Lightspeed Commerce Inc. (NYSE:LSPD) Q3 2023 Earnings Call Transcript

Lightspeed Commerce Inc. (NYSE:LSPD) Q3 2023 Earnings Call Transcript February 2, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Lightspeed third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. . Thank you. It’s now my pleasure to turn today’s call over to Gus Papageorgiou, Head of Investor Relations. Please go ahead.

Gus Papageorgiou: Thank you, operator. And good morning, everyone. Welcome to Lightspeed’s fiscal Q3 2023 conference call. Joining me today are JP Chauvet, Lightspeed’s Chief Executive Officer; Brandon Nussey, Lightspeed’s Chief Operating 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 third quarter 2023 results presentation available on our website, as well as in our filings with US 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 US dollars, all amounts discussed today are in US dollars unless otherwise indicated.

With that, I will now turn the call over to JP.

Jean Paul Chauvet: Thank you, Gus. And welcome, everyone. Thank you for joining us this morning. Lightspeed reported another strong quarter today. Our adjusted EBITDA loss of $5.4 million came in better than our expected loss of $9 million. Our revenue of $189 million came in at a higher end of our outlook range of $185 million to $190 million. GTV grew 75%, much higher than our GTV growth of 10%. And on a constant currency basis, GTV grew 17%. I believe our results today reflect Lightspeed’s commitment to profitable growth. Part of that commitment is a deliberate effort to pursue larger, more profitable customers. Although customer locations were flat from the previous quarter, we continue to shift towards higher GTV locations.

Excluding certain locations, as highlighted in our disclosures, customer locations with over $500,000 in annualized GTV grew by 15% over the same quarter last year and now represent 32% of total locations, up from 29% in the same quarter last year. Customer locations with over $1 million in annualized GTV were our fastest growing cohort, both year-over-year and from the previous quarter, and were up 19% year-over-year. In this quarter, we signed several multi locations in marquee customers, all with our latest flagship offering, including Soletrader, a British shoe retailer that operates 28 locations across the UK adopted our latest Lightspeed retail offering along with Payments; CASETiFY, one of the fastest growing tech accessory brands reaching one in seven millennials chose Lightspeed Retail with payments to power their first Australian flagship store; three Michelin star restaurant, Le Petit Nice, located in , will be adopting Lightspeed’ Restaurant and Payments; Moët Hennessy will be using Lightspeed Restaurants in its rollout of one of its initial restaurant projects; The Sky-Line Club, a Chicago fine dining institution delivering world class cuisine since 1926, will adopt Lightspeed Restaurants along with analytics and payments; in our B2B network, we were happy to add Santoni, the high end handmade Italian shoe brand, as well as Gerber child’s wear.

Earlier this fiscal year, I laid out three priorities for Lightspeed which were, one, to finish the integration of our acquisitions into two core platforms and one company, an effort we referred to as One Lightspeed; two, expand payments across our global customer base; and three, position the company to reach profitability. Two weeks ago, we announced the reorganization that included eliminating approximately 10% of our headcount. The main catalyst for this reorganization was the near completion of our One Lightspeed initiative. As we focused on two flagship offerings, it was always our intention that this initiative would unlock considerable savings for the company. I believe our new structure gives more accountability and authority to our existing senior management team, while at the same time, removing costs and complexity from the organization.

Approximately 50% of the cost reduction will come from management roles. Under the new org structure, we expect to streamline our organization to leaner working models, focus on key projects and customers, and continue to invest in our growth drivers. Deciding to reduce headcount is never an easy decision. We are parting ways with many talented and dedicated employees that helped build Lightspeed into the company it is today. But it was a necessary decision that strengthens our foundations for future growth. In terms of Payments, as I mentioned, we had another strong quarter. Although our GPV still heavily depends on North America, we continue to see strong momentum in APAC and EMEA where payments was launched just over a year ago. Before I discuss profitability, I want to touch on the current macroeconomic conditions and how Lightspeed is positioned.

