Lightspeed Commerce Inc. (NYSE:LSPD) Q2 2024 Earnings Call Transcript

Lightspeed Commerce Inc. (NYSE:LSPD) Q2 2024 Earnings Call Transcript November 2, 2023

Operator: Thank you for standing by and welcome to the Lightspeed Second 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] And finally I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Gus Papageorgiou, Head of Investor Relations to begin the conference. Gus, over to you.

Gus Papageorgiou: Thank you, operator. And good morning, everyone. Welcome to Lightspeed’s fiscal Q2 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 second 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 plus 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 everybody. This quarter Lightspeed made great progress towards achieving our key goals for fiscal 2024. Thanks to our powerful products and strong execution and our unified payments initiative, we delivered an excellent quarter with revenues of 230.3 million and 25% year-over-year growth. This is well ahead of our previously established revenue outlook of 210 million to 215 million. We are making tremendous progress executing on our unified payments initiative with our GPV now exceeding 25% for our total GTV. And for the first time since we went public, we delivered positive adjusted EBITDA in the quarter. This again, was well ahead of our previously established adjusted EBITDA outlook of negative four million, and positions us well to meet our goals of adjusted EBITDA breakeven or better for fiscal year 2024.

At the beginning of this year, I promised that fiscal year 2024 will be the year of execution. The results from this quarter firmly show that we are delivering on that promise. As a reminder, let me walk you through our main goals for the fiscal year. One, reap the benefits of One Lightspeed. Two, accelerate revenue growth from financial services, including Lightspeed Payments and Lightspeed Capital, three, continue building products that solve our customer’s problems and help them run their businesses, particularly with our supplier network. And four, accomplish our goal of achieving adjusted EBITDA break even or better for the full fiscal year. In terms of One Lightspeed, we continue to see good progress. By the end of this quarter, excluding equity customers, our new flagship products accounted for approximately one-third of overall customer locations.

GTV from flagships grew 35% year-over-year, and total revenue for flagships grew 124% year-over-year. Our flagships are now code complete, implied with regional regulatory requirements and will very soon be available in all of our global markets. In fact, our two flagship products are the best code base we have ever delivered. With these two products in market, the competitive gap between our flagships and others in the market can continues to grow. Delivering two industry leading products in the last two-years would not have been possible without the M&A strategy we deployed. We move quickly to integrate some of the best technologies from our nine acquisitions into the flagship, such as: industry leading analytics from Upserve; ingredients management from counter; advanced block chain technology from ICAN2; and best in class headless commerce from [Equid] (Ph).

We simply could not have developed these features on our own in such a short period of time. In part, thanks to these acquisitions, we have developed an organization with unparalleled depth of management and technical talent these game changing products. With industry leading products that have scale and global reach combined with our continuously improving financial performance, Lightspeed is in its strongest position ever. This is helping us attract and win more high GV customers. Let me share a few examples of these who have joined Lightspeed in the last quarter. In hospitality, we are incredibly honored to add the iconic Joël Robuchon International as one of our newest customers. With dozens of owned and operated locations across Europe, North America, the Middle East, and Asia, Joël Robuchon Group has been awarded more mission stars than any other restaurant group in the world with over 15 current Michelin stars.

They came to us looking for a global player that could manage their complex workflows under one integrated software and payments platform. We were also happy to add Gustoso Group in Germany with over 100 restaurants operating under six different brands. We started rollout of a number of their restaurants on Lightspeed restaurants. In the U.S., after a very competitive sales process, we signed seven locations with Indiana State Park Inns for both Lightspeed Restaurant and Payments. And in Sydney, Australia, we were selected by Kensington Street operator of nine Asian inspired food vendors, two bars, two event spaces, and six full service restaurants. Kensington Street is the exact type of complex SMB that can leverage the full power of our products to simplify and scale their operations.

Kensington Street’s Management chose Lightspeed to deliver more data-driven decisions for their business. On the retail front, we had an incredible quarter. Lightspeed retail is emerging as the leading cloud platform for complex multi-location, high GTV retailers the world over, notable wins this quarter included. GetBoards, the ski and snowboard retailer with three locations across California, wanted to upgrade from their legacy solution, and they have now adopted both Lightspeed Retail and Payments. Blue Star Eyewear, the independent high-end eyewear retail who chose Lightspeed to power their businesses across its four locations in Australia. And finally, Les Jumelles in Antwerp Belgium with 250,000 Instagram followers. This woman’s apparel boutique chose lights beat to power their two locations.

