ShiftPixy, Inc.
Q4 2018 Earnings Call Transcript

Published: 29 Nov 2018

[Operator:]

Greetings and welcome to the ShiftPixy Fiscal Fourth Quarter and Full Year 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 very much. Good afternoon everyone and welcome to today’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 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 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 fourth quarter of 2018 and full year period ending August 31, 2018. 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's my pleasure to turn the call over to Chief Executive Officer, Scott Absher.

[Scott Absher:]

Good afternoon everyone and thank you for joining today’s call. I am going to start by providing a little background on ShiftPixy for those who are new to our story; I’ll then review highlights from our fiscal fourth quarter results, and provide an update on our recent achievements before handing it over to Patrice to review our financial performance in more detail. We’ll then have a Q&A session. ShiftPixy is a staffing enterprise focused on businesses and workers in an environment in which shift or other part-time and temporary positions commonly known as gigs are performed. We focus 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 oriented, helping businesses with numerous requirements such as those related to workers compensation, paid time off accruals, payroll taxes, benefit plans, unemployment taxes and claims and more. 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 and can have confidence if compliance needs are met. Meanwhile the workers or shifters as we call them achieve better flexibility and access to a broader array of shifts. The emergence of the convenience economy is creating brand new opportunities for ShiftPixy. Quick Service Restaurants known as QSRs are increasingly generating new income under third-party delivery partnerships and have themselves become significant drivers of the Gig Economy. Unfortunately for these QSRs, they’re now surrendering their brand, their customer experience, their reputation and even 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. I’ll touch more on this in a moment. Also noteworthy, our disruptive technology includes a micro metering approach to incremental payment transactions and related insurance coverages. This is based on real-time use and exposures, utilizing a private centralized blockchain ledger to record and track critical human capital validation and utilizing IBM's Watson artificial intelligence engine to provide both our workers and our employer clients with a very person like experience. Turning to our fiscal fourth quarter results. We generated gross billings of 73.4 million up 122% compared to the corresponding quarter in the prior fiscal year and that represents a sequential increase of 18% over the May quarter. The increase is directly attributable to an increase in the average number of worksite employees to 8,538 versus 5,074 in the year earlier period. Before I hand it over to Patrice to walk through the quarterly results in more detail, I’ll highlight some of our recent news that you may have read about since our last earnings call. First, we are hoping to launch before we conclude this calendar year, our driver management feature, as our first step to enable our restaurant operator clients to self deliver and preserve their brand, customer experience and customer data, not to mention the 30% fees they give up to traditional third-party platforms. As I referenced earlier, many of them are highly concerned that customer complaints about food quality, late arrival and damage for wrong orders are harming their brand. What we’re bringing to them is a highly efficient and innovative proposition for fast food and fast casual restaurant operators that addresses these concerns. The new driver management layer in the ShiftPixy ecosystem allows ShiftPixy clients to use their own team members to self deliver a brand intended customer experience. We intend to take the compliance, management, insurance issues related to the support of the delivery option and create a turnkey self delivery opportunity. Another exciting and related topic I'd like to discuss is the launch of our national accounts campaign, which we announced in September. This campaign is directly aimed at helping larger multiunit fast food and fast casual restaurant brands across the country, deal with the food delivery concerns I just described and it's a nod to the fact that ShiftPixy solutions have reached the point at which we can deploy our platform at scale to further support our larger clients. Our new national accounts team focuses on building relationships and working with national brands interested in leveraging our sophisticated offering. The team is deployed from four separate locations including Irvine to cover the Western U.S. accounts, Chicago and Austin for Midwest accounts, and New York for Eastern U.S. accounts. I look forward to updating you on the team’s progress going forward. Third topic I wanted cover is the letters being sent by the IRS to businesses across the U.S. indicating their failure to comply with provisions of the Affordable Care Act. These penalty notices known as letter 226J relate to the alleged failure of companies with more than 50 employees to provide adequate healthcare insurance that is affordable in means of -- meets a minimum value. The fines are stiff and often in the 100s of 1,000s of dollars and you can imagine, it can be quite onerous for small companies to absorb and could potentially even take them out of business. As noted in our press release on this topic because ShiftPixy embraces employer status of our clients and employees and because we handle the administrative and compliance burdens, we are in fact protecting our clients from these unwelcomed violation notices. ShiftPixy has its roots in staffing compliance, which is something that some of our competitors cannot say. It’s also interesting to note that these same smaller companies facing penalties are generally unable to secure a loan or recover the fines, since most banks are unwilling to lend to a company charged with an IRS violation. In summary once again we have an opportunity to prove that our solution is the gold standard for employers looking to succeed and remain compliant in the gig economy. I hope this discussion gives you a good feel for the rapid progress we’re making and how excited we are about the growth of our business. And with that I’ll turn it over to Patrice to drive further details on our financial performance during the quarter. Patrice?

