GSE Systems Inc (GVP) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the GSE Systems conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Moran. Please go ahead, sir.

Thank you. Welcome, everyone, to GSE first year-end conference call. I am John Moran, GSE's CEO. I am joined here today by our Chief Financial Officer, Jeff Hough.

We decided to initiate what will be a twice per year conference call format, partly due to the growth and maturity of our business over the past eighteen months or so and as a result, the increasing interest we're generating from the financial community. Our next planned call will coincide with the release of our June 30 financials. Before we begin, I would like to turn it over to Jeff Hough to address the subject of forward-looking statements. Jeff?

Thank you, John. This presentation contains forward-looking statements regarding the future performance of GSE Systems Inc. that involve risks and uncertainties that could cause actual results to differ materially, including but not limited to, economic conditions, customer demand, increased competition in the relevant markets and others. We refer to you the documents that the Company files from time to time with the Securities & Exchange Commission such as the Form 10-K, Form 10-Q and Form 8K reports which contain additional important factors that could cause actual results to differ from its current expectations and from the forward-looking statements made in this presentation.

Thanks, Jeff. Let's begin. Today's call will begin with a brief overview of our fourth quarter and year-end 2008 financials. That will be followed by an overview of our nuclear simulation, non-nuclear simulation, and our training and education business sectors. Since this is our first call, and I am sure we have a number of listeners that are new to the GSE opportunity, I will also provide a bit of history on each of these three business sectors, in addition to our current activities and outlook for each. We'll conclude with some comments and a general outlook for 2009, followed by about 30 minutes for any questions that you might have.

Let's start with the financial summary. As noted in our press release, the Company reported that revenue for the three months ended December 31, 2008 was $8.4 million. That's a 3% increase from the revenue reported for the three months ended December 31, 2007 of $8.1 million. GSE reported operating income of $140,000 dollars for the fourth quarter of 2008 as compared to operating income of $522,000 for the fourth quarter of 2007. The net loss for the December 31, 2008 quarter was $69,000 or $0.00 per share on both the basic and diluted basis as compared to net income of $487,000 or $0.03 a share on both the basic and diluted basis for the fourth quarter of 2007.

GSE reported revenue for the twelve months ended December 31, 2008 of $29 million, a 9% decrease from the revenue reported for the twelve months ended December 31, 2007 of $31.9 million. In 2008, the Company generated $15.7 million or about 54% of our total revenue from nuclear simulation, $11.7 million or 40% of total revenue from non-nuclear simulation, and $1.6 million or about 6% of the total revenue from our training and educational services. GSE reported an operating loss of $12,000 for the twelve months ended December 31, 2008, as compared to operating income of $2.2 million for the twelve months ended December 31, 2007. The Company incurred a net loss attributable to shareholders and is arrived at by deducting the preferred stock dividend from net income of $690,000 for the twelve months ended December 31, 2008, or $0.04 per share on a basic and diluted basis, compared to net income of $1.1 million or $0.09 per share on a basic basis and $0.08 per share on a diluted basis for the twelve months ended December 31, 2007.

The Company utilizes derivative instruments, specifically forward foreign exchange contracts, to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign denominated trade receivables. The purpose and structure of these derivative instruments, GSE has entered into are designed to protect the contract value and margins at the time the contracts are signed and are not designed to speculate on the direction of any currency up or down. For the three months and twelve months ended December 31, 2008, the Company incurred a $288,000 and $453,000 pretax noncash loss respectively on its derivative instruments. Excluding these loss from our 2008 results, the Company would have incurred net income of $106,000 for the three months ended December 31, 2008 or $0.01 per share on both a basic and diluted basis and would have incurred a net loss of $350,000 for the twelve months ended December 31, 2008 or $0.02 per share on both a basic and diluted basis.

GSE's backlog as of December 31, 2008 was approximately $38 million, compared to $24.6 million at December 31, 2007. Backlog is defined as the remaining value of signed contracts and does not include any value for contracts being negotiated or for contracts that have been signed since December 31, 2008. Therefore the backlog of $38 million does not include the expected total value of the two new full scope simulators for a Japanese customer, nor the expected total value of the full scope nuclear simulator currently being build for Westinghouse Electric's Haiyang project in China.