Given the macro uncertainty, our focus has turned to running the business with a greater focus on profitability. This includes focusing on attracting the right customers, those with over $500,000 in annualized GTV, and upselling our existing base, reducing operating expenses, and limiting marketing spend to areas with the highest returns. I know that the macro environment is presenting challenges for our customers, but these conditions only highlight the need for complex SMBs to adopt technology. Lightspeed’s cloud based platform can help SMBs better manage their inventory, operate with fewer employees, eliminate mundane tasks, deliver data driven insights and give managers and owners more time to dedicate to their customers. Over the last few years, we have been building the most compelling offering for complex SMBs, and I’ve received very positive feedback from our customers.

In my view, we have never had a stronger product market fit. In addition, we have a more agile, cost effective and accountable organizational structure. With costs coming out and accountability increasing, I believe we will be in a better position to address the long term opportunity ahead of us. And finally, we assembled an exceptionally strong management team with the right experience to take us forward. Through a combination of strong internally developed talent and the addition of experienced and distinguished external candidates, we have the right people in the right position to continue to build Lightspeed into the dominant platform for complex SMBs the world over. The macroeconomic conditions will likely present a challenge, but economic cycles come and go.

I believe Lightspeed has never been better positioned. Getting back to profitability. In the quarter, we delivered adjusted EBITDA loss ahead of our previously established outlook. And we took the hard, but necessary, decision to reduce our overall headcount and cost base. I believe we are on track to meet our commitment of adjusted EBITDA breakeven or better in fiscal 2024. I’m very proud of the company we are building. Our mission of igniting businesses everywhere in the world is an important one. And our suite of competitive products means we have never been in a stronger position to deliver on this mission. But in the end, profitability is a vital part of building a successful business. And to that end, profitable growth will be the key driving force for the company for the foreseeable future.

And with that, I will hand the call over to Asha.

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Asha Bakshani: Thanks, JP. And good morning, everyone. I will first provide an overview of our third quarter results, highlighting in particular our continued focus on operating discipline and profitable growth. Then I will discuss trends we are seeing across our global merchant base and finish with our outlook for the remainder of this fiscal year. Before getting into our third quarter results, I’d like to remind everyone that this quarter’s total growth represents organic growth, given that our latest acquisition was made at the very beginning of our third quarter in the prior fiscal year. Now turning to the quarter, Lightspeed delivered another strong quarter with adjusted EBITDA loss ahead of our previously established outlook and revenue of $188.7 million, at the high end of our range, growing 24% from Q3 last year.

Subscription and transaction based organic revenue growth was 28% year-over-year on a constant currency basis. Recall that, in Q3 of last year, we received a one-time payment of $5.5 million from one of our payment partners, and in this quarter an additional $3 million from a different partner. When excluding the impact of these one-time catch-ups, subscription and transaction-based revenue grew 31% year-over-year, again, on a constant currency basis. We exceeded our adjusted EBITDA loss outlook, with an adjusted EBITDA loss of $5.4 million, ahead of our previously established outlook of $9 million, our lowest quarterly adjusted EBITDA loss in over two years. As you’ve heard from us before, we continue to exercise prudence in our spend. The results of this is continuous improvement in operational efficiency, which has been driving better-than-expected EBITDA margin.

We’re happy with our progress here. Turning more specifically to the market environment. We continue to see the impact of foreign exchange rate, inflation and shifting consumer spending on our merchants businesses. I will walk you through some of the specific trends we’re seeing across our customer base. Last year, we saw third quarter GTV grow 124% and 53% organically over the previous year, driven by back to physical shopping and dining in many of our regions. This year, our total GTV in Q3 was $22.4 billion, which grew 10% year-over-year or 17% on a constant currency basis. Omnichannel retail GTV grew by 6% whereas hospitality GTV grew by 16%. In retail, we saw average GTV per location decline in several of our verticals, with bike shops, home improvement and pet stores being particularly weak as these categories spiked during COVID and are now coming back to more normal pre-pandemic levels.

