Q4 2023 GSE Systems Inc Earnings Call

Participants

Adam Lowensteiner; Vice President; Lytham Partners LLC

Kyle Loudermilk; President, Chief Executive Officer, Director; GSE Systems Inc

Emmett Pepe; Chief Financial Officer, Treasurer; GSE Systems Inc

Presentation

Operator

Good day and welcome to the GSE Systems, Inc. fourth quarter and fiscal year 2023 financial results conference call. All participants will be in a listen only mode Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. So After today's presentation, there will be an opportunity to ask questions to ask a question, you may press star then one on the touchtone phone. 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 Lowensteiner, Vice President of Lytham Partners. Please go ahead.

Adam Lowensteiner

Thank you, Betsy, and good afternoon, everyone, and thank you all for joining us today. To review the financial results for GSE Systems Fourth Quarter and Fiscal Year 2023 ended December 31, 2023, with us on the call representing the Company today are Kyle Loudermilk, President and CEO of GSE Systems, and Emmett 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 meaning 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, 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 that forward-looking 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 materially different from 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 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 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.
And with that, I'd like to now turn over the call to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE solutions. Kyle, please proceed.

Kyle Loudermilk

Thank you, Adam. I'd like to welcome everyone to GSE's Fourth Quarter and Fiscal Year 2023 financial results conference call. Earlier today, we issued a press release detailing our financial results, hopefully that a chance to review this news release, but if not, a copy can be found on our website at www.gs.com under the News section lay out the agenda for today's call. I'll start with a brief update on the industry and then offer highlights of our quarterly and annual results, he will review the financial results, and we'll conclude with a brief Q&A session.
First, a brief update on the industry. The nuclear industry continues to build momentum on a global basis. This momentum stems from the fact that more countries continue to set and drive towards decarbonization goals and clearly recognize that nuclear has to be part of the equation in accomplishing these goals. There are also several macro trends and geo geopolitical political issues that are certainly shifting in the energy towards the energy industry that favor nuclear. This can especially be seen in the recent surge in the price of uranium, which is used to fuel many nuclear reactor sites. In addition, the desire to have enough electricity to power the use of newer technologies, such as the massive adoption of artificial intelligence and Bitcoin mining is driving the demand for revival in nuclear, which will provide sustainable carbon-free power that is available 24 hours a day seven days a week in order to power the massive data centers planned as AI. and Bitcoin and associated cloud computing scale. Nuclear power becomes the only scalable and stable carbon free power source option that can be reliably be available 24/7. A real-time demonstration of this nascent trend is the recent acquisition by Amazon Web Services of 960 megawatt data center from Talen Energy in Pennsylvania. Amazon purchased the Center for $650 million, primarily given its power source, the Susquehanna steam electric station which is the six largest nuclear power plant in the US. The site produces 64 million kilowatt hours per day and has been online since 1983. Currently, it is licensed to operate through 2042 and 2044 securing this data center, which is fed entirely from the nuclear power plant, enables Amazon to take a significant step towards achieving its stated goal of becoming a net zero carbon company by 2040, 10 years ahead of the net carbon net zero goals in the Paris Agreement, keywords of electric vehicles will also place a significant demand on the grid for nuclear power to power a carbon-free grid to offset the rise in the demand for electricity. These technologies offer and make sure that the power sources are secure and carbon neutral. Nuclear is going to be needed. Even in recent weeks, the headlines continue to be very favorable for nuclear globally. This includes the government in Japan filing a request for Tesco to restart its largest nuclear power plant. The cash-out was aka Karl Karl up, which has seven reactors and total generation capacity of almost 8,000 megawatts. This is on the heels of Japan's nuclear regulatory regulation authority granting permission for a restart of this site back in December. This is very positive news and demonstrates that Japan is serious about restarting its nuclear capabilities going forward.