Now, let me take a minute to it clarify this last point. In the case of the Japanese contracts, the customer's procurement process is to first select a simulator vendor, negotiate a final price and schedule, and then issue a small contract to begin work. Final terms and conditions are then agreed upon and a contract amendment is issued for the full amount of the contract. We expect this last step to be completed sometime this summer at which point the full value of the contract will be reflected in contract backlog.

In the case of the Haiyang simulator, a portion of the plant's design has not yet been finalized, and so the final price of the simulator cannot be determined. However, the customer wanted to select the simulator vendor and begin work in parallel with the design being finalized. In this case, the customer issued a small contract to begin work and will issue a contract amendment for the full value of the contract once the design is finalized. This should occur at some point during 2009. In both cases, we know what the approximate full value of the contracts will be.

What's important to understand here is that we have been authorized to begin work on these projects and our booking revenue on the initial portions of the work no differently than if the total amounts were in our official backlog. The total estimated remaining value of the Japanese and Haiyang projects not in backlog is estimated to be over $14 million, bringing our quote, implied backlog to over $52 million at December 31, 2009; the highest implied backlog in the Company's recent history. Again, this number does not include any of the new business that we have announced since December 31st.

Okay. Let's turn our attention to the business sector overview. As most of you are aware, the Company has three business sectors; nuclear power simulation, non-nuclear simulation, and our training and educational services sector. In the nuclear sector, customers around the world continue to purchase our simulators to train and certify control room operators, engineers, and managers, and to verify and validate new plant designs and control systems. In the US, GSE has built or modified approximately 86 of the 100 full scope simulators in operation today. And on a global basis, we've built or modified over 60% of the total number of nuclear power plant simulators. Over 75% if France is eliminated from this calculation.

The Company enjoys a very strong presence in the nuclear power industry, and works with most reactive vendors, contractors and operators such as Westinghouse and New Scale here in the US, [JAPC] in Japan, [Guan Dong] Nuclear in China, the Russian Research Institute and the Pebble Bed Reactive Group in South Africa, just to name a few. With the recent award in Slovakia, we're currently working on eight new full scope nuclear power plant simulators. Just eighteen months ago, that number was zero.

Also, and this is an important point to understand, we generate about 50% of our revenue from servicing and modifying the world's existing install base of nuclear power plant simulators. Over $12 million of that new work that we just announced since the beginning of the year falls into this category. As we look at it, nuclear is coming at us faster than we anticipated and of course we think this is a good thing. For 2009 and beyond, we anticipate a continuing stream of upgrade and modification work in Korea, Japan, Russia, the UK and greater Europe, and of course the United States. We anticipate the announcement of additional new full scope simulators as we progress through the year.

Let's shift to non-nuclear. Our non-nuclear simulation business sector is comprised of two primary areas; conventional power plant simulators, and petroleum related simulators. Our work in the conventional power plant area is being driven by new plant construction, the development of new and complex emission control systems, and the movement to modernize control rooms from old analog control systems to new digital control systems. Our strategic relationship with Emirates Process Management, one of the largest digital control system vendors in the world has never been stronger and continues to generate a significant number of projects. We also work with most of the world's digital control system vendors, including Siemens, ABB, GE, [Invents Us] and others. Our bookings in this area have increased from $2 million in 2004 to approximately $14 million in 2008, and we anticipate this growth trend continuing throughout 2009.

Our activity in the petroleum area is being driven by new work in Europe, the Arab Gulf region and in China. We have just about completed our first major project with [SINOPEC], one of the largest oil and gas producers in the world and are looking forward to additional projects. As you know, one of our core growth strategies is to extend our simulation capability to providing turnkey training solutions. That means GSE now has the capability to not only build and deliver the best simulators in the world, but also provide the training programs associated with the simulators and even the instructors when our customers need this service.

Our overarching objective in this area is to help our customers create new skilled workforces where they are needed. As an example, the electric power sector has been largely dormant for the better part of 25 years, and the industry is facing a skilled workforce crisis. Electric power workers are retiring in large numbers at exactly the same time as power companies are planning to build new capacity.

