GSE Systems Inc. Q1 2023 Earnings Call
Good afternoon. Welcome to GSE Systems Inc. Reports, First Quarter, Finan...Fiscal Year, 2023 Financial Results Conference Call. Our participants will be in listen-only mode. Should you need assistance?
please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then, one on your telephone keypad. To withdraw your question, please press star, then, two.
Please note this event is being recorded. I would now like to turn the conference over to Adam Loewenstein with Lyfum Partners. Please go ahead.
Thank you, Debbie, and good afternoon, everyone. And thank you all for joining us today to review the financial results for GSE Systems for the first quarter of fiscal 2023 ended March 31, 2023. With us on the call representing the company today are Kyle Lowdermilk, President and CEO of GSE Systems, and Evan Pepe, Chief Financial Officer of GSE Systems.
Before we begin, I would like to remind everyone that statements made during the course of this call may be considered forward-looking statements within the meeting of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934. These statements reflect current expectations concerning future events and results, words such as expect, intend, believe, and
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 risk and uncertainties and other important factors that could cause actual performance or achievements to be 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 on periodic reports filed under the Forward Looking Statements and Risk Factors section. GSE does not intend to update or revise any forward looking statements, whether as a result of new information, future events, or otherwise.
On this call management may refer to EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS which are not measures of financial performance under generally accepted accounting principles or GAAP.
Management believes that these non-GAAP figures, in addition to other GAAP measures, provide meaningful supplemental information regarding the company's operational performance. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to, and not as a substitute for, or superior to any other GAAP measures.
and Chief Executive Officer of GSC Systems. Kyle, please proceed.
Thank you, Adam, and I'd like to welcome everyone to GSE's first quarter fiscal 2023 financial results conference call. Earlier today, we issued a press release detailing our financial results. Hopefully you've had a chance to review this news release, but if not, a copy can be found on our website at www.gses.com under the news.
If for electricity on a global basis continues to grow, and as a result, governments are seeking to make sure there's an ample supply to meet this demand. In addition, many countries are looking towards something that produces clean energy to keep their carbon profile to a minimum. These trends are driving a new renaissance towards the consumption of nuclear power.
As a result, in the near term, we continue to see more facilities looking for license extensions to operate and investigate capital investments to produce more power in what is called an upgrade.
We believe there is a shift occurring within the industry from decommissioning to filing for extensions to keep operating for the foreseeable future. Recently, I met with the CEO of a major utility operator and he told me five years ago, I was planning to shut down a number of plants. Today I'm not only looking to extend our lifetimes, but to invest significant amounts of money
for a 20-year operating license extension for a Smoticello reactor, which currently runs through September 2030. This would be the facility's second 20-year extension, and if granted, we keep the facility open through 2050. In recent weeks, there has been discussion in Michigan to restart the 800-megawatt Palisade's nuclear power plant, which is currently being decommissioned.
This would be possible with the help of federal dollars from the infrastructure bill signed into law in November 2021.
In addition to potential federal dollars, the State of Michigan has announced it would provide up to 300 billion to assist in reopening the plant in order to meet key climate goals.
This news demonstrates the value nuclear power is bringing to the industry, clean and consistent power.
Also to reiterate, during the first quarter, the Volga 3 Nuclear Reactor in Georgia is the first nuclear reactor to go critical in seven years in the US and the first new building 30 years. Unit 3 is now coming into full service and Volga Unit 4 is nearing completion and expected to start up early next year. This is a great achievement for Southern Company and the industry and GSE.
Also, if you go into these control rooms and look at these new reactors, and the control systems is complete digital control room, nothing like the prior generations of nuclear power plants. As older nuclear power plants obtain operating extensions, we believe we are going to go through a transition where those old control systems
that are analog are going to transition to digital control systems. These upgrades will require investments in the hundreds of millions of dollars per reactor. This is exciting for industry as the digital control systems allow the operator to produce more power reliably, efficiently, and safely. This is good news for GSE as this creates significant opportunity to sell our solutions.
across the board from simulation to engineering design and analysis programs and performance. This is a long-term trend that is only now emerging in the planning stages and we are eager for industry to probably move forward.
In the longer run, there is continued momentum around the development of small modular reactors, which would be inherently safe to operate while requiring a smaller footprint than traditional nuclear power plants. It is no doubt that SMRs will be the way to the future.
