GSE Systems Inc (GVP) 2014 Q4 法說會逐字稿

Greetings and welcome to the GSE Systems Inc. reports fiscal year 2014 fourth-quarter financial results. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you 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 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities Act of 1934. 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 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 to call over to Jim Eberle, Chief Executive Officer of GSE Systems. Jim, please go ahead.

Thanks, Devin, and good afternoon. I'd like to welcome everyone to GSE Systems fourth-quarter and full-year 2014 conference call. Also on today's call is our CFO, Jeff Hough, and Larry Gordon, our Senior Vice President and General Counsel.

Earlier today we issued a press release covering our financial results for the fourth quarter and full year of 2014. Hopefully you have had a chance to review this news release, but if you have not, a copy can be found on our website at www.GSES.com under the Investor Relations section.

I would like to begin with a recap of some of the actions we took in 2014 to address lingering challenges in our nuclear fossil and process end markets. First, we restructured our Swedish operations. In 2014, our Swedish subsidiary generated $2.1 million in revenue which was a 37.5% decrease in revenue from 2013. The decrease was due in part to fewer orders from Japanese customers in the wake of the Fukushima Daiichi 1 nuclear power plant disaster in 2011 as well as the completion of a large fossil simulation project in 2013.

In addition, the overall European market remains weak. Accordingly, our Swedish operation incurred a net loss in 2014 of $1.6 million. Based upon anticipated orders for our Swedish subsidiary in 2015, we have downsized our Swedish operations, incurring restructuring costs of $611,000 in 2014.

We invested in new management and business development personnel for our process simulation business, which includes our portfolio of EnVision and JPro products and services, and spent approximately $676,000 on product development in 2014. In 2014, 14% of the company's revenue, approximately $5 million, came from process industry customers. We will continue to invest in this high potential business in 2015, and we will be releasing a new suite of EnVision liquid natural gas computer-based training and simulation models.

Finally, we made a significant acquisition and related investment. In the fourth quarter, we acquired Hyperspring and purchased a 50% interest in IntelliQlik. These transactions will further diversify our revenue base and provide GSE with two new growth platforms. Hyperspring's staff augmentation business contributed $2.3 million to our fourth-quarter 2014 revenue for services provided after the date of its acquisition on November 14, 2014. Hyperspring's historic gross margin approximates 10%.

In 2015, we see a significant opportunity to expand Hyperspring's US and international nuclear customer base while diversifying into the fossil, power, and process industries. Additionally, Hyperspring's US customer base are utilities that were not traditionally customers of GSE and vice versa. In fact, we are currently pursuing opportunities arising from the synergy gain due to the acquisition.

IntelliQlik is developing a next-generation cloud-based software platform for online learning and learning management for all energy sectors. We expect IntelliQlik's platform to launch in late 2015 and believe it will fill a significant unmet need for web-based learning and training in the energy sector.

To assist our clients in creating world-class internal training and performance improvement programs, we are building and E2E, entry-to-expert, performance solution. The solution includes a set of integrated and scalable products and services that provide a structured training program for employee selection and onboarding through continuous skills improvement for experienced employees. The Hyperspring acquisition and IntelliQlik training platform have increased the breadth of solutions we have within our E2E program. As a result of our progress, we believe that GSE finished 2014 in a much stronger position compared to the start of the year.

Now onto some perspectives on the fourth quarter. As you can see, we dramatically improved our financial performance from the prior three quarters. Excluding one-time and non-cash expenses, we were essentially breakeven for the quarter. In the fourth quarter, US fossil fuel powered utilities continued to delay the capital expenditures and some were shutting down their smaller coal-fired plants or converting them to gas-fired platforms rather than invest in flue gas desulphurization systems.

Overall, domestic fossil fuel simulation revenue decreased slightly to $5.6 million in 2014 from $5.7 million in 2013. However, our revenue generated from domestic fossil fuel simulation projects increased year-over-year by $1.4 million to $2.6 million in the fourth quarter of 2014, primarily reflecting a large contract from a US utility for a new high fidelity operator training simulators for four power plants. Overall, our combination of a fossil pipeline and backlog is at near historic highs.

