GSE Systems Inc (GVP) 2015 Q2 法說會逐字稿

Greetings and welcome to the GSE Systems 2015 second-quarter financial results conference call. 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, Kalle Ahl, with The Equity Group. Thank you. You may begin.

Thank you, Adam, 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 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 can 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.

I would now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Kyle, please go ahead.

Thanks, Kalle. And good afternoon, everyone. I would like to welcome everyone to GSE Systems's second-quarter 2015 conference call. Also on today's call are Jeff Hough, our CFO; and Larry Gordon, our Senior Vice President and General Counsel.

Before Jeff reviews our second-quarter financial results, I would like to first introduce myself and provide you all with some additional background, share some of my initial impressions of GSE based on my first 10 days as the Company's Chief Executive Officer. As many of you know, my background is in technology and software -- specifically, software that optimizes operating performance for complex industries and enterprises.

My career, spanning roles at MicroStrategy, Datatel, and Aspen Technology, have focused on creating value through identifying, defining, building, and delivering solutions to clients that solve complex problems in an insightful, user-friendly fashion. What attracted me most to GSE are many of the raw ingredients I've seen in my prior experiences -- unique technology with a high barrier to entry serving a compelling client base; a client base that is in need of solutions to address critical challenges; and opportunity to transform a business model for sustainable and predictable growth; and dedicated employees with unique skills. We have solid balance sheet and no debt. From my perspective these raw ingredients provide a compelling opportunity.

GSE's ongoing transformation is also compelling. Over the last several years the Company has evolved from a world leader in real-time, high-fidelity simulation, training, and engineering solutions into a premier performance improvement Company. For our clients operational success depends on two things: your plant and your people. GSE's legacy of developing leading-edge custom simulation is well-known.

Last year's acquisition of Hyperspring and the investment in IntelliQlik position GSE to more completely address a significant issue facing the energy industry with respect to staffing and training while diversifying our business model. With these pieces in place, from my perspective it is now about identifying and fostering the unique core capabilities of GSE that we offer to drive the next step of the Company's evolution, specifically with respect to our business model.

My goal is, over time, to transform our model towards recurring managed streams of revenue with less reliance on project-based revenue. This will be a process, but I'm confident we can get it done.

Although early, my belief in GSE's potential has strengthened over my first 10 days here, after meeting with a number of our employees and managers and getting better acquainted with GSE's businesses. While it's too early to predict where we will be 12 months from now, I can promise that GSE will look, act, and feel like a company moving towards a brighter and more sustainable future. As an executive who is well-versed in strategy and analytics, I'm here to define a clear and compelling strategic plan for the Company, set proper goals so we can measure our performance and hold ourselves accountable as we execute on the plan, and make fact-based and as we execute.

GSE's recent financial performance has disappointed our investors, and we clearly need to address that. It's unacceptable. I'm here to make sure we create value for our customers, grow our business as a result and, in turn, create wealth for our investors. The first step in that process will be: review our global operations; identify efficiency gains, areas where growth can be attained, and profit maximized. We will further identify growth prospects within our existing markets and explore adjacencies that offer us sustainable growth.

I expect by our third-quarter call in November, I will be in a much better position to provide a strategic roadmap, discuss some of the actions needed to allow us to reach our goals, and identify milestones and metrics that will help you gauge our progress. In the interim, I expect to meet and/or speak with many of our investors, and I welcome the opportunity to hear your thoughts and share my impressions.

In closing, I want to say again how really excited I am to be here. In fact, I'm delighted. I'm very enthusiastic about our future. And with that, I will now turn it over to Jeff for his review of the quarter.

Thanks, Kyle. And thanks to everyone for joining us today. Earlier today we issued a press release covering our financial results for the second quarter of 2015. 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'd like to remind everyone that as a result of our acquisition of Hyperspring, we are now reporting selected financial results for two business segments: 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; and staff augmentation, which provides personnel to fulfill staff positions on a short-term basis to energy industry customers. Hyperspring's results are included in the staff augmentation segment.

I will begin with an update on backlog and new business. We ended the quarter with $57.5 million of backlog, up from $52.4 million at the end of the first quarter of 2015 and up from $48.4 million at the end of the fourth-quarter 2014. Our backlog at the end of the second-quarter 2015 includes $9 million of staff augmentation backlog and $48.5 million of performance improvement solutions backlog.

The performance improvement solutions backlog is our highest since December 31, 2012, when the backlog was $51.9 million, of which $11.7 million was related to our large, full-scope simulator project with a Slovakian customer. We expect approximately 43% of our quarter-end backlog to convert to revenue in 2015.

