GP Strategies Corporation
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good morning. My name is Sharlene, and I will be your conference operator today for the GP Strategies First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Ann Blank, Director of Financial Reporting and Investor Relations. Please go ahead.

[Ann M. Blank:]

Thank you. Good morning, and welcome to GP Strategies' First Quarter 2013 Earnings Call. On the call today are

[Scott N. Greenberg:]

Thank you, Ann. Good morning, and welcome to our first quarter 2013 conference call. Today, we will follow our usual quarterly format. To initiate the call, I'll provide a brief overview of the results for the first quarter and then discuss a potential major contract award. Then, Sharon will present an in-depth financial analysis of our first quarter. Doug will give some key updates on our strategic initiatives and additional recent contract awards. After Doug's presentation, I'll focus on our acquisition strategy, future vision and the company's plan for long-term growth, and then we will conclude with a Q&A session. As reported in our press release today, GP Strategies continued to show overall improvement of its results in the first quarter 2013. We have developed a unique platform in the training industry through the combination of both organic growth supplemented by strategic acquisitions. In the first quarter, the company increased its business development efforts to support larger outstanding opportunities and invested in proprietary software technology at a greater level than in the past. We are optimistic that these investments will translate into growth in future quarters. As far as the operating results for the first quarter, the company reported an increase in revenue of 8% to $101.4 million. In addition, GP Strategies reported for the first quarter earnings per share of $0.26, or an increase of 13%. Looking at the trailing 12-month period, our reported EBITDA was approximately $44.3 million or $2.29 per share on a fully diluted basis. Our balance sheet remains strong. At March 31, 2013, the company had cash balances of approximately $11.1 million and no long-term debt. So we continue to be debt-free at the end of the first quarter of 2013. The operating results continued to demonstrate GP Strategies' ability to generate free cash flow. We generated approximately $4.5 million of free cash flow in the first quarter of 2013. During the quarter, the company repurchased approximately 20,000 shares of its common stock in the open market for approximately $500,000. At this time, I'd like to discuss a major potential contract award that could impact our prospects positively for long-term growth. We've been working for many months to expand our services with a global client, and we were recently notified that we've been selected as the preferred vendor for a multiyear training outsourcing opportunity. A contract is currently being negotiated for this opportunity and expected to be signed this quarter. Revenue should start generating towards the end of the year. It has the potential to be a major account and having a major impact on GP Strategies. While the training outsourcing market is highly fragmented, we believe we have the ability to grow and to stake our position as one of the leaders. We believe our key differentiators are our strong technical expertise, our global reach and cost-effective solutions. This combination is the key to success. On previous calls, we discussed our key initiative to expand in the financial services sector. This initiative, as you'll hear from Doug later on, continues to be successful. The company anticipates that by the end of 2014, it will have at least 4 out of our top 15 customers from the financial services sector. In addition, Doug will discuss additional long-term contracts received from other customers. This is extremely important to GP Strategies, as over 90% of our revenue is typically generated from our recurring customer base. Since 2006, we have a made over 20 acquisitions, and we are continuing to see significantly more cross-selling opportunities. We have made these acquisitions predominantly through the cash flow generated from operations. We see expanding leadership training, e-learning and global delivery as major initiatives of the company going forward. When we looked at the industry a few years ago, the majority of our training revenue was generated by stand-up instructors. Today, e-learning and blended solutions are paramount to our success. GP Strategies strives to be a frontrunner with its tools, techniques and people. With that being said, I'd like to turn the call over to Sharon, who will give a detailed financial presentation for the quarter.