In the nuclear power space, we continue to see most operators on the sidelines surveying the changing energy industry landscape with the main exception of the Chinese. We believe and industry data supports the position that nuclear power remain a part of the energy mix as we deal with climate change and search for low carbon or carbon free sources of energy production. Under increasing pressure to deal with the country's critical air pollution problem, the Chinese have articulated their ongoing commitment to nuclear energy.

Also, in our post-Fukushima era, we anticipate our first significant award in Japan this year. We have been positioning GSE for expanded business in China, and in that regard our wholly-owned Chinese subsidiary recently received ISO-9001 2008 certification for a simulation engineering design and consultation services for the energy industries. This certification confirms our commitment to building and delivering the highest quality staff and plant performance solutions. Besides China, we are seeing and targeting growth opportunities in other rapidly growing emerging nations with increasing power demand across the Middle East and all of Asia.

With respect to backlog and new business, we ended the year with $48.4 million of backlog, up 6% from the backlog of $45.7 million at the end of the third quarter of 2014. Year-end 2014 backlog includes $6.7 million of Hyperspring backlog. We expect approximately 2/3 of our year-end backlog to convert to revenue in 2015. Excluding Hyperspring, we booked $7.5 million of new business orders across all of our sectors in multiple geographies in the fourth quarter of 2014. In comparison, we booked new orders totaling $17.6 million in the third quarter of 2014, $9.6 million in the second quarter of 2014, and $6.3 million in the first quarter of 2014. So far in the first quarter of 2015, we have booked in excess of $7.5 million.

New contracts in the fourth quarter of 2014 included $3 million for simulator upgrades and services in the nuclear power market, $1.5 million for new full scope simulators and other projects in the fossil power market, $1 million for various tutorials and simulators for customers in the oil and gas industry, and $2 million for miscellaneous engineering services, training, and 3-D visualization projects.

We continue to see a substantial market for our immersive 3-D gaming technology for training purposes and for our engineering segment's technology to design scenarios that allow our operators to identify and correct problems before construction of new plans, mitigating risk, saving time and money. In 2015, we will continue to invest in software development with the goal of developing new and enhanced products for our clients and driving new business.

Finally, our balance sheet remains strong, even after our fourth-quarter acquisition of Hyperspring and investment in IntelliQlik. As of December 31, 2014, we had $13.6 million in unrestricted cash, working capital of $11.5 million, and no long-term debt, providing us with flexibility to invest selectively in additional growth opportunities as they arrive.

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

Thanks, Jim, and thanks to each of you for joining us today. I'd like to point out that, as a result of our acquisition of Hyperspring, we are now reporting selected financial results for two business segments, staff augmentation, which provides personnel to fulfill staff positions on a short-term basis to energy industry customers, and performance improvement solutions, which provides simulation, engineering, and training solutions and services to the nuclear and fossil fuel power industry and to the chemical and petrochemical industries. Hyperspring's results are included in the staff augmentation segment.

I also want to remind everyone that Hyperspring's results are included in our fourth-quarter results only from the date of its acquisition, November 14, 2014, onward. First quarter 2015 will represent the first full quarter of contribution from Hyperspring.

Total revenue for the fourth quarter of 2014 increased by 6.9% to $13.1 million from $12.3 million in the fourth quarter of 2013, driven by $2.3 million of incremental staff augmentation revenue from Hyperspring which more than offsets a $1.4 million decline in performance improvement solutions revenue. The decline in the performance improvement solutions revenue was attributed to a $2.5 million increase decrease in revenue from the $36.6 million Slovakian simulator project which ended in April 2014. However, revenue generated from domestic fossil fuel simulation projects increased by $1.4 million in the fourth quarter 2014 as compared to the fourth quarter 2013 mainly due to a large contract received from a US utility for new high fidelity operator training simulators at four power plants.

