Lightspeed Commerce Inc. (NYSE:LSPD) Q1 2024 Earnings Call Transcript

Lightspeed Commerce Inc. (NYSE:LSPD) Q1 2024 Earnings Call Transcript August 3, 2023

Operator: Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time I would like to welcome everyone to the Lightspeed First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. [Operator Instructions]. I would now like to turn the call over to Gus Papageorgiou. You may begin.

Gus Papageorgiou: Thank you, operator. And good morning, everyone. Welcome to Lightspeed’s fiscal Q1 2024 conference call. Joining me today are JP Chauvet, Lightspeed’s Chief Executive Officer, and Asha Bakshani, our Chief Financial Officer. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were applied in respect of conclusions, forecasts and projections contained in these statements. We undertake no obligation to update these statements, except as required by law. You should carefully review these factors, assumptions, risks, and uncertainties in our earnings press release issued earlier today, our first quarter 2024 results presentation available on our website, as well as in our filings with U.S. and Canadian securities regulators.

Also, our commentary today will include adjusted financial measures, which are non-IFRS measures and ratios. These should be considered as a supplement to, and not a substitute for, IFRS financial measures. Reconciliations between the two can be found in our earnings press release, which is available on our website, on sedar.com and on the SEC’s EDGAR system. And finally note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to JP.

Jean Paul Chauvet: Thank you Gus and welcome everyone. Thanks for joining us this morning. Overall, I was very happy with our results this quarter. Revenue came in better than expected with revenue growth of 20% versus the approximately 14% concentrated in our outlook. Our GPV volumes increased by 56% year-over-year and our adjusted EBITDA loss of $7 million came in lower than our outlook of adjusted EBITDA loss of $10 million. As I mentioned in our last conference call this year fiscal 2024 Lightspeed is focussed on execution and better aligning ourselves to the rule of 40 [Ph] financial measures. Our main goals for the year remain the same namely; reap the benefits of one Lightspeed, accelerate revenue growth for financial services including both Lightspeed payments and Lightspeed capital, continue building products that solve our customers problem and help them run their businesses particularly with our supplier network, and finally accomplish our goal of becoming adjusted EBITDA breakeven or better for the full fiscal year.

In terms of One Lightspeed we are closer than ever to deploying our flagships in all key markets. At the end of the quarter, we attained [Indiscernible] for Belgium, one of the last remaining markets where our flagship hospitality product was not available and we expect to receive approval and the problems of Quebec for it’s full launch. One Lightspeed has allowed us to simplify our operations and reduce cost and complexity across the organization. If I think more importantly, it’s helping us win the right customers. The customers with higher sales volume and more complex needs. Our day shows that these complex SMBs adopts more software and shown less. Drawing our customer base with the right customers remains an important goals for Lightspeed.

In this quarter, we saw ARPU reach all-time highs. Our flagship products are allowing us to attract customers, who can take full advantage of our software platforms and with high volume drive our payments revenue. Let me share a few examples of new customers who joined Lightspeed this past quarter. In retail, we were pleased to welcome Spice & Tea Exchange with over 80 locations across the U.S. adopting our Lightspeed retail offering. Women’s designer clothing [Indiscernible] with two locations in May also adopted our Lightspeed retail solution of e-commerce. And in the U.K. [Indiscernible] a luxury fragrance skin care provider with six locations has become one of our newest Lightspeed retail customers. In the world of hospitality, we welcome Australia’s Kick-on group, an organization with six locations that operates large venue that range from full table service to classic pubs.

We continue to expand our footprint in the important U. S. markets by adding March First brands. March First runs 4 brewery and tasting room locations in Cincinnati and have adopted our Lightspeed Restaurant offering along with Insights. And we were honoured to be chosen by Chef Teo Paul to power his 4 locations in the Greater Toronto area, including Michelin recommended restaurants Union. In Golf, we were chosen by the Cove Cay Golf course in Clearwater, Florida. We’re now using our retail and hospitality platforms to run their Golf Academy Restaurant, Pro shop and golf course. I’m thrilled to keep adding more names to our roster of customers around the world. But I also think it’s worthwhile reflecting on the sheer scale and impact our platforms have had on growing our customers businesses.