In addition to Japan and other recent news, Canada announced that US government is working on ways to fast-track approvals for nuclear energy projects. The Canadian government also recognizes that nuclear is going to be necessary baseload power to get to zero carbon. The country is looking to achieve net-zero emissions for its electrical grid by 2035 and be fully net zero by 2050. As a result, the government announced that is working on making approval processes quicker for nuclear power projects in order to bring them to fruition as quickly as possible.
In the US market Constellation Energy recently announced that has issued the first corporate green bond in the US that can be used to finance nuclear energy projects. A green bond is a financial instrument that is issued specifically to finance projects that deliver positive environmental or climate impacts while simultaneously enabling investors to invest in investments that promote sustainability and solve other environmental issues. Under this green bond issue, the company raised $900 million, and we used the proceeds for investing in maintenance expansion and life extensions extensions of its nuclear fleet. While the tailwinds for nuclear industry are apparent and abound, the capital spend within the industry is still moving at a slower pace, although there are some signs of green shoots with funding from recent legislation starting to make its way into the system. That said, the near-term outlook is certainly positive, but not yet back to the spending levels and pre-COVID days. While this does put some strain on managing our business, we've been able to land key wins having aligned our business to where the industry is spending money today, we will have and we have seen significant improvements in our operations in the latter half of 2023. We expect to have a full year benefit of this effort in 2024 as a result, which is very encouraging.
One area that has been very fruitful for the Company is to help our customers improve their plant efficiency, which can be accomplished in some specific ways. One is for a plant to convert over to digital control system. By doing this, the plant can operate more efficiently safely and reliably. The investment also helps set the stage to extend the lifetime of the plants and prepare for the future power uprates.
This is the means by which existing infrastructure can be upgraded to produce more power. As mentioned, producing more power through uprates is an extraordinarily cost-effective means to produce more carbon-free nuclear power versus building new nuclear power plants. This is a critical critical area of focus for the nuclear power industry and GSE is well positioned to capitalize in these maintenance and upgrade opportunities as we are today going forward.
Major part of our focus will be on the existing fleet of nuclear sites and assisting the operators with making sure they can operate in the most efficient and safe manner.
Now for some perspective on GSE's business in Q4 and fiscal year 2023. Overall, 2023 was a year of transition. We were successful in reworking the Company's cost structure to get it into a position where we are consuming cash. This was not an easy task, but it is now paying off as seen in the company's financial performance in the second half of 2023. Q4 was a bit lighter than expected on the order side, but we have seen orders that slipped out of Q4 close in Q1. This is good news, and we look forward to reviewing orders details in our Q1 earnings call.
That said, we were able to continue to operate at a high level and limit cash burn during the quarter. We are also focused on growing the business in the profitable areas to which we are aligned, especially on the engineering business as any additional business will now flow to the bottom line given the new operating structure.
As expressed in the last conference call, we continue to cut costs out of the business and made key strides to lower expenses compared to year ago as seen in the fourth quarter and fiscal year results. Amit will provide more details on our cost management initiatives in his remarks.
Now looking at our two divisions the company's performance engineering division continued to demonstrate solid results during the fourth quarter and fiscal 2023. We had strong wins during the year every quarter. New orders of $37.6 million in 2023, which is up over 70% from $22 million in 2022. Many of these orders came with strategic new logos, including the expansion of engineering services to provide critical value-added solutions to a uranium enrichment company and two nuclear operators to name just three of many key wins. The performance engineering division is also where we have our software and support sales, which were $4.7 million during fiscal 2023. As we mentioned in the past, the software side of the business has provided excellent margins and predictability, and we are pleased with these results.
