GSE Systems Inc
NASDAQ:GVP
Earnings Call Analysis
Q4-2023 Analysis
GSE Systems Inc
The company's Performance Engineering division showed notable resilience and growth during fiscal 2023, boasting a 20% increase in total new order flow, amounting to $47.3 million compared to the previous year's $39.5 million. They secured strategic wins, growing new orders by over 70% from $22 million in 2022 to $37.6 million in 2023. These included expansions in services to strategic new customers, positioning the division well in the emerging 'super cycle' of the industry. However, a slight disappointment came with the fourth-quarter orders, which fell to $5 million from $13 million in the preceding quarter, reflecting the industry's cautious approach to digital technology adoption and targeted investment.
Despite a 12% sequential drop in fourth-quarter revenue to $10.2 million, Engineering Services remains a positive contributor with a 71% yearly increase in orders. However, a fourth-quarter slide to $7.1 million in revenue indicates minor slumps amid an improved sales focus and business development investments. Conversely, Workforce Solutions is grappling with industry challenges and competitive pressures, only modestly improving its sequential revenue to $3.1 million. It also faced a stark decline in orders from $6.8 million a year ago to $2.3 million, hinting at the need for strategic efficiency improvements.
A margin uptick of 5.6% in the Engineering segment from H1 to H2 of 2023 demonstrates effective operational optimization. Moreover, the company diligently curtailed operating expenses by 22% sequentially to $3.4 million and now anticipates maintaining similar levels around $3.5 million to $4 million in future quarters, indicating disciplined cost management and improved utilization going forward.
The net loss for the fourth quarter was minimally reduced to $2.3 million, with a backlog summing up to $34.5 million, slightly descending from the prior quarter. Cash and restricted cash combined total $3.8 million, fostering a cautious yet forward-looking financial stance. Debt repayment displays commitment to reducing liabilities and shoring up the balance sheet, with $6 million paid off and only $200k remaining on the first convertible note. Management continues to prioritize cash repayments while trimming expenses by approximately $1 million per quarter compared to the previous year.
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Good day, and welcome to the GSE Systems Inc. Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Adam Lowensteiner Vice President of Lytham Partners. Please go ahead.
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 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.
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.
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. Emmett 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 geopolitical 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 a revival in nuclear, which will provide sustainable carbon-free power that is available 24 hours a day, 7 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 a 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 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 carbon 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 7 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 restart of this site back in December. This is very positive news and demonstrates 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 baseload power to get to net 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. The 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 spent 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. 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 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. This 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 in 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 and 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. The fourth quarter 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 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 2 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 and recorded 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 the Engineering Services to provide critical value-added solutions to our uranium enrichment company and to nuclear operators, to name just 3 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 engineering during the fourth quarter were approximately $5 million compared to $4.6 million 1 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. Cautious customer spending in the industry during this tentative drive to adopt digital technology, extend 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 1 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 the 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 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 -- as we have begun 2024. Our business pipeline continues to remain strong. We're 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 new momentum. I'm 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 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 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 DeLongchamp, our Vice President, GE Engineering Programs and Performance. Damian has 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 plant 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 pandemic. We have more to accomplish. It 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's CFO, who will review the fourth quarter and fiscal 2023 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. 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 division 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, 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 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 has 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 1 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 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 PTO use 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 $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 $765,000 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 $407,000 in the fourth quarter from 1 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 project expected to total roughly $4.3 million over 4 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 in 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 discussions to the company's balance sheet. We exited the fourth quarter with $2.3 million in cash. The cash levels do not include the restricted cash of $1.5 million, which is to secure 4 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 Lind. We'll be concluding our repayments on the first tranche this May, May of '24.
And as for today, we have paid $6 million with just $200,000 remaining from 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 repay the second tranche of $1.8 million from Lind and anticipate full payment by May of 2025. We continue to review on a monthly basis, the determination on whether to repay in cash, stock or a combination of both, and we will prioritize paying in cash whenever possible.
While we are still working in a challenging environment, we continue to examine every expenditure and we reduce costs where we can to reserve our cash position. That said, we have reduced our expenditures by roughly $1 million per quarter as compared to 1 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 stride 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.
Thanks very much, Emmett. Summarized 2023 has been a year of improvement for GSE, 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. We're 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 that there are strong tailwinds set for the nuclear industry will result in an improved environment for the long term. Adam, could you please proceed with the question-and-answer session.
Thanks Kyle. Betsy will you please proceed.
We will now begin the question-and-answer session. [Operator Instructions] 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.
Okay, Betsy. Thank you. I'll ask Kyle and Emmett a few questions. Kyle, order flows a bit off in the fourth quarter, but it seems somewhat streaky. Can you add a little color to that? And what does the pipeline look like?
Yes. Look, I think as we stated in the call, looking from quarter-to-quarter, it's always a bit of a [indiscernible] diagram, like you build up and then there's a lag and you build 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 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 Q1 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. So we do believe things have turned.
And what's the feedback from the salespeople with regards to the project flow? It seems although, as you mentioned, lumpy that the tempo of bidding has improved, is that correct?
Yes. It certainly has. Particularly on our design -- well, really across the board on engineering, design analysis, programs and performance, expecting and seeing improved bids, which should yield an improved order flow likewise in simulation, particularly with our work for the DOE labs, which is an area of long-term investment for the U.S. government, Department of Navy, a significant client of ours, and that's growing. So again, we look forward to talking to the details of that, but that's what we're hearing from the sales force.
You've done a great job at rightsizing the company, getting expenses down. Are there any more cost cuts to be had?
Emmett, do you want to take that?
I'll take that, Kyle. Yes, look, we're constantly looking to -- at our cost, right? We're not going to sort of rest on what we've done. We've got a couple of office leases, including the headquarters building that are expired this year. So I think we'll look to assess the size and other cost savings on our office leases. Vendor spend is always going to be on the table. I think, we went through and did a good job last year, but I do think there's some combing through with the fine-tooth comb to see if there's additional savings to be had on the cost side.
And then can you give us a little bit of an update or a reminder of what the debt is still low. What's the time line on it? And is the company becoming debt-free a possibility in the future?
Yes. As I mentioned on the call, the -- we're coming up on the -- completing the first note that we signed in February of '22 in a couple of months, that will be expected to be paid off. And then the second note from a year ago, $1.8 million we'll start paying in June. And yes, I think under normal payments within a year, May of '25, we should be debt-free.
That's all the questions I had Kyle, would you like to conclude?
Yes. Thanks, Adam, and I'd like to thank everybody who joined us today for joining us. We appreciate your time and interest in GSE. I'm excited about moving forward in the future here. If 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.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.