Lightspeed Commerce Inc. (LSPD) Earnings Call Transcript & Summary

Okay. Great. Welcome, everyone. Good morning. This is the beginning of the second day of our 24th Annual Credit Suisse Technology Conference. This is a 4-day event running Monday through Thursday. We're very happy to be starting out this second morning with JP Chauvet. He's the President of Lightspeed. JP has been at Lightspeed now for more than 8 years. And prior to his current role, he served as the CRO of Lightspeed. And then prior to Lightspeed, he spent some time, had a long and successful career, including time serving as the CEO of the Atex EMEA business. So with that, before we get into level setting around the Lightspeed business, I want to take a moment to allow JP to introduce himself, give a little bit more around the context of his time at Lightspeed and his current role. And more importantly, JP, thank you very much for being with us this morning.

Morning, Tim. Thanks for having me. So yes, just maybe a quick background. So I've been at Lightspeed for 8 years. I've spent my career in technology, growing companies. And my background, I actually started as a product manager, and then I moved very quickly into sales. And I joined Lightspeed, we were about 50 employees, and so I've participated in the growth. I'm now President of the company, and I'm really focused on go-to-market and the integration of all the acquisitions.

Excellent. Thank you, JP. Well, we'll certainly get to some of the acquisitions and the topic of ShopKeep later in the discussion today. But for now, let's start out with the basic level setting question given some investors listening to the presentation might be newer to the story. Maybe we can give a little bit of a basic overview around some of the key metrics that you've been disclosing, the percentage of recurring revenue you have from both SaaS and also transaction-based fees. And then talk a little bit about sort of the payments business as a brief intro, and then, of course, we'll touch on that later in more detail.

Okay. Great. So Lightspeed, maybe as a start, when you go up and down Main Street, look at all the retailers and the restauranteurs, we provide solutions in the cloud, so SaaS solutions for these merchants. If you look at our typical merchants, they generate about $600,000 of revenues a year. And really, when you -- what we propose is you'll see it often in stores, it's an iPad. And we enable them from there to manage everything in the cloud instead of having everything on their computer. And our revenue base is really 90% recurring revenue. So we're a true software and payments company. We just recently completed an IPO on the New York Stock Exchange, which was a follow-on from our Canadian IPO a little bit more than a year ago.

All right. Perfect. That's a great headway into some of the other topics here. Okay. Let's take a little bit of a deeper dive into your core customers and your verticals. A few observations just to kick things off. The average merchant size, as you mentioned, it's typically a little bit larger than what we'd see with a Square. It's roughly comparable to what we think about in terms of the company, Global Payments, that we cover. Also notice that you're fairly balanced across retail and hospitality. And 1 of the key tenets of the platform is that you're often solving for complexity, meaning more of a full serve restaurant that has more complex needs. So with that as a backdrop, maybe you could expand upon your customer set, talk about some of the problems that you're solving and some of your key vertical exposures.

Yes. Great. So I think let's start with the market. So there's about 47 million restauranteurs and retailers on the planet in the SMB space. And so it's such a large market that vendors kind of segment themselves in what they operate. And Lightspeed we're really looking at about 7 million restauranteurs and retailers in the planet. And really, those are the more sophisticated ones. And what we mean by that is think about restaurants where you need to manage ingredients. You need to manage recipes. You need to make a relationship between ingredients and recipes and manage all of your suppliers. And so those are definitely not the coffee shops, but the more sophisticated restaurants. And then when you think about our retail presence, think about the retailers that have a lot of SKUs. So we do well in sports goods, apparel, bikes, pets, jewelry. And these are all, again, industries where there's a lot of complexity. And I think that's really what sets Lightspeed apart from, let's say, the Squares and the Shopifys is really we work on the higher end of the market, where there's a lot of need for complexity and management of complexity. Maybe -- I don't know if you -- maybe we can talk about our spread. I think that's also very unique to Lightspeed. We are a true global company. 50% of our -- 55% of our revenues are in retail. 45% are in restaurants. And we operate really in 3 continents, in Australia, in Europe and in the U.S., and we have a fairly good revenue split between all the geographies. And we have physical presences with offices in all those geographies.

Great, JP. Thank you very much. Sure. I definitely want to talk a bit about international. First, let me hit a quick follow-up question, if you don't mind, on some of the competition. So you mentioned a few there in terms of how you're different in terms of the portions of the market that you attack, had also mentioned Square. Maybe you could talk about some of the other competitors that you might run into at times. I realize there's some varying degrees of overlap perhaps Shift4 or Clover, Toast or TouchBistro, to some extent, and the extent to sort of the rest of the competition. What else is out there besides those names that we're all pretty familiar with? To what extent are there legacy systems out there that you're able to replace? And maybe a few examples of those as well.

