GSE Systems, Inc. Reports a Respectable Q3 in a Tough Environment

Last night, GSE Systems, Inc. (GVP) reported a good quarter, delivering contract revenue upside, in line GAAP EPS and relatively stable backlog in its 3Q13 earnings report. Despite posting a respectable performance, the company is still feeling the impact from stalled nuclear and non-nuclear simulator projects in the US, and from cancelled and delayed nuclear projects in Japan and Germany. We’re reiterating our Speculative Hold rating because we see few catalysts to move the stock higher over the near to intermediate term other than an outside transaction.

GSE reported total revenue and GAAP EPS of $11.9 million (- 9% y/y) and $(0.06), which was respectively $1.4 million above and in line with our estimates. Backlog skidded 20% y/y to $38 million, the fourth consecutive quarterly decline, though it was relatively flat with the prior quarter. The nuclear/non-nuclear mix was 63%/37% of revenue, little changed from a year ago. The Slovakian simulator project continues to weigh down gross margins; gross margins were 26%, consistent with the prior 2 quarters but below historical norms. Management expects the hardware-intensive project to weigh down gross margins for another quarter or two before they revert to their more normal 30%-32% range. EBITDA was $0.9 million and the company ended the quarter with $17.6 million in cash and equivalents on the balance sheet.

Although the company didn’t provide quarterly or annual financial guidance – per the normal practice – management did reiterate its goal of returning to profitability in the December quarter. We continue to err on the side caution, taking a more conservative approach to our 4Q13 and 2014 estimates than management’s guidelines and upbeat tone would imply. As such, we’re bumping up our revenue estimate $500,000 to $11.0 million but lowering our GAAP EPS estimate to $(0.04).