Q3 2021 GSE Systems Inc Earnings Call
[music].
Good afternoon, and welcome to <unk>.
<unk> systems third quarter fiscal year 2021 financial results call.
Participants will be in listen only mode.
You need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Today's presentation will be an opportunity to ask questions.
We felt that this event is being recorded.
I'd now like to turn the call over to Mr. Adam <unk>.
Steiner Vice President of Lytham partners. Please go ahead.
Thank you Nick and good afternoon, everyone and thank you all for joining us today to review the financial results for GSE systems for the third quarter ended September 30th 2021 with us on the call representing the company today are Kyle Loudermilk, President and CEO of Gse's, 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 the course of this call maybe considered forward looking statements within the meaning of section 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities Act of 1934. These statements reflect current expectations concerning future events and results words, such as expect in <unk>.
<unk> 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 of future performance and are subject to risks and uncertainties and other important factors that could cause actual performance or achievements to be.
Material different than 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 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.
You 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. <unk>.
Kyle Loudermilk, President and Chief Executive Officer of GSE solutions Kyle. Please proceed.
Thank you Adam I would like to welcome everyone to Gse's third 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 USPS dot com under the news section.
So lay out the agenda for today's call I plan.
Excuse me opening my remarks with an overall discussion on the industry, then drill down into commentary on the quarter's highlights and the status of each of our divisions, including our engineering segment also known as performance improvement solutions workforce solutions also known as nuclear industry training and consulting or energy.
<unk> and our software as a service space.
Our solutions business.
Emmett Pepe will then give a recap of the financial results. We will then open the call to any questions at the end that we do have to ask questions.
First let me start by giving a macro overview of the industries, we serve particularly nuclear so let's begin by highlighting the very positive industry trends that are unfolding for the nuclear industry and as a result, providing which should be significant tailwind for our business are GSE.
This past August the American nuclear Society held at utility working conference in Marco Island, Florida, It's our largest conference of the year for our industry.
If there is any underlying message that came out of the conference. It was that nuclear is gaining serious traction specifically speaking the positivity emanating from the conference was from the recognition that nuclear produces zero carbon power, which is essential to zero to a carbon free future.
And the fact that Congress at that time was advancing the bipartisan infrastructure Bill which contains provisions to advance the goals of achieving a zero carbon by 2035.
Since then just today moments for this call we understand that the bill has become law with customer buying items, signing the bill formally kicking off the move towards.
The United States moving towards zero carbon grid by 25.
Nuclear as well as a result.
In our power mix will become ever more essential as a result of this the.
The trend is not limited to the United States, we are seeing several countries around the world embrace nuclear energy as an integral part of their plants to decarbonize the power sector, while ensuring a stable grid and energy independence.
In the past several months, we've seen countries, including Canada, the United Kingdom, Poland, Bulgaria to name a few formerly announced steps by which they will move to adopt more nuclear power generation moving forward, particularly leveraging the small modular reactor technologies that exist who need belts.
A bit more on the bipartisan infrastructure and jobs Bill that was recently signed into law. If one reviews. The proposed infrastructure spending theres a lot of dollars allocated towards strengthening in the U S grid and making sure. It can remain resilient stable, while also focusing on the implementation of more renewable and carbon free energy production.
Decarbonize our grid by 2035.
Keeping in mind the longer term goal is achieving a net zero economy by 2050.
In the Bill dimension of nuclear is quite prominent from supporting the operations of the existing nuclear fleet to advancing the next generation of nuclear power plants.
For obvious reasons and this is very exciting news for our industry and as a result, very positive news for GSE moving forward.
And then on nuclear power the legislative package targets aging power plants as well as yet to be built small modular reactors.
It sets aside $6 billion for the department of energy to spend on nuclear facilities that are under threat of being shut down due to economic factors.
It also sets aside $6 billion in funding for Microreactors small modular reactors and advanced nuclear reactors.
The obvious that the goal of the Bill is to incentivize states and utilities to routine and invest in nuclear power.
This investment is a critical factor in creating a robust and resilient carbon free power grid.
Another key point and the Bill is the recognition of the value of zero carbon power produced by nuclear through implementing what is what are known as zero emission credits or sex.
This is a key win for the nuclear industry as for the first time, there was a federal level economic credit allocated to the production of nuclear power much as wind and solar received federal credits.
This this creates a large economic incentive to invest in the continuance of nuclear power generation from the existing fleet, allowing utilities to invest in these plants to extend the operable lifetimes of the plants and produce more power from those plants over time through capital investment.
<unk> is geared towards serving the nuclear fleet to produce power safely extend operating lifetimes to produce more power through capital investment and these are just a few reasons why the American jobs, it's great news for us.
As I briefly mentioned earlier, that's good news for nuclear extends well beyond the United States.
