By Marla Backer
We expect Labor Smart (OTC BB:LTNC) to report 3Q13 results shortly. The company has pre-announced monthly revenue for the period; July 2013 revenue of $1.586 million advanced 172% versus July 2012 and August 2013 revenue improved 176%. August also represented the company’s first month above the $2.0 million mark. With September revenue at $1.65 million versus $803,564 registered in September 2012, revenue for the third quarter of 2013 likely came in at $5.3 million, ahead of our original $4.9 million forecast. Our revised forecast of $5.3 million puts our full year 2013 forecast at $16.57 million.
Revenue continues to grow. Last week, Labor Smart reported that October 2013 revenue of $1.642 million was more than double the $788,912 October 2012 level. The fourth quarter can be seasonally slow for the temporary staffing industry overall, reflecting the interruptions of the holidays and as companies focus on end of year activities. Moreover, in many parts of the country, construction and other projects wind down temporarily due to weather, as well. Nevertheless, with one month already announced at levels double the year ago timeframe, we anticipate significant growth for 4Q13. The company has also indicated that it expects to exceed its 2013 revenue guidance of $16.0 million.
Given the rapid growth and the infrastructure that Labor Smart has built to fuel this growth, including hiring experienced operating leaders, the company has not yet converted strong revenue expansion into positive EPS at this early stage. However, as branches mature, they can fill more competitive, higher margin assignments, according to management. We would therefore anticipate that as existing offices mature, grow their customer base and improve margins, it likely will contribute to the company attaining profitability.
Revenue growth is highly correlated to customer base expansion, in our opinion. In 2011, Labor Smart had 47 customers. In November 2012, the company announced that its customer base exceeded 300. We estimate that it is well above the 1,000 customer level the company announced earlier this year. As Labor Smart’s customer base expands and diversifies, we anticipate a positive impact on gross margins. The company targets a gross margin of 22% by year-end 2014.
When a new location opens, the branch manager first looks to the construction and janitorial industries for potential customers. These industries have relatively short sales cycles and their staffing needs fluctuate considerably. As the branches mature, they tap into new verticals. Other industries that frequently turn to on demand staffing include: hospitality, warehousing, manufacturing, logistics and events, among others. As the customer base expands and becomes more diversified, it gives the company greater flexibility in managing gross margins, we believe.
The dramatic growth of its customer base also prompted Labor Smart to form a corporate accounts division earlier this year. By covering regional and national customers from a centralized division, the company can provide a single interface and faster service for the client, even though the orders may be filled at the branch level across multiple locations.
Labor Smart also recently opened its 15th branch, which is located in Raleigh, North Carolina. The company has expanded its branch network from only two locations in 2011. We believe Labor Smart strives to manage its cash balances even as it advances its growth objectives. In addition to financing new branch openings, Labor Smart must maintain working capital to pay its temporary workers. It then gets reimbursed when it collects from the client, but the billing cycle can take up to three months. We expect the company to continue to engage in short term financings during this early period of rapid growth. Labor Smart recently retired two convertible promissory notes early, eliminating the overhang of their potential conversion into common shares, in our opinion. Their combined principle was $243,500. Labor Smart had $63,959 in cash as of June 2013. We anticipate further branch expansion in 2014, as Labor Smart intends to open another 15 to 25 locations next year, including in additional southeastern states.
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