Hospitality GTV growth was stronger year-over-year, given the impact of the COVID resurgences in the three-month period ended December 31, 2021, but declined from our previous quarter. Helping to offset this macro weakness is our ongoing rollout of Payments. We are fortunate to have a large customer base that remains underpenetrated with our payment solution. Our payments uptake has resulted in our gross payments volume, growing 75% year-over-year to $3.9 billion. We launched Payments globally in our last fiscal year. And although still early in our rollout, gross payments volume coming from outside North America is up 44% from the prior quarter. Turning to locations, we would like to remind everyone that Lightspeed remains focused on profitable growth.

As you heard from JP, given the uncertain environment and the fact that we derive our highest ROI from upselling our base, our go-to-market focus has shifted to prioritizing high value GTV customers from a net new perspective and growing our ARPU within our base, primarily through attaching payments. The result is a quarter where overall net new location count was flat from last quarter, but with larger GTV locations growing within the overall mix. Customers with annual GTV of $500,000 were up 15% year-over-year, and customers with under $200,000 in annualized GTV were our fastest declining cohort, down 4% year-over-year. I think it’s worth repeating that not only do larger GTV customers tend to adopt more software and their payments potential is much greater, but they also exhibit less churn.

As I mentioned last quarter, customer locations with over $500,000 in annualized GTV represent less than 10% of the churn of our overall base. The higher overall ARPU and lower churn from these customers results in our highest LTV to CAC ratios coming from this customer base. After excluding customer locations attributable to the Ecwid ecommerce standalone product, ARPU continues to trend in the right direction, with total ARPU of $348 increasing 20% year-over-year. The bulk of the ARPU increase came from increased Payments revenue. The headwinds brought on by a strengthening US dollar relative to foreign currencies was most felt in our subscription revenue line, which was flat quarter-over-quarter and grew 13% from the third quarter last year on a constant currency basis.

Transaction-based gross margins improved over last quarter, thanks largely to the one-time catchup payment of $3 million from one of our payments partners, as well as to Lightspeed Capital. Our merchant cash advance business is gaining traction with merchants globally, particularly in today’s economy where traditional lending institutions are becoming more and more selective with lending smaller businesses. Our Lightspeed Capital revenue grew 26% from the last quarter and 221% from a year ago with our default ratios continuing to remain under 2%. Hardware gross margins continue to bring down overall gross margins as rising costs and supply chain issues continue to drive the cost of our hardware up. We had a goodwill impairment charge in the quarter of $749 million.

I’ll walk you through the mechanics of this. Goodwill is required to be tested for impairment at least annually. Our annual test date is December 31. Given the decline in the valuations of technology companies broadly, and Lightspeed’s share price specifically, our net assets exceeded our market cap at December 31, 2022. This was a goodwill impairment trigger for us. This goodwill charge is a non-cash accounting entry that does not reflect any current or future cash outlay for Lightspeed. We’re also prudently managing our share-based compensation expense, and have taken a number of actions to reduce it as a percentage of revenue. Our share-based compensation expense has declined as a percentage of revenue for every consecutive quarter this fiscal year, from 22% in Q1 to 18% in Q3, and with the impact of the recent restructuring, we expect this ratio to decline even further.

We ended the quarter with approximately $838 million in cash. Our cash decreased by approximately $24 million in the quarter. The largest uses of cash were working capital movement, including the growth of our merchant cash advance business, which we fund from our own cash balances today. Now turning to our outlook. We expect consumer spending to remain challenged in the near term. And given that our transaction based revenues are now over half of our total revenues, weaker growth of GTV presents a headwind for us in the months ahead. We expect to remain vigilant on spend and to continue to focus on profitable growth. For the full year fiscal 2023, Lightspeed now expects an adjusted EBITDA loss of approximately $37 million, improved from previously established outlook of approximately $40 million.