[Sharon Esposito-Mayer:]

Thanks, Scott. Good morning, everyone. Before I get into the financial results for the quarter, I want to note that as of January 1, 2013, we made some changes in our organizational structure that resulted in changes in certain of our reporting segments. The LNG business that was previously in the Professional & Technical Services segment is now included in the Energy segment. Also, our foreign operations in India, China and a portion of Canada that were part of the Professional & Technical Services segment are now included in Learning Solutions, and our e-learning government business that was in Learning Solutions moved into Professional & Technical Services. We have reclassified the segment information from the prior year to conform with these changes. A restatement of segments for the prior year quarters is posted for your reference on the quarterly earnings release page of the Investors section of our website. Now getting into the financial results. We reported first quarter revenue of $101.4 million, or 8% growth over the first quarter of 2012. Our Sandy and Performance Readiness Solutions segments achieved double-digit organic growth in the first quarter. Revenue in the Sandy segment increased by $1.7 million, or 13%. Revenue growth in the quarter primarily came from an increase in product sales trainers and training programs for both domestic and foreign auto manufacturers. Sandy's first quarter results included publication revenue of approximately $500,000, consistent with the first quarter of 2012. We are projecting $3.1 million of publication revenue in the second quarter of 2013. Revenue in the Performance Readiness Solutions segment increased in the quarter by $1.7 million or 12%. The increase in revenue is primarily due to $3.8 million of revenue related to a large system implementation training contract that was primarily performed in the first quarter. The revenue increase from this contract was partially offset by other revenue declines due to project completions. Revenue in the Learning Solutions segment also increased by $7.7 million or 22%. The BlessingWhite acquisition completed on October 1, 2012, contributed $2.9 million of revenue in the quarter, and the Asentus acquisition completed on June 29, 2012, contributed $3 million of revenue in the quarter. The Learning Solutions segment had a $1.7 million or 5.7 -- I'm sorry, $1.7 million or 5% of organic first quarter revenue growth due to a $2.3 million increase in revenue from U.S. e-learning and training outsourcing clients, offset in part by a $500,000 decline in revenue from our Europe operations, primarily due to a decrease in technical services for an aerospace client and a decline in government skills training. The Energy segment revenue increased by $1 million in the quarter, primarily due to $900,000 of revenue generated by the Rovsing acquisition that was completed on September 17, 2012. The increases in revenue from these segments were partially offset by a $4.3 million or 19% revenue decline in the Professional & Technical Services segments. The first quarter revenue decreases in this segment are primarily due to a $1.2 million decrease in homeland security and chemical demilitarization services due to contracts concluding; a $900,000 decline in technical services for a pharmaceutical client due to a project completion; an $800,000 decrease in government e-learning services; and a $500,000 decline in revenue due to the completion of a large Lean consulting project in the second quarter of 2012. We anticipate that the revenue declines in this segment will continue at least through the second quarter of this year when compared to 2012 results. The automotive sector, which is our largest sector, comprised 15% of revenue in the first quarter compared to 14% in the first quarter of 2012, and the U.S. government remains our second-largest market sector, comprising 10% of revenue in 2013, down from 14% in 2012. General Motors remains our largest client and comprised close to 8% of revenue in the first quarter of this year. Gross profit increased in the first quarter by $600,000, or 4%. We experienced an approximate $900,000 increase in medical benefits expense in the quarter due to higher-than-usual claims incurred under our self-insured employee medical plan. This impacted both gross profit dollars and margin percentage in the quarter. If you exclude the increase in medical expense, our gross profit margin in the first quarter of 2013 was consistent with the first quarter of 2012. The $900,000 increase in medical costs in the quarter had an approximate $0.03 impact per share on earnings per share in the quarter. In addition, the acquisitions contributed $300,000 of gross profit on the $6.9 million of revenue contributed by the acquisitions in the quarter. As we discussed on our year-end call, the revenue and profit trend for BlessingWhite is lower in the first quarter and ramped across the year, with the fourth quarter historically providing the highest amount of revenue and income. Organically, we generated approximately $300,000 of gross profit on the $800,000 of organic revenue growth in the quarter. Operating income was relatively flat in the quarter at $7.3 million, and SG&A increased in the quarter by $800,000. The main drivers for the increase in SG&A expense are a $400,000 increase in labor and benefits expense and a $300,000 increase in amortization related to the acquisitions that were completed in 2012. During the quarter, we also recorded a $200,000 gain related to a change in the estimated earn-out payments and associated fair value of contingent consideration accrued for certain acquisitions, which compared to a $40,000 loss recorded in the first quarter of 2012. We recorded a $2.5 million tax expense in the quarter, which was a $400,000 reduction over the amount recorded in the first quarter of 2012. The tax rate for the quarter was 34.1% compared to 40.2% in the first quarter of 2012. In the first quarter of 2013, we recorded a onetime tax benefit totaling $373,000 related to foreign subsidiaries. Excluding this gain, the effective tax rate for the quarter and the rate we are currently projecting for 2013 is 39.1%. We are currently projecting over 20% of our 2013 income to come from lower-tax foreign jurisdictions, which is the main reason for the projected decline in the rate over 2012. First quarter net income improved by $500,000 or 12% over the first quarter of 2012, and first quarter earnings per share were $0.26, or a $0.03 improvement over the first quarter of 2012. The onetime tax benefit resulted in a $0.02 benefit in our first quarter earnings per share. Moving on to a few balance sheet highlights. We continue to report a strong balance sheet, with no short-term borrowings or long-term debt and cash balances of $11 million at March 31, 2013, or a 42% increase in cash compared to $7.8 million of cash on hand at December 31. In the first quarter, we spent $1 million on contingent consideration payments for acquisitions previously completed and $500,000 on share repurchases. We generated $5.3 million of cash flows from operations in the first quarter of 2013, comprised of year-to-date income of $4.9 million plus noncash add-backs to net income, including depreciation and amortization of $2 million, noncash compensation expense of $1 million, offset by a $300,000 change in deferred income taxes and a $200,000 gain on contingent considerations. In addition, there was a $2 million decrease in cash from changes in other operating items. Our backlog at the end of March was $200 million compared to $221 million at the end of December and $211 million at the end of March of 2012. A major driver for the year-over-year decline in backlog is due to the fact that we are awaiting a contract expansion from a U.K. client for technical documentation training that was fully funded in the first quarter of 2012. In addition, we have received several verbal contract awards recently that you will hear about from Doug that are not yet included in the March 31 backlog balance. And that concludes the overview of the financials, so I will turn the call over to Doug.

