcome everyone to Gse's second quarter 2021 financial results Conference call.
Earlier 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 <unk> dot com under the news section.
To lay out the agenda for today's call. Let me first summarize a few key events from 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 and consulting or an ITC.
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.
And that 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 quarter.
Quarter Osso highlighted the efficient management of the business and our balance sheet, which saw net cash increased by <unk> 3 million when excluding the PPP loan, which has indeed been forget it.
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 at the end of the pandemic 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 have seen that during peak energy consumption months, which coincide with the summer when air conditioning is that peak use our industry customers are focused on meeting our customers' peak energy demands.
While we are 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. 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 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 or purchase 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 de carbonization 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 GSA 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 <unk> provides to them.
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 in express what we are seeing and hearing out there as.
As I expressed in our last conference call, we continue to see bidding activity pick up the.
The chatter and banter about upgrading and maintaining facilities are out and about our customers have remained cautious when it comes to signing new orders, it's clear that returning to pre pandemic levels could take a few quarters looking towards the longer term our customers will have to focus on catching up on delayed essential services that they incurred from the pandemic.
At some point.
That said they are not so we are we are not signaling 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.
In particular, we announced our first project during the second quarter in Japan, with our strategic collaboration with ABB.
This is the first project win resulting from the alliance between GSE and ABB Bailey, Japan established in March of 2020.
This significant project is to provide process simulation for the Nihon <unk> LNG Niigata terminal located in Niigata, Japan.
The terminal, which has facilities for receiving storing and supplying liquefied natural gas or LNG to the Niigata and Tohoku area serves as an important energy source for power generation and city gas.
The project cover software and services, which will include modeling processes. You suggest these J pro 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 paves the way to more opportunities, which the two companies had been developing together.
Another significant we announced earlier in the second quarter.
After the second quarter ended but in the second quarter was a new order for simulation solution for a global energy utility based in Saudi Arabia. This.
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 C. C. G T plants.
It is important to note that this customer is committed to accelerating the transition towards net zero carbon by 2045 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 two key catalysts, we have discussed in the past the need for a stable grid and de carbonization remained 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.
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 produce 23% sequential increase in orders and a 46% sequential increase in revenue.
<unk>, followed up Q1 strong performance with another solid quarter. The first half of 2021 produce year over year orders increase of 68% and revenue increase of 10%. We continued 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 an industry wide.
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 pre pandemic bid and award processes, therefore takes longer as well.
That said our pipeline of opportunities overall for the segment is clearly improved so our focus is working diligently with our customers and potential customers to convert these bids into orders.
Moving onto our cloud based software as a service solution.
As I've mentioned 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 barents its own conversation.
Revenue from our software solutions was <unk> 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 one time licenses 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.
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 predict predictability to the business as well.
I'm extremely pleased with the progress the division has built for DSA.
Currently it represents about 6% of total revenues and we are focused on growing from those levels and our overall revenue mix.
Besides from the recurring nature software provides it's also very high gross margins traditionally in the $80 to 90% range for GSE.
Another positive is the way GSE recognized as revenue as the 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 base license agreements and are in discussions with several more clients and prospects about onboarding them with the solutions as well.
Now moving to workforce solutions, our TC 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 the negative number in the year ago period, as we had to account for cancellations as we entered into the pandemic.
So why the diversions from what we've 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 pressured due to the pandemic and and delays in deployment again I don't believe we're losing any market share here and are capturing our fair share of quotation went.
<unk>.
Decisions to move forward or 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 re emerge with pursuing upgrades and other required maintenance, while the second quarter experienced some seasonal.
<unk> 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 re emerge from the pandemic, but also focus on making sure they are delivering clean and stable power for customers clearly a national priority as expressed in the bipartisan infrastructure deal and then the American shops plant, which is very exciting.
I'll now turn the call over to Emmett Pepe, Jeff <unk>, CFO, who will review the second quarter financial results and please go ahead.
Thank you Carl.
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 three 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 10, 6% sequential increase in the company's workforce solutions offset by a three 1% decrease in the engineering segment.
Year over year decrease though.