In Golf, we added two big wins, after an extensive due diligence process, we were selected by GreatLIFE Golf to Power 14 of their 56 U.S. locations, and BlueStar Resort & Golf selected Lightspeed for all 15 of its Arizona courses. Both organizations will be using Lightspeed restaurant and retail in addition to golf to manage their dining facilities, pro shop as well as Lightspeed payments. And finally, we were able to sign up several new brands to our supplier network, including Jordache, Ashley Lauren and Espri. Moving on to Unified Payments, we made great progress this quarter, although too early to comment on the international rollout, I want to specifically call out our North American teams for their excellent execution this quarter. We onboarded a record number of payments customers, and September was our strongest month ever.

I shared earlier this year that we were prepared for potential bumps along the way as we launched Unified Payments. Our biggest concern was that we would see higher customer churn as we made payments mandatory. Fortunately, this risk has not materialized on the contrary, our churn levels remain very much in line with our historical ranges. We were confident that our customers would much prefer Lightspeed’s Unified Commerce platform over their commoditized and dated payment solution, and we were right. Lightspeed’s commerce platform is at the core of our customer’s operation. We act very much like an ERP system, managing inventory employees, customer loyalty payments, and accounting integrations, while also offering valuable data insights into their business.

Changing your POS is far more complex and disruptive than changing payments provider. It is only when you combine payments with software that you can create real value for your customers. I’m also very encouraged that our close rates for new customers remain very consistent and in many cases better than historical levels. New customers understand the benefits of buying a unified solution. Our new customer funnel remains strong. Even as we become more rigorous on marketing spend. Our ARPU is the highest it is ever been, given the impact of flagship’s commanding higher ARPU Unified payments, as well as our focus on targeting higher GTV customers. This is the best case scenario for us. Close rates remaining consistent with historical levels while ARPU on new business is growing.

I think it is safe to say that Unified Payments has been a great success in North America, and we are now turning our attention to international markets. Market dynamics internationally are different than North America. European SMBs have a closer association with their regional banks. However, the value proposition of Unified Payments is the same, no matter where our customers are located. There is absolutely no reason for our customers to isolate their payments offering from their software. An embedded solution allows them to reduce the time and effort needed to reconcile two disparate systems. It delivers far greater data insights into their business, and more often than not comes at minimal to no additional costs. Although we have more to do, I’m very encouraged by what we saw this quarter.

Our new business is thriving. Our teams are onboarding a record number of customers to payments and churn remains in line with historical levels. Our focus now will be to keep the momentum going through the rest of the year as we expand this effort internationally. On the product side, we continue to deliver innovative features that help our customers scale their businesses. In hospitality, we created smart items, an AI tool that creates menu descriptions and even generates images for online ordering. Compelling descriptions and images can increase revenue for restaurants, but many of our customers lack the time and expertise to properly develop these. We believe smart items can help them solve this problem and make our restaurant customers more successful.

It will also translate menu items into other languages such as French or Spanish. It is also worth repeating that our advanced insights module is now fully available for our hospitality customers globally. We solve for regional regulatory and privacy requirements, which our global scale and footprint are uniquely positioned to address. Advanced Insights has proven very popular with our North American customers, and because it requires payments in order to collect data, we believe it will be a driver of both higher ARPU and higher payments adoption for hospitality customers in EMEA and APAC. Delivering an advanced solution like Insights to a global audience requires a broad range of expertise that we do not believe any other organization can match.

In retail, the company delivered new omnichannel capabilities for multi-location merchants that accommodate complex workflows around inventory management for physical and digital customers. For New Order by Lightspeed, we enabled vertical assortments, which allows brands with their own retail locations to merchandise, assort and visualize their own products. Lastly, in terms of profitability, again, we are committed to being adjusted EBITDA breakeven or better in fiscal 2024. This quarter, we came in with a positive adjusted EBITDA ahead of our outlook, which places us in an excellent position to meet our goal of breakeven or better for the fiscal year. I believe we will continue to drive operating leverage in our business. We are expanding financial services such as payments and capital, and we are seeing our strongest ever unit economics with new customers.

As we continue to monetize more GTV, we expect to better align ourselves to the rule of 40 metrics focusing on balancing both sustained growth and profitability, and we are at the right path to get us there. I will now turn the call over to Asha to take us through the quarterly results and provide outlook.

