GSE Systems, Inc. (NASDAQ:GVP) Q4 2023 Earnings Call Transcript

GSE Systems, Inc. (NASDAQ:GVP) Q4 2023 Earnings Call Transcript April 1, 2024

GSE Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions]. 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 in 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 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 materially different from those projected. For a full discussion of these risks, uncertainties, and factors, you are encouraged to read GSE’s documents on the 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. The 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 over the call to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE Solutions.

Kyle, please proceed.

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Q&A Session

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, 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 section. To 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. And then we’ll 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 geopolitical issues that are certainly shifting 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 a 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 reliably be available 24-7.

A real-time demonstration of this nascent trend is the recent acquisition by Amazon Web Services of a 960-megawatt data center from Talon Energy in Pennsylvania. Amazon purchased the center for 650 million, primarily given its power source, the Susquehanna Steam Electric Station, which is the sixth-largest nuclear power plant in the U.S. 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-zero goals in the Paris Agreement. The emergence 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 TEPCO to restart its largest nuclear power plant, the Kashiwazaki-Kariwa, which has seven reactors and total generation capacity of almost 8,000 megawatts. This is on the heels of Japan’s Nuclear 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, in other recent news, Canada announced that its 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 base load power to get them 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 it is working on making approval processes quicker for nuclear power projects in order to bring them to fruition as quickly as possible. In the U.S. market, Constellation Energy recently announced that it has issued the first corporate green bond in the U.S. 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 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 of 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. 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 a 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 future power upgrades. Fifth means, this is the means by which existing infrastructure can be upgraded to produce more power. As mentioned, producing more power through upgrades is an extraordinarily cost-effective means to produce more carbon-free nuclear power versus building new nuclear power plants.

This is a critical area of focus for the nuclear power industry, and GSE is well-positioned to capitalize on these maintenance and upgrade opportunities as we are today. Going forward, a 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 aren’t 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. The fourth quarter was a bit lighter than expected on the order side, but we have seen orders that slipped out of Q4 closed 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 and 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 make key strides to lower expenses compared to a year ago, as seen in the fourth quarter and fiscal year results. Emmett 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 winds during the year and recorded new orders, $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 the engineering services to provide critical value-added solutions to our uranium enrichment company and to 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’re pleased with these results. New orders 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. Cost is 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 and 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, and 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 selected with regards to onsite staff augmentation services, as well as the competitive market place given the highly fragmented nature of staffing providers to industry.

We are currently focused on providing targeted staffing solutions to nuclear industry that make sense for us and our customers in this market environment. So, to summarize, as 2023 unfolded, we successfully streamlined the operations of the company and improved our engineering utilization. The 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 head and as we have begun 2024. Our business pipeline continues to remain strong. 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 in the breadth of services and value we can offer them by using GSE. The new 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. GSE’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 GSE is well-positioned to capitalize on this momentum. I am proud of our team’s accomplishments in driving improvements during Q4 and fiscal 2023. I’d like to thank all of our employees during this period who have worked diligently to help turn around GSE and get the company back to the point where we are today.

Specifically, I’d like to acknowledge Ravi Khanna, our Senior Vice President of Professional Services, who’s been with GSE since 2016 and brings over 18 years of experience in state-of-the-art delivery of engineering services and software technology solutions. Ravi’s been instrumental in our simulation side of the business, which has been a critical contributor to GSE and will only grow to be more critical moving forward. I’d also like to highlight efforts by Damian DeLongchamp, our Vice President of GSE Engineering Programs and Performance. Damian’s been with GSE since 2007 and brings over 20 years of utility experience both domestically and abroad. He has deep experience with various roles within the nuclear and energy industries and specializes in regulatory codes and compliance and plan improvement processes.

He’s 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 he 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 more to accomplish that is possible for the company to be in a position of profitability and be debt-free in the near future. Emmett 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 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 substantial 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 Kyle indicated, the company experienced some slippage with a few orders from Q4 into Q1. While 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. The increases are due to an improved sales focus in 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 it’s 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, orders for workforce solutions were 6.8 million. The division continues to experience certain challenges, including early terminations we received from clients, and as well as increased competition and less on-site worker projects. 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 Kyle mentioned previously, we have taken steps to align this 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 the 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 margin client compared to the 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 PTO used during the fourth quarter.