Executive Summary

Q2 2023 showed sequential improvement: revenue rose to $12.4M (+14% q/q) with gross margin expanding to 26.0% as Engineering utilization improved; net loss narrowed to $(1.5)M and adjusted EBITDA improved to $(0.36)M .
Year-over-year, revenue was modestly lower ($12.4M vs $12.7M) on continued Workforce Solutions softness and wind-down of large projects, partially offset by strong simulator upgrade activity in Engineering .
Backlog declined to $34.4M as orders slipped into early Q3; management reported nearly $5M of orders closed in early Q3 and cited cost containment positioning for improved H2 2023 cash flow .
No formal quantitative guidance was issued; management emphasized further OpEx reductions, backlog conversion, and improved cash flow in H2 2023 as key catalysts .

What Went Well and What Went Wrong

What Went Well

Engineering revenue strength and mix: $9.0M in Q2 (vs $6.9M in Q1; $8.0M in Q2’22) driven by significant simulator upgrades, supporting margin expansion to 26.0% .
Cost actions taking hold: “operating expenses reflecting significant improvement over prior quarter… positions us for improved cash flow in the second half of 2023” — CFO Emmett Pepe .
Pipeline/orders post-quarter: “nearly $5M in orders… slipped from Q2 into Q3. All of these orders have closed in early Q3” — CEO Kyle Loudermilk; plus a post-Q2 Workforce Solutions contract “valued up to $15 million” for digital control room modernization .

What Went Wrong

Workforce Solutions demand remained soft: revenue fell to $3.3M (vs $3.9M in Q1; $4.8M in Q2’22) amid reduced workforce requirements; orders $1.3M in Q2 (vs $4.4M in Q1; $3.1M in Q2’22) .
Order terminations: “early terminations… in the magnitude of $1.9 million” pressured Q2 orders and backlog utilization .
Backlog contracted: total backlog ended Q2 at $34.4M (vs $40.9M in Q1), reflecting tepid quarterly order flow despite early Q3 closures .

Financial Results

Consolidated P&L and Non-GAAP Metrics

Metric	Q2 2022	Q1 2023	Q2 2023
Revenue ($USD Millions)	$12.745	$10.873	$12.387
Gross Profit ($USD Millions)	$3.172	$2.395	$3.215
Gross Profit Margin %	24.9%	22.0%	26.0%
Total Operating Expenses ($USD Millions)	$4.895	$5.178	$3.991
Operating Loss ($USD Millions)	$(1.723)	$(2.783)	$(0.776)
Net Loss ($USD Millions)	$(1.401)	$(2.951)	$(1.498)
Diluted EPS ($USD)	$(0.07)	$(0.13)	$(0.06)
Adjusted Net Loss ($USD Millions)	$(1.172)	$(2.574)	$(1.292)
Adjusted EPS ($USD)	$(0.06)	$(0.11)	$(0.05)
EBITDA ($USD Millions)	$(0.713)	$(2.410)	$(0.436)
Adjusted EBITDA ($USD Millions)	$(0.715)	$(2.194)	$(0.361)

Segment Revenue

Segment Revenue ($USD Millions)	Q2 2022	Q1 2023	Q2 2023
Engineering	$8.0	$6.9	$9.0
Workforce Solutions	$4.8	$3.9	$3.3

KPIs and Balance Sheet Highlights

KPI	Q2 2022	Q1 2023	Q2 2023
Orders – Engineering ($USD Millions)	$3.8	$14.7	$4.9
Orders – Workforce Solutions ($USD Millions)	$3.1	$4.4	$1.3
Total Backlog ($USD Millions)	$34.0	$40.9	$34.4
Backlog – Engineering ($USD Millions)	$27.5	$31.4	$26.9
Backlog – Workforce Solutions ($USD Millions)	$6.5	$9.5	$7.5
Cash and Equivalents ($USD Millions)	—	$1.27	$1.80
Restricted Cash (Total) ($USD Millions)	—	$1.58	$1.60

Note: “—” indicates not disclosed in cited documents for that specific period.

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Quantitative Revenue/ EPS/ Margin Guidance	2H 2023	Not provided	Not provided	Maintained “no formal quantitative guidance” stance
Operating Expenses	2H 2023	—	“Cost containment measures… will continue to keep costs under control”; OpEx showed significant improvement q/q	Qualitative improvement
Cash Flow	2H 2023	—	“Positions us for improved cash flow in the second half of 2023”	Qualitative improvement
Orders/Backlog	Near-term	—	“Nearly $5M in orders… slipped from Q2 into Q3. All… closed in early Q3”	Timing shift clarified
NASDAQ Minimum Bid Price Compliance	2023	—	Extension to October 30, 2023 to regain compliance	Deadline extended