New orders for the engine for engineering during the fourth quarter were approximately $5 million compared to $4.6 million one year ago and compared to $13 million in the third quarter of 2023. We were disappointed by the level of orders won in the quarter but pleased with the orders for engineering in the second half of the year of approximately $18 million. The timing of the orders demonstrates the nature of the current market.
It's lumpy customer cautious customer spending in the industry during this tentative drive to adopt digital technology, extend plant lifetimes and produce more power through targeted capital investment.
These elements comprise what we feel will be a multi-decade POSITIVE super cycle that is just now in the process of ramping up, given the nature of the industry, it is more meaningful to look at the metric of new orders on an annual basis. And as I related earlier, orders for engineering was up 71% in 2023, showing improved order flow for engineering services and technology license, which is a leading indicator that the industry is ramping back. I feel this is important.
This improvement clearly demonstrates GSE's tenacity in developing and winning more business through close interaction with customers. I'm proud of the team effort here. We are clearly demonstrating the positive initial results of our alignment with the market. Our Workforce Solutions business continues to experience challenges, although it had a slightly improved quarter during the fourth quarter, the segment had revenue of $3.1 million, up sequentially from $2.9 million in the third quarter of 2023, but lower from the $3.3 million in the fourth quarter one year ago.
The division is still experiencing difficulties within the industry due to customers being selective with regards to on-site staff augmentation services as well as a competitive marketplace. Given the highly fragmented nature of staffing providers to industry, we are currently focused on providing targeted staffing solutions to nuclear industry that makes sense for us and our customers in this market environment.
So to summarize, this 2023 unfolded, we successfully streamline the operations of the Company and improved our engineering utilization for third and fourth quarters. And the fiscal year 2023 results really demonstrated that success, and we fully expect to reap a full year's benefit of these efforts in 2024. This is a great position to be in as we had as have begun 2024. Our business pipeline continues to remain strong. And while we were not in control of client decisions to move forward on projects, we are doing all we can to aggressively engage with customers and prospects and develop wins for the business through client engagement. We are making sure we are the vendor of choice and educating them and the breadth of services and value we can offer them by using GSE. The new logo logo wins in 2023 are early indicators of this traction.
While the industry spend is still at a very conservative level compared to pre-pandemic norms, things are improving at GSE, and that's clear, QVC's total new order flow for fiscal 2023 was $47.3 million, up $7.7 million or almost 20% from $39.5 million in fiscal 2022. We're optimistic that this momentum can continue into 2023, and GSC is well positioned to capitalize on this momentum. I am proud of our team's accomplishments and drive in driving improvements during Q4 and fiscal 2023. I'd like to thank all of our employees during this period who worked diligently to help turnaround GSC and get the company back to the point where we are today. Specifically, I'd like to knowledge Ravi Tanna, our Senior Vice President of Professional Services, who's been with GSEs since 2016 and brings over 18 years of experience and state of the art delivery of engineering services and software technology solutions.
Robin has been instrumental in our simulation side of the business, which has been a critical contributor to GSE only grow to be more critical moving forward.
I'd also like to highlight efforts by Damian DeLong Champ, our Vice President, GSE engineering programs that performance Damian spin with GSE since 2007 and brings over 20 years of utility experience, both domestically and abroad. His deep experience with various roles within the nuclear and energy industries and specializes in regulatory codes and compliance and plant improvement processes has been instrumental in keeping GSE at the cutting edge of applied engineering thought leadership with the industry, and that is demonstrated by the key wins that it continues to drive for the business. Thanks to our team, the company is definitely in a better place, both from a financial and operational standpoint than we have been since the pandemic. We have we have more to accomplish is possible for the Company in a position to be in a position of profitability and be debt-free in the near future. And I will speak to the details of this. This is great progress and sets the stage for EBITDA growth moving forward.
I'll now turn the call over to Emmett Pepe, GSE's CFO, who will review the fourth quarter and fiscal 2023 financial results. Emmett Please proceed.

