ShiftPixy, Inc.
Q3 2018 Earnings Call Transcript

Published: 17 Jul 2018

[Operator:]

Greetings and welcome to the ShiftPixy Fiscal Third Quarter 2018 Financial results Conference Call. All participants will be in listen-only mode. I'll now turn the call over to Vance Edelson with ICR.

[Vance Edelson:]

Thank you, [Lattice]. Good afternoon everyone and welcome to the 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 described 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. Also on today's call, management will be referring to certain non-GAAP financial measures. These non-GAAP measures allow investors to compare results of operations in the current period to prior results based on the Company’s fundamental performance and analyze operating trends of the business. Also any comparisons made today are based on a comparison to the same period in the prior year unless otherwise stated. With that, it's my pleasure to turn the call over to Chief Executive Officer, Scott Absher. Scott?

[Scott Absher:]

Thank you and good afternoon everyone. We appreciate your joining us for today's call. Within the past hour, we released our financial results for our fiscal third quarter of 2018 ended May 31, 2018. If you do not have a copy of the press release, please visit the Investor Relations section of our website. I am going to start by reviewing highlights for the quarter, provide an update on our many operational accomplishments and then turn it over to Patrice to review our financial performance. Finally, we will take questions that analyst and investors have provided us before the call. For investors who are new to the ShiftPixy story, I'd like to begin by providing a little background. ShiftPixy is a staffing enterprise focused on business and workers in an environment in which shift or other part-time and temporary positions commonly known as gigs are performed. We focused on the restaurant and hospitality industries which account for about half of the workers in the rapidly growing U.S. part-time labor market. We are endeavoring to bring to the Gig Economy a proprietary and sophisticated technology platform that's compliance orient, helping businesses with the numerous compliance requirements such as those related to workers compensation, paid time off accruals, payroll taxes, benefit plans, unemployment taxes and claims them so forth. We hire the workers and manage the compliance requirements with the goal of allowing the workers to easily move amongst our clients. Our clients get ready access to a flexible employee base along with the confidence with compliance needs are met, while the workers or shifters as we call them are paying better flexibility and access to a broader array of shifts. The Gig Economy is creating too headaches for restaurants and hospitality business operators and ShiftPixy is looking to address both. The first is the toxic levels of turnovers they face. We are arranging for part-time workers in our ecosystem to no longer need to hit the streets to hunt for jobs. Instead from their smartphones, they will be able to find real-time local opportunities. The business operators meanwhile will have a platform to connect with qualified and available part-time workers. Our scheduling technology will allow us to continuously monitor for work schedule gaps that can be offered to our fast growing on demand workforce essentially liberating businesses from that substantial employer responsibility they currently face. The second issue is the emergence of the new convenience economy propelled by third-party delivery providers. Quick Service Restaurants known as QSRs are increasingly generating new income under third-party delivery partnerships. In fact, these third-party providers are a key driver of the Gig Economy. These QSR brands have spent decades building a reputation are now surrendering their brand, the customer experience, and their customer data to third-party providers. ShiftPixy is preparing to offer them an extension of their operator platform allowing them to self deliver with precision and provide a better brand centric customer experience. With that as background on ShiftPixy's emerging central role in the new Gig Economy, I will provide an overview of our fiscal third quarter results. At the high level, our gross billings during the third quarter of fiscal year 2018 were up a 119% compared to the corresponding quarter in the prior fiscal year and that represents a significant acceleration over the last quarter's 58% growth. The increase is directly attributable to an increase in the average number of worksite employees to 7,648 versus 3,994 in the year earlier period. Before I hand it over to Patrice for more details around the quarterly results, you may have noticed we had a flurry of press releases since our last quarterly call outlining important developments here at ShiftPixy. In mid April, we've welcomed Zion Delivery Service to our ecosystem by letting us take over employer status of delivery drivers Zion is looking to streamline its recruiting and scheduling demands. This in turn should allow Zion to scale and grow its business with Amazon Logistics. Zion was founded in 2004 and has been growing rapidly, and by tapping into the ShiftPixy platform, they should be able to expand their footprint beyond Southern California. The next week, we announced the expansion of our ecosystem with the arrival of new brands attracted to our unique financial and insurance transaction metering platform. This included a 27 location franchisee of one of the country's largest pizza brands. Our micro-metering approach to this key component of our technology applied to incremental payment transactions and related insurance coverage is based on real-time use and exposures. It's gratifying to see new clients specifically drawn to our innovative capabilities especially such a large franchisee which views delivery as the foundation to their business. Moving into May we highlighted with the press release, California Supreme Court ruling that has the potential to pressure employers to begin classifying their gig workers as employees rather than independent contractors. This is reduced or may face multiple new burdens and higher cost to comply. ShiftPixy with its innovative tech driven and compliant employment solution can help these companies avoid these hassles, so they can focus on growing and developing their businesses instead. As we mentioned at the time, our original DNA is employer compliance and now we're allowing our clients to comply one shift at a time. You see the California Supreme Court ruling as enhancing the appeal of ShiftPixy's compliant solution while also offering those employers the flexible workforce they need. Moving further into May, we announced the opening of our Chicago location which marks the latest expansion of our rapidly growing national footprint. Earlier in the year, we announced our office openings in Orlando and Austin, and we now have a total of five locations throughout the country, up from just one a year ago. Our participation at the National Restaurant Association show in Chicago confirmed for us that the city is a natural fit given its dominant food and hospitality scene. We couldn’t be more excited to open shop in Chicago which will act as a terrific gateway for us to expand further into the Midwest. I hope this discussion gives you a good deal for the rapid progress we’re making and how excited we are about the growth of the business. And with that, I'll turn it over to Patrice to provide further details on our financial performance during the fiscal third quarter. Patrice?