Asha Bakshani: Thanks, JP. Lightspeed had an excellent quarter with revenue and adjusted EBITDA coming in well ahead of our previously established outlook and our unified payments efforts continuing to gain traction. On today’s call, I will provide a recap of the quarter, discuss the progress of our unified payments efforts, and then provide an outlook for the upcoming fiscal quarter and full-year. Overall, I was very happy with our progress this quarter. We achieved positive adjusted EBITDA for the first time since becoming a public company. In addition, we are seeing many of our key performance indicators move in the right direction. Revenue and gross profit growth accelerated from the previous quarter. ARPU hit record highs this quarter with 26% growth year-over-year.

GPV grew 59% thanks in large part, to our unified payments efforts. Churn was lower than anticipated and remained within historical ranges. And again, I’m happy to report that total cash burn in the quarter was under $10 million, excluding cash used to fund our merchant cash advance business. We continue to grow our high GTV customer base, although not at the rates we would like to see. We believe there is room for improvement here and this will be a continued area of focus for us. In the quarter, revenue came in at $230.3 million, an increase of 25% year-over-year, and more than 8% ahead of our previously established outlook. Subscription and transaction based revenues grew by 24% year-over-year. Subscription revenue increased 9% year-over-year to $81 million.

Gross margins on subscription revenue remain consistent with last quarter at 75%, and when removing the impact of share-based compensation expense, gross margin on subscription revenue was 77% consistent with last quarter, and at its highest in over two-years. Thanks to a dedicated effort to consolidate cloud vendors and improved overall efficiencies. I want to reiterate that in the quarter, our account 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 subscription revenue grew 9% year-over-year despite their temporary reallocation of duties.

Once our unified payments efforts are complete, we expect software revenue growth to accelerate. Transaction based revenue grew 36% to $137.7 million. In the quarter, we saw gross payments volumes increased 59% year-over-year to $5.9 billion, as a greater portion of our GTV went through our Lightspeed payments platform. We also saw good growth in the capital business in the quarter with revenue up over 120% year-over-year. Referral fees continue to decline in the quarter as customers move on to Lightspeed payments. Gross margins for transaction-based revenue came in at 28% up from the previous quarter, but down year-over-year, given declining referral fees. Total adjusted gross margin, which excludes the impact of share-based compensation and related costs came in at 43% flat to the previous quarter and down year-over-year.

Although the increased transaction-based revenue is putting pressure on gross margins, this is being partially offset by growing capital revenue. Adjusted gross profit dollars came in at $97.8 million, an increase of 17% year-over-year. Adjusted EBITDA in the quarter came in positive at $0.2 million. This is much improved from an adjusted EBITDA loss of $8.5 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 that was completed in our fourth fiscal quarter of last year. Total adjusted, research and development, sales and marketing, and general and administrative expenses were relatively flat to last quarter and up 6% from a year-ago.

Our one Lightspeed efforts are increasing sales productivity. As sales growth is greatly outpacing any increase in sales and marketing costs. We had an adjusted income of $6.4 million versus an adjusted loss of $7.5 million last year. Thanks largely to the improvement in the items driving, our adjusted EBITDA performance and growing net interest income in the quarter, which increased by approximately $5.9 million from a year-ago. We continue to actively manage our share-based compensation and related costs, which were $23.3 million, down from $34.9 million a year-ago, and approximately 10% of revenue down from 19% in the same quarter last year, and roughly in line with our prior quarter. GTV in the quarter came in at $23.5 billion, up 5% year-over-year.

Hospitality growth was stronger than retail. We saw strong growth in Europe, which is dominated by hospitality customers and GTV in North America and APAC remained relatively flat. This quarter, we also continue to grow our sophisticated higher GTV customer base. Customer locations with GTV exceeding 500,000 a year grew by 8% in the quarter, whereas those with GTV under 200,000 declined. Again, in this quarter, the fastest growing cohort was locations with annual GTV exceeding $1 million. This customer cohort grew 9% year-over-year. As we focus on more complex higher GTV merchants, we expect the under 200,000 annual GTV cohort to continue to decline. This churn is planned for, and as a reminder, these customers represent only 5% of our overall GTV.

As we churn off these lower value customers, we expect it will continue to mute our net location growth. However, the overall health of our customer base as a whole will continue to improve. Currently, Unified Payments is dominating our attention and resources, but growing our high GTV location count is very important to us and remains a core focus for Lightspeed. Total ARPU in the quarter came in at $425 up 26% year-over-year. Although, Unified Payments is helping increase overall ARPU as we mandate payments for all eligible new and existing customers, we are also seeing healthy growth in software ARPU as well. Churn rates in the quarter remain consistent with last quarter and within our historical range, despite challenging macroeconomic conditions and 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. Again, we were expecting turn to increase as we rolled out unified payments, but it is encouraging to see that the majority of our customers recognize the benefit of an integrated software and payment solution and the value of the Lightspeed commerce platform. In terms of our balance sheet, Lightspeed closed the quarter with just over $761.5 million in cash and cash equivalent down from approximately $780.3 million in the previous quarter. The biggest uses of cash was the increase in merchant cash advances of 10.1 million during the quarter. Again, if we exclude the growing capital business, overall, cash burn in the quarter was under $10 million.