[Patrice Launay:]

Thank you, Scott and thank you everyone for joining our call. It’s a pleasure to speak with you this afternoon. As Scott mentioned earlier, we generated gross billings of 73.4 million during the fourth quarter of fiscal year 2018, which represents 122% annual growth and the sequential increase of 18% over the May quarter. As Scott mentioned, the increase is directly attributable to an increase in the average number of worksite employees, which was 8,538 in the fiscal fourth quarter of 2018, an increase of 68% over the past year. Our gross profit for the quarter was 1.8 million up from 0 million in the prior year period. This implies a gross margin of approximately 16%, which represent an increase over the prior year period 0% gross margin. I am pleased to say that this rapid growth has continued into the current fiscal quarter, with 13 new clients added since the end of August. With these new clients we’re servicing roughly 1,230 new worksite employees generating approximately 28 million in additional gross billings per year. This concludes our prepared remarks for today. We again ask members of the investment community to email us their questions and we want to thank everyone who did so. At this point Vance will walk us through the Q&A portion of the call. Vance?

[Vance Edelson:]

Great, thank you Patrice and let's get right into it. So here’s the first question received, probably for Scott regarding your new offices that have been opened across the country, are they licensed and are they signing new customers?

[Scott Absher:]

Well regarding licensing Vance, it’s actually not necessary for our offices to be licensed based on the way we do business; we’re established with each state where we’re paying employer taxes and depending on the nature of our engagement with clients we might have to secure certain licenses to complete -- or complete certain registrations and we do that as it’s required. And the last part of the question, are they signing new customers? Yes they are.

[Vance Edelson:]

Okay, perfect. Next we have a question related to the expanding office network, again, which of your new offices is currently the most successful outside of California and can you provide a feel for which markets will be targeted next for new offices?

[Scott Absher:]

Outside of California our most successful locations so far, Texas and then New York. All of our new locations are doing well but I’d say that these two really stand out and looking ahead, most likely we will be ready to open our San Francisco office very soon and hopefully followed by Miami early next year; and Miami would of course be our second office and Florida as we opened Orlando back in March.

[Vance Edelson:]

Alright sounds good. And here's a question for Patrice. Could you please bring us up to date on funding for the business plan? What is your monthly cash burn rate and do you see ShiftPixy tapping the capital markets again?

[Patrice Launay:]

Vance, we can't comment on ongoing conversation but it seems that our position has trigged significant interest among institutional investors. And to the second part of the question, the company is currently burning approximately 0.4 million from operations per quarter outside of product development and initial deposit to secure worker's compensation progress.

[Vance Edelson:]

Okay got it. Next question, and this would be back to Scott. How successful has the national accounts campaign been? Is the idea to set up a blanket structure for each chain and then go out and add franchisees of that chain?

[Scott Absher:]

The national accounts campaign has been strong so far and showed immediately very good activity from time we launched it. And the answer to the second part of the question is yes, that's exactly what we do. We set up a blanket structure for each chain and then we go about adding the related franchisees.

[Vance Edelson:]

Okay make sense and here is another question on the national accounts. Is it a longer sale cycle than your typical customer?

[Scott Absher:]

The answer is yes, and as you imagined these are larger more complex negotiations and they take a bit longer than signing with a single local client.

[Vance Edelson:]

Alright understood. I have grouped together a number of questions we received that are -- what I'd call operational update questions. So let's cover those next. The first one is are we utilizing the app now to place employees with shiftwork? In other words, when will employ sharing or intermediation officially become available and if so, in which markets?

[Scott Absher:]

Vance, the current user features are focused on onboarding, which is our first point of entry for new ShiftPixy employees. We’re in the final development work on the user features that handle scheduling and intermediation, which is where employees will start to access shifts and operators will share shift opportunities across the platform. The target for release in Southern California where we have the fastest growing local population is after the 1st of the New Year. We also have some private brand driven groups outside of California that will begin scheduling in intermediation for just there local brand, in some of our newer markets after the 1st of the year as well.

[Vance Edelson:]

Thanks for that. And another update type question and this one comes with a follow-up, has any customers signed up for driver management and how many of your clients are currently taking advantage of self-delivery? I'll let you answer those seemingly related questions first and then I'll ask a follow-up.

[Scott Absher:]

Sure the answer is not yet Vance, the plan is to put driver management on beta for targeted clients early next year. Based on that testing we will proceed further. We’re still considering software development strategies for finalizing these features.

[Vance Edelson:]

Okay great and here is the related follow-up. Can customers buy driver management without buying any of your other services or does it always need to be an add-on for existing customers?

[Scott Absher:]

Well the answer is no, any driver management customers will need to have a base engagement with us as well. We believe that it is useful for us and our clients that we be involved in the employment compliance forefront prior to or in connection with their implementation of driver management. So we will pursue one of our human capital management service engagement to the basis as a kind of the baseline for driver management.

[Vance Edelson:]

And then getting back to the more strategic questions. How will you compete with Uber now that they're breaking into the contingent workforce with UberWorks?

