ShiftPixy, Inc.
Q3 2019 Earnings Call Transcript

Published: 22 Jul 2019

[Operator:]

Greetings and welcome to the ShiftPixy Fiscal Third Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode.I'll now turn the call over to Vance Edelson with ICR.

[Vance Edelson:]

Thank you operator and welcome everyone to this morning's call. I'm here with ShiftPixy's CEO, Scott Absher; and CFO, Patrice Launay.Before we begin, I want to remind everyone that today's call will contain several forward-looking statements, all of which are subject to risks and uncertainties and the Company assumes no obligation to update or revise any forward-looking statements. These risks and uncertainties, some of which are detailed in today's press release and in the Company's SEC filings, could cause actual results to differ materially from those in the forward-looking statements.On today's call, management will be referring to certain non-GAAP financial measures. These non-GAAP measures allow investors to analyze operating trends and compare results of operations in the current period to prior results based on the Company’s fundamental performance. Also any comparisons made today to prior period results are based on a comparison to the same period in the prior year unless otherwise stated.Within the past hour, ShiftPixy released its financial results for the fiscal third quarter ended May 31, 2019. If you do not have a copy of the press release, please visit the Investor Relations section of the Company’s website.With that, it is my pleasure to hand the call over to ShiftPixy's Chief Executive Officer, Scott Absher.

[Scott Absher:]

Thank you, Vance, and good morning, everyone. We appreciate you joining our call and we're excited to bring you up to date on our rapid progress. For anyone who is new to the ShiftPixy storey we invite you to visit our website to learn more about how we are bringing a proprietary sophisticated and compliance oriented technology platform to the gig economy, one that helps businesses with the many burdensome compliance requirements they face while affording shift workers the opportunities and flexibility they crave.Right now, I'd like to dive in with the highlights of our quarterly performance and some very recent announcements we've made before turning over to Patrice who will walk us through the financials in operating metrics in greater detail. We will then close with a Q&A session.During our quarter ended May 31, ShiftPixy's rapid growth continued driven by increased penetration of our target markets. Taking a look at the overall numbers our gross billings climbed 57% versus the prior year third quarter including a 14% increase just since the February quarter. This growth was the result of the growing average number of worksite employees on our platform which by the end of May had reached 10,860 or increase of 50% over the past year.We're also pleased to report a higher gross profit of $2.7 million despite the early stage nature of our business. And it is gratifying to see the rapid acceptance of our platform by both employers and employees alike, who clearly appreciate the value of our business proposition. What's more exciting is that we're quickly approaching the next important phase of our business.For several quarters now we've been quickly signing up new operators and thousands of workers, all in an effort to build the critical mass necessary for the next phase. Over the next several weeks we plan to actually turn on robust functionality of the sophisticated platform our developers have been so hard at work on. This is an exciting inflection point for us at ShiftPixy and one that we believe will further stir adoption of our platform and therefore our own growth profitability and efforts to create shareholder value.Our self delivery platform in particular is arriving at the perfect time to help our growing number of restaurant operator clients. We view this innovative extension of our human capital platform at the National Restaurant Association show in May and it is already receiving strong reception in the marketplace. With the [indiscernible] economy rapidly expanding, our clients welcome the opportunity to address their toxic turnover and delivering quality issues, not to mention their own profitability challenges stemming from the advent of self delivery without having to invest in expensive technology.Related to creating shareholder value, last week we announced a stock repurchase plan reflecting our belief that recent share prices haven’t adequately reflected our significant progress since going public in June 2017. Our Board has granted authorization to repurchase up to 10 million shares of our common stock and it is our intention to opportunistically buy back shares as we feel appropriate while course also investing what is necessary to continue ShiftPixy's rapid growth. And more on this in Q&A I'm sure.I'll now turn the call over to Patrice, who will take us through the quarterly results in greater detail and provide an update on our improving liquidity outlook and our progress reaching cash flow breakeven.Patrice?