To further amplify this point in the US nuclear industry, the average age of the nuclear worker is 48. 35% of the workforce is eligible to retire within five years. An additional 25,000 new employees are required to keep the 104 operating reactors running in this country and each new plant will require about 500 new employees. A new skilled nuclear workforce of over 120,000 new workers will need to be created globally.

The same issues associated with an aging workforce and the need to create a new pool of skilled worker is being experienced in many parts of the world, and in all of the energy sector industries including oil and gas production. Through the [Emirates] Simulation Academy in Abu Dhabi where we recently developed five simulators and five complete training programs, we're helping Emirates to develop new skilled workers in the electric power, oil and gas and desalination industries. In the UK, we're helping customers develop skilled conventional power plant operators and engineers. Here in the US, we're developing a nuclear simulator training center at Augusta Technical College in Georgia to create the next generation of nuclear workers for one of the largest nuclear utilities in the country.

The way we derive our revenue in this sector is as diverse as the opportunities. At the Emirates Simulation Academy, we drove revenue from building and delivering the simulator and training programs. In the UK, we produce revenue by offered tailored simulator training programs to customers like Rolls Royce, British Energy, Scottish Power, and [Clyde Pump], among others. In Augusta here in the US, we'll produce revenue by developing training materials, building a simulator and charging tuition on a per course basis. This last program extends for a period of six years, creating the kind of substantive recurrent revenue that the Company is seeking. We are very positive in our ability to scale this business segment in all of the markets that is the Company serves, employing all of the business models that I just mentioned.

Let's turn to the outlook for 2009 and beyond. We've talked repeatedly during the past year about two interrelated expectations. The first was our expectation that 2008 would be punctuated by a large number of new contract wins and meaningful backlog growth. The second that this expected influx of new business would set the stage for meaningful growth in our financial metrics during the latter part of 2008, and especially into 2009 and beyond. I am pleased to say that thus far both of those expectations have proved correct.

We begin 2009 with an implied backlog of approximately $52 million. And since then have announced major upgrade projects valued at $12 million and a new full scope simulator with the associated digital control system hardware in Slovakia, valued at at $18 million for a total of $30 million worth of new work. Our cost structure is sound. Our balance sheet is in excellent shape, and we remain debt free. And we are producing cash. We continue to maintain a large pipeline of both near and longer term opportunities. We therefore remain very optimistic about our growth prospects and positive trends going forward.

Having said this, let me remind everyone that there will continue to be some degree of up and down lumpiness in our quarter-to-quarter financial metrics, including backlog. I think that this is easily understandable, due to the nature of our business which is heavily influenced by the timing of large multi-year, multi-million dollar contracts. If in any given quarter, we sign several large multi-million dollars contracts like this first quarter, we would expect a backlog to increase from the prior quarter's level and vice versa.

Keeping in mind the GSE does not give quantitative revenue or net income guidance, let me share some general insights into what we believe we'll see for the balance of 2009. Based upon our current backlog, pipeline, current level of bid activity, and our internal expectations of new business awards, we believe 2009 should generate markedly improved financial results versus 2008. Also, thus far, we appear to be immune to the conditions which are affecting much of the broader economy. Specifically, we have seen no project delays or cancellations, and we are aggressively hiring new engineers to handle the increasing workload. Currently we're in good shape to scale our activities and revenues to significantly higher levels with minimum increases in operating expenses versus that incurred in 2008.

Gross margins for 2009 are expected to remain at approximately 25% to 30% with some level of quarter-to-quarter volatility similar to that experienced in 2008 continuing. Margin volatility is largely a function of any given quarter's revenue mix. We expect that our tax rate will be in the range of 19% to 22%. And as I mentioned previously, we expect our full-year operating expenses to be in the $8.3 million range or approximately 5% to 6% above the 2008 levels.