[Douglas E. Sharp:]

Thank you, Sharon, and good morning, everyone. Again, we are pleased to report a good first quarter. The fundamentals supporting our business of learning and development in the corporate and public space remained strong. Knowledge capture, knowledge transfer and putting knowledge to work more quickly and efficiently remains an important objective of our customers. I have talked in the past about how we are building GP Strategies into a global platform with the breadth and depth of learning solutions to meet the market demand. Add to the equation our passion for quality and customer service, for which we've received numerous awards, and we think we have a formula for winning big when opportunities present themselves. Several months ago, such an opportunity was presented to us. One of our existing Fortune 500 clients put out for bid a holistic global outsourcing of its learning development organization, a large opportunity that attracted a slew of competition. As Scott mentioned, we are pleased to report that we were recently selected as the preferred vendor for this opportunity. This is a significant multiyear global engagement for which we hope to tell you more about in the coming months. I could end there and be content, but I want to tell you about 4 additional awards, 2 with existing customers and 2 with new customers. We were recently notified by an industrial giant that we will be providing their learning administration and coordination services for leadership and development training globally. Again, a multiyear, multimillion dollar award. We have also received verbal award from Chrysler. Now for Chrysler, we've been supporting them for a number of years with technical training and plant support, but this award moves us for the first time into the sales side of Chrysler, a place where we feel very comfortable with. Our Sandy automotive group has also added Mitsubishi to our customer list with a recent award of a sales training and product launch support contract. And finally, our recently acquired BlessingWhite business unit has been notified of a multimillion dollar award for leadership development training from a large European insurance company. The success that we have had developing new business with existing customers and in securing new customers, we believe, demonstrates 3 things

[Scott N. Greenberg:]