Gross profit in the fourth quarter 2014 increased to $4.1 million from $3.6 million in the fourth quarter 2013. Our staff augmentation gross profit was $0.2 million, or 9.8% of the revenue, in fourth quarter 2014. Performance improvement solutions gross profit was $3.9 million, or 35.3% of revenue, in the fourth quarter of 2014. As a percentage of revenue, consolidated gross profit improved to 30.9% from 29.5% in last year's fourth quarter, primarily reflecting a decrease in the revenue from the Slovakia contract which generated lower than average gross margin.

Our selling, general, and administrative expenses in the fourth quarter 2014 was $4.7 million, up from $3.9 million in the fourth quarter 2013. Our SG&A was higher in the fourth quarter 2014 mainly due to three items -- $466,000 of increased software product development expenses, $382,000 of severance costs related to our US operations, and $157,000 of Hyperspring acquisition expenses.

Our operating loss for the fourth quarter 2014 was $912,000 compared to an operating loss of $492,000 in the fourth quarter 2013. Gain on derivatives was $31,000 in the fourth quarter 2014 compared to a gain of $486,000 in the fourth quarter 2013. Our provision for income tax was $4,000 in the fourth quarter 2014 compared to $169,000 in the fourth quarter 2013.

The net loss for the fourth quarter 2014 was $837,000, or $0.05 per basic and diluted share, compared to a net loss of $162,000, or $0.01 per basic and diluted share, in the fourth quarter 2013. The net loss in the fourth quarter 2014 includes $500,000 of pretax charges relating to restructuring expenses on Hyperspring acquisition costs.

EBITDA loss -- earnings before interest, taxes, depreciation, and amortization -- for the fourth quarter 2014 was $656,000 compared to EBITDA of $175,000 in the fourth quarter 2013.

GSE's cash position at December 31, 2014 was $13.6 million, excluding $4.2 million of restricted cash, as compared to cash and equivalents of $16 million, excluding $4.2 million of restricted cash, at September 30, 2014. The decline in GSE's cash position at December 31, 2014 primarily reflects the $3 million payment made by the Company to purchase Hyperspring in the fourth quarter 2014.

On November 14, 2014, GSE completed the acquisition of Hyperspring for an aggregate of $3 million at closing subject to adjustment based on a subsequent determination of the actual working capital of Hyperspring at closing. If Hyperspring is successful in renewing their TBA contract for substantially the same scope as currently being provided and at an agreed-upon profit margin on or before May 15, 2015, GSE will pay the sellers an additional $1.2 million. In such case, GSE may be required to pay sellers up to an additional $7.2 million in cash if Hyperspring attains certain EBITDA targets for the three-year period ending November 13, 2017. However, if Hyperspring is not successful in renewing their TBA contract, GSE may still be required to pay the sellers up to an additional $8.4 million in cash if Hyperspring attains certain EBITDA targets for the three-year period ending November 13, 2017.

At the end of the fourth quarter, had no long-term debt and working capital of $11.5 million.

I'll now turn the conversation back to Jim.

Thanks, Jeff. I'll now ask the operator to open the floor for questions.

(Operator Instructions). Trevor Colhoun, Spear Point.

It's Ron Bienvenu at Spear Point. Congrats on the good quarter. A quick question -- we are almost done with the first quarter. Are you guys going to give us any insight as to how it's going?

As you know, Ron, we don't give guidance. But what I can tell you, I see no material degradation from what you saw in the fourth quarter. So, I see a continuing trend.

Great. I know it is going to be tough to answer, but this bonus payment to the Hyperspring guys, would you say it's on track? Or --

They are ahead of initial plans on integration, and so right now, I wouldn't say that they are on track for the full amount. So it's a sliding scale based on their EBITDA performance.

To kind of frame up for the investors what kind of performance they would need to achieve all of that earnout, it's on the order of $5 million of EBITDA per year for the three years. So you are talking about, over a three-year period, $15 million of EBITDA contribution to achieve that full earnout amount and then it slides based on performance. But they are ahead of what our initial budget and plan was.

Great. And the last piece of my question and then I'll give it up. With the current asset mix and product mix, do you feel like the Company could achieve profitability in the future, or do you need to add more assets in order to get there?

