GSE Systems Inc (GVP) 2015 Q4 法說會逐字稿

Greetings and welcome to the GSE Systems, Inc. fourth-quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Kalle Ahl, with The Equity Group. Please go ahead.

Thank you, Shea, 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 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.

On this call, management may refer to EBITDA and adjusted EBITDA, which are not measures of financial performance under Generally Accepted Accounting Principles. Management believes EBITDA and adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate the Company's results, because they exclude certain items that are not directly related to the Company's core operating performance that may or could have a disproportionate positive or negative impact on the Company's results for any particular period.

Investors should recognize that EBITDA and adjusted EBITDA might not be comparable to similarly titled measures of other companies. This measure should be considered in addition to, and not as a substitute for, or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of EBITDA and adjusted EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation G follows -- can be found in the Company's earnings release and it can also be found on its website.

The Company's financial and closing procedures for the fourth-quarter and full-year 2015 are not yet complete. Fully audited financials for fiscal year 2015 will be included in the Company's Annual Report on Form 10-K filed with the SEC. It's possible that the results reflected in the 10-K -- the Company's 10-K may differ from the results reported today after the completion of the audit of the Company's 2015 financial statements; whereas the result of unexpected adjustments arising during the completion of the financial closing process.

So, with that, I'd like to now 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'd like to welcome everyone to GSE Systems' fourth-quarter 2015 earnings conference call. Also on today's call are Chris Sorrells, our interim Chief Operating Officer; and Jeff Hough, our CFO.

Earlier today, we issued a press release covering our fourth-quarter 2015 financial results. Hopefully, you have all 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.

It's been a very busy and productive first six months since I joined GSE. Our strong Q4 2015 results reflected the impact of the decisive, careful measures we have taken to improve operations. Today, we announced our first quarter of positive operating income and positive net earnings since Q3 2012, reversing a string of more than three years of quarterly losses at the Company. I'm extremely proud of our team's effort to better align resources with the core functions of our business.

We have consolidated nonessential offices and functions, discontinued unpromising R&D efforts, and focused on our compelling and unique technologies and solutions that are essential to our customers. We also introduced a culture of continuous improvement at GSE, replacing inefficient processes with best practices throughout our organization. Diligent operations management will remain one of our top priorities, even as we embark on an expanded growth strategy. We intend to continue to drive operational improvement as we move forward.

As a result of these and other steps taken under our restructuring program, we feel we are on track to achieve our previously identified annual cash savings target of nearly $5 million. In Q4 2015, we continue to fill critical senior leadership positions, including the appointment of Dr. Bahram Meyssami as GSE's new Chief Technology Officer.

I've worked closely with Bahram, both at Aspen Technology and Datatel, and have witnessed firsthand his ability to create substantial customer-aligned value through the development and use of cutting-edge technologies. Bahram is a highly effective manager of the technology teams, and has relevant experience, driving industrial technology in areas that fit our core vision of growth for GSE, specifically industrial process simulation, enterprise resource planning, and big data and analytics. Bahram will play an important role as we reinvigorate GSE's growth and transform its business model.

In Q4 2015, we also took steps to promote an equity-focused culture within GSE, based on our shareholder-approved long-term incentive plan. We granted restricted stock units, or RSUs, to many of our key employees with a vesting price of $2.50. However, these RSUs only vest after the stock has exceeded that price for 90 consecutive trading days.

At the time of the grant in November 2015, this hurdle was approximately 80% above the stock price. We believe this grant and future grants like this will serve to align employee interest with those of our investors, act as a retention tool for key employees, and provide our employees an opportunity to participate in the wealth we create for shareholders.

This year, we hope to create a yearly grant program for key employees to deliver exceptional value to GSE through outstanding customer engagement. Having streamlined operations, filled critical organizational positions, and aligned employee incentives with our shareholders' interest, we are now focused on the next phase of our turnaround plans -- revitalizing GSE's growth.

As I mentioned before, in addition to taking steps to enhance growth in our existing simulation and training business, we are focusing on transforming our business model over time with a goal of generating greater recurring revenues with less reliance on project-based sales. Currently, we are diligently working through the strategic planning process, evaluating a number of exciting growth opportunities, and I expect that we will be in a position to outline our vision for GSE's future in the coming months.

Importantly, our strong balance sheet provides us with financial stability and flexibility to implement and execute our strategic plan. At quarter end, we had zero debt and cash totaling $14.6 million, or $0.82 per diluted share, which equates to roughly a third of GSE's recent market capitalization. $11.1 million of cash -- this cash balance is unrestricted.

As we evaluate all of our growth opportunities, I want to reiterate that we will be intelligent and deliberate about our capital allocation decisions. At this time, unless we identify compelling accretive use for our cash, we intend to preserve and grow our cash position.

To sum up, while we still have much more to do, in the past six months, I believe we have put in place important building blocks for a brighter, more sustainable future for GSE, and enhance value for our shareholders.

With that, I will now turn it over to Jeff for his review of the quarter. Jeff?

Thanks, Kyle. I will begin with an update on backlog and new business. As a quick reminder, we are wrapping up our financial closing procedures for 2015 and the audit of our 2015 financial statements. As indicated earlier, we will file the audited statements with our Form 10-K.