Thank you, Doug. What Doug said was very important today. GP Strategies, I believe, is at an inflection point in the history of the company. When you look back at the company over the years, we were building a model based upon entrée into customers on a global basis, based upon being able to deliver them all types of services, and as Doug mentioned, giving them a holistic approach to the training industry. In the past, we would be very excited to be able to work on and bid and receive smaller jobs, and we still continue to do that. However, our model now gives us the ability to go after large, multinational, global outsourcings, large-dollar, large-volume contracts. And we believe we've developed a platform to achieve this, and our goal is to take the company to the next level. As you could hear from Doug as well, though, sometimes the contracts -- those large contracts take longer to work on, longer to win, and that's really been a goal of the company. And we are very excited to announce our first success today. Looking at the company in addition, we have continued to improve and enhance our model by acquisitions. We've been focusing in areas that we believe enhances the company. The first is e-learning. We've now developed capabilities on a global basis with global reach. The second is leadership training. We bought BlessingWhite in the fourth quarter of last year. That gave us the ability to deliver leadership training all over the world. We bought Communication Consulting prior. We bought Clutterbuck, which does sales training in the U.K., and we also bought Bath Consultancy Group in the U.K. With the combination of the 4 companies, we've just received a global award in the U.K. that will be in the second half of this year. And this one award was more than the whole revenue of BlessingWhite U.K. and Clutterbuck in all of last year. And one of the positives about leadership training, because it's content, is we're able to enhance our margin profile. So right now, when typically GP Strategies is generating -- this quarter is a little low due to seasonality, but in the past year, we generated about 11% EBITDA. On incremental revenue in leadership training content, we're typically able to receive over 40% margins to our EBITDA and pretax. So what we're doing is we're combining the strategy of our global reach, our customer base, and we're adding content to it as well. So it's a very exciting period. In addition, we're branding GP Strategies. When now you go over the world, all the companies that we bought over the 20 acquisitions is having the name and brand of GP Strategies, and that's giving us recognition as well. So all in all, a very exciting period for GP Strategies. We had strong financial results. But really, the first quarter demonstrates the long-term potential of GP Strategies, and we're really excited by this opportunity. Before I turn it over to questions, just -- we usually update on where we are with investment and investor opportunities. And we do have 2 presentations this month. We'll be at the Barrington conference in Chicago, and I believe that's next week or in 2 weeks. And then we're at the B. Riley conference in Santa Monica. So we hope to see a lot of the shareholders at that conference. So with that, moderator, I'd like to turn it over to the Q&A period.

[Operator:]

[Operator Instructions] And our first question comes from the line of Josh Vogel with Sidoti & Company.

[Josh Vogel:]

I may have missed it. But on the last call, you talked about the SunTrust ramp, and that was expected to ramp up in Q2. Is that still on target?

[Scott N. Greenberg:]

Yes. Right now, it's been delayed a little, so we still see it ramping up into Q2. And it is ramping up now, but it won't be full ramp-up until the end of Q2. But it is ramping up in Q2.

[Josh Vogel:]

Okay. And I know you don't discuss guidance. But Sharon, you did mention that publication revenue was going to be up about $2.5 million sequentially. And with SunTrust starting to ramp throughout the quarter, can you just maybe give us a sort of direction of what kind of growth we should see in Q2, at least from an organic standpoint?

[Scott N. Greenberg:]

Well, I think, Josh, that is giving guidance. You try, but typically, what we'll do is we'll give the backlog, we'll give the drivers, and we particularly give the numbers for Sandy, because the backlog is very -- the publication is very seasonal. But that being short, I think we have enough information on the call that the analysts could do their models. But we really can't comment, as a rule, for other companies.

[Josh Vogel:]

Okay, that's fair. With regards to the U.K. job skills, are you hearing any chatter or proposals out there that the government may eliminate vendors below GBP 1 million? I know it's -- GBP 500k was the limit. But you had discussed in the past that potentially, it would move up to GBP 1 million.

