Q3 2022 GSE Systems Inc Earnings Call

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 measures should be considered in addition to and not as a substitute for or superior to any measure of performance prepared in.

With GAAP, a reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with SEC regulation G can be found on the Companys earnings release with that said I'd like to now turn the call over to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE Suite solutions. Kyle. Please proceed.

Thank you Adam I would like to welcome everyone to Gse's third quarter fiscal 2022 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 <unk> dot com under the news section today.

To lay out the agenda for today's call I will start with a brief update on the industry discuss gse's business in the quarter across our lines of business.

And provide a summary of our focus on sales and revenue generation.

We will review the financial results and we'll conclude with a Q&A session.

First a brief update on the industry.

While keeping my remarks brief I do want to note some key positive developments in the nuclear industry since our last call. The first piece of recent news that I would like to highlight is the recent acquisition of Westinghouse electric by Brookfield Renewables renewable partners one of the worlds largest clean energy investors and Kimiko, a major supplier of uranium <unk>.

Seven 9 billion deal feels that these two major players believed that the nuclear energy sector has a long and growing future nuclear energy is becoming increasingly important in a world that prioritizes electrification de carbonization and energy security. There is still also demonstrates that investment activity in the sector is clearly picking up.

In the U S. Nuclear fleet, we are seeing more existing facilities file for operational extensions. Most recently district court submitted an application to the NRC to renew its license for the Comanche peak nuclear power plant in Texas through 2053 or for an additional 20 years beyond its initial license more plants in the U S will follow <unk>.

<unk> is well positioned to benefit from this industry activity as illustrated by our announcement in early October of our expanded service offerings offerings, specifically designed for nuclear power plant life extension services.

Yes.

Small modular reactors or <unk> continue to make significant strides towards commercialization very recently the NRC has indicated that it will certify new scale <unk> reactor for use in the United States. As many of you already are aware new scale is a long term partner of GSE as we have been working with them for over 10 years and helping them with their development of <unk>.

We are very excited for this relationship and the potential it offers in the future.

Overseas subsequent to last quarters conference call, South Korea announced their intention to increase production of nuclear energy to nearly one third of its energy mix up from our current 24% by 2030 on the heels of this news GSE announced a new contract to implement a digital twin design simulation system for a long time customer in South Korea.

South Korea has been an important market for GSE and this new contract highlights gse's prominence in the region with unique services and technology.

Shortly after our last quarterly conference call, Japan officially announced its intentions to restart its nuclear reactors, which is a piece of great news for the industry and GSE.

GSE has conducted business in Japan for decades, and I will be traveling there soon to meet with GSE customers and partners as Japan begins to long term restart of its nuclear assets.

In summary, the macro outlook for the nuclear energy industry continues to remain strong global awareness of the importance of nuclear power for energy security environmental equity and grid reliability is driving further action to sustain existing nuclear power fleets produce more power from those assets and accelerate the path towards adoption of next generation nuclear power technology.

We feel that the industry is entering a major cycle of long term investment for growth likely to be sustained for decades to come barring any major disruptions.

Now for some perspective on Gse's business in Q3 overall, the third quarter produced improved results compared to the prior quarter, we were able to improve our order flow and I do want to highlight that during the third quarter gross orders were at $12 2 million and offset by roughly $2 million, an order reversals for unused backlog of uncompleted projects while.

While we usually don't focus on reporting a gross order figure I wanted to share that figure as it demonstrates the extent of our order flow. This is much improved from the second quarter. As we are starting to see customers increase their engagement in project activity and that will get into specific numbers. During his remarks later in the call.

Performance Engineering Division had a solid quarter, we continue to win new business and we are especially pleased with the strong license revenue of $2 million in the quarter.

This is the result of our deliberate strategy of packaging and licensing our simulation technology and the resulting industry adoption of these solutions for significant value add this is great to see our license revenue business is now a material and growing part of our business delivering sticky high margin revenue the solid performance of the performance Engineering division, including the <unk>.

License revenue in the quarter helped improve our gross margins both year over year and sequentially.

And our workforce solutions business, we continue to bring in new orders and we have highlighted via a recent press release, the $3 million combined orders from a client in the southern United States for both workforce solutions and performance solution services. This demonstrates that our cross selling of our solutions to the industry is gaining traction for workforce solutions. We continue.

To retool and focus investment on revenue generating positions.

Business emergence emerges from industry slowdowns related to the pandemic and the ongoing economic uncertainty.

Now I'd like to focus our <unk>.