Emmett Pepe

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 revenue during the fourth quarter of 2023 was $10.2 million, slightly lower from a year ago and a sequential decrease of 12% compared to $11.6 million in the third quarter of 2023, while revenues experienced a slight decrease from the prior quarter. This is consistent with prior trends due to heavy holiday and PTO usage at the end of the year, which leads to lower billable hours.
The Engineering Services division continues to show positive results overall, despite a slightly slower quarter in the fourth quarter with revenues of $7.1 million, which was slightly lower from a year ago period of $7.5 million and sequentially below revenues of $8.7 million for the third quarter of 2023. Orders for the Engineering Services divisions were $5 million higher than $4.6 million from a year ago, but lower than the $13 million received in the third quarter of 2023. As Carl indicated, the Company experienced some slippage with a few orders from Q4 into Q1. Well, this does move some order flow to the right. The key is that the company is winning the business looking at on an annual basis, the order flow for engineering improved nicely to $37.6 million, a 71% increase from $22 million in 2022. Increases are due to an improved sales focus and our investment in the business development team in the past year, which has opened doors to new customers. Our investment led to an increase in customer spending and as well positioned us for a solid 2024 Workforce Solutions division revenue in the quarter was $3.1 million, a slight sequential improvement from $2.9 million in the third quarter of 2023 and slightly lower when compared to $3.3 million in the fourth quarter one year ago. Orders were $2.3 million in the fourth quarter. This compares to $1.7 million in the third quarter of 2023, which was slightly improved on a sequential basis. Looking a year ago quarters for Workforce Solutions were $6.8 million. The division continues to experience certain challenges, including early terminations we receive from clients and as well as increased competition and less on-site work or project. We are closely monitoring this business and starting to plan internally about making this unit more efficient and advantageous for the Company in the longer term, given the challenges in this segment, we had a loss on impairment during the fourth quarter of $500,000, which resulted in the elimination of the remaining goodwill related to workforce solutions on the balance sheet, as Karl mentioned previously, we have taken steps to align the segment with the current level of business, and we continue to explore ways to maximize its value.
Gross profit in the fourth quarter was $2.6 million or 25.5% of revenue sequentially lower when compared to third quarter of 2023, which was $3.7 million or 32.1% of revenue. This compared to gross profit of $3.1 million or 28.2% of revenue for the fourth quarter of 2022. The gross profit, the gross margin decline compared to third quarter of 2023 and the fourth quarter of 2022 were due primarily to a lower percentage of engineering revenue caused by a decrease in the billable hours due to the holiday and PTUPTOU.s during the fourth quarter, engineering utilization has been a major focus in the second half of 2023. And we have seen the results reflected in the improvement. We increased our billable utilization 7.3% in the second half of the year, which is driving the factor of 5.6% margin percentage uptick in the Engineering segment from the first half to the second half of 2023.
Operating expenses, excluding depreciation and amortization in the fourth quarter were $3.4 million, a sequential decrease of 22% when compared to the third quarter of 2023, which were $4.4 million. This also compared to $3.9 million in the fourth quarter of 2022. The operating expenses in the quarter were lower due to cost containment and certain costs that are not incurred in the second half of the year, such as audit fees and certain public company costs. We are confident in the expense reduction measures that were conducted in the past year. The OpEx per quarter should remain at similar levels in the future quarters in the range of $3.5 million to $4 million per quarter. Net loss in the fourth quarter was $2.3 million or a loss of $0.82 per share, which was slightly lower when compared to the third quarter of 2023 which was a loss of $2 million or an $0.82 per share compared to a loss of $1.5 million in the fourth quarter of '22 or a loss of $0.68 per share.
Adjusted net loss was $755,000 or $0.28 per share compared to an adjusted net income of $175,000 or $0.07 per share in the third quarter of 2023 and compared to an adjusted net loss of $1.1 million or $0.49 per share in the fourth quarter of 2022. Adjusted EBITDA totaled negative $98,000 during the fourth quarter compared to a positive $659,000 in the third quarter of 2023 and compared to a negative $107,000 in the fourth quarter from one year ago. Company's backlog ended at $34.5 million at the end of the fourth quarter and fiscal year, slightly lower than the prior quarter of $37.6 million as the Company experienced some order slippage into the first quarter of 2024, for example, received $900,000 funding in Q1, which was expected in the fourth quarter of 2023 as part of a major engineering projects expected to total roughly $4.3 million over four years. The majority of the backlog continues to lie within the engineering Performance division performance engineering segment backlog was approximately $29 million at the end of the fourth quarter, sequentially lower from the $31.4 million at the end of third quarter of 2023, but improved when compared to the $23.8 million the same period a year ago. Workforce Solutions division was $5.5 million at the end of the fourth quarter of 2023, which was slightly lower than the $6.2 million at the end of the third quarter 2023. This compared to $9.1 million at the end of the fourth quarter of 2022.
Moving our discussion to the company's balance sheet, we exited the fourth quarter were $2.3 million in cash. The cash levels do not include the restricted cash of $1.5 million, which is to secure for letters of credit with various customers totaling $1.1 million and $400,000 to secure our corporate credit card program. We continue to make payments on our convertible debt secured with LID. We can including our repayments on the first tranche this May May of '24. And as of today, we have paid $6 million with just $200,000 remaining on the first convertible note, this demonstrates great progress and the potential of the Company moving forward. In June of this year, we will begin to replay the second tranche of $1.8 billion from blended anticipate full payment by May of 2025. We continue to review on a monthly basis the determination of whether to repay in cash stock or a combination of both. And we will prioritize paying cash whenever possible. While we are still working in a challenging environment, we continue to examine every expenditure and reduce costs where we can to preserve our cash position. That said, we have reduced our expenditures by roughly $1 million per quarter as compared to one year ago. And I'll reiterate that while there are always some quarterly shifts of costs lowering our quarterly expenses to around $3.5 million to $4 million. We remain optimistic that the company can book additional orders in the coming quarters, which, along with our improved utilization, will result in improved cash flow. While there's more work to be done, the company has made significant strides to becoming a leaner operation and is positioned to further improve cash flow and financial results. I'll now turn the conversation back to Kyle.