No formal numerical guidance was issued in Q2 2023; management provided qualitative expectations on OpEx, cash flow, and order timing .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2022 and Q1 2023)	Current Period (Q2 2023)	Trend
Digital control room modernization	Emphasis on rebuilding sales/recruiting and MSAs; industry spend to improve; early signs via renewed contracts	Announced post-Q2 Workforce Solutions contract up to $15M for main control room digital modernization; highlights multi-year opportunity	Strengthening opportunity pipeline
Simulator upgrades and Engineering mix	Olkiluoto training simulator upgrade win (~$0.9M) in Finland; strong Engineering orders ($14.7M in Q1)	Engineering revenue up to $9.0M; multiple significant upgrade projects driving margin	Positive execution, margin accretive
SMR momentum and macro nuclear renaissance	AP300 SMR plans; license extensions; Vogtle 3 startup; macro tailwinds	CEO reiterates grid stability, energy security, decarbonization tailwinds; cites Canada, Finland, US developments	Sustained industry tailwinds
Workforce Solutions demand	Sequential improvement in Q4→Q1, still below prior year; retooling in progress	Q2 revenue down; customer resistance; orders impacted by $1.9M terminations	Soft; execution focus and selective ramp
Cost containment / OpEx	2023 run-off of leases; vendor savings; back-office changes; expect OpEx improvements starting Q2	OpEx down q/q; further vendor/lease/labor savings enacted late Q2; expect stabilization/improvement	Improving expense trajectory
Financing / Liquidity	Convertible debt repayment choices; receivables collection expected to support near-term cash	Follow-on financing with Lind Partners ($1.4M proceeds); extended repayment to July 2024; cash $1.8M, restricted cash $1.6M	Liquidity bolstered; lower monthly repayment

Management Commentary

CEO on order timing and macro tailwinds: “Orders in Q2 were lighter than desired, as we had nearly $5M in orders that slipped from Q2 into Q3. All of these orders have closed in early Q3… Longer term, the macro trends towards grid stability, energy security and decarbonization are creating strong tailwinds for the industry” .
CFO on OpEx and cash flow: “operating expenses reflecting significant improvement over prior quarter… initiatives… will continue to keep costs under control… positions us for improved cash flow in the second half of 2023” .
CEO on Engineering execution: “engineering teams… focusing on high-margin business… higher utilization than we’ve seen” .
CFO on cost actions timing: “many of our more significant cost reductions were implemented toward the end of the second quarter… expect… reap more benefits going forward” .
CEO on industry context: cites Finland’s OL3 lowering spot prices; Canada’s Bruce Power expansion; US Vogtle 3 commercial operation; GSE technology basis for AP1000 simulation systems .

Q&A Highlights

Utilization and margin focus: Management emphasized disciplined focus on “high-margin business” and higher Engineering utilization driving better results .
OpEx stabilization: Cost actions (leases, vendor renegotiations, labor reductions) executed late Q2 should benefit forward quarters; expect stabilization/slight improvement .
Orders/backlog dynamics: Q2 orders pressured by ~$1.9M early terminations; backlog used to support revenue; several slipped orders closed early Q3 .
Liquidity and financing: Follow-on Lind financing ($1.4M proceeds) and extended repayment to July 2024 lowered monthly repayment by ~$133k; cash $1.8M, restricted cash $1.6M .

Estimates Context

S&P Global/Capital IQ consensus EPS and revenue estimates were unavailable for GVP due to missing SPGI mapping, so a formal comparison to Wall Street expectations cannot be provided at this time. As such, beats/misses versus consensus are indeterminate.

Key Takeaways for Investors

Engineering-led improvement: Sequential revenue and margin expansion reflect strong execution on simulator upgrade projects; watch Engineering orders and mix to sustain margins .
Expense discipline: OpEx fell meaningfully q/q; further vendor/lease/labor savings suggest better operating leverage and potential cash flow improvement in H2 2023 .
Order timing risk but improving: Q2 softness driven by terminations and slippage, but ~$5M of slipped orders closed in early Q3; monitor conversion pace and backlog recovery .
Workforce Solutions remains a drag: Continued customer hesitancy and competitive pressure; selective ramp on digital control room projects could be an upside swing factor .
Industry super-cycle tailwinds: Grid stability, energy security, and decarbonization support multi-year investment in nuclear; GSE’s simulator/digital control competencies are aligned to spend areas (AP1000, SMRs) .
Liquidity improved near-term: Lind financing and extended repayment lower cash demands; receivables collections and backlog conversion are key to sustaining liquidity .
Catalysts: Additional Engineering wins, Workforce Solutions uptake from large digital modernization programs, and visible margin/OpEx progress could drive stock narrative despite lack of formal guidance .

GSE SYSTEMS INC (GVP)·Q2 2023 Earnings Summary