Yes. So I think let's start with the market. So first of all, the vast majority of the market is legacy systems. And you recognize those systems because they're client servers, they're ugly black plastic terminals. And that's really what the bulk of the market is made of. And so when we think about competition, really there's a big replacement market, and especially in the context of COVID, where the -- everything needs to be virtual, and there's really the online world is meeting the offline world and people are ordering ahead or they're ordering online. When you think about the market, it's really underserved with those legacy systems, and that's really what we're going after. And especially in the more complex segment of the market, the one we're operating in, that's really where you see those. And I'll give you a few names, but MICROS or NCR will be the legacy players. And here, what we've seen in the last 6 months with COVID is, there's a big replacement that's happening on the market because those systems can't operate in the new world. Now the other reality of our market it's extremely fragmented. So every country has a set of new competitors. And I think everybody knows that there's a big market up for grabs. And so there's a lot of smaller players right now that are all trying to operate. And in the U.S., you mentioned a few names like Toast, TouchBistro, ShopKeep, obviously, before we acquired them. And here, what's happening now in this very big market is there's going to be 1 or 2 very large players that are going to take a large share of the segment. And here, what we want to do is consolidate this market and be sure we remain the market leader. And I think maybe just to address the question on the product gaps. When you're managing, I don't know, a bike store and you have hundreds of thousands of SKUs, you really need more than just a cash register. You need a cash register, but you need kind of a mini ERP that manages all of the reorder points, all of the inventory levels. And that can't be done with platforms that are on the lower end of the market, and that's really where Lightspeed shines.

All right. That's excellent. Thank you, JP. Great. Perhaps, if we have time at the end, which I doubt we will, maybe we'll circle back to some more of this. Let's hit on a topic that you mentioned in your prior comment, which was around international, and your mix across North America, Europe, Australia. This is a topic that comes up often in terms of the intersection of software and payments in that -- sure, there's a long runway in the U.S., no doubt. It's still relatively nascent. But it's also a concept of putting software and payments together that has been in the market now for some time. Perhaps it's maybe a little bit more early stage outside the U.S. Maybe you could just talk about to the extent that you see that in your business, how much more nascent is it outside the U.S.? Maybe why it's taken a little bit longer? And maybe what that opportunity is there for Lightspeed and others?

Yes. Very good question, actually. The -- so if you start with the market, I think just because of all the omnichannel workflows, the integration between payments and software is becoming tighter and tighter. And I think that's where a lot of the software companies that handle omnichannel and handle all these new workflows from online to offline, there's a really big need to integrate very tightly the payment with the software. And so I think that's a big trend we're seeing, and Lightspeed is also moving in that direction is because the consumer is moving towards digital payments, the solutions like ours need to adopt those. And what we've clearly seen is that the lifetime value of a customer on software, once you've attached payments, the lifetime value of the payments portion is exactly the same. So it's very, very lucrative and very attractive for software companies. When you think about Lightspeed, we launched our Payments in 2019 -- in the beginning of 2019. And we had this objective of starting in the U.S., integrating in the U.S., learning how to become a PayFac and a real payments company. And then what we decided to do is over time to expand our footprint. So in the U.S. today and in North America, all of our solutions now are in Lightspeed Payments. And it's been very successful. We now have an attach rate of more than 60% of every new customer that buys Lightspeed Payments with the software and they buy from us. And so what we've decided -- and it's very attractive because a customer in Lightspeed Payments, basically, ARPU of the customer doubles overnight. So just by attaching payments without any extra cost, we're basically doubling the value of the customer for Lightspeed. And so what we've done now is we have a number of partners in the U.S. that are working on Lightspeed Payments and Stripe being the latest 1 that we're pushing in the U.S. markets. And now what we've started to do is to expand Lightspeed Payments to the other countries where we have a presence. And what you can expect in the coming 12 months is we're going to expand Lightspeed Payments to all products, all regions. And you're right. It's very interesting to see because, in Europe, there's a really strong opportunity for attaching payments and software. And from all the models we've looked at, it's going to be just as lucrative as doing it in Europe as it is in U.S. And we have a high confidence that our attach rates are going to be similar to the U.S. But you're right. The European market is yet to be taken by software companies that are bundling payments. And I think the other big piece for us is that it's a very large market, when you look at the revenues we're generating in Europe, and we're also going to expand this into Australia. So you can expect in the coming months and years for us to really move forward into expanding Lightspeed Payments across the globe. And here, obviously, every region will have very different partners to do the rails or the payment facilitator.