Kyle Loudermilk

Thanks very much, Jim and summarize. 2023 has been a year of improvement for GSC, especially in the second half as it demonstrates, the company has been streamlined and aligned to focus on higher margin businesses and deliver revenue in a more efficient manner. We expect to reap the benefits of these second half improvements for the full year of 2024. It's a great position to be in for highly focused on winning more business where we can and remain optimistic about the future market environment is still somewhat conservative, but we do believe there are strong tailwinds, tailwinds that for the nuclear industry will result in an improved environment for the long term Adam, could you please proceed with question and answer session?

Question and Answer Session

Adam Lowensteiner

Thanks, Kyle. Betsy, will you please proceed.

Operator

We will now begin the question and answer session to ask a question. You may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster. There are no questions from the phone line at this time, I'd like to hand the Q&A session back over to Adam Lowensteiner.

Adam Lowensteiner

Okay, Betsy, thank you. I'll ask Kyle and Emmett. A few questions on how order flows a bit off in the fourth quarter, but seems somewhat striking. Can you add a little color to that and what does the pipeline look like?

Kyle Loudermilk

Yeah, look, I think as we stated in the call, looking from quarter to quarter, it's always a bit of a salt to diagram like to build up, and then there's lag and you built up and you look year over year, our pipeline has grown significantly and you look at the second half of the year for orders for engineering up very significantly over there over the prior period.
Of time, So we expect that to continue. And we've had some really nice orders that closed in Q1, for instance. So we're looking forward to highlighting the business on the or Q1's on a conference call and earnings call. So we remain really positive, especially around this engineering business. We're just starting to see traction and as we've demonstrated some significant growth in winning business for the engineering side. We expect that to continue really focused on that on. So we do believe things have turned.

Adam Lowensteiner

And what's the feedback from the salespeople with regards to project flow. And it seems although as you mentioned, lumpy, that the tempo of bidding has improved. Is that correct?

Kyle Loudermilk

Yeah, it sure has, you know, particularly on our design and as well, really across the board on engineering design analysis programs and performance on expecting and seeing improved it builds, which arm should yield an improved order flow. Likewise, in simulation, particularly with our work for the DOLEPBDOE. labs, which is an area of long-term investment for the US Government Department of Navy, a significant client of ours that's growing. So again, we look forward to talking to the details of that, but that's what we're hearing from the salesforce.

Adam Lowensteiner

You've done a great job in rightsizing the company getting expenses down? Are there any more cost cuts to be had?

Kyle Loudermilk

Emmett do you want to talk?

Emmett Pepe

I'll take I'll take that, Kyle. Yeah, look, we're constantly look into it our cost, right? We're not going to. So the rest of what we've done, we have we got a couple of office leases, including the headquarters building that are up expire. This year. So I think we'll look to do we assess the size and other cost savings on our office leases. Vendor spend is always going to be on the table. I think we we went through and did a good job last year. But I do think there's some are coming through with a fine-tooth comb to see if there's additional savings to be had on the cost side.

Adam Lowensteiner

And Emmett, can you give us a little bit of an update or a reminder of what the debt is still owed? What's the time line on it and it was the Company becoming debt-free, a possibility in the future?

Emmett Pepe

Yeah. As I mentioned on the call, the arm, we are coming up on the and completing the first note that we signed in February of '22 and a couple of months that that will be up expected to be paid off.
And then the second note from a year ago or $1.8 million will start paying in June. And yes, I think under normal payments within a year May of '25 we should be, is that correct?

Adam Lowensteiner

That's all the questions I have on. Kyle, would you like to conclude?

Kyle Loudermilk

Yeah. Thanks, Adam. And I'd like to thank everybody who joined us today for joining us. We appreciate your time and interest in GSE excited about moving forward in the future.
Here, do you have any questions, please reach out to Adam Lowensteiner from Lytham Partners, and we'd be happy to schedule a follow-up call with management. Again, everybody. Thank you so much, and have a great day.

Operator

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