[Scott N. Greenberg:]

Yes. We haven't seen that. One of the things that occurred, Josh, is that with the slowdown in the economy in the U.K. that occurred 2 years ago, the government believed that politically eliminating vendors above the GBP 0.5 million level might not be well received by the public. So they didn't go forward with that plan. But that being said, we are seeing acquisition opportunities. And one of the reasons why we're seeing acquisition opportunities, while they haven't eliminated vendors, they've got much more involved in the order process, the U.K. government, to make sure that the remaining vendors have very high quality. So that's really what they focused on as opposed to eliminating vendors. GP Strategies got audited by Ofsted, which is the independent government organization that rates us training vendors, and I think we discussed this on the last call. And the ratings that we got put us in the upper echelon of training companies. We also even got graded on things like our acquisitions and how the people performed on the acquisitions. And the people performed much better -- and the people that are being trained, the apprentice, performed much better under GP Strategies' domain than previously. So because of that, we still think we have an opportunity for consolidation, and we are getting support by the job skills agency to continue on with our acquisition program. So we are continuing to look at acquisitions in the skills funding area.

[Josh Vogel:]

Okay, great. And just lastly, outside of the skills funding, can you just talk to the acquisition pipeline today?

[Scott N. Greenberg:]

Yes. I mean, we continue to be active in the acquisition pipeline. We're working on companies like e-learning to give us the global reach to help us. But that being said, with the major opportunities that we have that we discussed today, we just want to make sure we're able to integrate these opportunities. So the goal one is really to integrate some of the major opportunities that we talked about, including a major contract. But we are supplementing that with some distinct acquisitions that continue to help us. But we purposely slowed down some of the other ones because of the potential of the major contracts.

[Operator:]

And our next question comes from the line of Kevin Liu with B. Riley & Company.

[Kevin Liu:]

First question, just on that project. I mean, can you give us a sense for where that customer sits in terms of your largest customer? Is it already a top 10? Is it below that level? And then where do you anticipate it getting to once it reaches kind of full scale?

[Scott N. Greenberg:]

Right now, they are a current customer of GP, but they are not in the top 10. We're currently under contract negotiations with them, so we don't have the final scope of work. But that being said, we wouldn't be bringing it up to the magnitude we are if we didn't believe that it could at least be a top 5 customer of GP.

[Kevin Liu:]

Understood. And with respect to ramping up for that program, is there any sort of infrastructure you would need to put in place in other countries to support them? Or do you already have that infrastructure intact?

[Scott N. Greenberg:]

This will expand GP on a global basis, and we will have to put in infrastructure. Once we have further details on the contract and we're able to disclose it, we would discuss it with our shareholders. But the answer is, overall, this will expand GP's global reach.

[Kevin Liu:]

Okay. And then you talked about the backlog decline earlier. Just in terms of the award that had been funded going into March last year, are you guys still working on that contract at the moment? And what's your degree of confidence that you receive that same level of funding?

[Scott N. Greenberg:]

Kevin, it's a perfect question that you asked because we just got an email last night. We expect to receive full funding on that contract, that 1 contract, which is roughly USD 9 million, USD 10 million by the end of May. And as a matter of fact, we expect to receive it -- even though we're talking about the 1-year funding, we do expect to receive a multiyear contract by the end of May [ph].

[Kevin Liu:]

That's great. And then I mean, just in terms of any other sort of kind of drop-offs from the December level, is that just kind of normal seasonality? Or was there any sense that you got that maybe there was some hesitation in terms of budget being funded or deals being finalized within the quarter?

[Sharon Esposito-Mayer:]

Yes. I mean, Kevin, if you recall what we've talked about on some of our earlier calls, we get funded for some of our large clients upfront in the beginning of the year. So we go into the year with full funding for clients like GM, for the most part, Hyundai, Rockwell. Those are big multimillion-dollar-a-year clients and projects. So it wouldn't be unusual to see that backlog drop off as the year progresses, because we normally don't reflect the next year's funding until the fourth quarter.

[Kevin Liu:]

Got it. And just lastly -- sorry, go ahead.

[Scott N. Greenberg:]

Yes. Kevin, well, one of the things that does happen, if you look at our business, we have experienced, and we talked about it today, a downturn in areas of our government and some of our other areas that are related to the government in Professional & Technical Services. So when Sharon talked about a comparative, compared to the second quarter last year, that those areas have had a decrease. So you would naturally expect certain areas to have a government funding increase.

[Kevin Liu:]

Got it. And then just lastly for me, to the extent you can kind of talk about it. The health care claims that you said it is unusual. I mean, any sense as to why we should believe these to be just kind of a onetime issue and not something that could potentially recur in any given period in the future?

