GSE Systems Inc (GVP) 2012 Q3 法說會逐字稿

Greetings, and welcome to the GSE Systems reports third-quarter 2012 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Devin Sullivan, SVP of The Equity Group. Thank you, you may begin.

Thank you very much. Good morning, everyone. Thank you for joining us today.

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 (technical difficulties) words such as expect, intend, believe, (technical difficulties) identify forward-looking statements, but their absence does not mean (inaudible) are guarantees of the future (technical difficulties) does not intend to update or revise any forward-looking statements, whether as a result of new information (technical difficulties).

Now, I'd like to turn the call over to Mr. Jim Eberle, Chief Executive Officer of GSE Systems.

I apologize during your speech there, Devin, I got a little static over here in Dubai. Can someone let me know if you can hear me fine?

Yes, we can hear you Jim.

Okay, very good, then I will go ahead. Thank you, Devin.

Good morning, I would like to welcome everyone to GSE Systems 2012 third-quarter conference call. I am joined today by our Executive Chairman, Jerry Feldman, who is in Dubai with me; our CFO, Jeff Hough; and Larry Gordon, our Senior Vice President and General Counsel. We have deviated, somewhat, from our usual practice of holding our earnings call the same day as the release. This was done to accommodate my travel schedule. As a mentioned, I'm in Dubai. I'm speaking to you from our SimWorld 2012, which I will does discuss in some detail later.

I will be back to you shortly with some closing comments, but I would like to, now, to turn the call over to Jeff Hough, our Chief Financial Officer, who will discuss the quarter. Jeff?

Thanks Jim. Thank you, all, for joining us today.

We issued a release covering our financial results for the third quarter yesterday afternoon; and hopefully, you have all had a chance to review the release. As compared to the same quarter of 2011, we reported increases in a number of important metrics including revenue, gross profit, pretax and operating income. Operating expenses were essentially flat with third quarter 2011, although a reduction in amortization expense was offset by increases in business-development expenses. The Company had five additional business-development personnel in the third quarter 2012, as compared to the third quarter 2011, and spent approximately $70,000 in the third quarter of 2012 on marketing activities such as the development of the new GSE brand, our new website, and the implementation of a new customer relationship management system.

We were profitable for the fifth-consecutive quarter. However, our backlog, as of September 30, 2012, decreased by $4.1 billion from June 30, 2012 to $47.2 million. Revenue in the third quarter 2012 rose 3.7% to $13 million from $12.5 million in the third quarter 2011. The increase was driven by a $1.8 million increase in GSE EnVision product revenue, which was partially offset by lower revenue from our full-scope simulator project in Slovakia. As previously announced, work on that project has been suspended due to regulatory changes in Slovakia, not because of any issues related to work being performed by GSE. Although we expect the suspension to continue until May 2013, we are working closely with our customer to amend certain provisions of the contract. We are continuing our efforts to diversify our business model, and through the first nine months of 2012, approximately 41% of our revenue was generated from non-nuclear projects. This is compared to 37% in the same period of 2011. We remain committed to expanding our expertise in simulation and training beyond the nuclear industry.

Gross profit improved on an absolute-dollar basis and as a relative percentage of revenue. For the third quarter of 2012, our gross profit was $5 million, or 38.8% of revenue, compared to $4.6 million, or 36.8% of revenue, in the third quarter of 2011. This was due, again, primarily to an increase in the higher-margin GSE EnVision revenue and a decrease in revenue from our Slovakia project, which carries a lower overall margin. However, in the third quarter of 2011, we had received a $3 million change order from our customer in Slovakia that increased the overall gross margin on that project and had generated an additional $679,000 of gross profit on the project in the third quarter 2011.

Operating income increased to $1.4 million in the third quarter 2012, from operating income of $975,000 from last year's third quarter. The increase is, again, reflective of higher-margin GSE EnVision revenue, coupled with relatively level operating expenses year to year. Net income for the third quarter 2012 was relatively steady at $816,000, or $0.04 per share, compared to net income of $858,000, or $0.05 per share, in the third quarter 2011. The difference quarter over quarter reflects a $450,000 increase in our provision for income taxes as compared to the third quarter of 2011. In the third quarter 2011, our Swedish subsidiary had incurred a significant loss on derivative instruments which reduced the overall tax provision in the quarter. Our cash balance at September 30, 2012 was $21.3 million, which compared to $12.3 million at June 30, 2012, and $20.3 million at December 31, 2011. In addition, we had $900,000 of unrestricted certificates of deposit, this included in other current assets on the balance sheet, and $4.9 million of restricted cash, which is being utilized to collateralize performance bonds issued to our customers in the normal course of business.

