GSE Systems, Inc.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Good day and welcome to the GSE Systems Reports First Quarter Fiscal Year 2021 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the today's presentation, there will be an opportunity to ask question. Please note this conference is being recorded. I would now like to turn the conference over to Robert Blum. Please go ahead.

[Robert Blum:]

All right. Thank you very much, Sarah, and good afternoon, everyone. Thank you for joining us today to review the financial results for GSE Systems for the first quarter ended March 31, 2021. With us on the call representing the Company today is Kyle Loudermilk, President and Chief Executive Officer of GSE Systems. Unfortunately, Emmett Pepe, the Company's Chief Financial Officer, will not be joining the call today as he is attending to the loss of a family member.

[Kyle Loudermilk:]

Thank you, Robert. I'd like to welcome everyone to GSE's first quarter 2021 financial results conference call. Earlier today, we issued a press release detailing our financial results. Hopefully, you've had a chance to review this news release, but if not, a copy can be found on our website at www.gses.com, under the News section.

[Operator:]

Our first question comes from David Wright with Henry Investment Trust. Please go ahead.

[David Wright:]

Did you say the $808,000 of restructuring charge in Q1 was the final related to the Swedish wind down? Is that what you said?

[Kyle Loudermilk:]

That's correct. It's noncash-related and it's entirely related to the dissolution of the Swedish entity.

[David Wright:]

Great. Okay. Restructuring charges have played a recurring role in the financial statements in the last couple of years. Is it anticipated that there'll be any more in the next quarter or 2?

[Kyle Loudermilk:]

The only element of restructuring charges that may come into play is related to the abandonment of unused real estate as a result of the pandemic. It's not a firm thing yet, but that's the only thing that comes to mind right now.

[David Wright:]

Okay. Great. And then just kind of a tactical question. You talk about small modular reactors, and do we know are those going to require simulators for training purposes for their...

[Kyle Loudermilk:]

Yes, absolutely. I'd point you to do some research on the internet or on a company called Nuscale, N-U-S-C-A-L-E. And they were just posting today, in fact, on LinkedIn, about their use -- their commercial simulator to accelerate their design license from the NRC. But simulator, in fact, is based on GSE's technology. We've been working for them for at least a decade now. And so the short answer to your question is, yes. And there's just a tremendous story behind just that. So long before these plants are built, they need to simulate those plants as they design them, and then prove they can operate them safely. And that's where GSE can come into play just as we have on Nuscale.

[David Wright:]

So you are working with Nuscale now in that regard?

[Kyle Loudermilk:]

That's correct. We've been working with them for quite some time. They're very public about that.

[David Wright:]

So even though it may be a while before the reactors come along, GSE could be earning revenue from simulator development well in advance of the plans -- of the plants actually becoming operational?

[Kyle Loudermilk:]

Yes. That's correct. Not only could we, we have, and we'll continue to do so.

[Operator:]

[Robert Blum:]

Sarah, while we wait to see if there's any additional questions here, Kyle, I just had a couple here. On the software solutions component to the business, can you maybe add a little bit more color there? Maybe what the opportunity is? Size of that opportunity? And what this can mean as -- in terms of the larger picture for GSE going forward?

[Kyle Loudermilk:]

Sure. Look, when we came into the business in 2015, we saw as part of the deep value this company can offer is packaging and licensing. It's IP in a contemporary fashion to industry to add value to the industry and create an ongoing annuity for GSE. And you look at where we are today, it's very significant SaaS-based revenue increase, 160% year-over-year, this is high value-added, very sticky, 80% to 90% gross margin. And that's really a direct result of the strategy and hard work of the team in working with customers. The growth potential is significant. While I won't put a specific dollar estimate on it, we certainly have the opportunity to go back into clients who have spent millions of dollars on our solutions and convert them into a recurring annuity, and we're working hard at that. The example of the Canadian client that we highlighted is just one example where we've achieved that conversion, but there are many others that we're working with to go through a similar conversion. The value prop is obvious. They don't want to have to support on-prem technology to hardware and software. They'd rather just support it Internet connectivity and a web browser much cheaper for the client, more effective and scalable for us. And it's -- so it's lower cost of ownership to the customer and higher value-added for us, that's very sticky and grows over time so significant opportunity ahead.

[Robert Blum:]

All right. Great. And then maybe just a couple more here. Obviously, the Company has been well entrenched in North America, particularly within nuclear here. Are there other geographies that are opportunities for the Company, both within nuclear as well as other power sources?

[Kyle Loudermilk:]

Yes, for sure. We've had a long standing robust business overseas, really almost since the Company was founded. So over the past year, we've been delivering projects in the United Kingdom, in Slovakia, in the Ukraine, mostly by delivering those projects from our domestic locations here in the United States and only with essential travel meeting to go there. One of the silver linings of the pandemic, we've been able to deliver these solutions -- improve we can deliver these solutions with technology delivery versus having to fly over and remain entrenched, say, as we may have in the past. So there's value added there. We have a very extensive work that we've done in South Korea and continue to do work there. And I'll note, in Japan, Japan was 1/3 of our business prior to Fukushima. And obviously, with Fukushima, that was like turning off the spigot. But we've seen that spigot crack back open three, four years ago as we started to get new order flow from Japan. It's modest, but we remain engaged in that country with very close ties and good relationships and look forward to see that grow as Japan starts up their fleet.

[Robert Blum:]

All right. Maybe just one more here. In the Workforce Solutions division, obviously, the labor market is very tight. How does the Company make sure it can supply the necessary workforce or really the required engineers there?

[Kyle Loudermilk:]

Yes, it's a great question. Our workforce solution value-added is, we have a robust and very proprietary database of highly skilled workers that are available for on-demand work. And we -- they are as much our customers as our end-user utility customers are. So we work really hard to build up great relationships with these professionals over the long term. There -- we reach out to them when projects become available, and they have the option to work when they want to and need to. So, it's really a win-win, but it's that proprietary database and contacts with highly skilled workers that really differentiates us in the marketplace.

[Robert Blum:]

Sarah, I will turn it back over to you.

[Operator:]

Thank you. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Kyle Loudermilk:]

All right. Well, thank you, and I'd like to thank everybody for joining us. We appreciate your time and interest in GSE, and we're very excited about what's ahead of us in here in 2021. We look forward to speaking with many of you in the weeks ahead. Feel free to reach out for one-on-one discussions, if you wish to follow-up for that, happy to speak with you. If you have any questions, please reach out to our IR firm Lytham Partners, and we'd be happy to schedule those follow-up calls. Again, thanks, everyone, be well, and have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.