While the global push towards carbon free economy since been years in the making we are now getting serious momentum to meet certainty carbonation goals by 2035 and beyond.
That said over the past few years the world is waking up to the fact that renewable energy sources of wind and solar while zero carbon are highly inconsistent and therefore unreliable energy sources in enough themselves.
As a result of countries around the world have scrambled to secure a legacy energy sources like natural gas oil and even coal most notably in Germany, and China to make sure. Its citizens can heat their homes and the colder weather and keep the lights on and keep the economy moving forward.
The recent energy crisis is driving recognition among countries that the answer to the equation of how to Decarbonize, while simultaneously being energy independent absolutely must include nuclear.
This solution is not a secret anymore as seen in recent price range surprises in uranium which declined over 40% in recent months.
One of the new technologies, that's going to help solve many of the challenges I just alluded to and that GSE is heavily involved in has been for quite some time, our small modular reactors also known as <unk>.
Now some ours are gaining lots of momentum all over the world GSE has been involved in providing supporting software and simulation software and services for <unk> over 10 years through a partnership that we have with new scale, one of the leading developers ADESA bars.
New skills majority owned by floor public company, that's providing engineering procurement and construction services for more than 100 years, our software solutions and simulation technologies required in a downside <unk> being deployed or commission for design licensing running necessary tests simulation operating scenarios and for training future.
Employees will operate and engineer these plants.
These efforts continue to gain steam as reported a few weeks ago when they scale announced it has installed a new stimulation laboratory at the center for advanced Engineering studies and.
Excuse me the center for advanced Energy Studies in Idaho Falls, Idaho, situated approximately 50 miles east from where our new skills first commercialized tomorrow is expected to be built at Idaho National Laboratory.
Several of GSE software offerings are being used in these new scale simulation laboratories. This is the second of three facilities that won't be built for the purpose of developing and training operators and the broader workforce for the next generation of nuclear <unk> facilities.
The first facility is that deep skills headquarters in Corvallis, Oregon.
And the third facility is planned to be built at Texas A&M in the near future.
It is news items like this one with new scale, which are important for investors to understand and remember as <unk> start to gain momentum and be procured our technologies and offerings are extremely important and necessary early in the process and throughout the process.
After all new scale has been a customer of GSE for approximately 10 years already and we've only just begun to see planning for new off some of our plants.
As also as cogeneration facilities are taken offline there are plans to potentially repurposing sites. Some of our locations. We're already seeing this occur in coal mining states like Montana, and Wyoming with planning studies underway.
The state governments.
For each state.
Our embracing de carbonization and quickly pivoting to repurposing older coal power plant sites into our some of our sites.
It's a relatively straightforward transaction as the current sites are already brownfield sites are often there are water services, a heat sink and have grid connections and utility lines on site. These are all key elements, which are difficult to obtain and costly to replace or replicate if starting from a greenfield site.
Additionally retired coal plants typically have a workforce that is ready to pivot to a new power generation plant.
The focus on nuclear is not limited limited to simply converting fossil fuel power sites to nuclear powered sites nuclear power ended up itself is becoming a valuable source of carbon free 24, seven steady power for essential applications, such as data centers, which require significant amounts of uninterrupted power.
And a fascinating development Energy Harbor Corp, an energy company in Akron, Ohio announced this past July but it will provide nuclear power to standard powers, New Bitcoin blockchain mining center more recently Talon energy announced it is developing a cryptocurrency mining facilities and data center, that's nuclear power plant with Pennsylvania.
As bitcoin miners look for carbon free energy source. It is no surprise that these announcements came on the heels of Elon Musk opining on the high energy as a bitcoin and suggesting that nuclear should be a viable option to keep these emerging technologies online and operating at zero carbon emissions.
We had a press release earlier today about our work with talent in advancing this capability, it's very exciting and it's happening today.
Providing carbon free nuclear power to critical data centers, what are for crypto currency purposes, or other critical data applications will only become more essential for large tech companies to claim they have zero carbon data centers Datacenters need 24, seven high reliability power nuclear is really the only game in town for providing 27 high reliability.
Free power, it's exciting to see this trend getting hold in their history and move forward.
Similar positive for nuclear it can be found on the international front, just north of the U S border, Canada has been very vocal with regards to becoming carbon free and that the path to get there will require significant investment in nuclear power.
Canada has been taking aggressive steps embracing us tomorrow, some investing in nuclear to meet decarbonization goals.
<unk> benefited from this directly in the quarter. When we were awarded a $1 $6 million contract to upgrade the simulators at two Canadian nuclear power plants. This contract focused on upgrading clients. The latest simulator technology and we are also engaged in projects to help this customer enhance their energy production efficiency effectively producing.
More similar carbon power from existing facilities. These are recent examples of how candidates investment in nuclear directly benefited GSE.