The $9 million improvement from June 30, 2012 was due to the previously announced $3.7 million payment we received from our Slovakian customer and strong cash collections during the quarter. Our outstanding trade receivable balance decreased from $14.7 million at June 30, 2012, to $7.7 million at September 30, 2012. At September 30, 2012, we had no long-term debt, and our working capital was $29.4 million. Under our share repurchase plan, during the three and nine months ended September 30, 2012, we acquired 60,700 and 223,087 shares of common stock, respectively, for an aggregate purchase price of $119,000, and $422,000, respectively. Subsequent to the close of the third quarter and through November 13, 2012, we purchased an additional 26,905 shares of common stock for an aggregate purchase price of about $50,000. Total shares purchased under this plan to date is 1.073556 million shares, which is about 5.6% of our total shares outstanding when we commenced buying under this plan.

Now, I will turn the call back over to Jim for his comments.

Thanks, Jeff.

As I mentioned earlier in the call, we continue act on our plan to diversify our business model, and more importantly, change the perception of GSE in our various energy end markets. We continue to focus on new business and have undertaken a number of initiatives to assist us in the effort. We have a number of brand name, IT, and marketing initiatives currently underway to assist us in pursuing and capturing new business. The Company is investing in a new global ERP system, which will help to provide more timely financial information to management, increase the efficiency of our finance department, and give us a dynamic global financial system that can accommodate the Company's future expansion through acquisitions and organic growth. We have implemented a new CRM system, which will allow the Company to track leads and opportunities from various marketing initiatives and will be used as the information sharing tool between our worldwide business development personnel.

Despite the challenging domestic and international markets, we were awarded contracts totalling $8.5 million during the third quarter, comprised of $5.2 million in nuclear projects, $1.1 million in training, and $2.2 million in other non-nuclear projects. We continue to apply Serious Gaming 3D Visualization technology to provide innovative training and simulation solutions to our customers. For example, in October, we announced a project with a foreign military that will incorporate our Virtual Flow Loop Trainer and VPanel to provide training for complex power-plant functions. We believe that our 3D Visualization [gaming] training tools will allow our customers to train their staff quicker, cheaper, and with better retention of knowledge.

More tangibly, perhaps, we introduced a new logo and brand identity -- Imagine. Empower. Improve. -- here at SimWorld. SimWorld is a biennial gathering of world energy and process industry engineering and training professionals. In addition to discussing training and simulation, visualization, and learning technologies for the energy industry, detailed presentations were given on three targeted tracks -- nuclear power, fossil power, and oil and gas. Leaders from each energy segment address the challenges in workforce development in order to improve performance, reduce costs, and enable workers to achieve competency faster.

This year's conference featured the latest simulation technology in workforce development concepts by GSE Systems and our users. The venue for SimWorld 2012 was the Hilton Dubai Jumeirah Resort located in UAE. Our keynote speaker was Dr. Richard K Lester. Dr. Lester is the Japan Steel Industry Professor and Head of the Department Nuclear Science and Engineering at MIT, where he is also the founding Director and faculty co-chair of the MIT Industrial Performance Center. His research focuses on innovation management and policy, with an emphasis on the energy and manufacturing sectors.

I would like to talk a little about our new brand as well. While our new brand offers a nod to our 40-year history, it points to GSE's commitment to our global clients, to continuously improve the quality and drive innovation in simulation, training, and engineering. The brand also creates a unified global identity for all GSE employees, many of whom joined the Company through acquisition. All of our subsidiaries will begin using the GSE name exclusively in an effort to globally unify our Company message and products. Our new brand more accurately reflects the broad complement of products and services that we now offer to our customers. The elements of the new GSE brand include contemporary logo in deep blue, which is the same as the deep blue we had in our prior logo, and yellow gold with the tagline -- Imagine. Empower. Improve.

The Company's brand statement is GSE Systems is a next-generation simulation, training, and engineering service provider, applying a world of experience to help you achieve the performance you imagine. Our brand statement is a focal point for employees and a clear, concise explanation to customers, prospects, and partners of just who we are. It is concrete but still forward-looking. In conjunction with our rebranding, we also launched our new website. The URL however, remains unchanged from www.gses.com. As we are right middle of budgeting for 2013, we continue to refine our global strategy based on the realities that exist today, as compared to last year or the year before. As a truly global company, it is to our advantage to be able to service the many energy verticals with several training and engineering offerings anywhere in the world. Our strategy is continue to leverage our market leadership worldwide in the nuclear-simulation business, to develop new products and services that add value to that mature customer base, and to be in front of new nuclear nations with what we know they will need. In the competitive fossil power market, we are looking to exploit the natural gas boom, while continuing to serve our coal customers as they are challenged to reduce admissions.

Additionally, we see the process business as a large area for market penetration. As we complete our strategic planning for 2013, please look for additional actions we will take to exploit our global opportunities. As we look ahead to 2013, we expect to use our balance sheet and network of industry relationships to pursue organic and acquisition-based growth opportunities in areas that are both supportive and complementary to our position as a global energy service solutions provider.

We appreciate your time today and are now happy to take your questions. Operator, please go ahead.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Joe Bess, ROTH Capital Partners.

You gave a little bit of color regarding gross margins in the quarter. I was hoping you could give us some sort of guidance as to what you would expect it to be going forward? Also, are you comfortable, at this point, of potentially raising your guidance for your gross margin range?