[Patrice Launay:]

Thank you, Scott. Good afternoon everyone and thank you for joining the call. We generated gross billings of 60.2 million during the third quarter of fiscal year 2018, which represents 119% annual growth and the sequential increase of 24% over the February quarter. As Scott mentioned, the increase is directly attributable to an increase in the average number of worksite employee which was 7,648 in the fiscal third quarter of 2018, an increase of 92% over the past year. I am pleased to say that this rapid growth is continued into our current fiscal quarter with 14 new clients added since the end of May. With these new clients, we’re servicing roughly 337 new worksite employees, generating approximately 12.3 million in additional gross billings per year. Our gross profit for the quarter was 1.5 million, up from 635,000 in the prior year. This implies a gross margin of 17% which represents an increase over the prior year period of 14% gross margin. Our net loss per share was $0.06 during the quarter which was an improvement over a loss of $0.11 in the prior year period. That concludes our prepared remarks for today. Similar to last quarter, we've asked members of the investment community to email us the questions. And Vance will now take us through the Q&A portion of the call. Vance?

[A -Vance Edelson:]

Okay, thank you Patrice, and thanks to all those who submitted questions this quarter. Let's dive right in with the first question received. So, the first question is. Can you comment on the success of the various new offices? And what states they are in? And are there any early indications of success in Chicago? Related to that, when a new location is announced like Chicago, how quickly does Pixy see revenue from that location?

[Scott Absher:]

I've grossly targeted the large metro markets we are now in as our starting place. Part of that timing and movement into those markets is opportunity driven, the opportunity to take on several new clients or the opportunity to bring on high quality team member into the sales operation. In some of our new markets we have business in place before we open the office and in cases like Orlando and Chicago, the decision was people driven. On a cold open, generally, we expect to see clients on board within six months.

[Vance Edelson:]

This next question is probably for Patrice. Can you provide some idea of what percentage of sales now comes from outside of California?

[Patrice Launay:]

Sure, Vance. We generated gross billings of 60.2 million during the third quarter of fiscal year 2018, of which 92% came from the state of California, which is actually consistent with the previous fiscal quarter. Our next major market penetration in terms of growth billings are Texas and Arizona. We also anticipate Pennsylvania to increase in the coming fiscal quarter as the Company on-boarded a 27 locations from franchises one of the country's largest pizza brands.

[Vance Edelson:]

Let's go to the next question. Have there been any regulatory changes that have affected business prospects either positively or negatively?

[Scott Absher:]

Well, the California Supreme Court, they have helped us a bit with the Dynamex case. We believe that in developing a new test to determine independent contractor status, the court is prompting many companies to change from a model that uses independent contractors to a model that uses employees. We can help such transitions because we embrace employer status with regard to workers and endeavor to bring employment law compliance with the relationship. If the case proves to be a tipping point for the court's another jurisdiction, we can expect to see transmissions occurring in other states as well. We want to position our company to be the best commercial solution choice that makes into that type of transition payments.

[Vance Edelson:]

All right, appreciate that. And the next question probably also for Scott. Can you provide a feel for the number of employees required per office? And how quickly it ramps? For example, how many currently work in New York, which you've in since August of 2017 versus Chicago which just recently opened?

[Scott Absher:]

Sure, Vance. These offices always begin with sales staff, and in the case of New York, we have a four person sales team now assemble there in New York. In the case of Chicago, Austin and Orlando, we start with sales teams of two people. The initial support for client service for these offices comes from our Irvine headquarters, but as these regional populations grow, we will establish regional staff to support these regional clients as well those staff decisions or additions are population driven decision for us.

[Vance Edelson:]

Okay, great. Next question I think we're up to a number six here. We have heard a lot about ShiftPixy helping companies to self deliver. Can you give a real-life example of how a company doing business with ShiftPixy will benefit by keeping delivery in-house?