In the 12-month period ended May 2023 Lightspeed’s hospitality customers have served over 1billion meals and facilitated over 300 million dining experiences globally. It’s very satisfying to me and the entire Lightspeed team to be a partner of growth and build innovative products and technology that impact both SMB and their customers around the world. On the topic of scale, I also want to touch on Lightspeeds continued commitment to growing our sustainability impact as a global company. To date, we have planted more than 1.4 million trees to our Carbon Free Dining initiative and our industry leading inventory and ingredient management capabilities are helping reduce waste and streamline our merchant supply chain. In July, we published our second annual sustainability report, which is available on our website and showcases how our customers are leveraging Lightspeed technology to transform the world and build vibrant, diverse communities.

Moving back to One Lightspeed, this strategy has allowed us to attract the right kind of customer, but it has also led us to more successful R&D efforts. In this quarter, we were able to deliver several new products and releases that are directly responsive to our customers needs. In Hospitality, we were very excited to launch our Advanced Insights module in Europe. Advanced Insights gives our customers real time access to the data and offers proactive suggestions for how to run their businesses more efficiently and in a way that helps them comply with their obligations under GDPR. It is one of our bestselling modules in North America, one that often commands a higher monthly fee than the POS itself, and we hope to see a similar level of success in Europe.

Advanced Insights is a major differentiator for our offering and something that separates us from the competition. In our continued commitment to create a best-in-class unified payments offering, we enabled next day pay-outs for many retail customers using Lightspeed payments globally, giving merchants access to their cash faster than we have ever done before and twice as fast as many legacy systems can provide. We’re hearing great feedback from customers who made the switch. Customers like Melissa Joy Manning, an ethically made jewelry store with two locations in New York City. I think Lightspeed benefits our business daily and we’re saving a lot of time in the reconciliation process. We’re also saving a lot of money in fees and it’s made the business much faster, much easier and so much cheaper to operate on that end.

We also enabled self-service capital for all eligible customers in Canada and expanded Lightspeed Capital into new regions, including Australia. In retail, we enabled multi-layered pricing that allows our retail customers to charge different prices by location or customer group. A feature we believe is unmatched by our competition and highly sought after by high volume merchants. And at NuORDER by Lightspeed, we released assortments for brands, allowing brands that operate their own retail outlets, the ability to visualize inventory in the cloud, optimizing inventory allocations, and identify merchandising gaps. This technology has been successfully used by our retail partners and we’re excited to bring its benefits directly to brands themselves.

Moving on to Unified Payments. Last quarter, we announced the introduction of Unified Payments, our initiative to combine the power of POS and payments into one platform. By making it mandatory for eligible new and existing customers to adopt Lightspeed payments, we are confident that more and more Lightspeed customers will soon experience the positive impact a Unified Platform can bring to their businesses. Last quarter, we notified eligible retail and hospitality customers in North America that they will have to adopt Lightspeed payments. And for new eligible customers, we made payments mandatory. We will continue to launch this initiative to customers around the world during Q2 and throughout the year. I know many of you are interested in our progress.

We are still very much in the beginning stages of this rollout, but overall, I’m encouraged by what we are seeing. First of all, I’m very happy to see that our close rates have remained relatively consistent since we made payments mandatory for all new eligible customers. This tells me that the new customers see the value in Lightspeed payments and understand the benefits of embedding payments with the POS. What’s more, sales cycles also remain unchanged, with deals closing very much within our typical timeframe. Thirdly, as I mentioned previously, ARPUs is now reaching all-time highs, thanks to our deliberate efforts to target high GDP customers and to Unified Payments. And we are getting these customers transactional faster, thanks to our efforts to improve the onboarding process.

Finally, our biggest concern was that we would see customer churn increase substantially as a result of this initiative. So far, that has not been the case, as it remains within historical ranges. What has also become very apparent is how cost competitive we are. At this stage of our rollout, we are quite confident in telling our customers that we are able to meet or beat their current payments rates. And even though we aren’t really competing on the cost, the fact that we can deliver a superior experience at a similar or lower cost is an added benefit to our customers. Overall, I’m convinced that Unified Payments will be a success. The big question in my mind really revolves around timing. For our larger customers, who command the bulk of our GCV [Ph], we are being as accommodating as possible.

If they require longer than two, three months to switch to payments, we are of course willing to work within their timelines. In the end, the goal for us is to get all of our eligible customers onto Lightspeed Payments, no matter how long it takes. I also wanted to address our supplier network, which continues to be a key strategic priority for this company. We were happy to add John Shapiro to our Product and Technology team as our new Senior Vice President in Retail to help further integrate the supplier network into our core platform. John recently joined us from Wayfair, where he was responsible for the global supplier product and design organization, and was previously at Intuit, where he was the Director of the Product Management for QuickBooks, including serving as the GM for QuickBooks Payments.

