Executive Summary

Q3 2023 delivered margin-led improvement: gross margin expanded to 32.1% (highest since 2016), driving positive adjusted EBITDA of $0.7M, though GAAP net loss widened to $($2.0)M due to a $0.9M impairment and a $0.8M legal settlement .
Orders re-accelerated to $14.7M (vs. $6.2M in Q2), lifting backlog to $37.6M (vs. $34.4M in Q2); management highlighted improved engineering order flow and utilization as the key drivers .
Segment mix favored higher-margin Engineering (Q3 revenue $8.7M) while Workforce Solutions remained soft ($2.9M), but achieved breakeven on an adjusted EBITDA basis; software and support sales reached $1.4M in Q3 (YTD $3.7M) .
No formal quantitative guidance was issued; management emphasized sustained cost control (ex one-time items, OpEx would be ~ $3.4M/quarter) and order conversion, positioning for operating leverage as volume improves .

What Went Well and What Went Wrong

What Went Well
- Margin inflection: gross margin rose to 32.1% (from 26.0% in Q2 and 27.4% in Q3’22), supported by higher Engineering mix, improved utilization, and project execution; “Gross profit margin of 32.1% was the highest it's been since 2016” .
- Turned to positive adjusted EBITDA: “our first positive Adjusted EBITDA in eight quarters, and strongest Adjusted EBITDA since 2020,” at $0.7M; management credited utilization and cost controls .
- Order momentum/backlog: Q3 orders of $14.7M (vs. $6.2M in Q2; $10.2M in Q3’22) lifted backlog to $37.6M; CEO: “Our opportunity pipeline is very strong… focused on converting those opportunities to bookable backlog” .
What Went Wrong
- Workforce Solutions softness: revenue declined to $2.9M (from $3.3M in Q2 and $3.8M in Q3’22); early project terminations (~$1.7M) impacted orders despite breakeven adjusted EBITDA in the segment .
- GAAP profitability impacted by non-recurring items: Q3 included a $0.9M impairment (Workforce Solutions) and a $0.8M litigation settlement, driving GAAP net loss to $($2.0)M .
- Customer spend remains conservative, delaying nonessential projects; management cited macro pressures and prioritization of regulatory and life-extension investments .

Financial Results

Metric	Q1 2023	Q2 2023	Q3 2023
Revenue ($M)	$10.9	$12.4	$11.6
Gross Profit ($M)	$2.4	$3.2	$3.7
Gross Margin (%)	22.0%	26.0%	32.1%
Operating Expenses ($M, GAAP)	$5.2	$4.0	$5.5
Operating Loss ($M)	$(2.8)	$(0.8)	$(1.8)
Net Loss ($M)	$(3.0)	$(1.5)	$(2.0)
Diluted EPS (GAAP)	$(0.13)	$(0.06)	$(0.82)
Adjusted Net Income (Loss) ($M)	$(2.6)	$(1.3)	$0.175
Adjusted EPS	$(0.11)	$(0.05)	$0.07
Adjusted EBITDA ($M)	$(2.194)	$(0.361)	$0.659

Non-GAAP adjustments: Q3 adjusted metrics exclude a $0.9M impairment and a $0.8M legal settlement; management noted OpEx would have been ~ $3.4M excluding non-recurring items .

Segment Revenue ($M)

Segment	Q1 2023	Q2 2023	Q3 2023
Engineering	$6.9	$9.0	$8.7
Workforce Solutions	$3.9	$3.3	$2.9

Orders and Backlog

KPI	Q1 2023	Q2 2023	Q3 2023
New Orders ($M)	$19.1	$6.2	$14.7
Backlog ($M, end of period)	$40.9	$34.4	$37.6
Backlog – Engineering/Performance ($M)	$31.4	$26.9	$31.4
Backlog – Workforce Solutions ($M)	$9.5	$7.5	$6.2

Additional KPIs

KPI	Q1 2023	Q2 2023	Q3 2023
Software & Support Sales ($M)	$0.9	$1.1	$1.4
Cash, Cash Equivalents & Restricted ($M)	$2.8	$3.4	$3.5

YoY Snapshot (Q3 2023 vs. Q3 2022)

Revenue: $11.6M vs. $11.9M (down $0.3M) .
Gross Margin: 32.1% vs. 27.4% (up ~470 bps) .
Net Loss: $(2.0)M vs. $(9.0)M (improved), prior-year included $7.5M impairment .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	FY/Quarter	N/A	No formal quantitative guidance provided in Q3 materials	Maintained “no guidance” stance
EPS	FY/Quarter	N/A	No formal quantitative guidance provided in Q3 materials	Maintained “no guidance” stance
OpEx	Ongoing	N/A	Ex one-time items, OpEx would have been ~ $3.4M/quarter; expected to remain at similar levels	New color (no formal guide)

Note: Management did not issue numeric revenue/EPS guidance; emphasis remained on utilization, higher-margin mix, and order conversion. In prior commentary they stated they were not giving guidance; no Q3 press release guidance provided .