The company now expects annual revenue to come in at the low end of the previously established outlook of $730 million to $740 million, or approximately $740 million to $750 million on a constant currency basis. We remain committed to adjusted EBITDA breakeven or better in fiscal 2024. With that, I’ll hand it over to JP for closing remarks.

Jean Paul Chauvet: Thanks, Asha. Before we go into Q&A, I want to welcome a new member to our senior executive team. Kady Srinivasan. Kady is our new Chief Marketing Officer, and comes to us with over 15 years of experience leading marketing efforts at organizations such as Dropbox and Electronic Arts. I’m thrilled to have Kady on our team as we continue to focus on our core customers of complex SMBs, raise our brand awareness and improve our go-to-market momentum. And with that, we will take your questions.

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Q&A Session

Operator: . Your first question comes from the line of Dan Perlin with RBC.

Daniel Perlin: I just had a couple of questions here. Specifically around subscription ARPU being flat over the past several quarters, you kind of touched on it a little bit. But I guess my question is, as you’re making this pivot to, obviously, more profitable clients, I’m wondering what the pricing environment is around subscription and to what extent do you have to have discounts to incentivize certain merchants who want to take payments?

Jean Paul Chauvet: I think the last phrase you said I think is very much in line, is what we look at is net take rate, which is net payments in that software. And on that front, what we try and do is bundle a package that is going to be just positive for Lightspeed. So when you look at the bigger customers, especially the higher GMV, if I attach payments to the software, you’ll realize that the bulk of the revenue on a net take basis is software. So, again, what we try and do is we just try and ensure that we maximize our take rate from when we sell to customers.

Daniel Perlin: Just quickly on the EBITDA guidance for 2024, I looked back, it looks like you’ve tweaked the language a little bit. I think previously it was breakeven. Now it’s breakeven or better. But you’ve got the $25 million now of incremental annualized savings from this workforce reduction. I’m just wondering, are you suggesting that maybe you’re more concerned about the top line to just kind of stay in that breakeven or slightly better range or should we be thinking about that $25 million actually potentially falling through as we think about 2024 numbers.

Asha Bakshani: The $25 million and the reorg, we had already contemplated that we would unlock operating efficiencies from the integration of our acquisitions when we committed to EBITDA breakeven next year. We do anticipate breakeven or better. We anticipate that that’s going to happen somewhere in the mid-range of the year given that, in Q1, we have our in-person sales and partner and customer summit, which does drag down EBITDA. And as you know, Q4 is our seasonally weakest quarter. But we do expect adjusted EBITDA breakeven or better for the full year falling within those two quarters.

Operator: Your next question is from the line of Daniel Chan with TD Securities.

Daniel Chan: Thanks for all the color on the customer locations. Just hoping you can help me reconcile your comments regarding larger locations. But if we look at the ex Ecwid locations, those were flat quarter-over-quarter, and then the Ecwid locations actually grew by 1000 quarter-over-quarter. So just wondering if there’s some strategic initiatives that still need to be rolled out or whether there was

Gus Papageorgiou: Daniel, you cut off there at the end.

Daniel Chan: Just wondering if you can just help provide some color on why the Ecwid locations grew sequentially by 1,000 locations, whereas the non-Ecwid locations stayed flat sequentially, whereas you guys are targeting to lap your larger locations.

Jean Paul Chauvet: Again, when we look at Ecwid, Ecwid is part of Lightspeed omnichannel. And inside of the omnichannel strategy, we’re going after bigger customers, and we’re selling them, call it, a channel agnostic platform. So with that in mind, that has an impact when you upsell or you sell to existing customers, that omnichannel platform that creates new stores on Ecwid. So maybe that’s one of the reasons. But I think, ultimately, we are focused on attracting the larger and more sophisticated, and that’s going to continue, and that’s going to be the focus for the company. And that really brings us to profitability. And that’s really what’s €“ the key message is profitable growth, as I said.

Daniel Chan: Is it fair to say that when you upsell a brick and mortar store to the omnichannel that one location gets counted for the brick and mortar store and then the other location gets counted for the Ecwid?