[Scott Absher:]

Sure. ShiftPixy self-delivery concept was a result of our daily work with multi-unit fast food operators. We saw this fast growing way of third-party delivery driving new sales to these operators. We saw the same gig platforms that were the root cause of the turnover problem in the -- part-time labor market for the restaurant operators, now leveraging these same platforms to create sales growth for them. We watch the conversation get louder and the third party momentum grow stronger and stronger, but when we looked at the new convenience way, we asked our operator clients, why they would surrender their brand, their customer experience, and now their customer data to a kid in a red cap and golf shirt. That turned out to be a big question that unloaded story after story, all describing serious brand damage. We knew that part of the enabling structure that allows pizza operators to deliver, there's an insurance layer that really isn’t easy for the rest of fast food to access, but a layer that we could provide and meter through the ShiftPixy platform. So, we asked these same operators to shift their third-party brand damage stories, if they could, and we could enable them to assist one or two of their own uniformed and trained shift workers to take orders to their customers with that help them better ride the new convenience way. And the response was not only enthusiastic, but it opens up a lot of new and very large conversations. Since ShiftPixy lives with the top order clients daily, this modest extension of our engagement now allows operators to have people assigned as drivers who maybe cashiers or cooks shoot out to a customer with an online order as it comes in. ShiftPixy's mobile platform manages driver, the road and may end -- actually meters the required coverage one trip at a time.

[Vance Edelson:]

So, let's move on. Next question is. How does Zion Delivery Service factor into the broader ShiftPixy story? Will your other clients be able to utilize ZDS for their own deliveries?

[Scott Absher:]

No, not really. That's not how ZDS is set up. Zion is really more of an interesting indication of what's going on at Amazon. There's a strong push to get more independent operators into the Amazon Delivery family and Amazon is looking to build their network with entrepreneurs like ZDS who will make an investment in people and equipment to take more the Amazon Delivery burden. What's great for ShiftPixy is that we're part of that enabling infrastructure that allows these entrepreneur operators to run well for Amazon. The ShiftPixy approach to human capital will make sure that employer related liabilities don't end up on Amazon's desk and that operators are always have a locally available pool of Amazon vetted drivers to run the routes.

[Vance Edelson:]

Understood, okay, this next one is interesting. Any thoughts on starting a standalone delivery company division to compete with GrubHub and Uber Eats due to ShiftPixy already being able to reduce the liability due to their insurance expertise and reach it would seem to make sense.

[Scott Absher:]

We've been asked that quite a bit, but that's not our core competency, and once you understand the ecosystem approach ShiftPixy is deploying, it becomes clear why that is not the best way for our clients to use us. ShiftPixy approach leverages to fix people resources at the operators individual location to complete that delivery loop. If we became a third-party operator then we would be contributing to the brand damage we're trying to help them avoid. Our approach is unique and highly valuable on its own.

[Vance Edelson:]

Okay, thank you for that. Let's go on to some question number nine. I understand the app is not fully functional in terms of allowing any worker to sign up and apply for any job. What milestones need to occur for this to take place? And how much will it cost? And when should be we expect it?

[Scott Absher:]

Well, this summer is our major feature rollout, right now, we on-board our field employees via the mobile app which alone is very valuable for growing our business quickly. But new scheduling for home teams opens up this summer as will our intermediation, which is where employees already in the system can look at locally available shift opportunities. Coming into the fall in Southern California, we have enough population density that we can start allowing people outside the system to download the app and go through the employment application and on boarding, to then be vetted and allowed to look at these open shifts. As to cost, this is where we have been investing aggressively and this was built into our recent raise which allows us to get our primary user features completed.

[Vance Edelson:]

Alright, that's great. Moving right along, I recently read that New York has joined other states in investigating whether fast food outlets are practicing no coach rules as part of their franchise agreements, which make it difficult for employees to shift among jobs and could be keeping their wages artificially low. What might this mean for ShiftPixy?

[Scott Absher:]

Well, it seems as if some of the states are preparing to implement legislative solutions that will enable workers to move more fluidly among franchisees or franchisee contracts or franchisee policy discourages such movement. We first do not want to know the outcome of such efforts, but it's fair to say that our platform is designed to enable workers to move freely amongst our clients. In some instances that that could mean an employee is moving from one franchisee to another, but the movement would be temporary because we’re not trying to help our clients and workers, still avoids on a shift by shift basis. Workers would also be able to accept shift work outside of a franchise, again on a temporary shift by shift basis.

[Vance Edelson:]

Next investor question is as follows. Since we're halfway through your final fiscal quarter of the year and this one is probably for Patrice. Can you share with us how business has been this quarter?

[Patrice Launay:]

Vance, again, I’d like to hold the fourth quarter for next earnings call, but I would remind folks that monthly numbers tend to be inconsistent and sometimes seasonal. In that sometime, it doesn’t make sense to engage in a stacking relationship towards the end of the calendar year, but the strong sequential growth rate that with experience should provide a good example of the power of the business model. Our gross billings for the month of June 2018 grew 14% sequentially over the month of May.

[Vance Edelson:]

All right, sounds good and that will wrap up our Q&A session for this afternoon. So, I am going to hand it back to Scott for closing remarks.

[Scott Absher:]

Great, thanks, Vance, and I want to thank everyone for joining us today, and on behalf of Patrice and the rest of the team here at ShiftPixy, we appreciate your ongoing support, your interest in the Company. We look forward to providing our next update when we report our August quarter and full year-end results. Have a good evening everyone and we’ll speak with you soon.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.