Earnings Call Themes & Trends

Topic	Q1 2023	Q2 2023	Q3 2023	Trend
Industry tailwinds (grid stability, energy security, decarbonization)	Strong long-term nuclear renaissance framing	Reinforced IRA/Infrastructure Act tailwinds	“Long-term resurgence” reiterated	Positive, consistent
Digital control room modernization	Strategic opportunity, highlighted as multi-hundred-million per plant over time	$15M multi-year contract announced; more conversions expected	Expect ramp in 2024 as supply chain issues ease	Building pipeline
Engineering utilization/margins	Focus on utilization and cost controls	Higher utilization improved margins	Highest gross margin since 2016; utilization initiative implemented	Improving
Workforce Solutions demand	Retooling; still below prior-year levels	Still softness; early terminations impacted orders	Revenue down; early terminations ~$1.7M; breakeven adj EBITDA	Soft/lagging
Orders/backlog	$19.1M orders; backlog $40.9M	Lighter orders; ~$5M slipped to early Q3	Orders $14.7M; backlog $37.6M	Rebuilding
Cost structure/OpEx	Identified reductions; leases rolling off	Cost containment delivered; OpEx down	Ex one-time, OpEx ~ $3.4M/quarter; similar ahead	Structurally lower
NASDAQ compliance	—	—	Reverse split completed; compliance regained	Resolved

Management Commentary

“Our focus on operational execution resulted in a significant improvement in Gross Profit, ultimately translating into positive Adjusted EBITDA, our first positive Adjusted EBITDA in eight quarters, and strongest Adjusted EBITDA since 2020.” – CEO Kyle Loudermilk .
“We will continue to focus on engineering utilization and driving higher margin business.” – CEO .
“Gross profit margin of 32.1% was the highest it's been since 2016… we implemented a utilization initiative for the Engineering segment that has reduced unproductive labor costs and improved margins.” – CFO Emmett Pepe .
“If these expenses were not incurred, operating expenses would have been around $3.4 million… lower than OpEx costs of $3.8 million in Q2 of this year.” – CFO, re: Q3 one-time legal and impairment .
“During the third quarter, we announced a contract valued up to $15 million over several years to support a project to modernize the nuclear power plants main control room to a digital environment… we expect client spending to ramp up… in 2024.” – CEO .

Q&A Highlights

Engineering order flow is improving across simulation, design & analysis, and programs & performance; higher Engineering mix explains gross margin improvement (Workforce carries lower margins) .
Strategic alignment to lifetime extensions and power uprates at existing plants; GSE sees a large serviceable market relative to its ~$50M scale .
Customers remain conservative, prioritizing regulatory compliance and life-extension/power upgrade projects; GSE is staying close to customers to convert opportunities .
Cost discipline: culture shift to maintain utilization, vendor renegotiations, and scaling without significant cost adds as revenue grows .

Estimates Context

Wall Street consensus (S&P Global) for Q3 2023 revenue and EPS was unavailable through our S&P Global integration for GVP due to a missing mapping; therefore, we cannot provide an estimates comparison for this quarter. We will update if/when SPGI mapping is available (no estimates presented).

Key Takeaways for Investors

Margin and profitability inflection: meaningful gross margin expansion (32.1%) and positive adjusted EBITDA suggest operating leverage from utilization and mix; watch sustainability as volumes evolve .
Orders/backlog improving: Q3 orders rebounded to $14.7M and backlog rose to $37.6M, supporting near-term revenue visibility, especially in Engineering .
Workforce Solutions remains a drag: continued revenue pressure and early terminations; however, breakeven adjusted EBITDA indicates cost actions are taking hold .
Non-recurring items masked GAAP progress: impairment and legal settlement elevated OpEx; excluding these, OpEx would be ~ $3.4M, pointing to a leaner cost base going forward .
2024 catalysts: ramp of the $15M digital control room modernization contract and continued mix shift to higher-margin Engineering and software .
Balance sheet watch: cash and restricted cash of $3.5M at Q3; management is repaying convertible debt (aiming for full repayment by March 2025), recently favoring cash repayments amid business improvement .

GSE SYSTEMS INC (GVP)·Q3 2023 Earnings Summary