I expect John to help advance our ambitions here. I remain encouraged by the feedback we are seeing from our customers and the potential for increasing monetization of his network. Lastly, in terms of profitability, again, we are committed to being adjusted EBITDA break-even or better in fiscal 24. Given that the year started off better than expected, I believe we are in a good position to reach this goal. And at the risk of repeating myself, I want to make it clear to investors that we are 100% committed to achieving it. I intend to place this company in a position that highlights the sheer potential of our business model while still investing in our growth opportunities. I will now turn the call to Asha to take us through the quarterly results and provide outlook.

Asha Bakshani: Thanks, JP. Overall, Lightspeed started the year strong, delivering revenue and an adjusted EBITDA loss that were better than our previously established outlook. We continue to execute on our strategy of attracting high-GTV customers and expanding our payments offering across our new and existing customer base. On today’s call, I will provide a recap of the quarter, discuss the progress of our Unified Payments launch, and then provide an outlook for the upcoming quarter and full year. I was pleased with the progress we’ve made this quarter. Despite the attention and resources that our Unified Payments initiative is demanding, we were able to maintain our discipline on costs, increase the number of high-GTV locations, and drive towards our goal of adjusted EBITDA break-even or better for the fiscal year.

I was also happy to see our total cash balance, excluding merchant cash advances, went down by less than $10 million in the quarter. In the quarter, revenue came in at $209.1 million, an increase of 20% year-over-year and ahead of our previously established outlook. Subscription and transaction-based revenues grew by 21% year-over-year. Subscription revenue increased 7% year-over-year to $78.7 million. Gross margins on subscription revenue remained consistent with last quarter at 75%, the highest in the past two years, thanks to a dedicated effort to consolidate cloud vendors and improved overall efficiencies. I want to stress again that in the quarter, our account management team, which is a key component of our financial management team, which is usually focused on upselling our customers on software, has been temporarily assigned the job of onboarding new payments customers.

Our account management team historically accounts for half of our added software MRR in any given quarter, and so it was encouraging to see that despite their temporary reallocation of duties, subscription revenue grew by 7% year-over-year. Transaction based revenue grew 32% to $121 million. In the quarter, we saw gross payments volumes increase 56% year-over-year to $5.1 billion as a greater portion of our GTV went through our Lightspeed Payments platforms. Gross margins for transaction based revenue came in at 26%, down from the previous quarter and year-over-year. There were several factors that negatively impacted transaction based gross margins this quarter, including costs associated with Unified Payments. We expect many of these factors to dissipate next quarter.

Total adjusted gross margin, which excludes the impact of share based compensation and related costs, came in at 43%, down from the previous quarter and year-over-year. Adjusted gross profit dollars came in at $89.8 million, an increase of 13% year-over-year. Adjusted EBITDA in the quarter came in at a loss of $7 million. This is much improved from an adjusted EBITDA loss of $15.6 million in the same quarter last year. This improvement is the result of our continued focus on prudent spend across our organization, including the efficiencies we identified and implemented through actions like our reorganization done in our fourth quarter last year. Total adjusted R&D, S&M and G&A costs increased by only 5% from last quarter, despite the added costs of our sales summit and annual salary increases that were put through this quarter.

We had an adjusted loss of $2.2 million versus an adjusted loss of $17.6 million last year, thanks largely to the improvement in the items driving our adjusted EBITDA loss performance and growing net interest income in the quarter, which increased by approximately $8.4 million from a year ago. Share based compensation and related costs came in at $18.7 million, down from $38.3 million a year ago, coming in at approximately 9% as a percentage of revenue, down from 22% in the same quarter last year, and flat to our previous quarter once removing equity accelerations included in restructuring. In the past few years, share based compensation has been elevated, partially due to equity incentives granted to employees of the various acquisitions we have undertaken.

GTV in the quarter came in at $23.4 billion, up 6% year-over-year. Omni-channel and hospitality GTV both grew at similar rates in the quarter. This quarter, we also continued to grow our complex customers with higher GTV tiers. Customer locations with over 500,000 a year in annual GTV grew by 10% in the quarter, whereas those with under 200,000 a year in GTV declined. Again in this quarter, the fastest growing cohort was locations with over $1 million in annual GTV, which grew 11% year-over-year. As we focus on more complex higher GTV merchants, we expect the under 200,000 GTV cohort to decline. As a reminder, this cohort of customers continues to represent approximately 5% of our overall GTV. I want to add a little more color on what is happening with new location wins.