Discuss our focus on sales and revenue generation as a company in the industry, we serve emerge from the pandemic and deal with the current economic uncertainty our focus is on getting the sales and revenue generating dimensions of our business built out and as productive as possible sales consists of individuals and engage with our customers and prospects to build the pipeline of opportunity.

<unk> and convert those opportunities into orders that will convert to revenue as work is performed <unk> solutions are delivered revenue generating positions, our billable engineers and other professionals, who convert orders to revenue through their work.

Finding attracting and retaining top talent is an acute challenge in this industry.

The economy in GSE is not immune to this challenge we are focused on what is in our control to.

To address this need we brought on new recruiters, whose sole job is to find the people with the right skills to specifically sales position and fill revenue generating positions such as billable engineers.

This is a constant and ongoing process, we review candidates and have been effective in filling open roles created by new business as well as those openings that are a result of turnover.

Good people is never easy, but we are addressing this challenge I will note that having found a great. Sales addition earlier in the year to focus on license revenue products is starting to yield nice results. As this quarter demonstrates we also have a strong pipeline of new opportunities as a result of this investment.

What is also in our control is ensuring we are focused on meeting with customers in person to develop new business. Our most recent board of Directors addition has been instrumental in opening new doors for us to meet with key executives in the nuclear industry, who are responsible for the budgets and decisions that matter to us.

Myself and other top executives are hitting the road meeting with these leaders promoting GSE solution listing for areas of opportunity, where we can deliver value for the customer and generate business. As a result, we currently just have a few business development staff, our engineering, but what is clear is that finding a full time sales leader, whose credentials and well connected client executive levels is.

The critical need for us and a top priority we have a retained search underway for disposition in engineering sales. This will take time to fill and it won't be easy as I mentioned, we are on the road engaging with key individuals to promote GSC to build the business consistent feedback is that at this level of customer. The GSE story is new to them and they are glad to learn.

That we do so much more than the legacy simulation business for their respective companies there is opportunity and we're going after it.

For workforce development.

Have been busy since early in the year to cycle in key salespeople, we have for sales business development people now in place for workforce development with three having been introduced since the start of the year the salespeople when contracts that enable us to fill open reqs for customers.

To support these salespeople, we have seven recruiters six which were higher during this year in place to submit the <unk> of our staffing field professionals to customers for selection to fill the open reqs.

Thus, having a salesperson part with recruiter are both essential parts of the revenue generation for workforce development, we have excellent bids in place with significant customers and are working to win more contracts and fill the rules associated with those contracts once awarded.

To summarize we've made good progress in the third quarter strong license revenue accompanied by improved orders and bookings are the result of getting out in front of customers and being aggressive to win business that is available while setting the stage to capture more business as industry spend recovers. We are focused on targeting investment in revenue generating positions and activities for the business.

The team is highly motivated taking ownership of what we control and we are moving forward. The many exciting developments in the nuclear industry right. Now continue to make me feel very confident about gse's future I'll now turn the call over to Emmett Pepe Gse's CFO , who will review the third quarter financial results.

Please proceed.

Thank you Kyle.

With the numbers highlighted in detail in the press release, let me focus my comments on a few areas will provide added color where I can.

Revenue during the third quarter of 2002 was 11 9 million a decrease of 19% compared to the $14 7 million in the third quarter of 2021 and.

Six 6% lower when compared to the $12 7 million in the second quarter of 2022.

Revenue from the company's performance engineering work.

Were improved during the third quarter rising nearly nine 2% over last year and one 2% sequentially from the second quarter of 2022.

These improvements were offset by lower revenues from the workforce solutions Division.

A slower than expected conversion of new business development opportunities on the revenue.

As Tom mentioned, we have invested in expanding workforce solutions business development team to drive new order flow and improved this division's results over time.

We are excited about the potential opportunities with this group has identified and are pursuing.

Our engineering performance Division also known as performance improvement solutions.

Certainly a highlight of the quarter engineering performance revenues were approximately $8 1 million in the third quarter of 2022.

The seven $4 billion in third quarter of 2021, and compared to $8 million in the second quarter of 2022.

<unk> orders for this division were higher in the third quarter to $7 2 million when compared to the second quarter of 2022, which was $3 8 million.

But lower when compared to the third quarter of 2021, when it was $11 2 billion.

Tom mentioned briefly we had approximately $2 million of backlog reversals. In this segment, primarily time of material contracts with remaining value that was not converted into revenue.

Excluding these items, our engineering performance division delivered $9 $2 million of orders in the quarter, which we're pleased with.