Turning now to our unified payments efforts. As you heard from JP, we were very happy with the progress we made this quarter. We saw a record number of customers become transactional and our onboarding teams really executed well. Our efforts in North America thus far have been very successful and we saw less turn than we expected. We will continue to encourage the remaining existing customers with software only to add payments. Our attention will now turn to international markets. We expect markets such as the UK and Australia will act much like North America. However, continental Europe may be more challenging as customers there are generally more conservative. In Europe, we expect the recent launch of our insights module will help encourage customers to adopt payments as that module requires payments to provide meaningful insights.

We are also armed with strong customer testimonials that are helping convince our European customers that switching to Lightspeed Payments will simplify their operations, save them time, and deliver better data insights into their business. Now to our outlook, this quarter illustrated that our strategy of pursuing high GTV customers mandating payments advancing our capital business and making profitability a priority, is working. Given transaction-based revenue is over 50% of our total revenues and highly dependent on GTV growth we are being conservative on our GTV growth assumption. We remain cautious on the macro environment given central banks continue to suggest potential future rate hikes. Also, we believe that there are increasing signs that consumers plan to be more frugal this upcoming holiday season.

For the third quarter of fiscal 2024, we expect revenues between $232 million to $237 million and an adjusted EBITDA of approximately $2 million. For the full-year of fiscal 2024 we are increasing our outlook to total revenues of between $890 million and $905 million with breakeven or better adjusted EBITDA. Despite the macroeconomic backdrop, we expect both revenue and adjusted EBITDA performance in the second half of the year to be better than the first half. With that, I will pass the call back to JP.

Jean Paul Chauvet: Thanks Asha. Before we take your questions, I want to welcome Menno Vette back to our Board of Directors. Menno has over 20-years of experience as the head of global media and telecommunications company, including the last two-years at Verizon and is a proven leader in the industry. I’m very excited to have her back on our Board. We are now halfway through our fiscal year. I’m encouraged to see that we are delivering on our key goals, particularly in the area of profitability, where in the quarter I believe we made tremendous progress. As we look beyond this year, I continue to see incredible potential for Lightspeed. We will continue to build a category leader for sophisticated SMBs the world over with our acquisitions fully integrated, our industry leading products, improving financial performance and strong balance sheet we are in a position of strength.

And we will use this position to grow our business, expand our solution set, help our customers, and create value for our shareholders. 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 your first question comes from the line of Andrew Jeffrey from Truist Securities. Your line is open.

Andrew Jeffrey: Thanks. Good morning. I appreciate taking the question. JP, I want to understand a little bit maybe how you are looking at the unified payments efforts as you move beyond the US and particularly and Asha too, I guess your comments on Europe. Should we be thinking about perhaps attach rates slowing a little bit and software becoming more of the revenue and gross profit growth driver as we exit fiscal 2024? I’m not asking you to guide, I’m just thinking directionally, you know, do you declare victory in North America this year and refocus the team on software? How does that all sort of balance out?

Jean Paul Chauvet: Yes, good morning. So just, simply put, just to state where we are when you look at North America, I think we have enough months and quarters behind us to think that this is going to be a really successful. When we look at Europe, we are early on, and Australian and, and New Zealand the same thing. But for now, the early signs is that churn remains low, and we have no reason to believe that it is not going to go well. And I mean, we are bringing the same value to customers. So I think for me, I’m just going to go back to this year, this year is all around unified payments. We want to ensure that the majority of our customers, who are existing customers, attached Lightspeed payments. And we want to also ensure that all new customers attach Lightspeed payments at almost a hundred percent.

And so, it is going to be the focus. Once we have unified payments under our belt, of course we are going to go back to selling more financial services, capital being one that has a really good gross margin. And of course, we want to continue selling more software. And with that in mind, we have a number of initiatives that are underway. The first one is analytics. We have launched analytics across Europe, which is a big module there. And we are also now launching our insights modules on the retail side, which we think it has some great success. So just answering your question directionally, is we are going to focus on unified payments this year, and as we get into the end of the year, we will refocus all of our teams back on upselling software and growing ARPU.