More broadly GE Hitachi nuclear energy has made recent news regarding Canada by entering into an agreement with BWXT, Canada to help with engineering and procurement support the design manufacturing and commercialization of an SME at Ontario power Generation's Darlington nuclear generation station.
In Japan, the new Prime Minister recently announced his plans for getting nuclear back up and running to meet decarbonization goals as well as ensure that the country has a consistent and affordable means of power, especially in a digital environment whereby citizens are using are relying on more.
Connected devices. This is also a very significant national security priority for Japan as energy security for the country becomes an existential concern.
In the United Kingdom, where they have recently had energy.
<unk> energy reliability and availability issues, they announced that they too are aggressively pursuing nuclear power options. While the UK has been slow to chart a path forward for nuclear the recent significant rise in natural gas prices combined with the much slower than planned windpower be generated has motivated government officials.
Two engaged in talks about renewing new nuclear options as there are many new technologies like <unk> that can be safely implemented.
The financial times recently reported that several UK ministers onboard to put quote nuclear power at the heart of Britain's strategy to reach net zero carbon emissions by 2050.
Spearheading semis in the UK as well as voice group, which publicly announced last week that it has raised over 600 million to fund the next generation of low cost low carbon nuclear power technology.
<unk> partnered with Exelon generation limited to develop <unk> initially in the U K and then we'll open for export to customers worldwide.
Another example of progress is Poland, which was recently made news with regards to pursuing some ours given the country's geography and political profile Poland has expressed their desire to be energy independent and are recognizing that can be accomplished using part of that some months, while at the same time, producing carbon free power broader sources.
In September new scale signed a deal to explore the deployment of <unk> at a KOL repurposing solution as a coal repurposing solution for existing coal fired power plants much as the U S has in Montana and Wyoming.
This came off the heels of GE and cameco entering an Mou with a few other parties to evaluate the potential of the uranium fuel supply chain from Canada to service the potential fleet about some office in Poland.
All according to the Polish government energy strategy, Poland plans to construct six nuclear power units.
In 2033 points should watch reactor generating some month to one six gigawatts of power subsequent reactors would be constructed every two to three years. According to this plan until the targets of 16 months is achieved.
Also of note, Romania as well.
Recently entered into an agreement with new scale to evaluate the implementation of an SLR site in the country.
In France, one of the earliest countries to use nuclear energy extensively has announced plans to invest heavily into innovation, including the building of Mercer Marsh, which among other technologies will be needed to meet aggressive green energy plants by 2030.
In addition to announcing the importance of being carbon neutral president of France noted that.
Investing in these new technologies is a must to ensure the country and continent energy independence.
One more important industry piece of news that I'd like to share it came out of Finland, which announced that it was going to produce proposed to the EU that nuclear power. Finally officially be included as a sustainable energy source, which it is.
So it is quickly becoming apparent that you came net zero carbon emissions and have a stable grid with energy independence nuclear must be included and it will in fact become a more critical part of our power mix as we move to zero carbon.
The news that I, just shared and additional news. They don't have time to note here. It makes me feel extremely confident about the future opportunities for GSE and its unique offerings, which are at the forefront of making these nuclear power generation technologies in plants operated mines safely and efficiently.
Now, let's dive into some of the key events GSE experienced in the third quarter, which was our strongest reported since the onset of the pandemic. It's good news.
So some key events in Q3 market <unk> dynamics in new orders overall third quarter produced solid results and demonstrated that our business has stabilized we see sequential and year over year improvements in revenue and new orders. The quarter also highlighted the efficient management of our business and our balance sheet, which saw net cash increased by $10 six.
Million is the PPP loan has been forgiven during the third quarter.
While new orders were not yet at pre Covid levels. So we are very pleased to be trending in the right direction with the third quarter, producing higher new order sequentially from Q2 and year over year from last year's Q3.
While we continue to see some impact from the pandemic still linger the third quarter results show that our customers are starting to emerge from them and then I can we continue to make strides within each of our divisions.
Demonstrates we are a highly diversified enterprise enabled to be in a stronger position.
Excuse me when our customers finally already to catch up on all the work that was delayed as a result of the pandemic.
As I mentioned, we announced at the end of this quarter of contract wins for advanced simulator technology upgrades and engineering services valued at $1 6 million.
This was a great win for GSE are largest in regards to an almost two year or so as it shows the value of our simulation technology and how customers rely upon us to deliver the latest technologies that can enable them to operate their facilities in the most efficient and safe manner possible.
This customer who is based in Canada was looking to upgrade the simulators at two nuclear plants, which we are already were using GSE technologies by upgrading the simulation environment utilizing our latest software the customer will have state of the art plant simulators and leverage these simulators to understand plant operations, how to optimize those operations most effectively.
As well as create sophisticated training scenarios around relevance in operating conditions in.