The sequential revenue improvement was primarily from the company's systems. Our simulation division previously known as our legacy performance simulation, which has been executing on backlog projects or programs and performance Division.

<unk> known as true North consulting showed solid growth from the prior quarter and was up slightly from a year ago. We are excited about the opportunity pipeline moving forward in this division.

But did not design and analysis division previously known as DP engineering was a bit lower both from the prior quarter and prior year and we are actively work in this business unit to expand its reach and customer base and are encouraged by the feedback we've received from customers.

Now moving to our workforce solutions Division also known to some as our <unk> segment.

Revenue in the quarter was $3 8 million compared to $7 3 billion in the third quarter of 2021.

Compared to $4 8 million in the second quarter of 2022.

Orders were also lower in the quarter, albeit slightly at $3 million, which was lower from the $3 1 million in Q2, and the $3 5 million for the same quarter a year ago.

Year over year and sequential declines were due to some reduction in fill professional needs due to a major construction comfort customer winding down a significant project, but also due to the turnover and recruiters in the highly competitive job market for these skills.

The turnover constrained our capacity to place and deploy field professionals as.

As mentioned before we have hired talented sales professionals and recruiters tour in 2022 and are continuing to add to this team to build a balanced and productive group that can bring in new customers and recruit skilled professionals to fill roles.

Gross profit in the third quarter of 2022 was $3 3 million or 27, 4% of revenue.

This compared to a gross profit of $3 2 million or 21, 7% of revenue in the third quarter of 2021.

And $3 2 million or 25% of revenue in the second quarter of 2022.

So gross margin improved due to project mix, including increased software sales and more revenue coming through the performance Engineering division, which carries higher margins.

While revenues were lower in our workforce solutions margins improved from the prior quarter each of the lowering of our payroll tax burden that is highest at the beginning of the year.

As we have stated on prior calls our software and support offerings are key focus those are high margin on a predominantly recurring in nature.

We're extremely pleased with the 147% growth in Q3 as compared to the prior year.

So the year to date mix of our software business has grown to nine 6% of total revenue as compared to five 8% in the prior year.

Operating expenses, which excludes restructuring depreciation and amortization expenses in the third quarter of 2022 were $4 5 million compared to $3 4 million in the third quarter of 'twenty, one and $4 6 million in the second quarter of 2022.

The increase in Q3 was partially due to what many other companies in our industry and across the economy. We are seeing now are expenses for corporate insurance and other inflationary pressures such as wage increases due to cost of living.

Q3, we also were impacted by foreign exchange fluctuations, which resulted in a remeasurement expense.

As we enter 2023, we are taken a critical look at our expenses as we have mentioned on previous calls two significant facility leases are ending in the middle of next year, which will provide an opportunity to decrease our physical footprint and our fixed costs.

We also just more generally assessing our vendor spend with an eye on improving our cash flow.

Net loss in the third quarter of 2022.

9 million or <unk> 42 per basic and diluted share compared to net income of $11 4 million or <unk> 55 per basic and diluted share in Q3 of 'twenty, one and compared to a net loss of $1 4 million or <unk> <unk> per basic and diluted share in Q2 2002.

So net net income in Q3 Q3 of 'twenty. One included $10 1 million in PPP loan forgiveness, and $2 1 million in other income from the recognition of ERC credits.

Net loss recorded in the third quarter included a noncash loss on impairment of $7 5 million.

Which was incurred due to the business slowdown in workforce solutions Division.

As a result caused us to lower the carrying value of the division.

The write down is comprised mostly of goodwill and some intangibles.

Given the pandemic related shifted staffing requirements and a long tail associated with that.

Poor solution Division has not shown the stability and growth that we would have liked yet it is still a critical piece of our business and has promising opportunity moving forward.

Adjusted EBITDA was a loss of 690003rd quarter of 2022.

Compared to 130000 in Q3 of 'twenty, one and a loss of 715000 reported.

We reported in the second quarter of 2022.

The company's backlog remained healthy but ended the third quarter a bit low as the company worked off previously announced orders and new order flow has slowed compared to the year ago quarter.

Backlog at the end of the third quarter was $32 3 million compared to $34 million at the end of the second quarter and $37 5 million at the end of the third quarter of 2021.

Performance Engineering segment backlog was $26 7 million and workforce solutions Division was $5 6 million at the end of the third quarter and compares to $27 5 million and $5 6 million respectively. At the end of the second quarter.

