GSE Systems Inc (GVP) 2015 Q1 法說會逐字稿

Greetings, and welcome to the GSE Systems 2015 first-quarter financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Devin Sullivan, senior VP of The Equity Group. Thank you. You may begin.

Thank you, Danielle, 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. These statements reflect current expectations concerning future events and results. Words such as expect, intend, believe, may, will, should, could, anticipate, and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean that 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 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, Devon, and good afternoon. I would like to welcome everyone to GSE Systems' first-quarter 2015 conference call. Also on today's call are 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 first quarter of 2015. Hopefully, you've 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.

We are pleased with our progress in Q1 of 2015. I believe our results will continue to improve as we move through the balance of the year despite lingering challenges in our nuclear fossil and process end markets. We are not only benefiting from streamlined cost structure, primarily at our US and Swedish operations, but also from a strategy to grow our business while diversifying our revenue base.

In that regard, we believe the chemical and petrochemical industries will be important long-term growth drivers for GSE. We will continue to increase our investments in our process business in 2015, which includes our portfolio of EnVision and JPro products and services. We have logged our first E2E order in our process business unit. The pipeline is growing, and we expect to see significant traction late this year. ARC, an oil and gas industry thought leader, hosted a discussion of our E2E offering on their oil and gas blog.

To date, we've invested in a new seasoned SPU head, Chris Carnavos, a senior business leader, and two very senior consultative sales executives. We are currently investing in LNG and NGL modules and significant upgrade in our Web frameworks. We plan to continue investing in the process business by strategically hiring an additional Senior Sales Executive. Additionally, we are considering how to expand our Indian office and considering opening a Houston office.

We also established important new growth platforms for GSE with the November 2014 acquisition of Hyperspring. Hyperspring has contributed $5.2 million of revenue to our staff augmentation business segment in the first quarter of 2015, and we have logged total orders of $13.1 million in 2013 through today. We are confident that we can enhance Hyperspring's revenue growth through cross-selling initiatives. We see opportunities to expand Hyperspring's nuclear customer base while diversifying into fossil, power, and process industries.

Additionally, Hyperspring's US customer base is comprised of utilities that are traditionally GSE customers and vice versa. We have generated a significant amount of proposed train services globally due to the synergy created from the Hyperspring acquisition.

Finally, our acquisition last year of a 50% interest in IntelliClick LLC creates another growth opportunity for GSE heading into 2015 and beyond. We expect IntelliClick's next-generation cloud-based software platform to launch in late 2015 and believe it will fill a significant unmet need for Web-based learning and training management and development in the energy sector.

As you can see, GSE's business model and strategy involve positioning us well for future growth. Now on to some perspectives on Q1.

The first quarter of 2015 was the fourth consecutive quarter in which our operating losses narrowed, with an operating loss of less than $400,000. We're getting closer to break-even. In the first quarter of 2015, US fossil fuel-powered utilities continue to delay their capital expenditures, and some are shutting down their smaller coal-fired plants or converting to gas-fired platforms rather than invest in flue gas desulfurization systems. However, our domestic fossil fuel simulation revenue increased to $2.1 million in the first quarter of 2015 from 763,000 in the first quarter of 2014, primarily reflecting a large contract from the US utility for new high-fidelity operator-training simulators for full power plants.

In the nuclear power space, we continue to see most operators on the sidelines (inaudible) the changing industry landscape, with the main exception of the Chinese. We believe, and the industry data supports the position, that nuclear power will remain a part of 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. We've been positioning GSE for expanded business in global markets.

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. We just opened a sales office in Bahrain to support our Middle East strategy, and we are pursuing many opportunities across Asia. As I mentioned in our last call, this year we anticipate our first significant award in Japan since the Fukushima disaster.

With respect to backlog and new business, we ended the quarter with $52.4 million of backlog. That was from $48.4 million at the end of 2014. Our backlog at the end of the first quarter of 2015 includes $8.4 million of stack augmentation backlog and $44 million of performance improvement solutions backlog. We expect approximately 70% of our quarter-end backlog to convert to revenue in 2015.