In addition to the upgrades the customer we'll work with GSE engineers to incorporate plant specific design information for new balance of plant models, which shows the breadth of services, we can offer our clients and that they have come to rely upon our services as well.
Another one we announced very early in the third quarter with a new order for simulation solution for a global energy utility based in Saudi Arabia.
The order was valued at over $1 million and highlights the potential for additional opportunities with a large global operator. This order was for a complete simulator solution for combined cycle gas turbine or <unk> plant as it is important to note that this customer is committed to accelerating the transition towards net zero carbon by 2045 and beyond Utah.
<unk> selected GSE as a simulation partner in order to boost their commitment to modernize and optimize operations, while significantly enhancing our training capabilities and simulation systems too.
Two key catalysts the need for a stable grid and de carbonization of the power sector remains strong and our only to only going to gain momentum as we see them moving forward and have recently accelerated due to high power costs from energy shortages and global initiatives.
Broadly as well as the U S jobs.
Jobs Act, which was signed into law today.
Now, let's review a bit into each operating segment for engineering performance also known as performance improvement solutions. Our engineering performance saw revenue increased 7% sequentially from the second quarter and up slightly by 2% compared to the year ago period orders have improved significantly during the third quarter nearly doubling to <unk> 11.
One 2 million when compared sequentially to Q2, when compared to the third quarter a year ago orders increased by 21%. These increases are attributable to the two contract wins are referred to in my comments earlier key orders.
Looking further into the engineering performance Division, our true North consulting and DP engineering units performed well compared to the third quarter a year ago as more customers are starting to invest in these essential services that we provide to the industry.
Our core GSE performance operations, which is comprised of sales and upgrades of simulator solutions for nuclear and natural Adjacencies performed stronger on a sequential basis.
While the division is still in the midst of recovering from the pandemic. We are seeing customers start to put more work out to bid and inquire specifically of our unique solutions. There has been a large uptick in the opportunity pipeline as a result of this increased activity.
In part because of this we have reason to be confident industry is starting to emerge from the pandemic related slowdown in spend and we do expect additional business within this division over the longer term as a result, our pipeline of opportunities overall for the segment is clearly improved sort of focus is working diligently with our customers and potential custom.
Mers to confirm.
These bids into orders.
As experienced during the quarter with new key orders received.
Moving onto our cloud based software as a service solutions either as I've mentioned in the past. While this is technically categorized under our engineering performance Division. It was a very exciting and unique component to our business and one which I believe warrants its own conversation.
Revenue from our software solutions was.
<unk> 8 million for the third quarter compared to <unk> 8 million for the second quarter. Most of this revenue is comprised of SaaS based revenue subscription revenue, which is recurring in nature. While the remainder was for one time licenses annual maintenance associated with those licenses.
While your date software revenue was roughly flat compared to the prior year. It is very important to note that the mix of the software license revenue has shifted meaningfully and not the software revenue. This year is primarily a SaaS based which increased by 42% year over year. Why is this important it's important because it's an indicator of long term growth.
And success for this business SaaS revenues recurring and highly sticky as sticky in nature with automatic annual adjustments that account for inflation plus margin to the company. We continue to be excited about these high value high margin software solutions, which have demonstrated the potential for continued above average growth rates, while bringing strong predictability.
Software license business.
I'm extremely pleased with the progress. This division has built for GSE currently it represents about 6% of total revenues and we are focused on growing from those levels and our overall revenue mix aside from the recurring nature software provides it also provides very high gross margins typically 80% to 90% for GSE.
GSE recognizes this revenue on a ratable basis for SaaS software quarterly over the lifetime of contracts.
Perpetual license sales, which are necessary in certain instances, we recognize this revenue upfront and associated maintenance ratably over each year for which maintenance is current.
We're making a significant push to convert a perpetual license term licenses with customers and deliver that via cloud based solutions. We have been successful in converting several of our clients. These cloud base license revenue agreements and are in discussions with several more to keep keep moving forward. We're also selling that new SaaS.
Revenue, which is fantastic, we're happy with our growth in this area and look forward to continuing the transformation to make this segment a larger part of our business.
Excuse me we're positive about this part of the business that could be an interesting diamond and the rock I'd be remiss, if I didn't mention that in the sector.
High level, especially recently with Aspen technology, and Emerson, whereby Emerson will acquire Aspen I've been merged our software units into New company also called Aspen.
The combined industrial software company will comprise emerson's grid modernization technology engineered practical simulation software and asking tech software offerings to mining manufacturing petrochemicals pharmaceuticals and refine it.
More importantly, the valuation of the deal was proposed at a whopping 15 times revenue showing the demand and strength of software businesses in our industry. This highlights the potential value of GSE software business as there is strong demand from our customers to help them improve their performance of their assets.
The workforce solutions moving to workforce solutions.