Backlog for the performance Engineering Division was $31 $5 million at the end of the third quarter 2021, and $6 million of workforce solutions at the same time period.

These backlog figures really highlight the company's performance, while the company has burned off some older orders.

<unk> is reporting a lower backlog levels are similar to a year ago period and can change with new orders are awarded.

Moving our discussions to the company's balance sheet remained strong as we exited the third quarter with $5 2 million and total cash compared to $3 6 million at the end of 2021. These cash levels include restricted cash of $1 6 billion.

The secure for letters of credit.

With various customers totaling $1 1 million.

And 500000 to secure our corporate credit program.

We began making payments on our convertible debt.

That was secured in February of this year in Q3, we made two payments one in cash and the other in company shares.

We will assess which payment type to utilize on a monthly basis.

The company has one $4 million of ERC refunds outstanding at the end of the quarter. We did receive 400000 in November and we are expecting to receive the remaining ERC refunds from the IRS. During the next three to six months of approximately $1 million, which would enhance the company's cash position and enable enabling.

Us to make necessary investments for the future.

While we are working in a challenging environment I'm pleased with the actions in the third quarter to maintain a solid capital structure and the results demonstrate that the company is stabilized and prepare for future growth.

We have additional efficiencies, we believe we can put into place.

Currently examining our options. We also want to remind investors that in addition to the two leases that run off during 2023, we anticipate that there are further cost containment capabilities next year, giving savings on certain expense renewals being negotiated.

I'll now turn the conversation back to Kyle.

Thank you Amit to summarize the third quarter financial results demonstrated solid performance and we are delighted with the results of our software licensing business. While we are dealing with the immediate challenges of high inflation and economic uncertainty and the impact on the industries. We serve we are performing and executing on what is in our control.

We're making sure we are positioned well for future opportunities and the good news is that we're now engaging more with our customers in person to remote with GSE can do to add value to their efforts, ensuring we are in the ready position to capture business as industry spend increases.

Three key catalyst still are at the forefront of driving growth for nuclear the need for a stable grid the drive towards energy security and independence and the de carbonization of the power sector.

These catalysts that gives us confidence that the nuclear industry will be increasingly in demand for the foreseeable future given.

Given gse's very unique situation as a tech enabled provider of essential services to this industry. We remain confident in our opportunity to create substantial long term value with that said Adam. Please proceed with questions and answers session. Thank you.

We will now begin the question and answer session.

As a reminder, if you do have a question. Please press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

If you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

At this time, we're showing no questioners in the queue and I'd like to turn the call over to Adam Lowan Steiner.

Hey, Chris I would like to pose a couple of questions to the management team.

Kyle the software business still remains a growth vertical correct I mean, how much more can investors gleaned from that business and how should investors look at that business relative to the entire GSE.

Yes, good question Adam.

To begin the answer and I would say when we first came into the company about seven years ago.

Key to our thesis was to package, our IP license it and deliver it in a contemporary SaaS.

SaaS based.

Licensing model and.

What had gone from fairly de Minimis level is now representing about 10% of our revenue that's highly sticky it's recurring very hard margin. So that effort is paying off and it's it's creating a really nice annuity for the business that scales.

As we move forward, so rather than talk about futures I'd look at that history of how license revenue has gone from.

The onset two where we are today.

The tracking to be about 10% of our business and.

We certainly want to continue to grow the overall business, including the license revenue growth in the license revenue growth really has been a very steady performer throughout the pandemic and economic uncertainty.

That investment is clearly paying off and we will continue to focus in that area for sure.

The next question is can you give us a little bit more color on the investments in revenue generation. What did you have in mind for these investments.

Okay.

Hey, Adam I'll take that.

I think as Carl mentioned and we've talked about it.

Business development personnel, and I'll workforce solution that recruiters to fulfill and deploy these field professionals.

Investment in our sales with full time sales leader.

We recently during the year middle of the year had someone that's come in and focused on our software sales right, which is also going to contribute to furthering that that growth in the software line.

I mean, the other aspect.

Investments in the business, whether it's R&D.

You need to keep our software products for us. So so it's a wide investment to generate revenue service to customers and we'll use whatever savings to both help us with the bottom line, but some of that a lot of that will get reinvested.

These efforts to generate revenue as well.

Thank you.

Do you want to conclude.

Look I'd like to thank everyone for joining us. We appreciate your time here and interest in GSE. If you have questions. Please reach out to Adam loan Stiner from Lytham partners and we'd be happy to schedule a follow up call. Thanks, again, everyone and have a great evening.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Yeah.

[music].