[Patrice Launay:]

Thank you, Scott. It's my pleasure to provide everyone with an update this morning. Starting with the top line, our fiscal third quarter results includes gross billings of $94 million reflecting 14% sequential growth and 57% growth over the same period last year. As Scott mentioned, our average number of worksite employees during the quarter was 10,860 and that reflects 12% sequential growth and 50% growth year-over-year. Our gross profit expanded to $2.7 million from $1.5 million the prior year third quarter and that reflects the gross margin of 19% up from 17% a year earlier.Similar to last quarter the higher gross margin is attributable to the scale advantage in our Workers' Compensation programs, as well as favorable outcome in employer payable taxes. We generated a net loss per diluted shares of $0.15 compared to a net loss per diluted share of $0.06 the prior year quarter.Turning to the balance sheet now, we ended up the month of May with approximately $2.9 million in cash which was above the $1.6 million level at the start of our fiscal year in September. I want to provide a feel for our improving financial outlook as well. As Scott mentioned we're reaching an improvement flexion point at ShiftPixy, during which our growth should benefit from the activation of greater functionality of our platform.Even ahead of this, just half way through our fiscal fourth quarter 2019 which ends on August 31, it appears our growth has remained robust, specifically we've brought on board another 17 new clients since the end of May, which have added approximately 6000 new worksite employees generating roughly $29 million in additional annual revenue.From a cash flow standpoint we anticipate achieving breakeven towards the end of our first quarter of fiscal 2020. In other words by November and once again we believe the activation of user functionalities will significantly improve our operating and financial metrics.I think we are going to set some of our remarks along convertible debt activity and move on our newly announced share repurchase program for Q&A session that Vance will now walk us through. Once again, we ask members of the investment community to send us their questions which cover these topics. Vance?

[Vance Edelson:]

Thank you, Patrice. So we received a really interesting and diverse set of questions this quarter, but I want to start right in with a couple of questions on what many investors consider to be the heart of the matter. So for starters, many want to know about the 8-K filing that announced the conversion requests by the 2018 and 2019 convertible bond holders would no longer be honored putting you into a voluntary default on these instruments. So Scott, were what is the thinking there?

[Scott Absher:]

Sure Vance, I appreciate the opportunity to explain why we decided it was best for ShiftPixy to force the notes into default. In simple terms we believe our former bankers offered poor advice leading us down the path that eventually harmed our share price and made additional capital raising an unattractive option given where our stock was trading. We've now taken two steps to rectify the situation. The first was ceasing to honor the convertible bond redemption request which we we're constantly punishing our stock price, and the second is, the stock buyback program we just announced on Friday. It is our hope that these two actions will allow ShiftPixy shares to start to better reflect the steady progress we are making executing our business plan.

[Vance Edelson:]

Okay got it, and then one investor has a follow-up which is, how are the negotiations with the convert holders going and is negotiations still a fair way to describe it or has it kind of moved beyond that?

[Scott Absher:]

We're talking with them and we hope to come to a mutually beneficial arrangement. In other words we think there's a lot of future value in ShiftPixy stock and ideally that can be a benefit to all our stakeholders including the converts.

[Vance Edelson:]

Okay, I understood. And what's really a closely related question, what are you doing to address the notification from NASDAQ that due to where shares were trading you had six months to regain compliance with their listing requirements. It sounds like the steps you just described are also designed to address this issue as well?

[Scott Absher:]

That's right Vance. It is our hope that ceasing the conversions which were a primary reason for the pressure on the stock and by opportunistically buying back shares in the open market, we can now support our share price, hopefully move the stock above the $1 threshold for the NASDAQ listing and hopefully quite a bit higher than that.

[Vance Edelson:]

All right, fair enough. This is then maybe a related question for Patrice, what are the mechanics around the buyback, are there specific open windows in which you need to operate and any other limitations or thoughts you have around how you will execute on the buyback?

[Patrice Launay:]

Sure Vance. As always there are some timing volume restriction for any share buyback program, but overall we tend to repurchase as the market conditions warrant.

[Vance Edelson:]

Okay, makes sense. Maybe back to you Scott on this next one, this is a question we haven’t received before probably because ShiftPixy is still quite new. Are any of your current contracts up for renewal in the next few months?

[Scott Absher:]

Vance, our business operated clients sign 12 month auto renewal service agreements. The only times we review these auto renewals is in the case where Worker's Compensation losses caused us to reevaluate, re-price or remove the client. Our business does not have the contract ebb and flow which is why our revenue continues to stack quarter-over-quarter.

[Vance Edelson:]

All right, thanks for that. Another new quarter this quarter, do you have any plans for advertising your videos on social media like Facebook or Reddit or is your Youtube platform your main focus?

[Scott Absher:]

Our target clients don’t feed on social media. So we keep our industrial messaging on platforms that help us support the brand. Once we open up the doors to hiring [ph] shifters from outside of our platform, we intend to leverage the other social media platforms.