We're up 29% year over year, and 10% sequentially. Good news what are some $3 5 million, which compared to 5 million sequentially from the second quarter, an increase from $1 6 million over last year's third quarter, which was a low level as we were still dealing with certain I wonder cancellations at that time stemming from the pandemic.
The increase was really demonstrate how our customers are now feeling more comfortable with having workers on prem and committed to making sure their facilities received required upgrades and maintenance and services, while the third quarter orders were lower we are confident that the division has turned a corner preparing to gear up as our customers start coming back to the marketplace.
To summarize I'm extremely proud of our team of GSE and the results produced in the third quarter, we're able to demonstrate the turnaround of the business to produce positive cash flow, we're seeing signs of the industry, improving and do believe that investors will need to be a little patient to see the industry further loosen the pandemic related constraints on spending which you have.
Well happen barring any unforeseen events.
In the meantime, the company has been right sized and the diversified business model. We built over the past few years has proven resilient and we believe it is positioning the company to broadly benefit from the macro trends that bode very well for gse's future.
We are an essential part of the power industry ecosystem and our clients rely on us to keep their assets up and running while creating a highly efficient and safe environment. The strong reputation we have in industry and the relationships, we maintain with our customers and the value added engineering workforce and software technology, we provide the industry should position us well to be not the competition, it's more busy.
This was answered the vendor ecosystem for nuclear and the broader zero carbon power generation sector.
As the industry continues to develop a resilient grid that will advance the goals of de Carbonization GSE is at the forefront of providing citizens I'm ready to partner with the power industry and to achieve these goals.
With that said I'll now turn the call over to Emmett Pepe GSE CFO, who will review the third quarter financial results.
Please proceed.
Thank you Carl.
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.
Carl highlighted a few of our key new orders in Q3, which led to our highest consolidated quarterly total since Q1 of 2020.
Engineering performance led the charge with their highest quarterly total in nearly three years.
Revenue during the third quarter of 2021 was $14 7 million, an increase of eight 6% compared to $13 5 million in the second quarter of 2021 and.
And an increase of 13, 7% from the $12 9 million reported in the third quarter of 2020.
This is the highest quarterly revenue total since Q1 of 2020 pre pandemic.
Sequential improvements in revenues were driven by substantial increases in the company's engineering performance and workforce solutions segments.
Year over year increase of $1 8 million.
Due to continued improvement.
And emerging from the pandemic, which continues to affect the power industry.
Seen in the third quarter results starting to gradually improve.
As customers start to Reengage and site upgrades and maintenance.
Engineering performance revenues were $7 4 million in the third quarter of 2021 compared to $6 9 million in the second quarter of 2021.
Seven 3 million in the year ago third quarter.
Sequential change was largely due to improvements in our true north and DP engineering subsidiaries the year over year change was primarily due to lower orders on the simulation part.
The business, but offset with improvements in our specialized engineering and consulting services.
Workforce solutions revenue increased approximately 10% to $7 3 million in the third quarter up from $6 7 million in the second quarter of 2021 and increased 29% when compared to the $5 7 million in the year ago third quarter.
Sequential and year over year improvements were due to continued growth of new customers gained in 2021.
Q3, 2021 was the highest quarterly total since Q1 of 2020.
Year over year changes, primarily due to an overall increase in activity.
Due to the subsiding of the COVID-19 pandemic.
Gross profit in the quarter.
Third quarter of 2021 was $3 2 million or approximately 21, 7% of revenue. This compares to gross profit of $3 3 million or 25, 7% of revenue in the third quarter of 2020, and $2 7 million or 20% of revenue in the second quarter of 2021.
Gross margin was affected by project mix as our workforce solutions segment contributed a larger portion of revenue than in the prior year.
Operating expenses, which excludes restructuring and impairment charges and amortization expenses in the third quarter of 2021 were $3 4 million compared to $3 7 million in the second quarter of 2021.
<unk> expenses, excluding restructuring and legal settlement costs was $4 million in the year ago third quarter. We continue to closely monitor our operating expenses and expect them to be in line with the past three quarters going forward.
Net income in the third quarter of 2021 was $11 4 million or <unk> 55 per basic and diluted share compared to a loss of 700000 or <unk> per basic and diluted share in Q3 of 2020.
Net income was $3 2 million or <unk> 16 per basic and diluted share in the second quarter of 2021, which included a $5 1 million other income recorded for the employee retention credit.
Positive income in the third quarter stems from the recording of the forgiveness of the PPP loan.
Well as $2 1 million of other income recorded for the employee retention credit.
Adjusted net loss totaled.
Point $2 million or <unk>.
Per diluted share in the third quarter of 'twenty, one compared to <unk>.
600000, or <unk> <unk> per diluted share.
Second quarter of 2021, compared with an adjusted loss of 1 million or <unk> <unk> per diluted share in the third quarter of 2020.
Adjusted EBITDA.