The Company will continue to be required on a quarter-to-quarter basis to mark-to-market the value of its foreign currency hedging contracts. These contracts although noncash in nature are expected to impact the income statement positively or negatively, dependent upon the value of the hedging contract at the end of each quarter. The gain or loss that will be reported due to these hedging contracts will net out to zero at the time the hedging contract expires. As I mentioned earlier, the purpose and structure of the foreign currency derivatives GSE has entered into are designed to protect the contract value and margin at the time the contracts are signed, and are not designed to speculate on the direction of any currency up or down. Simply put, we're protecting against currency fluctuations in a way that regardless of which way a given currency moves, our ultimate payments from foreign customers will translate to the originally agreed to amount.

In summary, I am very pleased with the overall performance during the past twelve months, particularly with respect to record levels of new business wins and backlog growth. We have continued that momentum into the early months of 2009 with the announcement of over $30 million of new business since the beginning of the year. Our relationships with many of the world's largest and leading engineering and construction companies, integrated energy companies, nuclear contractors, utilities and state run enterprises position GSE for an exciting multi-year period of growth, as our customers' programs continue to gain momentum. I would now like to turn it over to Q&A. And as I mentioned before, I have got about 30 minutes before I hop on a plane to Indonesia. I would also like to take as many questions as I can, so please limit yourself to one question and one follow-up question per call. Thanks.

(Operator Instructions). We'll take our first question from Mark Tobin with Roth Capital Partners.

Good afternoon, John.

Hi, Mark.

Quick question on gross margins for the quarter, just under 25%. What drove that?

As I had mentioned before, the mix of the different projects is the primary factor in the gross margin. For the fourth quarter, we had a substantial hardware purchase in support of our AEP project. That's the full scope nuclear simulator that we're building for AEP.

And then looking ahead on the guidance, the 25% to 30%, 25 obviously being at the low end of the range, is that primarily due to the hardware deliveries with the Slovakia project?

That's precisely correct, exactly, so what we're going to do is see impact from that Slovakia project. Correct.

And just really quickly, do you have any estimate of how much -- what the magnitude of the hardware deliveries during '09 would be on that project?

Mark, we're still determining and negotiating with Siemens. That's the major piece of that hardware contract -- exactly when the delivery of their equipment will occur. And that will basically determine when we recognize that revenue. The answer is we don't know at this point.

Okay. Thank you. I will jump back in the queue.

Okay.

Next we'll move to Dick Ryan with Dougherty.

Hi, John.

Hi, Dick. How are you doing?

Good. Question on the backlog flowing through the revenues. I see in the 10-K you talked about $20 million or roughly 53% of the $38 million year ending backlog converting in '09. Can you give a sense of what might happen with the $12 million that you've announced so far and the additional $18 million -- the extra $30 million that's in there, how that might flow in '09?

As you know, we're working on those projects right now. On the [Mahoffnae] project which is the $18 million project, we stated that we would execute that over 30 months. We are working on that right now, and so of course that's not in that $20 million number. As well, the two back fits I think or the two major backfits that we're doing for the $12 million I think we're executing over about an 18-month period of time. I am looking at Jeff, and he is agreeing with me.

Okay. If you could just assume those might be a linear or would those be more backend loaded?

No. Those would be linear.

Okay. Great. Thank you.

You're welcome.

Next we'll take Clint Morrison with Feltl and Company.

A quick mechanical one. What was the depreciation portion of your operating expense?

Stand by. I am going to look that up. Jeff will give you the answer.

Depreciation in 2008 was about $445,000.

For the whole year?

The whole year.

And then employee count, you've indicated that you have been hiring employees like mad or aggressively I think you said. Is that part of what's happening with the gross margin? Or do new employees really hit the ground running and pay for themselves right away? Can you give us a little sense as to what your employee count is now versus maybe a year ago and what you're anticipating?

We started a year ago at about 140. My guess is that by the time we get to maybe middle of second quarter, we'll be closer to about 200. The vast majority of those are engineers. In other words, and -- all of the new hires are engineers. What happens, Clint, is we apply those engineers to projects immediately, so that would have no impact on the gross margin. Each new employee immediately contributes to the revenue generation capability of the Company.

Okay. Thank you.

Okay.

We'll move onto [Jeremy Holmes with Cingular Research].

Hi, John.

Hi, Jeremy.