Jeff mentioned about 67% of our backlog is projected to move into revenue for the year 2015. I do believe that profitability for the year is possible. We do need to win more work to achieve that. So we do have an order forecast that we track very closely. It's set up by quarters but we track it constantly to be honest. So it is a fit. There is a little bit of land track in front of the train. But profitability for the year is possible. And some of our budgeted expenses are based upon winning more work. So, obviously, we will hire to fulfill additional work. If we don't win the work, we are not going to hire, so we won't necessarily incur the cost.

I will point out that, as I highlighted, one of our areas of growth that we've targeted is the process business. So there you do have some spending up front in order to grow the business in the form of management and business development personnel, but we also have what I consider a solid strategy in that space. We've got a strong leader leading the charge and he's put together a strong team so far. We've also had some positive results based on that team coming together and we do have some wins in their belt already. So -- but we monitor it constantly and so we are going to try to balance cost with revenue.

Great. Can I sneak one last question in, because it's just something I thought of while we were going through this?

Of course.

Lower energy prices overall -- negative, positive, neutral for your business in the next couple of years?

Ron, I would say the two word answer is it depends. Overall, I would say it's probably neutral but there is always, when there is disruption, there's always opportunity. So if you look at our process industry, there's two sides. There's upstream and then downstream. And it just kind of shifts where who is making the money. So upstream, which is not typically where our products and services were aligned, is going to suffer but downstream now is where any profit is going to be made and that's really one of our sweet spots currently. So with them scaling back, you can make the argument they are not going to have the internal staff. Some of their initial cuts usually are training and travel. So their internal training group which would lead to potential outsourcing of training which would be right down our alley. So I know the story we'll be trying to tell and sell will be just that. How successful? I can't because it's so fluid. But overall, as the price of oil goes down, it's so different geographically where the energy is coming from. And that's one of our strong suits is that we are quite diversified across all forms of energy. And we are very global. Over 50% of our business is done outside of the US. So I predict that largely it will be neutral to us with the possibility of an upside.

Great. Thank you.

(Operator Instructions). Kyle Kreuger, Apollo Capital.

Yes, Jim, could you talk about your opportunity in the security space? Your customers, particularly utilities, are increasingly focused on a variety of security threats, talking about operations and software, and you are directly involved in some of those areas with your customers. What is your opportunity there?

That's a good question, Kyle. So far, that has not been an area of business that we have pursued. However, I will tell you that we have had conversations in the recent past relative to cyber security for our customers, both being in the power generation as well as process industries. So we do believe there is an opportunity there and we are working with a partner company to develop a tax strategy, so it's something that I expect we will make some progress on this year.

Can you kind of frame the magnitude of the opportunity and how you are looking at it? You control a lot of these customers. I mean, you've got a great gateway into providing an additional product set and features associated with security. It seems like it would be a natural fit. But how are you looking at the size of the market opportunity? I know you said later in the year, but how significant could it be potentially for GSE?

I think it could be quite significant because, as you say, all of the customers have to grapple with this. There are some very specific regulated requirements for our nuclear customers. That is our area of strength and size, so that would be a first logical entry point. Again, you are looking at nuclear customers worldwide.

But additionally, on our process industry customers, we believe that is a relatively untapped area. So while not regulated, we know that it's something that our customers are concerned about. So I really can't speak to -- put a dollar amount on it. It will be our ability to, as I say, put together the attack strategy with our partner who has core competency in this area where we do not natively have core competency. But putting the attack strategy together and then being able to scale with the opportunity set we see. So, I would say, that's a good -- one, as I mentioned, it's a good question. Two, I think it's going to be a good question to ask each quarter to see how we are progressing on that.

Have you disclosed the partner?

No.

Okay. Is the partner somebody who could be a potential acquisition candidate if the marriage works on a preliminary basis, that kind of a thing? Or (multiple speakers)

They certainly could. We are not at that stage right now, but they certainly could be an acquisition candidate or even a -- I think we can, even as a strategic partner, we could garner benefit. But I'm sorry. I answered your question as best I can.

Thank you. Appreciate it.

Sure thing, Kyle.

Thank you. Ladies and gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Okay. I'd just like to thank all of you again for your time and your continued interest in GSE Systems. Have a good afternoon.

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.