Andrew Jeffrey: And then just in terms of adding flagship customers, these more complex, higher GTV customers, a little bit of a downtick in the growth rates in those this quarter. Is that macro or is there something else going on? And can you re-accelerate the growth in those larger customers?

Jean Paul Chauvet: Yes, so I will take this one too. Let’s start with how competitive these products are and here, what we are excited about is that these products are the most competitive they have ever been. If you look at our retail North American market, that is a huge demand. And I would say that the gap between us and our closest competitors is broadened and ARPU on new customers is up. And I would say payback is the lowest it is ever been. So we are really in a good position for competitiveness. Same thing with hospitality. When you look at Europe, this is our largest market, and we are extremely confident that K accommodates the more complex, and I think, just look at the wins this quarter and it gives you a good idea.

So for me, it is not around is this the macro or are the products competitive or not? It has to do with the year of two halves. The first half of the year for us, we were very clear is going to be around unified payments and focusing all of our teams on unified payments. And then the second half of the year, as we get into the end of this fiscal year, we will refocus everybody back on software. And maybe the last point just to answer your question very precisely is, as unified payments becomes a success, that will generate more free cash flow. And we are going to take a portion of that and re-inject it into go to market. So we can have strategies where we have people with foot on the ground everywhere accelerating our growth with the higher GMV merchants.

Operator: Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Your line is open.

Thanos Moschopoulos: JP, maybe on that last point, how should you think about operating leverage? As I mean, you profitable this quarter and as your profitability ramps, how do you intend to strike the balance between reinvesting the business versus ramping up the margins. Might you look to cap margins at a certain level and then drive it into customer acquisition given the strong feedback you are seeing or will we see it kind of an ongoing ramp in margins as you are profitable?

Jean Paul Chauvet: Yes. So I will start an Asha, maybe if you want to jump in on the second half here, but for me it is around rule of 40, and we have been very clear. We want to get closer to the rule of 40. And I think, so that is the first answer here, is we will be getting closer to rule of 40 as we exit the year. And then for me, the second view is it is a huge market. It is up for grabs. Our products are extremely competitive. We know that from the feedback from our customers that we have the best platforms on the market. So now the question for us becomes how do we balance out profitability versus this market that is up for grabs. And I’m a strong believer we need to generate in the rule of 40 some adjusted EBITDA positivity. But I think we should favor owning this market and going back into a higher growth.

Thanos Moschopoulos: That is helpful. And then, just remind us of the seasonal dynamics for this quarter and how that might influence the payments ramp just because given the Christmas season, could you have a dynamic where retailers are maybe more reluctant to change their payments provider this quarter? Might there be a lag in switching on merchants who have committed to designing for payments?

Asha Bakshani: Hey, Daniel, so I will take that one. You are right in the third quarter, which is our biggest quarter for retail, given the holiday spend. We do expect merchants are not going to be switching over their payments provider. And that is why the North American launch is largely behind us. Inhospitality, it is actually the opposite. We have the summer months, which is our highest seasonal quarter in hospitality. And that is why the hospitality launch, which is primarily Europe, happened at the end of the second quarter. And so, we will start seeing those merchants switching in the third quarter. So again, keep in mind, Q2 strongest quarter for hospitality. So we expect to see those merchants switching in the third quarter. AndQ3 is the strongest quarter for retail. And so the majority of the North American launches behind us which is primarily retail.

Operator: Your next question comes from the line of Matt Coad from Autonomous Research. Your line is open.

Matthew Coad: Just wanted to touch on the macro. You guys historically have taken more of a conservative approach, I would say, to kind of like your assumptions around same-store sales growth for your merchants. So I was just hoping that you could opine on like what is embedded in your guidance and then more broadly what you are seeing in terms of the consumer strength, in terms of discretionary versus non-discretionary spend.

Asha Bakshani: Yes, sure. I will start Matt. So from a GTV perspective, and what we are including in the guide, although we did see strong growth this quarter, and particularly in hospitality, what we are thinking as we enter the very strong retail spend season is that we really don’t believe the end consumer has felt the full impact of rising interest rates inflation. We are hearing about student loan repayments as well. So we are keeping our expectations on GTV modest for the rest of the year, including the upcoming busy retail season. So when we – and when we think about verticals across our different verticals, what we are seeing is we are actually seeing in many of our retail verticals, same store sales declining, things like bikes, home improvements, sporting goods and even golf year-over-year, the GTV is declining in many of these verticals.