Can you give us any rough sense regarding how much or what quantity of business worldwide might be awarded over the next twelve months or so? Is it putting it in perspective versus what you have been announcing?

I think the way I would answer that is just pulling some of our previous discussion. Number one, nuclear is coming out as -- faster than we anticipated, so there will be more full scope nuclear simulator awards in 2009. On the powerful side of our business, we don't see any decrease in -- certainly any decrease in the workload there, and again primarily being driven from our channel partners, Emirates Process Management, GE, ABB, and the like. In a non-quantitative sense, the pipeline is robust. It is getting more robust each day. The backlog is growing. We would anticipate that trend continuing throughout 2009.

Great. And then for my follow-up, with respect to that, what are the relative movements with respect to home brew models or simulators or other competition in the marketplace? Are there any entrants coming into the market that we need to be aware or otherwise?

I would say that the competitive landscape has remained pretty much the same. We anticipate that we're going to have to partner in China, and this is in the nuclear space. And so we'll be building simulators with a Chinese partner. But other than that, we're basically looking at [Cory's] out of France, and L-3 out of Montreal, Canada. Of course it is L-3 is a US company, but their simulation group is headquartered in Montreal.

Okay. Great. Thanks.

You're welcome.

We'll move to Peter [McMillan with IPC].

Hey, John, it is Peter McMillan. How are you doing?

Hi, Peter. How are you?

I am excellent. Thank you.

Good.

How do you see the new administration affecting your business over the next two to four years? Any thoughts on their energy policy at all?

I do have some thoughts. Obviously Obama is not as vocal as McCain in his support for nuclear power, but nonetheless it is there if you peel away all of the rhetoric. But and so I think he has no choice, but to support the buildout of nuclear and cold fired stations because there is no -- there really isn't any other viable alternative. But the point I think that I would like to make and this is an important one. And I keep stressing this, if we never built another nuclear power plant in the United States for the rest of time, the Company would still enjoy the growth that we're seeing right now.

Over 95% of our work roughly is overseas. Frankly, that's where a lot of the growth that we're anticipating is coming from. Do I believe that we're going to build nuclear power plants here in the United States? Absolutely. Do I believe the administration will support that? Absolutely. Again the Company does fine with or without it. I like to view it as accretive icing on the cake.

Appreciate it. Thank you.

Next we have Kevin [Vi with Seritone Capital].

Hi.

Hi.

How are you doing? I was curious in terms of your business in Slovakia, and it looks to me like -- reading the press release, it sounds like you're purchasing the Siemens equipment and then deploying into the Slovakia facility? How are you managing the risk of their ability to pay?

You mean Slovakia's ability to pay?

Correct.

I would say that we have been working with this customer for the better part of 20 years -- over 20 years. We haven't had a problem with payment yet. We don't anticipate we would have a problem. We recognize -- we've got enough international experience where we recognize where there may be risks. In that case, we protect ourselves with things like up front payments and favorable terms. We have a large up front payment on the Slovakian job, but we consider them to be a solid risk.

Have they already paid the up front? And the second question or the follow onto that would be is your contract with them in Euros or dollars?

Contract is in Euros. The contract was just signed. We've got the proposal out -- I beg your pardon, we got the press release out, so my guess is that the wire is somewhere in the banking system. We won't start work until we get the wire.

Thank you.

Next we have (inaudible).

Hello. Thanks for taking my call. How are you? I wanted to ask you about just the mix in the revenues this quarter. Could you give us an idea of what the new nuclear was as a portion of the mix and maybe you could compare that to last quarter and a couple of quarters ago just to give us an idea of all the -- we have seen a lot of your announcements. That's where the excitement is. We would like to gauge where we are in the process of realizing some of that and monetizing some of that?

I will ask Jeff if we do that calculation at the close of every quarter for the investor presentation, I am not sure if we have done it yet. The answer is that we haven't done it yet, but we will within the next couple of weeks. That will be in our investor presentation. Qualitatively, what I would say is our install base services are probably going to continue to be about 50% of our work. Our plant specific simulators are going to increase as a percentage. You will see our training and simulation services start to gain a little bit of traction as well with the work that we'll be doing at Southern Company.

