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PIXY: Gross Billings Up 58% as The ShiftPixy Concept Gains Traction

04/16/2018
By Lisa Thompson

NASDAQ:PIXY

ShiftPixy, Inc. (NASDAQ:PIXY) reported earnings for its FY 2018 Q2 quarter ending February 28, 2018. Q2 gross billings came in at $48.6 million versus $30.8 million a year ago, up 58%, but below the company’s guidance. Despite this shortfall in gross billings, the company beat earnings estimates and lost only $0.09 per share rather than the expected $0.10 per share. This was achieved primarily by reducing operating expenses sequentially from $4.6 million in Q1 to $3.4 million in Q2, by capitalizing software in the quarter and reducing spending in product development.

Net revenue was $7.9 million versus $5.4 million a year ago, up 46%. This was 16% of gross billings, the same as Q1, but below the 18% reported in last year’s quarter.

Gross margin as a percent of gross billings declined to 1.8% versus 3.6% a year ago and 3.1% in FYQ1. The gross margin was restated downward in last year’s quarter as the company readjusted it accounting to apply an unemployment insurance increase in the state of California ratably rather than adjusting the number in Q4 of 2017. We expect both Q3 and Q4 of 2017 to be restated in the future. Gross margin was down sequentially because of a rate increase in unemployment tax that kicked in January 1, 2018. Going forward the company expects gross margin to tick upwards as it charges customers a flat fee for unemployment insurance. As a percent of revenues, that number declines as the calendar year progresses and employees reach limits as their annual wages accumulate. Some of ShiftPixy’s clients are “do not honor limits,” which means that the gross amount of fees ShiftPixy bills them, including unemployment taxes, remains static over the course of the year. However, when the taxable wages attain $7,000 then it is under no obligation to remit the taxes to the tax authorities, and its costs stop at this point. Thus gross profit should increase gradually throughout the year as the $7,000 threshold of taxable earnings is met by employees. Another factor driving the increase in gross margin is expected to be caused the company’s increasing purchasing power in obtaining lower rates for workers compensation.

Operating expenses in the quarter were $3.4 million versus $1.9 million a year ago. Sequentially they were down $1.2 million. Some of this was due to spending less on development. $760,000 was due to the company capitalizing software development rather than expensing is as it had been doing in previous quarters. As the company completes its large software development effort, this number should continue to move down.

In the quarter the company lost $2.5 million versus a restated loss of $960,000 a year ago. This resulted in a loss per share of $0.10 versus a restated loss of $0.04 a year ago. Shares outstanding increased 9.9% from the year ago quarter.

During the quarter the company burned $1.9 million of which $1.3 million was for payment for software development and the rest from the operations of the business. In Q1, it burned $3.3 million in the quarter, of which $1.9 million was spend on development of the mobile app and another $300,000 was for a prepayment of workers’ compensation insurance. When the majority of this software development is completed this cash burn should be substantially reduced. Given the burn rate and only $900,000 in cash on February 28, 2018, we believe the company is now raising capital.

The company has given revenue guidance for Q3 2018 of $50 - $65 million in gross billings. Since the quarter ended the company signed agreements with 6 new clients, who combined have approximately 1,300 worksite employees with approximately $93 million in annual gross billings. It also reported that gross billings for the month of March grew 21% sequentially from February.

Updates in the Quarter

ShiftPixy continues to take steps to expand geographically and has offices in NYC, Austin (announced March 8th) and Orlando (announced March 14th). We believe that any sales generated outside of California have been less than 5% of revenues so far, and believe that these new offices provide major growth potential.

The company also recently rolled out a new product offering for restaurants wanting to provide delivery service. Many restaurants, with the exception of pizza places, have no ability to make deliveries due to the inability to get insurance, and have relied on services such as Grubhub that are costly and are not the restaurant’s employees who can be supervised as such. ShiftPixy’s new insurance offering lets restaurants economically send their own employees, as the restaurant only is charged for insurance when a delivery is in progress, making costs very low. The company believes there will be great interest in this product as restaurants seek to expand sales potential and service. Products such as these will also sold at better than average gross margins increasing ShiftPixy’s profitability.

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