On this run, recently Westinghouse has announced plans to enter the SMR marketplace with plans to create its own SMR called the AP3000. The company is leveraging its know-how and this action acknowledges the significant market opportunity for SMRs at the 300 Mg scale.
This is great news for the industry and shows the next wave of plants built for the nuclear industry will involve significant MMR opportunities.
The macro-applet for nuclear energy continues to remain positive. 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.
While it takes significant time for industry to move through the planning process to project execution and spending, we feel that the industry is entering a major cycle of long-term investment for growth, barring any major disruption. Now for some perspective on GSC's business in Q1 of the fiscal year 2023.
The highlight of the first quarter were the new orders awarded, which was $19.1 million, the highest in nearly three years.
As a result of these new orders, we have refelt the company's backlog to nearly 41 million, the highest level in over a year, which is very helpful to our organization for the remainder of 2023. While we hope to win some of these orders sooner, we're pleased to have won this business in Q1 and expect these orders to be converted into revenue during the coming quarters.
As a result of revenue lagging orders, operationally the first quarter was similar to that with Q4. While the company's performance needs to improve, we believe we have a good opportunity to deliver better results with the new orders received in the first quarter.
focusing a bit more on the highlights of the first fiscal quarter.
The company's performance engineering division continue to show contributions, especially including software and sports cells of 1.2 million up from roughly 400,000 in the first quarter of 2022. Many of the new orders received in the first quarter are for performance engineering services.
New waters for performance engineering during the first quarter were 14.7 million increase of 130 percent when compared to 6.4 million in the first quarter of 2022. This is good news. We're pleased with this trend. We feel this reflects what we're seeing in the industry. Tentative initial investment in engineering services as broader investments will play out over the year.
8 million over that time.
GSE has been under a series of service contracts with these laboratories for over 20 years, and the screen is a testament to the strong relationship we have created with these laboratories, and the essential value these services delivered over that time. We're proud to serve the mission of these important national assets. Another significant win is the recent announcement of the upgrade of the training simulators at the Oak Hills...
revenue was 3.9 million in the first quarter, which is still lower than a year ago level but improves sequentially from the fourth quarter, which was 3.3 million.
As I've expressed in the past, we spent the majority of 2022 retelling the division by rebuilding the sales and recruiting teams for this business. We're still in the midst of turning around the division and more needs to be done to continue the momentum here.
Now I'd like to discuss our focus on sales and revenue recognition. While revenues in the quarter weren't at our historic levels, new orders were and we believe that demonstrates the customers of work to conduct and are making their way back to spending. While this doesn't mean we're out of the woods, this nuclear isn't going away and our discussions with our customers and new prospects continue as a...
by recent improved orders and bookings are the result of being out front of customers and being aggressive to win the business that is available. By being in front of customers we feel we're setting the stage to cap for more business as industry spend recovers.
To summarize, while we wish the momentum was building faster, we do continue to make further progress to reaching our goals of increasing orders, backlog and a tick-up on revenue. The new orders received in the first quarter are step-in-the-race direction and places the company in a solid position for improved performance. I'll now turn a call over to Emmett Peppie, GSC-CFO.
who will review the first quarter financial results. Emmett, please proceed. Thank you, Kyle.
With the numbers highlighted in detail in the press release, let me focus my comments on a few areas and provide added color where I can. We are pleased with the progress that we are seeing in our order flow for the first quarter, which as Kyle has indicated is the highest for the company in three years.
New orders in the quarter were 19.1 million or 72% increase from Q1 of fiscal 2022. We are starting to see the early signs of the investments that were made into the business development functions of each segment. Revenue during the first quarter of 2023 was 10.9 million.
A decrease of 11% compared to the 12.3 million and Q1 of 2022, but slightly higher when compared to the 10.8 million and the fourth quarter of 2022.
Our performance engineering definition continues to perform well for the company with revenues of 6.9 million for the first quarter of 2023. This compared to 7.5 million in the fourth quarter of 2022 and compared to 6.4 million in the first quarter of 2022. Orders for engineering performance increased 129%.
The 14.7 million in Q1 of 23 compared to 6.4 million in Q1 of 2022.
Workforce Solutions Division Revenue in the quarter was 3.9 million compared to 3.3 million and the fourth quarter of 22 and compared to 5.9 million and the first quarter of 2022. Orders were 4.4 million for Q1 of 2023 compared to 4.7 million for the same period in 2022.
