GSE Systems Inc (GVP) 2013 Q3 法說會逐字稿

Greetings and welcome to the GSE Systems reports third-quarter 2013 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 a reminder, this conference is being recorded.

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

Thank you, Manny, and good afternoon, 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. The 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 performance or achievements to be materially different than those expected.

For a 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 in the 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.

With that said, I would now like to turn the call over to Jim Eberle, Chief Executive Officer of GSE Systems. Jim, please go ahead.

Thanks, Devin, and good afternoon. I would like to welcome everyone to GSE Systems 2013 third-quarter conference call. Also on today's call are our Senior Vice President and CFO, Jeff Hough, and Larry Gordon, our Senior Vice President and General Counsel.

Earlier this afternoon, we issued a press release covering our quarterly financial results, a copy of which can be found on our website at www.gses.com under the Investor Relations section.

On a sequential quarterly basis, our third-quarter results were a significant improvement from the second quarter of 2013. Although none of us are pleased with the continuing losses, we are encouraged that the proactive steps we took last quarter to reduce costs and improve efficiencies are beginning to take hold. These measures should save us approximately $1 million on an annualized basis, and the success thus far in combination with increased orders supports our forecast, a return to profitable operations in the current fourth quarter.

Of the $17 million of orders that we had initially believed would close in the first half of 2013, we have closed several and several more remain pending. We now expect the remaining decisions to be made between now and the end of the first quarter of 2014.

Some challenges persist in a post-Fukushima nuclear world, most notably as it relates to substantially lower revenues in Japan, whereas of September 2013 all of the country's nuclear reactors have been shut down; and Germany, which has decided to abandon nuclear energy by 2022.

In the US, regulatory concern, public pressure and lower-cost fuel sources, notably natural gas, have combined to stall the once-heralded nuclear renaissance. We are also continuing to invest in combining our immersive 3D gaming technology with physics-correct simulation models to provide immersive, highly-effective training solutions. Although our Activ3Di business has grown over the last several years and is expected to be breakeven or be slightly positive this year, industry appreciation of the profound impact this next-generation technology will have in the training of work forces faster and better is still developing.

After a difficult first three quarters of 2013, we are beginning to see improvements in our operations and in markets. It will be a slow process, but we are making progress. We continue to believe that GSE's future lies at the intersection of growing global energy demand and the shortage of qualified energy workers, and that our engineering and training solutions can bridge that gap for energy employees around the world.

We are still very optimistic about the long-term prospects for our business, and we repurchased 177,755 shares of GSE's common stock in the third quarter of 2013, as well as completing our $3 million share repurchase plan in October 2013, repurchasing an additional 99,170 shares during the month. In total, the Company has repurchased just under 1.6 million shares of common stock during our repurchasing plan.

I will now turn the conversation over to Jeff Hough, who will review our results for the quarter.

Thanks, Jim, and thanks to each of you for joining us today. Revenue for the third quarter declined by 8.7% to $11.9 million from $13 million in the third quarter of 2012. Although the revenue we recognized on our $36 million Slovak simulator project increased by $3.4 million in the third quarter 2013 as compared to third quarter 2012, this increase was more than offset by decreases in our EnVision product revenue. We recognized $2 million in the third quarter of 2012 on an EnVision contract to provide simulation and computer-based learning modules to a global energy services company. And, as we have noted in prior quarters this year, we incurred lower revenue from nuclear customers in both Japan and Germany as part of the aftermath to the Fukushima earthquake and tsunami, which occurred over two years ago.

At September 30, 2013, we had $2.7 million of backlog remaining on our Slovak project. This project is scheduled to be completed in the first quarter of 2014.

Gross profit for the quarter was $3.1 million, or 25.9% of revenue, as compared to $5 million, or 38.8% of revenue, in the third quarter of 2012. Gross profit was impacted by the higher percentage of revenue associated with the Slovakian project in Q3 2013 as compared to Q3 2012. It was 31.1% of our revenue in the third quarter of 2013 versus only 2.3% in the third quarter of 2012. And lower revenue from the EnVision projects, as we mentioned.

The Slovakia project, because of the high hardware component, has an overall gross profit lower than GSE's normal gross profits, while the gross profit for EnVision products is significantly higher than the Company's normal gross profits.