Which was positive at 100000 for the third quarter of 2021, an improvement from a loss of 400000 in the second quarter of 2021.
<unk> was 600000 in the third quarter of 2020.
Our adjusted net income and EBIT figures have improved each quarter sequentially in 2021.
Strength in our business post pandemic.
As of September 32021 backlog was $37 $5 million with $31 5 million attributed to performance engineering and $6 million to workforce solutions. These levels in the backlog show stability.
Existing contracts and our improvement in orders highlights the movement forward on some newer contracts that are anticipated to come online in the coming quarters.
As we have stabilized the business the balance sheet has benefited and should continue to demonstrate additional stability and improvement in the coming quarters. We.
We exited the quarter with $4 million in cash and $2 $1 million remaining on our credit facility, which was lowered by 250000 in the third quarter.
Our working capital increased by $1 6 million from the prior quarter net cash also increased to $2 million.
From $1 5 million in the second quarter.
In addition, $4 $3 million of ERC refunds is expected to be received in future periods.
And is reflected as a current asset on our balance sheet.
As mentioned on the last earnings call.
Approximately $10 million that we received last year under the Paycheck protection program has been forgiven by the SBA has now been reflected in the third quarter results.
The loan has now been forgiven any related interest incurred under this loan was subsequently also forgiving.
As the business has been right sized and our operating expenses have been tightly manage we believe we have positioned ourselves for stability in the coming periods.
I'll turn the conversation back to cop.
Okay. Thank you Amit to summarize.
Looking forward to the longer term, we see an interesting dynamic and pulled on a global basis on two major fronts that we believe will act a strong tailwind for the services. The GSC provides one is the focus on de carbonization, but the other is the recent rise in electricity prices costs from a shortage in energy sources, we believe that as the <unk>.
Energy prices continue to rise due to lack of supply the desire for countries and companies to see cleaner, but also consistent means of energy sources have put a large focus on nuclear as seen in recent price increases in uranium and from the news in the press about nuclear it is.
Our belief that as a result of these.
Issues in assay persist the realization of implementation of SMS or being put to the top of the list and the timeline that then becoming a reality has probably been moved up as a result.
Now before we open the call for questions I'd like to conclude that we believe that the company has stabilized and that we continue to work on several projects as we wait for the industry or resume upgrades and maintenance of their facilities and workforce bidding in recent months has definitely improved.
I know that many of our customers are pushed bids during the pandemic are coming back to the table and then need for upgrades.
Paid services.
While the timing on this business is still hard to pinpoint we do believe that GSE is well positioned to win our fair share of opportunities and with a leaner cost structure.
We're very happy with the quarter, which we think demonstrates significant progress given our very unique situation as a heavily tech enabled provider of defense essential services to the de carbonization of the power sector in nuclear power industry, we remain very confident in our ability to create substantial long term value with that said operator. Please.
Open the floor for questions.
Okay.
Okay.
Operator could you please instruct for prompting us to ask questions. Please well begin the question and answer session to ask a question you May Press Star then one on you touched on phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
The majority of your question. Please press Star then two.
This time, we'll pause momentarily to assemble the roster.
First question.
Comes from Don Argus Barclays Capital. Please go ahead Sir.
Yes. Thank you.
With a lot of the opportunities globally, all over the world seems to be emerging could.
Could you talk about your capabilities outside the U S. It seems like you do work and a lot of markets can you do work.
Anywhere.
What is the sales process.
Yeah.
Performing the work do you have to have people in those markets or is it does virtually no.
Yes, John Great question. This is Karl thanks for asking that.
Look we deliver projects globally, especially on our simulation solutions.
Our capabilities and we deliver those globally.
And we do so out of the United States. So we have projects that have you know either.
Either recent are ongoing in the United Kingdom, Slovakia to Ukraine, obviously, all boarding and surrounding Poland. So we are well positioned for that market well position for the U K.
Prior to Fukushima, Japan was roughly 30% of our business and we continue to do business in Japan. They upgrade their licenses regularly into that market and we're well poised to serve that market as they grow.
And we so.
So.
Net net net we are a global company, we provide certain technologies globally out of the United States, where we need to project talent globally, we do so.
And.
So this momentum.
Dancing nuclear globally as well as.
<unk>.
Key segments, we're very well positioned to serve that market and do so out of the United States and that is very much the norm for our business since its inception 50 years ago.
Okay.
The other one I had was on the.
<unk> energy.
Are the services Youre, providing there is the projects seem to be a little different the enormity of the services.
From your current suite of services or is it is it different.
Look I think the nature, so let's be specific.
Engineering group that is providing the engineering services for that project our press release.
That we wrote with Talon was intentionally very specific about what we're doing to highlight the very unique.
The solution, we're providing for them, which is all very many of the especially engineering services associated with connecting high voltage lines directly from the nuclear power plant.