In the first quarter of 2015, we had a strong quarter of bookings with $18.1 million of new business orders across all of our sectors and multiple geographies. In comparison, we booked new orders totaling $8.4 million in the fourth quarter of 2014, $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 second quarter of 2015, we have booked in excess of $12 million.

By segment, this quarter we recorded performance improvement solutions orders totaling $11.1 million and stack augmentation orders totaling $7.0 million. New performance improvement solutions contracts in the first quarter of 2015 included $7.8 million for simulator upgrades and services in the nuclear power market, $1.2 million for full-scope simulators and other projects in the fossil power market, $1.2 million for various tutorials and simulators for customers in the oil and gas industry, and $0.9 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 segments technology to design scenarios that allow operators to identify and correct problems before construction of new plants, mitigating risk, saving time and money. In 2015, we will continue to invest in software development with the goal of delivering new and enhanced products for our clients and driving new business.

Finally, our balance sheet remains strong as of March 31, 2015, with $11.6 million of unrestricted cash, working capital of $11.3 million, and no long-term debt, providing us with the flexibility to invest selectively in additional growth opportunities as they arise.

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

Thanks, Jim, and thanks to each of you for joining us today. I would like to remind everyone that as a result of our acquisition of Hyperspring, we are now reporting selected financial results for two business segments. First, staff augmentation, which provides personnel to fulfill staff positions on a short-term basis to energy industry customers and our performance improvement solutions segment, 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.

First quarter 2015 represents the first full quarter of contribution from Hyperspring. Total revenue for the first quarter increased by 60.4% to $14 million from $8.7 million in the first quarter of 2014, driven by $5.2 million of incremental staff augmentation revenue from Hyperspring and $0.1 million of higher performance improvement solutions revenue.

Gross profit in the first quarter of 2015 increased by 44.9% to $3.2 million from $2.2 million in the first quarter of 2014. Staff augmentation gross profit was $0.5 million, or 10% of segment revenue, in the first quarter of 2015.

Performance improvement solutions gross profit was $2.7 million, or 30.7% of segment revenue, in the first quarter of 2015, up from $2.2 million, or 25.5% of revenue in the first quarter of 2014.

The increase in performance improvement solutions gross margin as a percent of segment revenue is mainly attributed to three factors: the restructuring of GSE's Swedish operations in 2014, which has reduced its operations overhead and facility expenses; higher margins engineering consulting projects in 2015 for our UK operations; and the completion in 2014 of a process simulation project that had a lower margin.

As a percent of revenue, consolidated gross margin declined to 23% from 25.5% in last year's first quarter due to the incremental Hyperspring staff augmentation revenue, which has lower margins than performance improvement services revenue.

Our SG&A in the first quarter of 2015 was $3.4 million, down from $4.1 million in the first quarter of 2014. Our SG&A was lower in the first quarter of 2015 mainly due to, one, an absence of severance costs, which totaled $281,000 in the first quarter of 2014; a favorable foreign currency translation variance of $202,000; and a [$90 to $1,000] decrease in our operations, bidding, and proposal expenses.

Our operating loss for the first quarter of 2015 was $396,000, compared to an operating loss of $2.1 million in the first quarter of 2014. Loss on derivatives was $48,000 in the first quarter of 2015 as compared to a gain of $104,000 in the first quarter of 2014. Our provision from income taxes was $88,000 in the first quarter of 2015, compared to $54,000 in the first quarter of 2014. The net loss for the first quarter of 2015 was $544,000, or $0.03 per basic and diluted share, compared to a net loss of $2 million, or $0.11 per basic and diluted share in the first quarter of 2014.

EBITDA loss, which is earnings before interest, taxes, depreciation, and amortization for the first quarter of 2015 was $231,000, compared to a EBITDA loss of $1.8 million in the first quarter of 2014. GSE's cash position at March 31, 2015 was $11.6 million, excluding $4.2 million of restricted cash as compared to cash and equivalents of $13.6 million, excluding $4.2 million restricted cash at December 31, 2014.