Got you, Can you give us an idea of how many projects in the new nuclear side you might have recognized revenue from this quarter, even though the numbers may not be final yet? Is there an idea of how many units -- ?

As I mentioned, we're building eight new full scoped nuclear simulators as we speak. Mahoffnae came in in the first quarter, so we've just begun that. In fourth quarter -- and we're also by the way ramping up on some of the projects that we announced late last year. The number is eight that we're working on right now that we're billing to.

Okay. I will follow-up with that another time. Just on another front, in Korea and China, there are a number of units that will go online in couple years -- there's a large number of units that will go online in a couple of years. You mentioned Korea as an upgrade area for you guys in '09 where you might get some business. Can you give us a sense of how much -- basically can you give us a sense of if you're going to get -- or anticipate getting new nuclear business in Korea at all from all of these six or eight plants that are going to start between now and 2016? Or is it stuff you have done before and new nuclear shouldn't be really our expectations for Korea?

No. It should very much be in your expectations for Korea. We are working with several Korean entities right now on those projects. I would anticipate that as we move through the 2009 and beyond, we'll be building full scope simulators for Korea as well as Japan. Obviously we just announced two of them in Japan. In Korea, again, we would be working with a partner. And we're developing those partnerships right now.

Okay. Great. Thanks very much.

We'll take Dick Ryan with Dougherty.

John, looking at the non-nuclear side of the equation, Emirates was pretty significant growth, I think you indicated over the last four years. Are you hearing anything from them based on the economic challenges out there? Maybe a tagalong on the petroleum side, I think you're delivering against SINOPEC or close to delivering. What's there? What's their attitude going forward?

Emirates is seeing the world much the same that we are. The bottom line is that there is still a huge gap between the energy that we can produce and that which we need. It is in all of the growth markets that you would anticipate, the Chinas, the Indias, the United States by the way, Europe, and so on. The Emirates's business flow has not slowed. As a result, our business flow in large part on the fossil side has not slowed at all.

In terms of -- in the second part of the question was SINOPEC. Indeed, you're absolutely correct. They are actually in our offices right now doing the factory acceptance test on the first major project which was the Fuji and [IGCC] facility. Our anticipation is that once we complete that -- by the way, the project went very well. We anticipate that once that project is accepted by SINOPEC, there would be additional projects.

Okay. One other maybe on the nuclear side. If you look at the capacity the US versus the rest of the world, it is pretty significant. Do you think that's a factor in maybe getting some additional nuclear orders globally, whether they might be adding a second simulator at a reactor site?

I think that certainly is the trend in the industry. We're still seeing a fair amount of global customers that -- where they have two identical plants, they will order one simulator. But we're seeing a basic shift to having one simulator per plant. If I were to predict and go downstream ten years, my view is in ten years there will be one simulator for every nuclear plant. If you think about it, the value proposition is just overwhelming. If we can save one or two plant trips because we have got a better trained operating staff, then we can pay for the simulator by itself. If we can improve the availability of these plants by 5%, we can literally pay for the plant itself over its 40-year life. That kind of thinking is starting to basically propagate on a global basis.

Great. Thanks, John.

Okay. You're welcome.

(Operator Instructions). We'll move to Mark Tobin with Roth Capital Partners.

A quick follow-up. John, can you give some color just on the pipeline within the nuclear space as far as what regions or what areas do you think offer the most near-term promise and the magnitude of contracts you expect to sign during '09?

Okay. Let me go to my map here. Stand by for one moment. Okay. Where do we expect the new nuclear build to occur? Just going around the map in no particular order, China obviously, a large portion of the stimulus package is basically being vectored to the nuclear sector.

Japan is going to continue their build program. Korea. India where we just opened up nuclear relations is going to build 30 plants in the next 20 years. We believe Russia will continue to build plants. We believe that the United Kingdom is serious about their prospects of building twelve plants. We think that the United States is for real, and with the 33, the 35 applications for accelerated operating licenses.

All of the activity that we're seeing, in other words, the Southern -- maybe this is a good point to address that Southern Company training contract. This is a contract where we're creating the new nuclear workforce, not only for the existing plants but the primary driver for that project was to create operators for the new nuclear capacity that they anticipate building and coming online by the way, in some as early as the year 2016. Those are the hot nuclear areas.