800000 is due to continued impacts of 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.
$8.3 million in the year ago second quarter.
Sequential change was largely due to customers delaying certain upgrades 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.
Year over year change was primarily due to an overall increase in activity due to the subsiding of the COVID-19 panic in workforce solutions.
Gross profit in the second quarter of 2021 was $2.7 million or approximately 20% of revenue. This compares 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 budgeting budgeted cost.
From a mid contract review on certain existing projects. These additional expenses are expected to be considered one time and the result of mid contract review to ensure no additional expenditures are required to complete certain contracts. While this scenario was 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.
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 16 cents per basic and diluted share compared to a loss of $2.1 million or loss of <unk> 11 per basic and diluted share in Q2 of 2020.
The net loss was $2.2 million or <unk> 11 per basic and diluted share in the first quarter of 2021. The improvement in Q2 was 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.
According to credit we reported net income in the second quarter due to recording of this credit of $5.1 million 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 900000 in the second.
Quarter and the remaining balance of $4.2 million is expected to be received in future periods.
Adjusted net loss of 600000 or <unk> <unk> per diluted share in the second quarter of 'twenty, one and compares to an adjusted loss of 1 million or <unk> <unk> per diluted share in the first quarter of 2021.
And this also compares to adjusted net loss of 700000 or <unk> <unk> per diluted share for the second quarter of 2020.
Adjusted EBITDA was a loss of <unk>.
100000 in the second quarter of 2021, and an improvement from a loss of 800000 in the first quarter of 2021.
Loss was 200000 in the second quarter of 2020.
As of June 32021 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 run off on existing contracts and a lull in the movement forward on some newer contract. This is anticipated.
Just wanted to come in online later this year.
As we have stabilized the business 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 300000 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 200000 in capacity 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 lowest loan has now been forgiven any related interest income into this mode will.
It will be subsequently also forgiven.
As the business has been right sized in 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 cop.
Thank you Amit.
Operator, please open the line for questions.
Sure. Thanks, Dan said.
Yep. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on the telephone keypad.
If you're reasonably speakerphone, please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And again, if you have a question. Please press Star then one on your telephone keypad.
Operator, if there are no questions.
I'll say a few words and then Adam if you want to ask some questions.
<unk> received some from investors, but I would like to conclude that we believe the company is 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 pushed bids during 2002.
Many are coming back to the table and a need for upgrades and upkeep services and solutions that we provide while.
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 it.
These opportunities and we certainly have a leaner cost structure today moving forward.
So given a very unique situation is heavily tech enabled provider of essential services.
To help the de carbonization of the power sector in nuclear power industry. We are very confident in our opportunity to create substantial long term value.
For our shareholders like so.
With that said Adam do you have any questions that have come in from investors since no questions on the call.
Yes, I have a few here.
Cowen Emmet excellent expense controls in the quarter are those levels sustainable or will they rise at some point how should we look at those.
Uh huh.
This is Scott Yeah 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 year that would be the expectation.
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 re examining the types of qualities of contracts you are bidding on.
And Mike do you want to take that Amit.
I can start and you can you can you can jump in.
Yeah look great.
Absolutely looking at a.
A number of items right value of the contracts.
Driving higher margins with higher higher bill rates, we look at utilization.
The resources and types of resources, we're putting on the contracts.
So all of the above.
<unk> run the projects more efficiently. So our view is that yes, we're always looking for ways to.
Improved margins and.
And just stayed focused on the cost.
Part of these costs were part of a bid contract review.
We'll look at contracts more frequently as well.
I don't know if there's anything to add to that yes.
The 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 license revenue that we grow as a percentage of our business. The overall that improves our margins and with the 80% to 90%.
Gross margin on software has a big impact just a few dollars a big impact so we've.
We've seen that as we've grown year over year.
Continuing to grow through the pandemic continues to grow in this year as we've been moving forward. So yeah. So.
A little more color on that.
The mix of our business.
So with the uptake on software and the high demand for highly specialized engineers are there opportunities for margin expansion.
Yes.