The decline in our cash position is due in part to the following cash outflows during the first quarter of 2015: $610,000 of capital expenditures including capitalized software development costs; $339,000 to pay down the outstanding balance of Hyperspring's line of credit; and $318,000 for payment of contingent consideration for the acquisition of EnVision Systems Inc.

On November 14, 2014, GSE completed the acquisition of Hyperspring for an aggregate of $3.0 million at closing. In addition, GSE may be required to pay the sellers up to an additional $8.4 million if Hyperspring attains certain EBITDA targets for the three-year period ending November 13, 2017. Included in the $11.4 million was a $1.2 million payment to the sellers if Hyperspring was successful in renewing its current contract with the Tennessee Valley Authority by May 15, 2015 for a two-year period for substantially the same scope as was currently being provided. However, TVA did not issue the request for bid until late April 2015, and the award date is now scheduled for November 2015.

Although TVA did grant Hyperspring a six-month extension of their contract from May to November 2015, since this did not meet the extension requirements per the purchase agreement, the $1.2 million would have been divided into three increments of $400,000 each and added to the annual payments to the Hyperspring members based on the EBITDA targets. On May 13, 2015, we amended the purchase agreement, extending the date for the attainment of the TVA contract renewal to December 31, 2015.

If, by the extension date, the TVA contract is renewed for one year, the sellers will receive $600,000. If the contract is renewed for at least two years, the sellers will receive $1.2 million. If the sellers receive less than the $1.2 million payment based on the TVA contract renewal, the payment shortage is divided into three increments and added to the annual payments that will be made to the sellers based on achieving the EBITDA targets.

At the end of the first quarter, we had no long term debt and working capital of $11.3 million.

I will now turn the conversation back to Jim.

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

(Operator Instructions) Ron Bienvenu, Spear Point.

Hey, Jim. Good quarter, man.

Thanks, Ron.

Just a couple of quick questions. It seems like the Hyperspring is really performing to where you thought it would. When we are trying to model the rest of the year, should we model in -- is there a cyclicality to the revenue at that division?

The only -- there's no cyclic parts to the revenue. There is a bit of cycles to the earnings due to taxes that are paid up front in the year and not paid towards the end of the year once the maximums are paid. So actually earnings will tend to go up the latter half of the year. And really, the things that are going to change their revenue are going to be some of the results of synergy, new awards that are constantly doing new business development. So they are getting more positions at their existing customers and then also GSE introducing them to utilities that they were not strong in, that we are. Also, there are some international opportunities that we are pursuing.

Got it. The revenue from where we were modeling came in a little higher than we expected. And it just seems like -- so is the Hyperspring business growing, and do you see it continuing to grow, or is it fairly stable and regular?

It is growing, and they've got a number of good opportunities. I will tell you they are ahead of our initial benchmarks as well. And we remain very positive and excited about the acquisition and the management that came with it. The cultural fit has been excellent. Paul Abbott believes that group and was the CEO of the Company sits on the broader executive team of all of GSE and has really fit in seamlessly. So, so far really happy with the acquisition.

Sounds like it's going well. And then on the software business, do you really think it's going to launch by year end? Is that what you are projecting?

Currently on track. We have interim milestones that were in the agreement. And I work with the leader -- the managing director of that -- the IntelliClick organization to monitor the milestones. So right now, on track, and we will continue to monitor. So we're hopeful.

And really when we say part of it -- this is not the 100% vision launching, this is probably like 15% of the total vision launching. However, it will give us an opportunity for sales. And it's a different type of revenue model, so it should be significantly higher margin than our base business.

Great. That's it for me. Good quarter.

There are no further questions. I would like to turn the floor back over to Jim Eberle.

First, I would like to thank all the dedicated, hard-working women and men at GSE. And I'd like to thank each of our callers again for your time and continued interest in GSE Systems. Have a good afternoon.