Through switch yards too that those data center on complex data Center campus, we called out a behind the meter.
Our solution and this is going to become more the norm.
What we're seeing for industry the major utilities across the board are very interested in.
Investing in data centers, having long term energy contracts with them at.
Premiums to spot market prices simply because they're providing carbon free power that is highly reliable very clean 24, seven and you know.
We're really excited by that project, because we could take those capabilities and apply them throughout industry doesn't.
Very emerging but is going to be a very significant spend and exciting dynamic for data centers.
Look all of these companies that are.
Post systems in these data centers large tech companies Bitcoin mining.
Blockchain.
Capabilities, they want to claim that their carbon free and one of the few ways. They can do that as we've seen with this pilot project is by leveraging the value of nuclear power.
Thank you and congratulations on the progress in the quarter Yeah. Thanks, Yeah. We're thrilled thank you.
Thank you. The next question will come from Asia.
A private investor. Please go ahead.
Hi, Good afternoon can you hear me.
We can hear you shout how're you doing.
Oh, great. Thank you first of all thank you for hosting the call it's great to have such a.
Above standard transparency. So this I recognize that you are very shareholder friendly and appreciate it. Thank you for that.
My question really.
I'd love to learn more about the industry at large is there a dynamic where nobody got fired for buying off again culture. So as you've been contracts that makes it easier to win more is that how the industry.
Great.
Yeah.
I think generally speaking the answer is yes shy I think specifically the more we can get the good news out not only about wins, but specifically what we do.
You would have seen really over the last six months a number of press releases from us highlighting the very specifics of our wins and wanted to be very transparent.
Not only to the investment community, but also to the market about what we're doing and.
Most recent example is this data center power.
Linkage project that we announced this morning very specific but it has largely clickability across industry as they invest likewise I think it was in August we spoke about how our.
DVR and thermal performance monitoring system.
Really well.
And Arizona public utility operator has demonstrated significant value and.
Allowing that operator to understand just how much power they are producing and putting them on the grid to get paid for it and that's.
Finding millions of dollars of what's changed in the couch. So we can now point to these things as part of our sales efforts.
The quarter also shows where.
Successfully cross selling and up selling and that's the only gaining momentum and that explains a lot of why.
No.
Being as transparent as we are but also what level of specifics that arent.
Typically the norm for press releases.
It's very much helpful domestic marketing capabilities more broadly.
I think that dovetails to my second question that in an 8-K with the SEC on May 19.
You noted there were $4 million of software revenues was a 34% annual growth rate.
When thinking out over five year 10 year time horizon, what would you suggest it might be a sustainable rate of growth for the software segment.
Yes, it's a great question.
As Youll see in the earnings call today and that release and prior we're very bullish on this sector and to the extent, we can invest it's clearly modest given our resources, but our technology team Brahma Asami led by Brahma Asami as well as our engineering team led by John Hart and his team work.
Together have created these tremendous value added solutions and we've converted what has been out there.
Legacy on Prem, which are growing still for clients into evergreen softwares and service solutions wherever we could provide as well as creating net new solutions like we.
Demonstrated with that August press release so.
Look we're investing in it because it's high margin, it's clearly grown quite significantly and we expect that growth to continue.
We obviously don't project features around.
Specifics this year, we're gonna grow X percent Nextera likewise, but we're just at the beginning what we feel it's going to be a long term broker for this company. So 20 years ago, you can just imagine what besides that license revenue line of business would be like but we really began six years ago to deliberately as part of our turnaround thesis.
With the company.
And we're just now beginning to see the fruits of that labor. So congrats to broaden this tommy and his team and Dan Horn.
As they as they built this business out through innovative new solutions.
And then just to keep my own expectations properly grounded could you talk about rate limiting factors in terms of how large the total size could be very long term, what the glass ceiling might be or just a sense of where the.
Yeah, we're where there tends to be a forget it might slow down.
Well look if you look at our past investor decks from a couple of years back we put very much out there what the existing served available market is for engineering services.
Workforce solutions and pro technology solutions in the nuclear power industry in adjacent sectors and they were each over $1 billion at one point, if I recall correctly. So that's the served market what the glass ceiling is.
That's the minimum floor.
So we want to grow within that obviously.
Obviously embarked in a great thesis early as we turned around the company to Inorganically with what you've seen particularly in the software. This is purely organically and highly high margin highly profitable growth.
The investment we put into it we expect that to continue but from a served market.
Between engineering services and workforce solutions technology.
In the United States lungs.
North of $2 billion, you know you can look at this whole.
Investor decks, and while there was a slowdown due to coronavirus. Nevertheless, the software services accelerated in growth.
During the coronavirus pandemic.
Look we're very bullish but we're also very realistic. So we're not here that show a hockey stick projected hockey stick, we're going to execute on the business and as we do the fully transparent on what.