There are so so again by focusing on improving our ability of our software to provide significant value to customers. It means we will sell more value added software, which will in and of itself drive our margin expansion.
As well as the engineering services that we provide.
Our engineering services Division.
Our focused on very high and unique engineering capabilities that are essential and that drives higher margin business as part of our mix as well so through those two efforts, that's where we'll be driving margin improvements.
And thank you very much and for all participants joining telefonica again, if you'd like to join the question queue. You may do so by pressing Star then one again will cause for this audience members.
In the Meanwhile, I'll keep the keep moving forward here with some questions.
Cai.
<unk> M that you've done a great job of stabilizing the business and improving the balance sheet. If the business can stay stable to maybe even return towards pre COVID-19 level there should be.
And in the company's capital structure any thoughts on next moves by management with an improved balance sheet.
No look we are we're always focused on ensuring our balance sheet is as strong as it can be certainly the PPP loan forgiveness is.
Really been a help for the company.
And to the extent we need.
Some further help we're always evaluating options that.
The company could take advantage of so.
Certainly there are updates in that regards.
Everyone will know.
But this is something that we routinely routinely and regularly focus on.
We've come through very difficult global pandemic.
We continue to focus moving forward and.
Any other color you washed out.
Sorry, Yeah, no yeah look I think again we're.
Focus on the business strengthen our balance sheet and.
I think we're still in the midst of.
A slow ramp up post COVID-19 right as we've talked about so I think until until were clear through that.
Focus is really continuing to stabilize the business.
Regarding the new infrastructure Bill that the government is focused on passing how will that affect GSE and its customers.
Well look.
The Bill bipartisan infrastructure deal American jobs plan.
We have a clear focus on nuclear it's been called out specifically and.
At the federal level.
Certainly our support for the nuclear power industry, the existing plants or a federal level credit.
Really helps the industry and that 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 is finally, a recognition of the absolutely critical nature of nuclear for achieving zero carbon grid.
Now our utility clients will see that.
Theres commitment at a federal level to continue the lifetime of our existing fleet and extend lifetime and ensure that the operate safely for the long term and that's for GSE comes up so once that confidence is there and assurances with industry.
On the spend.
There's going to be spent to support the operations just as those plants move forward in that and that helps us that helps us quite significantly.
So we're glad to see progress on that legislation.
Small modular reactors also known as <unk>. They continue to make serious progress even today Excel energy announced an Mou with new scale power to explore partnering on operating <unk> with the potential for excel as the main operator of new skills nuclear plants, that's great for the industry.
<unk> can you comment on this and how it'll affect G GSE.
Sure well first of all it is great for the industry.
There was a lot of buzz at the.
American Nuclear Society conference that I had that.
That I had mentioned earlier in the transcript and a lot of buzz around <unk>, specifically and how close they are to coming to fruition. So GSE has been.
Partner to new scale for quite some time for many many years going on a decade now and so the use of our technology.
Toward the development of <unk> is used well in advance of deployment <unk> and once they are deployed.
Our technology, and our engineering services only increases and ink.
Kris quite significantly so for instance, our software reuse was used on the front end engineering design of reactors help expedite the licensing process for new scale, Theyre very public and supportive of our partnership with them and we're grateful for that.
That's only going to continue so the more plants to get built.
More engineering services will be required to support those plants as well as to.
Stop those plants on a workforce solution so.
The more plants are better for the environment to the grid and zero carbon and better for us.
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.
Oh.
Part of the program.
Adam.
Yeah, we we will assess Q3 and Q4.
Based on our projections for those quarters we.
We'll have potentially an opportunity to have more credits.
Thanks, Colin Emmet I'll pass the call off to to Kyle to conclude.
Well, thanks very much income.
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 is 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 in the weeks ahead.
I would like to note that we will be at the Lytham Partners Conference Virtual Conference October 5th sixth seventh so I'd encourage folks to consider registering for that to speak with us as well as at the AGP Energy Conference on September 24, So a lot of opportunity to get our our exciting story out there to new and existing investors.
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 will be happy to schedule a follow up call. So thanks again, everyone and have a great day.
And thank you Sir.
France has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Yeah.
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