While this is a slower ramp than anticipated, we're closely monitoring this business and we're excited about the upcoming opportunities.
Gross profit in the first quarter of 2023 was 2.4 million or 22% of revenue. This compared to a gross profit of 2.4 million or 19.8% of revenue in the first quarter of 2022. Gross profit margin improved over the last year due to project mix, including the benefit of our software sales and more revenue coming through the performance engineering division.
which carries higher margins.
While revenues were lower at the workforce solutions, margins were 13.1% in the first quarter, up from 10.4% in the same period a year ago, showing that investments made in division are working and have a higher quality of orders coming through as well as significantly more direct higher placements than previous periods.
Operating expenses in the first quarter of 2023 were 5.2 million, compared to 5 million in the first quarter of 2022.
Operating expenses in the first quarter of 2023 were 5.2 million compared to 5 million in the first quarter of 2022. The increasing Q1
was due to additional corporate expenditures, primarily related to the build out of our business development team.
That said, we continue to take a critical look at our expenses and believe we have identified additional cost containment measures. As we have mentioned on previous calls, three facility releases are ending this quarter in Q2 and what should provide an opportunity to decrease our physical footprint and our fixed costs related this year.
We are also more generally assessing our vendor spend with an ion improving our cash flow.
Net loss in the first quarter of 2023 was $3 million or a loss of $0.13 per share, compared with a loss of $3.4 million in the first quarter of 2022 or $0.16 per share. Adjusted net loss was a loss of $2.6 million or $0.11 per share in the first quarter of 2023.
compared to what adjusted that loss of 2.2 million for 10 cents per share in the first quarter of 2022.
Adjusted EBITDA was a loss of 2.2 million in the first quarter of 2023 compared to a loss of 1.7 million in Q1 of 2022. The company's backlog greatly improved during the first quarter of 2023 as seven new orders received. Backlog at the end of the first quarter was 40.9 million.
compared to 32.9 million at the end of the fourth quarter. And up when compared to the 40.1 million at the end of the first quarter of 2022.
Performance Engineering segment backlog was 31.4 million at the end of the first quarter, and workforce solutions divisions was 9.5 million.
This compares to 23.8 million and 9.1 million respectively at the end of the fourth quarter. To better or a year ago, the backlog for performance engineering was 31.9 million and 8.2 million for workforce solutions at that same time period.
We will look to leverage these new orders and our strong backlog to generate future revenue while we continue to pursue cost and payment measures and expect to start seeing the benefits of these initiatives in Q2 of 2013.
these new orders and our strong backlog to generate future revenue while we continue to pursue cost containment measures and expect to start seeing the benefits of these initiatives in Q2 of 23. We would our discussion of the company's balance sheet.
We exit the first quarter with 1.3 million in cash as that compares to 2.8 million at the end of 2022.
The 2022 cash flow do not include restricted cash of 1.6 million, which is to secure letters of credit with various customers totaling 1.1 million and 0.5 million to secure our corporate credit card program.
O, are overall receivables.
Increased in the quarter, with a significant portion expected to be collected in the next 30 days.
We continue to make payments on our convertible debt, which was secured in February of 2022. On a monthly basis, we'll make a determination based on our cash balance and cash forecast on where the repay cash stock or combination of both.
Payments on the convertible debt will be completed by February 2024.
Lastly, the company was able to receive an extension from Nasdaq to regain compliance with the minimum bid price requirement and we will have until October 30th of 2023 to regain compliance. We are working in a challenging environment.
As a result, we're examining every expenditure and cutting costs where we can to limit cash burn. We're hopeful that the orders booked in Q1 will start to hit the income statement in the coming quarters, which should yield improved results than those reported in the first quarter.
We do have additional efficiencies that we can put in place and are currently examining our options to lower the company's costs. We also want to remind investors that in addition to the leases that run off in 2023, we anticipate that there will be further cost containment capabilities and we will report on those when appropriate.
additional efficiencies that we can put in place and are currently examining our options to lower the company's costs. We also want to remind investors that in addition to the leases that run off in 2023, we anticipate that there will be further cost containment capabilities and we will report on those when appropriate. I will now turn the conversation back to Kyle.