In the second-quarter 2015 we had a strong quarter of bookings, with $18.8 million of new business orders across all of our sectors in multiple geographies. In comparison, we booked new orders totaling $18.1 million in the first quarter of 2015, $8.4 million in the fourth quarter of 2014, $17.6 million in the third quarter of 2014, and $9.6 million in the second quarter of 2014.

By segment this quarter we recorded performance improvement solutions orders totaling $12.7 million compared to $11.1 million in the first-quarter 2015 and $9.6 million in the second-quarter 2014. Staff augmentation orders totaled $6.1 million compared to $7 million in the first quarter of 2015.

New performance improvement solutions contracts in the second quarter of 2015 included $7.7 million for simulator upgrades and services in the nuclear power market, $2.9 million for new full-scope simulators and other projects in the fossil power market, [$0.9] million for various tutorials and simulators for customers in the oil and gas industry, and $1.2 billion for miscellaneous engineering services and training projects.

Now onto a review of our financial results for the second quarter: total revenue for the second-quarter 2015 was $13.6 million, which included $5.4 million of incremental staff augmentation revenue from Hyperspring, compared to revenue of $8.3 million in the second quarter of 2014. Performance improvement solutions revenue was basically flat as compared to the second quarter of 2014.

Gross profit in the second quarter of 2015 was $2.9 million compared to $2.6 million in the second quarter of 2014. Staff augmentation gross profit was $0.6 million or 10.8% of segment revenue in the second-quarter 2015. Performance improvement solutions gross profit was $2.3 million or 28.4% of segment revenue in the second quarter 2015, down from $2.6 million or 32% of segment revenue in the second-quarter 2014. The decrease in performance improvement solutions gross margin as a percentage of segment revenue reflects lower margins on training and process simulation projects in 2015. As a percentage of revenue, consolidated gross margin declined to 21.4% from 32% in last year's second quarter due to the incremental Hyperspring staff augmentation revenue, which has a lower margin than performance improvement solutions revenue.

Selling, general, and administrative costs in the second-quarter 2015 was $4 million, down from $4.5 million in the second-quarter 2014. SG&A was lower in the second quarter of 2015, mainly due to three reasons: first, the prior-year restructuring costs associated with the downsizing of GSE's Swedish operations and reduced business development and marketing expenses.

These adjustments were partially offset with an increase in the loss for the change in fair value of contingent consideration related to acquisitions, which is also known as accretion expense, which is mainly associated with the deferred contingent consideration due to the Hyperspring members, if certain EBITDA targets are met and if their current contract with TVA is renewed. Accretion expense was $513,000 in the second quarter 2015 versus $20,000 in the second quarter of 2014.

Operating loss for the second-quarter 2015 was $1.3 million compared to an operating loss of $2 million in the second quarter of 2014. As previously mentioned, the $1.3 million operating loss for the second-quarter 2015 included $513,000 of accretion expense. Loss on derivatives was $31,000 in the second-quarter 2015. In the second-quarter 2014 we had a gain of $5,000.

Our provision of income taxes was $73,000 in the second quarter 2015 compared to $47,000 in the second-quarter 2014. The net loss for the second quarter of 2015 was $1.5 million or $0.08 per basic and diluted share compared to a net loss of $2 million or $0.11 per basic and diluted share in the second-quarter 2014.

EBITDA loss, earnings before interest, taxes, depreciation, and amortization for the second quarter 2015 was $1.2 million compared to an EBITDA loss of $1.8 million in the second quarter of 2014. Excluding the loss from the change in fair value of contingent consideration, adjusted EBITDA loss for the second-quarter 2015 was $643,000 compared to an adjusted EBITDA loss of $1.8 million in the second-quarter 2014.

GSE's cash position at June 30, 2015 was $9.8 million excluding $4.5 million of restricted cash, as compared to cash and equivalents of $13.6 million excluding $4.2 million of restricted cash at December 31, 2014. The decline in GSE's cash position is due in part to the following cash outflows during the first half of 2015: $1.9 million related to changes in various working capital items; $1.1 million of capital expenditures, including software development; and $0.3 million for payment of contingent consideration for the acquisition of Envision Systems, Inc.

Subsequent to June 30, 2015, we collected $1 million from a Chinese customer that had been overdue. Our cash position at August 12, 2015, was approximately $12.4 million. At the end of the second quarter we had no long-term debt and working capital of $9.9 million.

I'll now turn the conversation back to Kyle.

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

(Operator Instructions)

Okay. Well, it seems like we don't have any questions. So with that, I'd like to thank everybody for joining us today. I hope to get a chance to meet and speak with many of you in the coming months. And thank you again for your time and interest in GSE.