[Scott Absher:]

The UberWorks announcement just came out last month, so there's no subsequent detail other than its launch and it will be launching in Chicago. I think it makes sense in light of their platform IPO next year that they show that they are extending their proposition into other markets. They will also have to learn however to engage B2B. This type of engagement -- this type of employment is not like UberEats where they bring a restaurant owner new orders. The temporary labor market is sold very differently. So they are going to have to gear up for that new and street-level selling engagement. And they will also have to reconcile their independent contracted position, none of these businesses will want to be exposed by the Uber approach to side step labor laws. The business client would be legally vulnerable. I hope this is an indication if they're going to be pursuing compliant employer status.

[Vance Edelson:]

Very interesting. Thanks for the color there. Next question is what do you say to operators who outsource delivery to UberEats and Grubhub solely because of the logistical headaches and managing delivery? How are you convincing them to bring it back in-house?

[Scott Absher:]

Vance, what we do is we build our discussion around our human capital engagement. We are leveraging the on-site human capital that we are now responsible for is our starting place. We allow operators to invite one or two people per shift who can be designated as drivers. We then take these people who want this designation opportunity through an additional onboarding and documentation process to be available to drive and deliver online orders. Our mobile driver application layer is connected to the brands online order system to intercept the inbound ticket and paying our staff person with the order and routing information to take the order to the customer. The integration both technically and operational is very simple and it's not their headache that they would have trying to do this without ShiftPixy.

[Vance Edelson:]

Okay, that’s good to hear. Here is another strategy question. What other industry verticals outside of restaurant and hospitality do you see growth potential in?

[Scott Absher:]

Yes, we are seeing some exciting movement in a couple of areas that look very important for us next year. The first is what we call our last mile vertical in which we serve clients like the Zion Delivery who is part of the fast-growing Amazon contractor system. The driver management features that we are introducing after the first of the year has some very exciting implications for our operators and will be a large catalyst for our growth in the last mile race. The other fast-growing vertical for us is our introduction to the staffing market. ShiftPixy offers a unique operating platform for independent temporary staffing operators to not only one on the cutting-edge fully mobilized human capital management platform, but also the access to the live local on-demand workforce, allows them to keep their bench depth high to better serve their clients. We expect this temp staffing vertical to grow as fast as our restaurant vertical next year.

[Vance Edelson:]

Okay, terrific. This next question question is about your experiences with any pushback from shifters during the employment transition from the operator to ShiftPixy. So I guess they want to know has there been any pushback from the shifters?

[Scott Absher:]

Well, Vance, change is difficult for any business. We spend the early part of our engagement process, however, assessing our clients and their employees for what we call change readiness; we make sure that the owners know what to expect and we make sure the employees know what the onboarding and transition process is opening up a whole new door of opportunity and access for them as well. We see typically about 95% of employee transition smoothly and we have usually 5% we have to work through their transition. Our team has a lot of years of experience with this type of human capital transition. So we’re actually pretty good at managing the onboarding process.

[Vance Edelson:]

Alright sounds like a good approach. Next up, an investor wants to know if there are any new regulatory changes that are affecting your business.

[Scott Absher:]

Nothing recently. Earlier this year, the California Supreme Court developed a new test to determine independent contractor status, which works actually to our advantage in which we discussed in our last call, but nothing recently.

[Vance Edelson:]

Okay, got it. The next question, is it getting easier or harder to find new customers?

[Scott Absher:]

I’d say no change really there, in fact our early average client size was around 50 employees and now we’re boarding larger clients with our average now trending at 500 employees. What folks should understand is that we have -- as we have more mass we also have more momentum. So our adoption is getting easier.

[Vance Edelson:]

Okay, very exciting. Here's a question we seem to receive every quarter, probably for Patrice, can you provide an update on how your fiscal first quarter has gone? And I’ll just remind our audience ShiftPixy operates on an August fiscal year-end basis. So the first fiscal quarter of 2019 ends this November 30th. So anything you can share Patrice on first quarter performance?

[Patrice Launay:]

Sure Vance, I think this question has come up before, but I’d like to hold our first quarter for next earnings call. But I would remind folks that monthly numbers tend to be inconsistent and sometimes seasonal, and that sometimes it doesn't make sense to engage in a staffing relationship towards the end of calendar year. But the strong sequential growth rate that we’ve experienced should provide a good example of the power of this business model.

[Vance Edelson:]

Okay, thanks for that Patrice. So that will do it for our Q&A session this afternoon. Thank you both Scott and Patrice for fielding all these questions and with that I’ll turn it back to Scott for closing remarks.

[Scott Absher:]

Thanks, Vance. I’d like to thank everyone for participating on today’s call and hope you found it informative. Patrice, myself and the rest of the ShiftPixy team appreciates your interest. We will be back with our fiscal first quarter results in a few months and look forward to updating you again at that time. Thank you again for joining us today and I hope everyone has a good evening and we'll speak with you soon.

[Operator:]

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