As we keep stressing, our goal is to attract larger, more sophisticated customers who can take full advantage of our software platforms. If I look at the ARPU, it has continued to increase, reaching all-time highs in the quarter. At the same time, our acquisition costs have remained relatively steady. We are also seeing our churn rates remain very much within our historical ranges. As a result of this increase in ARPU, we expect our payback period and LTV-CAC ratios to continue to improve, which bodes very well for our ambitions of being adjusted EBITDA break-even or better for the fiscal year. As I mentioned, churn rates in the quarter remain consistent with last quarter despite challenging macroeconomic conditions as well as the launch of unified payments.

Also, the vast majority of our overall customer churn is in the cohort of customers processing under $200,000 in annual GTV. We continue to grow the capital business in the quarter. Under normal circumstances, we would likely be pushing capital even harder. However, given the current macro environment, we are being conservative on the ramp. There is no lack of demand from our customers and we believe our high GTV customer base is an ideal demographic to use this financial service, especially in the long-term. Risk of business failure is much lower with high GTV customers, but the need for capital is still substantial. In terms of our balance sheet, Lightspeed closed the quarter with just over $780 million in cash and cash equivalents, down from approximately $800 million in the previous quarter.

The largest uses of cash were working capital items and the increase in merchant cash advances of $11 million during the quarter. Turning now to our Unified Payments efforts. As JP mentioned, we are still very early in this process and are only now beginning to launch this initiative outside of North America. As a reminder, international markets account for approximately half of our total customer locations. In terms of our existing base of customers, what we are seeing is a strong contingent of customers adopting our payment solution almost immediately. In addition, the number of customers that are churning is lower than we expected. However, there is still a large number of customers that have not taken any action. In the coming months, they will see the new transaction costs on their monthly statements and we expect that will act as a catalyst for action.

Based on our experience, we are confident in our ability to match or beat rates for most of our customers, but we are not competing on cost alone. Lightspeed Payments allows our customers to save time and money and gives them unprecedented insights into their operations. Our value proposition is very strong and in addition, we continue to deploy technical support, contract buyouts and free hardware to our customers to help them in this transition. That is why we believe this initiative will be a success. Now on to Outlook. I was encouraged by our performance this quarter. We believe that our business remains incredibly strong with abundant opportunities for sustainable long-term growth. We continue to add higher GTV customers and our new platforms combined with the Unified Payments Initiative is helping ensure our LTV to CAC ratios are headed in the right direction.

I believe we have established the foundations to accelerate towards the Rule of 40 Financial metric as we exit the fiscal year. Our key concerns remain the overall macroeconomic environment as well as the timing of Unified Payments. Transaction-based revenue is over 50% of total revenues and highly dependent on GTV growth. Despite the growth in GTV we saw in the first quarter, we are being increasingly cautious on the macro environment given central banks continue to increase interest rates. As a result, we are keeping our GTV expectations modest. Additionally, although the signs are promising, it is still too early to determine the full impact of our Unified Payments efforts on our fiscal year. Our key concern here is on timing. Our end goal is to get our eligible customers onto payments, but we want to be as accommodating as possible.

After all, we are here to try to help our customers. This may impact the overall time it will take to get our customers transactional. For the second quarter of fiscal 2024, we expect revenues between $210 million to $215 million and an adjusted EBITDA loss of approximately $4 million. For the full year of fiscal 2024, given the macro uncertainty outlined above, we continue to expect total revenues of between $875 million and $900 million with break-even or better adjusted EBITDA. We expect both revenue and adjusted EBITDA performance in the second half of the year to be significantly better than the first half. With that, I will pass the call back to JP.

Jean Paul Chauvet: Thanks, Asha. Before we take your question, I thought it was worth highlighting one more item from our sustainability report. A third of the executive roles at Lightspeed are occupied by women, which is approximately three times the average of the tech sector for women in leadership roles, an accomplishment I am proud of. We are committed to hiring and promoting the best and brightest in this company, and maintaining a diverse workforce is crucial to obtaining this goal. So far, our fiscal 2024 is off to a good start, and our goals are simple. One, benefit from One Lightspeed. Two, expand payments, three build great product for our customers and finally four gets a profitability. We are fully committed to meeting these goals. With that, I will turn it over to the operator to take your questions.

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Q&A Session

Operator: [Operator Instructions] And we will take our first question from Daniel Chan with TD Cohen. Your line is open.

Daniel Chan: Good morning. Nice to see some good progress on the payments front, but sounds like there’s some uncertainty on the time you go and forward. Are you still on track to get the majority of customers on payments by the end of the year?