[Sharon Esposito-Mayer:]

Yes. We are fully funded -- or self-funded for our medical program up to a certain amount of money per enrollee in the program. It's difficult to say what the claims will be in the future. We had some large claims come through for various medical expenses that were incurred that hit in the quarter. So we can't say with any certainty what the claims will look like going forward. But we can say that we have been self-funded for many, many years. And this is really just out of character for us to have this volume of claims and this volume of incidents occur in 1 quarter. For the handful of individuals that were the main driver for the large claims that occurred in the quarter, we are insured for amounts that exceed $200,000 approximately per individual enrolled in the plan. We have approached close to those limits for certain of these claims. So our excess insurance will kick in for anything above that for these particular incidents that occurred in the quarter. But just looking at the historical trends of our medical, we really don't expect to have this volume of claims as we continue throughout the year. And what we've seen so far with Q2 is that the claims are coming more in line with where they've been historically.

[Scott N. Greenberg:]

Kevin Sharon's exactly right. But it's almost like a bell curve probability in that, for whatever reason, in Q1, due to the catastrophic claims we had, it fell outside the bell curve and went to the fringe. If you look at, historically, the last few years, it very rarely fell to this extent -- or it never fell to this extent out of the range before.

[Operator:]

Our next question comes from the line of Joe Janssen with Barrington Restaurants (sic) [Research].

[Joseph D. Janssen:]

Just so I can be clear here, and I know this potential global account is still in negotiations and it's going to be hard, and you won't quantify it until, I think, the deal is inked. But it does sound, possibly, once the deal is inked, there would be a little bit of spend in the next couple of quarters, and revenue wouldn't start flowing until Q4. Is that correct?

[Scott N. Greenberg:]

Yes. That's within [ph] the time.

[Joseph D. Janssen:]

Okay. And then also just a couple of line item things. On the Professional & Technical, we knew Q1 was going to be tough. I heard Sharon's comments regarding Q2, that you expect it to be down, but do you expect it to be down -- I'm assuming at a lesser rate obviously. Are we talking single digit or double digit? And then as well as, you'd made some previous comments in the last quarterly call that you were optimistic that you would see, once this kind of got more into an apples-to-apples comparison, you potentially would see modest growth in Q3 and Q4. Is that still kind of how you see it?

[Scott N. Greenberg:]

Well, right now, overall, as we look at Q1, Q1 is similar or close to the Q4 run rate. It might just be slightly below. So the tail lost the curve really after Q2 of last year, and it dropped down. So obviously, the comparable is harder in Q1 in comparative. The only thing I will say is we're not looking at a major -- any type of significant drop-off from Q1. So at this stage, again, it's early in the quarter, but right now, that would be our analysis on that, that it's kind of stabilized, at least within a narrow band of the Q1 revenue.

[Sharon Esposito-Mayer:]

And if you recall, and we talked about this on prior calls, that this is still a segment that still predominantly derives the majority of its revenue from projects, not master agreements that recur year-over-year. Even though the client base is pretty recurring, the projects are still pretty much individually funded. So I think, while we still remain optimistic that the revenue trend will turn in the third and fourth quarter, we really can't see those projects -- that project funding in front of us right now. So there are some good things going on in that segment, but it's hard to look beyond Q2 at this point in time. But we're still optimistic that hopefully, we'll see that revenue uptick a bit as we get into the third and fourth quarter from the levels that it's running at right now.

[Joseph D. Janssen:]

Okay. I appreciate that. And then within Energy, I saw top line growth, healthy clip, but a little bit of expense at the margin there. I'm just curious what's going on in that line item.

[Scott N. Greenberg:]

Well, 2 things happened in the Energy. One is the Rovsing, which is the software technology that we knew would take a period of time to develop. And that's one of our explanations about investing in research. So in the first quarter, the Rovsing technology, and also due to the seasonality of BlessingWhite, that impacted our earnings by a few cents. And so in effect, you have top line revenue without profitability. The second thing that happened is we experienced, in Q1, an upturn in our LNG business. They've been working on a few stations with some major companies. And while the revenue has gone up, and that's all organic, they don't run at the same margin as our software business. So you would have a change in the margin profile because of that.