But the results on where we're at it.
And early in the call you brought up the Aspen Tech and Emerson headline, which is quite interesting I actually have in front of me. The July 32015 press release, when you were appointed CEO and in the second half and the second paragraph there is language that.
Your previous positions at Aspen included VP of design and simulation business unit.
Served as VP of recent with elevated at Aspen Tech.
So I'm curious to what degree do you think your experience with Aspen Tech, possibly influence your vision for GSE and to what degree there are analogs that could be studied in case studying how far should I read into this parallel if at all.
Well look it's a great question.
That was a very formative part of my career, which I took forward into micro strategy day to tell.
Were promised somebody join me from Aspen Tech for that growth journey had a very significant sale of that business all through organic license revenue growth.
Back to micro strategy and then here. So we've deliberately yeah look so what does that experience mean for me, both ASP and pack and subsequently micro strategy team to call. It shows that the market for industrial appliance software and solid industrial problems is a very significant market when it applies to very clear value added.
Is it a business problem to solve how much similar account is going to cost me to deliberate we are doing that now at GSE, we learn that way back in the day asthma attack apply.
Applied that they're applied that and the team. There is obviously doing an amazing job and you don't have this great transaction and it's exciting to see that because they are continuing to move forward with the business you know great liquidity event.
My focus and investment.
You know.
Romney Asami not work together Aspen Tech we're here.
And we also work together on a day to tell I'm very fortunate to be with him for a third tour of duty here at Aspen Tech and of course, our excuse me at David.
Yeah, <unk> so the experience from Astra Tech and data tell clearly applies here and we also have a board member Suresh Sundaram who is.
Really a storied career at Aspen tuck in.
So we're honored to have had that experience and through the totality of our careers by that to GSE and we're seeing the benefits of that today.
So I don't know if that answered my question or not but.
This is a deliberate this is a deliberate part of our strategy and we're seeing that pay off.
And you can see that valuation of Emerson Aspen Tech deal just imagine.
Why not.
All lines of business you get a sense of just how valuable this could be.
And the last question on my side, you brought up the small modular reactor FMR and the new scale relationship for 10 years could.
Could you and whatever degree it's appropriate unpack unit economics, so how does growth and FMR translate to revenue at GSE is it per unit is it.
What's the metrics and how is it sort of.
[noise] translate.
Yeah, we don't.
Obviously, we'll we don't make a level of transparency about specific contracts with specific customers, but in general would you say how do we license our software license it either by user or by site my application by module very standard energy industry.
It's licensed two.
To the extent it can be a SaaS oriented shops with annual increases and renewals rather.
Usually geared towards <unk>.
5% or CPI.
Plus three 5% so when you see CPI down pushing five 5% you get a sense that these ratchets get above 8%, it's very meaningful to our business.
We continue to invest in the software so that it's sticky and.
The latest software upgrades et cetera, and security patches. So clients are highly motivated to keep that evergreen.
And then the other security applications that may be on premise nuclear Navy and other clients. Some nuclear clients. They don't want things connected to the internet. So it's hard to keep that connected through a SaaS paradigm, but then that's when we have annual maintenance. That's paid regularly. So again all the latest capabilities are available to the client as well as security patches et cetera.
Okay.
And again I don't know, if you're able to comment, but what would be some assumptions when it becomes material is there a percent of market share or number of units, where this begins to really show up in the financials.
Well I'll just say you know.
When we started this was a de minimis part of our business you know historically, our company had delivered IP to customers in order.
As the embedded cost of the project in order to win projects and that was upside down, particularly 20th century 20 <unk> century. So.
Here we are.
Changing that paradigm is long overdue.
We've done that and its grown too.
I'd call material part of our business, 6% and is highly profitable at 6%.
And so if we keep that going you know you can project out on your own models, but that means but it is quite meaningful.
Okay. Thank you so much I appreciate your time, thank you again.
No. Thank you Shar I really appreciate it.
Yeah.
Again, if you have a question. Please press Star then one.
At this time, we have no further questions now I'd like to turn the call back over to Mr. Kyle Loudermilk for closing remarks. Please go ahead.
Okay, well look I'd like to thank everybody for joining our call.
We appreciate your time and interest in GSE, we feel we have really good news to share today, and we've done that as well as sharing with you the broader.
Macro trends, which are a flight.
Regarding de Carbonization SLR advancement in our positioning for that and that's why we're very excited.
Well also be presenting at the let them partners Winter 2021 Investor Conference December 14th 16, So we do hope folks on this call and certainly more please attend that and we'll look forward to speaking with many of you at that time. If you have any questions don't hesitate to reach out to Adam is on this call from Lytham partners and we'd be happy to schedule.
A follow up call and again. Thank you again, everyone have a great evening and thank you for joining us.
Thank you for attending today's presentation you may now disconnect.
Yeah.