Asha Bakshani: Hey Daniel thanks for your question, it’s Asha. What we had committed to was a North America launch in both hospitality and retail. And then APAC and Europe follows. We had mentioned that we expect the penetration to be in the 30% to 35% range as we exit the year. And we’re still very much aligned with that trajectory. We have to keep in mind that when we say the majority of our customers, we have to keep a couple things in mind. There are still certain verticals that we don’t underwrite and certain regions where light feed payments is still not available. We plan to unlock those regions in the coming quarters and verticals as well. But the goal that we had outlined at the beginning of the year for fiscal 24, we’re still very much aligned with that.

Daniel Chan: Great, thanks for that, Asha. And then on the fiscal 24 guidance, you reiterated that despite the beat this quarter relative to the guidance that you had, anything to call out there that’s changed that you think in the next three quarters. You call that macro and timing. Are those have had those gotten worse than what you expected last quarter considering the beat this quarter?

Asha Bakshani: No, not at all, actually. The beat in our first quarter really resulted from two things, as you mentioned. The first is gross payments volume growth. That is an expected and that’s just given the verticals where we’re well penetrated on payment. As well as some early signs that are quite encouraging on Unified Payments, such as lower churn than we forecast it as well as time to transact much more quickly in certain contingents of customers. However, as we look forward into the following three quarters, we’re choosing to remain very modest on our GTV assumptions. We do believe that the end consumer hasn’t fully felt the impact of rising interest rates and inflation to actually being more modest on our GTV expectations for the next three quarters.

And with respect to Unified Payments, we have to keep in mind that 50% of Lightspeed’s customer base is international and we haven’t yet fully launched in those markets. So we’re not, we don’t want to take the early encouraging signs of Unified Payments and apply it to those regions. We feel it’s still early days and we’re choosing to remain cautious.

Daniel Chan: Thanks, I’ll pass it away.

Operator: And your next question comes from Andrew Jeffrey with Truist Securities.

Andrew Jeffrey: Hi, good morning. Appreciate you taking the question. I wanted to dig in a little bit on retail versus hospitality trends. Interesting to see that both categories are sort of growing at the same rate right now and I appreciate Asha the high level macro commentary. But that’s a notable change from recent periods. How would you sort of anticipate those two categories growing it sounds like there may be a shift back to more sort of discretionary spend from experiences and maybe you could parse that by geography a little bit just a little more color on expectations.

Jean Paul Chauvet: Thanks, I’ll, take this Asha and then we can. I think it’s very similar to what we, we talked about last quarter. What people are wearing to go to restaurants, those categories are doing well. So we’re seeing luxury apparel, apparel footwear and also jewelry going very well. And we’re continuing to see call it the COVID that’s positive not to do that well. So outdoors sports bike have still not recovered and it’s still down year-over-year. And on the hospitality side, we’re seeing still good demand globally. So, but I think for us, we just want to remain cautious because we think there might be — we don’t know what’s going to happen. But we want to be cautious as we get into the second half of the year.

Andrew Jeffrey: Okay, I can appreciate that given the uncertainty. And then just wondering whether or not some of the sort of fee issues that have a risen customer fee issues that have a risen in the U.S. with sort of a nominal competitor and some of the noise around that has helped has hurt has made your selling motion and easier. I know you’re not big in U.S. restaurant, but I wonder just generally the cost of payments for merchants. It sounds like you think you have a price advantage. I’m wondering if you’re sort of seeing anything in the market that’s notable in that regard.

Jean Paul Chauvet: Yes, maybe on payments, what we’re seeing is one customer’s use Lightspeed Payments they love it. So I think that’s very encouraging to us. They’re saving time. They love the consolidated reports. They love the actual hardware and the ease of use and mobility and all of these are important. And I think what they like also is they’re getting all of that at a rate that is very competitive. So we’re so confident now with our rates that we’re telling your customers we’re going to match or beat your rates. Regardless of what happens. So I think what we’re seeing is that people, you like to eat is a very good choice at a good price. And again, we’re seeing our close rates and I think maybe that’s the most exciting to us.

As you know with Unified Payments we were really looking at making payments mandatory for all new customers. And here what we’re seeing is our close rates are just as good. Our times to close are just as good. And ARPU is gone up pretty significantly because a lot of our customers are now using payment. So nothing to add except that we’re very happy with the outcomes for now. But we want to say just cautious for the rest of you.

Andrew Jeffrey: All right, appreciate it.

Operator: Your next question comes from Thanos Moschopoulos with BMO Capital Markets.