[Sharon Esposito-Mayer:]

The Rovsing acquisition did not contribute to gross margin in the quarter. So even though it had about $900,000 of revenue, they were pretty much breakeven and had no gross margin profit in the quarter. So that in itself will have a pretty big impact in terms of diluting the margin percentage for the Energy segment.

[Joseph D. Janssen:]

Is there any redundancies going on there? It's just -- I know this -- I think this came onboard in Q3 or Q4 of last year. Should we expect -- is there any synergies that we expect, commodity, acquisitions...

[Scott N. Greenberg:]

We are looking at, once the technology gets integrated, to, in effect, reduce staff. So while we don't have one and -- don't have any redundancies in the quarter, over time, you should expect a reduction in the technology development staff in Denmark as it gets incorporated into the U.S. product mix. But nothing occurred as of yet.

[Sharon Esposito-Mayer:]

And then we should see the margins uptick as well when that occurs accordingly.

[Operator:]

Our next question comes from the line of Jeff Martin with Roth Capital Partners.

[Jeff Martin:]

Scott, can you elaborate on the software technology investments that you were speaking of? Are those for internal use, or are they interfacing with clients?

[Scott N. Greenberg:]

It is interfacing with clients. And let me explain what we're doing, so you'll get a further understanding. GP Strategies started in the Energy space, and we developed a lot of technical expertise. So that's one of the areas that, not only do we do training, but we actually have generic content called GPiLEARN, where we have 1,600 courses over 800 hours of material that we sell on a per seat basis. But we also, at one time, developed a software called EtaPRO. What EtaPRO is used for is thermal efficiency at power plants. Then in the course of time, we developed a second leg to that technology, which is advanced pattern recognition, which, over a period of time, will tell you by patterns whether you have a problem in the operation of the power plant. Part of the offshoot of the 2 of those is we're actually able to measure carbon emissions at power plants as well. We sell this software independently or we sell it with operating agreements, where we actually monitor the software out of our location in Amherst, New York. Now when we reviewed the technology, our technology, and we wanted to take it to the next or final level and become a major competitor in the industry, the one thing that we were missing was vibration analysis software. What vibration analysis does is it measures parts vibration and it tells you whether you need predictive maintenance. So we could basically tell you when the plant's running -- not running correctly, we could tell you the outputs, we could tell you the carbon emissions. And now, with the acquisition of the Rovsing technology, we could actually tell you whether there's vibration in parts in the power plant which would need maintenance. And that's the technology we bought towards the end of last year, and that's the technology that we're molding into our Energy group. We believe that, when we combine the 3 of them, we have a pretty strong product in the marketplace. So I wanted to explain it in fully, but the simple answer to the question is it's technology that we're selling to the outside world. And that is basically what it is, Jeff.

[Jeff Martin:]

Okay. So was there -- I mean, do you mention that because there was a particularly disproportionate investment in the first quarter? How should we think about it from a P&L standpoint?

[Scott N. Greenberg:]

Well, I think right now, it wasn't that -- we bought it and we're integrating it. And as we integrate it, we're going to, one, reduce personnel, but two, start generating sales to our current customers. So I think it's almost a combination of the 2 in that we're incorporating the technology into ours. I believe you'll see some major steps in completing that in the second quarter of this year. But then, after the second quarter, you'll have the marketing of the joint technology, which would start leading to increased revenue going forward.

[Jeff Martin:]

Okay. And then Sharon, you mentioned that gross margin from the acquired businesses was relatively low. Should we think about that as a first-year phenomenon, where margins normalize as you grow those businesses? What's it going to take for those to start contributing on a gross profit basis? Just so I understand.