Joe, thanks for the questions. First, I would like to address the G word -- guidance. We have not given guidance, so I want to be very careful about that. And this particular quarter, as you can tell, we had a very large impact from a terrific project that we won through our EnVision product line, which carried much larger than normal gross margins. So, at 38%, I wouldn't -- I am not ready to tell you that we have an expectation to hold that level.

I am still very comfortable telling you that we are no longer at the 24%, 25% -- that 30%, and we have consistently beat that over the last few quarters. Our business does remain somewhat lumpy. Some projects move to the right. Sometimes you win a big project. Sometimes a project that we were counting on for revenue in the quarter moves an entire quarter or a year. While we are very happy with the percent of gross margin this quarter, I would steer your expectations more towards 30% as a base.

Okay, thank you. Then, you kind of touched on it towards the end of the call, of your commentary -- can you provide a little bit more color regarding what you are seeing in terms of M&A or acquisitions, and how you might use your balance sheet to be able to fund that?

Absolutely. Joe, I've been in the position now for two years. November 1 was my second anniversary, and I spent two years working with the team, working down in some details of how we execute projects, how we are organized, our strategy, so all of those things, and building a team. I think we are very close to completion of that level of internal focus on my part. And I am very comfortable to share that, on a go-forward basis, we expect to be more aggressive on the acquisition front.

One is, as all of our shareholders know who have been with us for a while, we had the experience of the Fukushima incident, and we had a pretty good pipeline. We have shared that with everybody, and we also flushed the pipeline when that happened. We felt the strong balance sheet would be our buoy through that storm, and it was. However, we had to wait and see how the world responded since, at the time, our percentage of nuclear backlog and revenue on a quarterly basis was even higher than it is now. We needed to see how the nuclear world reacted and responded.

We are comfortable. We know where the world is now. We know what they need to do going forward. So, it allows us to turn our eyes towards growth, both organic, which we are certainly not ignoring that, but we expect to be more aggressive in leveraging the balance sheet on an acquisition front.

Okay, and in terms of that, are there things that you are seeing right now that would make sense in the pipeline? Or is this more of a strategic building?

Joe, we have targets in the pipeline that make sense, and I think that's a really important phrase that you use that makes sense. We expect that when we announce something, that it will make sense to the investment community, as we have shared our strategy. It has evolved some over the two years, but it hasn't changed a whole lot in the two years I've been here. We made a pretty significant shift when we, as a team, came together and looked at the world as it was and where we needed to go. So, I think, absolutely, it will be something that makes sense, and like I said, we do have active targets in the pipeline. That's not to say that we are satisfied where the pipeline is. You can expect us to continue to work and build the pipeline.

Okay, great. Then, last housekeeping item -- I might have missed it on the front end of the call. What was the revenue contribution from TAS and EnVision?

Okay, on a quarterly or year-to-date basis, what would you like?

Quarterly would be great.

Okay, on a quarterly basis, EnVision revenue was $2.3 million, and TAS was $1.1 million.

Great, thank you, guys.

(Operator Instructions)

Mark Schappel, Benchmark.

Jim, could you just speak to your non-nuclear revenue with respect to how much of that is fossil energy versus, say, process manufacturing, like oil and gas?

Sure. In the quarter, fossil was $2.2 million, process was $0.3 million. The EnVision -- as we put out a strong -- from a revenue perspective in the third quarter, 54% was nuclear, 46% non-nuclear. Obviously, we had a solid bump from the EnVision order.

Okay, thank you. You touched on this a little bit earlier, with respect to your business in Japan, and I was wondering if you could just give us an update on what you're seeing in Japan with respect to existing projects and potential new projects.

Yes, we have two active projects; and at this point, there is about -- Jeff, can you help me out -- I think it's about $500,000 in backlog?

Yes, that is correct.

Okay. However, there are opportunities, Mark. If I can extrapolate the reason for your question, obviously, the nuclear business -- or nuclear industry in Japan is somewhat in flux. I get all the articles that you guys do. However, we continue to get invited over there, and there are opportunities, but those are the projects that we are executing today. There is still, obviously, political things that they are going to have to work through.

But two plants are operating. I read an article not too long ago where the government looked like they were going to continue with some of the plants that were under construction prior to Fukushima. But that's a bit speculative, is what that article said; I am sure there's articles that say the opposite.

Okay. One final question here on your Chinese JV with UNIS, has there been any noteworthy projects coming from that partnership in the quarter?

Not in the quarter, but we announced very large projects at the beginning of the year, and we believe establishing that joint venture certainly helped in having the boots on the ground, so to speak. We went from having 15 GSE people to being able to leverage up to 80 engineers to help with jobs in China. While the jobs are not directly [allowed] through the joint venture, we believe they help. Also, you probably read recently, China officially lifted their ban on the future construction, and they are moving forward.

Okay, thank you.

(Operator Instructions)

There are no further questions at this time. I would like to hand the floor back over to management for closing comments.

Thank you. Again, I would love to thank everyone on the call for your time, continued interest in GSE Systems, and I would like to thank the hard-working and dedicated employees of our Company, who continue to help us innovate and move forward.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.