We ended the quarter with $47.9 million of backlog compared to $49.7 million at the end of the fourth-quarter 2014. Our backlog at the end of the fourth-quarter 2015 includes $41.9 million of Performance Improvement Solutions backlog and $6 million of Nuclear Industry Training and Consulting backlog.

In the fourth-quarter 2015, our Performance Improvement Solutions bookings totaled $9.3 million compared to $10.8 million in the fourth quarter of 2014, with orders across multiple sectors and multiple geographies. Nuclear Industry Training and Consulting orders has totaled $4.6 million in the fourth-quarter 2015 compared to $2.3 million in the fourth-quarter 2014.

New Performance Improvement Solutions contracts in the fourth-quarter 2015 included $5.1 million for simulator upgrades and services in the nuclear power market; $1.7 million for full scope simulators and other projects in the fossil power market; $1.6 million for various tutorials and simulators for customers in the oil and gas industry; and $0.9 million for miscellaneous engineering services and training projects.

Now on to a review of our financial results for the fourth quarter. Total revenue for the fourth-quarter 2015 was $14.2 million, which included $1.8 million of incremental Nuclear Industry Training and Consulting revenue from Hyperspring compared to total revenue of $12.7 million in the fourth-quarter 2014.

Performance Improvement Solutions revenue decreased 4% to $10 million from $10.4 million in the fourth-quarter 2013. Gross profit in the fourth-quarter 2015 was $4.5 million or 31.4% of revenue compared to $3.7 million or 27.3% of revenue in the fourth quarter of 2014. Performance Improvement Solutions' gross profit was $3.8 million, or 37.8% of revenue in the fourth quarter of 2015 compared to $3.2 million or 31% of revenue in the fourth-quarter 2014.

The 700 basis point increase in gross margin reflected a high-margin project that was delivered in the fourth-quarter 2015 and higher operating efficiencies following the Company's third-quarter 2015 restructuring. Nuclear Industry Training and Consulting gross profit was $0.6 million or 15.3% of revenue in the fourth-quarter 2015 compared to $0.2 million or 9.8% of revenue in the fourth-quarter 2014. The 550 basis point increase in gross margin was driven by a focus on winning higher-margin projects.

Our selling, general and administrative costs in the fourth quarter of 2015 was $3.2 million, down 27% from $4.4 million in the fourth quarter of 2014. SG&A was lower in the fourth-quarter 2015, primarily reflecting the beneficial impact of our companywide cost reduction program, as well as the following items: a $0.5 million reduction in our business development and marketing costs; a $0.2 million reduction in bidding and proposal costs, which had Costs of Operations personnel assisting with business development activities; and a $0.6 million reduction in uncapitalized software development costs.

In the fourth-quarter 2014, the Company had incurred restructuring charges of $0.3 million. Our operating income for the fourth quarter of 2015 was $1 million compared to an operating loss of $1.5 million in the fourth quarter of 2014. Pretax income for the fourth-quarter 2015 was $1.1 million compared to a pretax loss of $1.4 million in the fourth-quarter 2014.

Our provision for income taxes was about $260,000 in the fourth quarter of 2015 compared to $4,000 in the fourth-quarter 2014. Net income for the fourth-quarter 2015 was $0.9 million or (technical difficulty) [$0.05] per basic and diluted share compared to a net loss of $1.4 million or $0.08 per basic and undiluted share in the fourth quarter of 2014.

EBITDA -- Earnings Before Interest, Taxes, Depreciation and Amortization -- for the fourth quarter of 2015 was $1.3 million compared to an EBITDA loss of $1.2 million in the fourth quarter of 2014. Excluding losses from the change in fair value of contingent consideration and restructuring charges, adjusted EBITDA in the fourth quarter of 2015 was $1.5 million compared to an adjusted EBITDA loss of $0.7 million in the fourth-quarter 2014.

GSE's cash position at December 31, 2015 was $11 million, excluding $3.6 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 outlays during the 12 months ended at the end of 2015.

We spent $1.9 million of capital expenditures, including software development; $0.5 million and $1.2 million were payment of contingent consideration for the acquisitions of Envision Systems, Inc. and Hyperspring, LLC, respectively; and $0.3 million to pay down the outstanding balance of Hyperspring's line of credit.

This was -- these expenditures were partially offset by approximately $0.7 million in releases of cash as collateral under Letters of Credit, and approximately $1 million generated by favorable changes in working capital. At the end of the fourth quarter, we have no long-term debt and working capital of $8.7 million.

I will now turn the conversation back to Kyle.

Thanks, Jeff. While we've accomplished much during my first two quarters at GSE, we have more to do ahead of us. I truly believe we can utilize the base business of GSE as a platform from which to build a best-in-class technology-enabled Software and Service company over the next three to five years.

With that said, I will now ask the operator to open the floor for questions.

(Operator Instructions) We appear to have no questions at this time.

Okay. Everybody, thanks for joining us today. I hope you get a chance to meet -- I get a -- I hope to get a chance to meet and speak with many of you in the coming months, as we move forward. And thank you again for your time and interest in GSE.