[Sharon Esposito-Mayer:]

Yes. Sure. I mean, I think we already touched on Rovsing and the fact that once we get that software fully integrated with our other offerings that we'll be able to make some cost reductions there, and that margin should hopefully improve, I would hopefully think, by the third and fourth quarter of this year. BlessingWhite actually has good margins. It's just that their revenue tends to be lower in the first quarter. And it's one of those things that, once you increase revenue on the top line, the majority of that falls to bottom line profitability. So BlessingWhite's margins will improve sequentially quarter-over-quarter as we progress through the year. The fourth quarter -- in the fourth quarter, they achieved over 20% gross margin. So it's just a factor that they've got a little bit of seasonality when you look at the quarters and their revenue trends. I think over time, that will hopefully normalize itself a bit as we're able to get out there and continue to cross-sell that leadership offering across our other client base. Hopefully, we'll see that improve and even out a bit. But I think that will occur throughout, probably, the remainder of 2013. And then the other acquisition that has only provided marginal profit to us would be Asentus acquisition. And that's something that we continue to look at and to try to find ways to streamline that as well and improve margins. But I think honestly, being fair, we're probably going to need through the remainder of 2013 for that to take effect, or at least until the later quarters in the year.

[Scott N. Greenberg:]

And if I could just add something to what Sharon said, Jeff. When you look at BlessingWhite, because that was obviously the largest acquisition of the 3 as far as purchase price and potential due to purchase price, and we compare it to what we're currently doing -- but last year, before we bought BlessingWhite in the first quarter, they lost, before G&A and amortization, they lost over $300,000 because of their seasonality. So the numbers that we had in Q1 compared to Q1 before they were bought by GP actually improved dramatically due to the increased revenue due to cross-selling. So in the BlessingWhite, it's definitely seasonal, because their operations have improved under the GP banner.

[Jeff Martin:]

Got it, okay. And then looking at the Sandy training and marketing side of the business. I know you may have reclassified a little bit and that Q2 through Q4 of last year might not be exactly comparable. But when I'm looking at the year-over-year growth rate that Sandy had in the last 9 months of the year, you're looking at anywhere from 25% to 40% year-over-year growth that you're comparing against this year. Should we think of Sandy as running at a higher sustained level, or are we going to run into that tough comp and maybe should model it down a little bit year-over-year for the remainder of this year?

[Sharon Esposito-Mayer:]

Yes. Sandy did not have any sort of reorganization occur, so whatever you see for 2012 does reflect the Sandy segment as it exists today. I do think that Sandy will continue to achieve organic growth throughout the year. The one thing probably that is worth noting, though, is we did have very high revenue from the Sandy segment in the second quarter of 2012. We reported close to $21 million of revenue with Sandy, so that was, by far and above, their strongest quarter in 2012. We did, in 2012, some product launch work for Hyundai that is not continuing at the same level in 2013. So while we still expect Sandy to continue to do well and grow organically, it's not going to be most likely at the 20% that they grew at last year. So I'm not sure if that provides enough color for you or not, Jeff.

[Scott N. Greenberg:]

Yes. I mean, Sharon is right. While we expect it in the long term to grow, it would be foolish to predict that the results of 2012 is a model that you should use. But there are other parts of the business that did not grow as strong and shrank in prior years, which we're obviously counting on to do better.

[Jeff Martin:]

So it sounds like with Chrysler and Mitsubishi, those give you a chance to grow. Will those contract awards be hitting in 2013? And if so, what's your...

[Scott N. Greenberg:]

Yes. That would start, for the main part, in the end of the second quarter, but more at the beginning of the third. But they are 2013 events. Now the big part about Chrysler is we've done work with them before in technical training, but this is our first initiative in sales training with Chrysler. And we really believe that if we do a good job, it opens up a major account for us. So we're working real hard on that one as well.

[Operator:]

And there are no further questions at this time. I'll turn the call back over to you to continue with your presentation or closing remarks.

[Scott N. Greenberg:]

Thank you, moderator. Thanks for participating on our conference call today. We will see you at the investor conferences coming up. And I'd like to thank the management team of GP Strategies, our shareholders, our Board of Directors, particularly with all the effort that was done to win some of the contract awards that we won in the quarter. A lot of people worked on it, and we owe a big thanks to the dedication of our employees. And I hope to see you soon. So thanks a lot.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.