Selling, general and administrative expenses for Q3 of 2013 was $3.8 million, an increase of 9.3% from $3.5 million in the third quarter of 2012. The increase is related mainly to operating expenses for the new Oracle ERP system which was implemented in the fourth quarter of 2012, higher facility costs related to our new UK office and higher software product development expenses, net of capitalization.

We recorded a net loss of $1 million, or $0.06 per diluted share, in the third quarter of 2013 compared to net income of $816,000, or $0.04 per diluted share, in last year's third quarter.

Our balance sheet remains very strong. At September 30, 2013, our cash balance, excluding $2.2 million of restricted cash, was $17.6 million, or $0.98 per share. We have working capital of $26.5 million and no long-term debt.

I will now turn things back to Jim.

Thanks, Jeff. While the nuclear industry in Japan, Germany and the US are under considerable pressure, we still see significant opportunity in markets where nuclear power will grow. In China, where 28 plants are under construction, 53 are planned and 118 are proposed, we remain in a strong position and are actively strengthening that position. We are substantially finished dissolving our joint venture in China, which will return over $1 million to cash and allow us to retain 100% of the revenue and profit from all future orders in China.

In South Korea, we have signed agreements with in-country partners to pursue work within Korea as well as with Korean exports. We are positioning ourselves to pursue new nuclear work in the Middle East and Southeast Asia, and we remain very strong in the small module reactor space, which we believe long-term will be a significant technology in the future of nuclear power.

We continue to enhance our diversified offerings and are increasing our engineering services work. We have closed a number of contracts globally to provide our post-Fukushima solutions. We are utilizing our high-fidelity modeling and engineering capability to perform a feasibility study on a brand-new, first-of-a-kind power plant technology for a leading international provider of energy products and services.

Additionally, we received our first true software development contract to provide a graphical user interface for an engineering-grade severe-accident analysis code. And in the UK, we received contracts for our first fracking simulator and the world's first engineering simulator that will be used as an analysis tool associated with nuclear fuel transport.

We have terminated certain underperforming business development assets and have brought on and are pursuing certain other strategic business development hires. We remain focused on M&A, both here and abroad. We have progressed negotiations with the prospects we have provided term sheets, as I mentioned on the last call, and we have follow-on targets with whom we are in the early stages of discussion and negotiation.

Lastly, the game-changing opportunities that I referred to in the last call remain active and we have achieved additional significant milestones necessary to bring them to fruition. Now I would like to open the call up for questions and answers.

(Operator Instructions). Mark Schappel, Benchmark.

Hi, good evening. Jim, what was the nuclear/nonnuclear mix this quarter?

Jeff?

Yes, for the orders, it was 76% nuclear, and for revenue, it was about 63% nuclear.

63% revenue and 76% orders, okay. And how about the percentage of backlog? What does that look like?

Backlog still remains about 75% nuclear.

And on the Slovakian simulator project, if I recall correctly, that winds down in the first quarter of next year, is that right?

That is correct. Substantially, it will be complete in this quarter, but there is a little bit of trailing into the first quarter. So we can confidently say we will wrap it up in the first quarter of next year.

And would you expect gross margins to kind of revert back to historical norms at that point?

I would; I would expect to see gross margins as a percent to get back up. Obviously, it is a lot of revenue to replace, so I would expect to see revenue drop from where we have been. But again, it will be higher-quality margin revenue.

And Jim, I was wondering if you could just go into a little bit more detail on the delayed deals from the first half of the year. It sounds like you closed some of those this year -- excuse me, this quarter. And it looks like it is going to be another several quarters before they come in. Is that a good read?

Yes, it is, Mark. Obviously, we had expected some of them in 2012. Then it looked like -- we were expecting $20 million in orders in the first quarter of this year, and $17 million of orders between those quarters pushed to what we had hoped would close in the second half. We have closed a good number of those. Our orders in the third quarter was essentially double those of the first and second quarter, and we expect actually higher orders in the fourth quarter. However, some of the orders that we anticipate to close have slipped into the first quarter of next year.

There are some rarities; there is one job that I can think of in particular out of our Swedish operation that is postponed on a multiyear basis, but that is one job.

Okay, thank you. That's all for me.

Thanks, Mark.

(Operator Instructions). Okay, gentlemen, we have no further questions in queue at this time. Would you like to make any closing remarks?

Sure. As always, I would like to thank all the talented, hard-working women and men worldwide who make GSE what it is, and I thank all of you on the call for your time and continued interest in GSE Systems.

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