Okay, thank you, Emmett. To summarize, the first quarter had some key positives, including a size-bowl amount of new orders, which has replenished the company's backlog. We believe that the remainder of the year should show improved results as we start to fulfill these new orders and lower our cost structure where we can't. We continue to work with our customers.
with current challenges, high inflation and economic uncertainty, we're performing an executing on what is in our control and making sure we are positioned well for future opportunities. Three key catalysts are at the forefront for driving growth in the nuclear industry. Need for a stable grid to drive towards energy security and independence and the decarbonization of the power sector.
It is these catalysts that give us confidence that the nuclear industry will be increasingly in demand for the foreseeable future. Given our very unique situation as a heavily tech-enabled provider of essential services to the decarbonization of the power sector in nuclear industry, we remain...
Confident and our opportunity creates substantial long-term value. With that said, Adam, please proceed with the question and answer session. Thank you.
We will now begin the question and answer session. If you have a question, please press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster.
Question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. These. Please.
First question is from Graham Madison with Water Tower Research. Please go ahead.
Hi, good afternoon, everyone. Just wanted to follow up a question on the new orders. Sounds like you guys are pretty encouraged in terms of what you're seeing out there from some of your customers. Can you comment on what you're seeing in the margin potential on those orders versus the ones you've been booking, say, this quarter or the ones in 2022?
Do you want to take that? Yeah, I can. I mean, both of those orders are as we've indicated or driven in the performance engineering segment, which carry higher margins. So I think you, those orders that came in in Q1 would.
typically drive a bit higher margin than we had in previous quarter.
Great. And then on the workforce solutions, I know you're still doing some retooling there. Can you give a little bit more color in terms of what steps are needed, or I guess maybe the timing on that? Is that something you might be able to put into place in the next quarter, or is that something we should be looking for over the course of 2020?
Well, I'll take that. I mean, that's okay. And you can follow up with more bill or but we really spent most of 2022 when you look at 2022 where we were at that time. It was really at a very barebone staff, you know, coming out of the tail end of the pandemic and a lot of employee turnover.
calling of unproductive sales and recruiters, we really took an effort to rebuild. So we feel like we're in a position where we've rebuilt now and we should see results of that flow through the rest of the year. It's not going to meet an immediate next quarter impact.
but we do expect that the flow in the air and we'll be monitoring that closely.
I meant anything else you want to add there? Yeah, I'm just really just echoing it. You know, a lot of that came to fruition toward the end of 22 or mid year to the end of 22. So there's a bit of a ramp up that's occurring. So we're still hoping to see the benefit of.
where we positioned ourselves coming into 23. All right, great. Yeah, it sounds like the exciting rest of the year. So look forward to it. Jump back and keep. Thanks so much. All right. Thank you, Grant. Thank you.
The next question is from Jeremy Levine with Labrador.
Next question is from Jeremy Levine with Labrador Shorts Funds. Please go ahead.
Just want to know what do you believe is your main obstacle to making profits at this point? Yeah, I'll start from my perspective and I'm as you can follow up. I mean look, what we need to do is make sure we're super lean on our cost structure and we're taking action there without
cutting too far as to hurt our ability to execute on the business.
So that's one dimension. The other is to execute on the business. So we saw that nice flow of orders significant orders largest in three years coming Q1. We are going to strive our best to keep that momentum up. Now, you don't expect orders at that level You know, so you won't want to run rate that
But that's really what we need to do. Customers have these opportunities in the planning stages. They're discussing them with us. They're in our forecast and pipeline. But what needs to happen is they need to start to flow into booked orders and then start to flow into executed projects which flow to revenue. So, yeah, it's just, it's just that going that.
It's really orders. Orders will generate the revenue and will generate cash. So we can keep any reasonable momentum off the Q1 order base. And then at the same time, taking some costs out will further enhance that profitability or drive the profitability. So we can keep any reasonable momentum off the Q1 order base.
orders will generate the revenue and will generate cash. So we can keep any reasonable momentum off the Q1 order base. And then at the same time, taking some costs out will further enhance that profitability or drive the profitability. Thanks.
The next question is from Samir Joshi with HC Wainwright. Please go ahead. Hey Kyle, thanks for taking my question. Just digging a little bit on the workforce opportunity that you see in front of you. I also have the more reason.
also from your customers or like old customers coming back.