We're leaving out all of what I call the outliers. We know, for example, that Indonesia is cranking up a nuclear program, Vietnam, the United Arab Emirates. We know that South Africa has some very aggressive plans. We know that Brazil will likely build a few plants. But we don't consider these to be the high probability deals and so we left them off our pipeline. If I were to summarize, I would say China, Japan, Korea, India, the UK and the United States.

Any indication of -- in the past, you had provided commentary on number of deals you expect to close within a certain timeframe. Can you comment on your proposal activity currently and what you see in the near term?

I would say that our proposal activity in the nuclear space is greater than at any other time in the Company's last five year's history. And as I mentioned in my comments, nuclear is coming at us much faster than we anticipated. That's a good thing. Recall, we are building eight new nuclear power plant simulators right now. We were building zero eighteen months ago.

I don't know if that trajectory will continue. Let me put it this way, there is certainly enough opportunities out there for that kind of trajectory to continue. Whether we do it or not will be a matter of timing which is awfully difficult for me to predict.

Okay. Thank you.

You're welcome.

(Operator Instructions). We'll move to Jeremy Holmes with Cingular Research.

Thanks. Just thinking bigger picture, longer term on the education side, do you expect that over maybe a three to five-year period that education dense areas, such as maybe the research triangle in North Carolina or Boston with MIT and Harvard, are going to be pursuing anything on the order of what you do with the Emirates Simulation Academy?

I think -- I'll answer it this way, I think the opportunities in the US to create simulation academies such as we have seen done in the Emirates Simulation Academy, I think those opportunities are real and I think they exist. I don't think they're going to be done with the major universities, however. We have enough experience with the MITs and the Georgia Techs and the Texas A&Ms and the Carnegie Mellons that basically understand that they're difficult systems to work with. In certain cases, they actually don't see a tremendous amount of value add to their programs.

Said differently, the discussion I had with the president of Georgia Tech, who says, we love your stuff. We think it is great. We think our students would enjoy it and there would be tremendous value from it, but we're the number one engineering university in the country. Why do we need it? Our guys have waiting lists of job offers. And so we're doing fine, thank you very much.

What is more likely will happen and where there is some very significant potential is at the technical college level. For example, when we talk to Southern about creating what amounts to the first nuclear simulation academy built in this country in the last 30 years, we said, gee, we've got a great relationship with Georgia Tech which we do. And we have a great learning center there which we do. Let's do it at Georgia Tech, Southern said we don't want our guys going to Georgia Tech. We want them going to Augusta Community College because Augusta is doing many of our programs, creating a lot of the feedstock for some of our nuclear workers and they're very receptive to new ideas and to this particular academy. We have taken that Augusta Community College model and believe it or not, we've generated some substantial interest in other parts of the country. It would be more likely it would be that than at an MIT; much as I would love to do work at MIT and all of the other major universities.

At a point, does it become part of the discussions or consideration to essentially operate your own facility?

In certain cases we are. The UK [strap] is a GSE facility. We're training -- as I said, we're building tailored programs for customers like British Energy and Scottish Southern, and Rolls Royce and Clyde Pump among others. We actually own and operate that facility. As I said, in this area, which is why I get so excited about the training center area and the training services, is our mechanisms for generating revenue are almost as diverse as the opportunities.

As I've mentioned in the Emirates, we built the simulators and the training program and got paid for that. That's one model. In the UK, we actually own the facility itself, and obviously we're leasing space. We don't own the facility, but we own the simulator and the training program. We generate revenue in that way.

Then the third model is the Southern Company where we're actually doing a tuition based payment, as well as them paying us for developing the simulator and the training program. I think we can succeed in a lot of different ways in that area.

Great. Thanks.

It appears we have no further questions in our queue at this time. I would turn it back over to our speakers for any additional or final comments.

Okay. Thank you very much, everyone. As I mentioned, we plan to do these twice per year. As soon as we close our second quarter, we'll have our second conference call. Thank you very much.

That does conclude our conference call for today. Thank you, everyone, for your participation.