[Vance Edelson:]

All right, that's good to hear. Now here're one we received probably a month or two ago and I think would be helpful for everyone to hear the answer, why is the app showing far fewer than 10,000 downloads when on your last conference call you mentioned there were close to 10,000 shifters already?

[Scott Absher:]

Sure, that's an easy one. When we launched a new version 2.0 the app, the app store counter for us reset. With the new features being released, you'll see those numbers tick up.

[Vance Edelson:]

Okay, very good. Here is a question we seem to get every quarter, are you pursuing any new contract? I think you've explained the process in recent quarters Scott, but feel free to elaborate?

[Scott Absher:]

As I stated last quarter, our approach is always to the franchised operators under various national brands. Once we engage an operator under one of those national brands we approach the rest. So you won't see "major clients" but rather depth within the brands whose operators we are continuing to stack.

[Vance Edelson:]

Got it. Here's another question that I think you've also covered before, but perhaps it's worth a refresh. Do you think – who do you think the company's biggest competitors are?

[Scott Absher:]

There is no one serving the markets we serve with the same strategy and technology stack. We see people doing pieces of what we do in other markets. So right now we're a first mover in a wide open market.

[Vance Edelson:]

Okay great. A lot of investors ask about upcoming catalysts in this investor rights with potential events, oh sorry, what potential events should we be watching for over the coming few months? So perhaps you can provide a rough timeline Scott, of what's on tap in terms of future rollouts?

[Scott Absher:]

Well, hopefully by now shareholders and observers see the pattern of growth and can see that we will improve a little every month with our recurring revenue model. That steady growth, along with our continually improving cash flow should come as no surprise because of the business model. The events I keep an eye on are population growth and geographic expansion, getting critical mass and the national footprint really laid the groundwork for a much more rapid growth.

[Vance Edelson:]

Interesting, all right thanks for that. Let's transition over to a couple questions for Patrice before wrapping up. Investors of course want to know about the path to breakeven and how growth in the business and the revenue that growth provides, how that offsets the R&D expense and other spending needs? So what can you share with us there Patrice?

[Patrice Launay:]

Sure Vance. I would like to remind everyone that as an early stage company we will continue to invest in the business model to end up what we consider to be tremendous potential, and to leverage our market advantages. We are also very comfortable with our growth trajectory and this growth positive contribution to cash flow. And that our investment in our operations staff and takes [indiscernible] give us sufficient capacity to support growth. We are seeing without having to add our fixed [indiscernible].However, we anticipate an increase in our operating expense as we begin to build our software development team internally and also from a licensing agreement related to our sub delivery solution. This will allow us to expedite the technology department which should further accelerate the growth of the company. Assuming expenditures are paid as incurred in outside of product development the company is now burning approximately $2 million per quarter or slightly less than $700,000 per month, we expect to generate additional cash flow from the growth of our base of client and worksite employees as well as the better monetization of our baseline engagement.The company is beginning to onboard larger clients and franchisees of national brands producing significant increases in the number of worksite employees as businesses here value position as necessary for their own success. With the added fixed overheads the company will hit breakeven by the end of our fiscal first quarter of 2020 as I mentioned in prepared remarks. We believe the critical mass is now between 22,000 and 24,000 will be added overheads.

[Vance Edelson:]

All right, thanks for all that color Patrice, and let's finish off with an interesting question which I think reflects ShiftPixy's unique nature. This investor wants to know how to classify the company. Are you just another technology or software company or how do you really see yourself and may be you can take a stab at that one too Patrice?

[Patrice Launay:]

Yes, it's an interesting question. I think the – I'd like to remind that the technologies are only here to support our human capital management strategy and reduce the multiple touch points specific to our target market and alleviate all the manual implication for continually staffing and training new employees. Therefore, as I think you've heard Scott mention before, at its heart ShiftPixy is a staffing enterprise, focused on both businesses and workers in the new gig economy.

[Vance Edelson:]

All right, terrific. So that will conclude this morning's Q&A session. Thank you both as always for providing these thoughtful answers, and I'll now hand it back over to Scott for his closing remarks.

[Scott Absher:]

Great. I went to thank everyone for being with us this morning and as always we appreciate your interest in ShiftPixy. This is an exciting time for us and we look forward to providing additional updates as we close out our fiscal year. Thanks again for listening in today and I hope everyone has a terrific week. Speak with you soon.