Right, I'll take that. I would say in general, most of the orders we get are from customers that we've already had in some form or fashion. It's very rare, you know, the nuclear entity pops up out of the blue and then conducts business with us. Although, I'm both say...
which has been an interesting development over the last two quarters from a business development perspective. There are nuclear adjacent entities which are quite significant that we're engaging with now that have very significant opportunities that we're bidding on. So, you know, I can't give you an exact ratio. There is a 6 to 1.
But I guess we can see, expect some change there. There is a documentary by all you have shown that is making the rounds. So let's see what happens, what comes from that. In terms of your backlog, conversion, cadence from 40 million, 40 plus million.
backlog. How should we see it play out over the next few quarters and maybe six to 18 months?
Yeah, I can jump in and start with this one, Kyle. It's going to be a mix like sort of the components of our backlog that are time and material contracts will start to see that revenue immediately, right? We probably started to see a bit of that toward the end of Q1. The longer projects, the POC projects.
You know, those could take six, nine, and even beyond 12 months. Each project's gonna be unique. We're working with the teams to burn through the backlog.
particularly as the new orders come in. So I'd like to see that 40 million somewhere over the next 12 to 15 months.
And just a sort of a corollary question and I think it is in response to one of the comments made that the rest of the quarters of 2023 are likely to be better than one Thank you.
Should we see a sequential increased quarter or quarter or the next few quarters? Well, we're not given guidance, but I think what we're trying to say is having the good orders by in and of itself with the backlog would drive.
It improved revenue, right? Because one of the issues is revenue being flat quarter to quarter. So now to have that continue, the rest of the year, then orders need to continue. Our pipeline is there, we have to close the deals. So to the extent we continue with the orders at a cadence.
Oh, that is...
positive than the revenue will follow. But yes, the comment was really made that we should start generating more revenue because we have higher backlog and the increased orders in Q1. Just a couple more from me. On the OPEC front did the S-G-N-A line have any like one-time items that are...
There's someone off, there's some wrap up. You know, we had a lot of...
recruiting fees from recruiting personnel that should no longer be there in the out quarters as we've built out hiring engineers and some of the BizDev teams. Q1 is always our highest.
use our higher quarters. We have audit fees that are heavily based in Q1 and supporting fees related to that. So I think you'll see, you should see in the client and also, as we mentioned, in the Q1 results are the normal, normal op-X costs that we know are going to reduce.
related to leases and other things in the future quarters.
Lisa's and other things in the future quarters. Yes. Yes.
Yeah, that was clear. Last one from me, maybe a clarification on the accounts receivables, did I hear that you would be getting
I mean, receiving cash in the next 30 days, and I did not catch how much you are expecting all the next 30 days just in terms of working out. I didn't give a number. I think I was just trying to highlight that, we do have...
The nature of our business is a lot of cases we have milestone billing so we'll burn through you know labor costs working on projects until we can achieve the milestone and then build the milestone and collect. So there's a bit of low point in cash until we can build and collect those and there is it.
significant portion of our AR balance that I expect to come in in the next 30 days, which should help, in least the short term, to improve our cast position. Now, we have to maintain it and sustain the business to maintain it, but that was my message. There's really more of it.
There is a AR that is a lot of it in the current.
That is a lot of it in the current situation.
current situation. Burn it, block it.
Got it. And I'm sorry, but this one more if I may. The restricted cash is against two bucket items. I think two buckets. The letter of credit and the corporate credit card.
Is there a chance that it can come out from the first bucket? We have some respite on that front or no?
I'm sorry, say repeat that again on the question. The restricted, maybe simpler question is, do we expect any restricted cash to become unrestricted in the next few months?
We do, we have about a hundred and 18,000. One of the letters of credit should expire and probably, you know, sometime early Q3, mid Q3, we'll be able to release that. And then there is a schedule that over the course of the next.
about 118,000. One of the letters of credit should expire. And probably, you know, sometime early Q3, mid Q3, we'll be able to release that. And then there is a schedule that over the course of the next 12.
for the 15 months, depending on the project that we should see some additional restricted cash release.
depending on the project that we should see some additional restricted cash release. God.
Thank you. Thanks once again for taking my questions. Good luck. Yeah, thanks, Mary. This concludes the question and answer session. I would now like to turn the conference back over to Kyle, right, louder milk for any closing remarks.