Okay. Excellent. Thank you, JP. A few other follow-up questions while we're on the topic of Lightspeed Payments here before we move to some of the other financial services. Maybe you could -- you touched on a lot of these, but maybe you could just give a recap for investors in terms of the P&L, the mechanical differences and how the revenue share aspect of the payments works for those that are perhaps not on Lightspeed in terms of the growth in net revenue, which are the same for those? And then also on the Lightspeed Payments portion in terms of the gross versus net. In other words, maybe you can give us context around the take rate on a gross level and then what that cost of goods sold, if you will, or that pay away to partners is?

Yes. So good question again. So before -- so now Lightspeed is a PayFac. So really what happens when you're a PayFac and you underwrite and you take the risk, the big difference is you move from a net revenue recognition to a gross revenue recognition. And so when we move to PayFac, that means technically, for every dollar, we take -- our take rate is 2.6%. And what happens with that 2.6% is we keep -- we bill the customer. We recognize the revenues for that. And then the net take rate is about 65 to 70 basis points for that. And then what we do with the rest of the money, obviously, that's interchange, and then we will pay Stripe and all of our providers. But I think what's interesting to us is we move from a net to a gross and also we expanded our margin. So if you look at it on a different perspective, it's more than $200. So because our merchants are doing roughly $600,000 a year, that means, on a customer basis, the net revenues for us is about $200 a month. So it really -- you look at Lightspeed before payments. We had a net ARPU of about $200 per month. When a customer buys payments, it goes from $200 to $460 per month. So it's a very interesting equation for us. But I think also what's very interesting to us is the revenues we recognize, 2.6%, in terms of our revenues for every customer and for every dollar of transaction that happens on Lightspeed Payments.

Great. Which -- and that pricing, you're completely in control of? In other words, you set that 2.6% gross take rate. Is that correct?

Absolutely. So on average, we do a 2.6%, but what happens is customers that have a higher volume will have a more attractive rate and customers that have a lower volume will pay more than 2.6%. But on an average basis, we are roughly 2.6% on the -- on all the customers that have signed up to Lightspeed.

Right. Okay. All right. Absolutely. And I think most investors would appreciate. Part of the reason for that 2.6% number being slightly lower than what we might see with a Square or other competitors would be largely related to the average annual volumes, which you mentioned was slightly higher than some of those. Therefore, the pricing is a little bit more attractive for those slightly larger merchants. Is there anything else to call out there? Or is that pretty much?

No. I think -- I mean, the most important thing to call out is the segment of the market we're operating in is the higher end of the SMB segment. So this means that survival rate of those customers is higher. These are well-established businesses. So even though the take rate might be slightly lower because they have higher volumes, the lifetime value is greater because they're less prone to churn and they are more established businesses.

Fully follow you, right? Less bankruptcy and longer expected lifetime.

Absolutely. And we operate also with hotel chains, and we also operate with golf courses where they use our platforms within their restaurants and their retail stores. And those are even more established businesses and less prone to turn. So here, when you think about -- I think when you think about Lightspeed in the market, I think at the starter level, you have the Square and the Shopifys that are operating there. And then once these merchants reach a certain level and they have complexity to manage, and they have a lot of SKUs, a lot of inventory, a lot of workflows that are specific, then they'll probably graduate onto platforms like Lightspeed.

Okay. Excellent. Before we move on to the next topic of Lightspeed Capital, just want to quickly just talk about how far Lightspeed Payments has come. I know you mentioned some stats around the 60% or so of new merchants coming on to the platform are now signing up for Payments, which is an impressive number. Maybe you could just talk a little bit about the overall penetration in the markets where you have been rolling it out, realizing it's very early days and just recap some of those growth rates that you've been seeing for investors?

Yes. So I think -- so the first thing is, even though we're very strong on attaching new customers, Lightspeed has a very large base. So we do more than $30 billion in volume on an annualized basis. And so what happen is, if you look at penetration for every 1 of the products in the verticals, obviously, the product that we launched first in the U.S., which was Retail in the U.S. now has about a 10% penetration on our total GMV. So even though we're very excited about it and represents good revenues for us, there's still a ton of runway to move forward. There's 10%, and we're attaching 60% of new customers. So over time, we're expecting the majority of our customers to be using Lightspeed Payments. But here, the penetration is 10% on U.S. retail, which was the first 1 we launched. Then we launched Canadian retail, and now the penetration is 4%. And then we launched U.S. restaurants, which is now 3% penetration rates. And as I said, on an average, we take -- our take rate is 2.6% and on an average, 60% of all new customers are now buying from Lightspeed. So here, when you think about ARPU and you think about expansion of ARPU, there's still a lot of room to grow there, to sell Lightspeed to our existing base.

Okay. Great. Excellent foreshadowing. I definitely want to get to the ARPU expansion question down the road here, and I fully understand that Payments and also Capital could be a part of that. So why don't we switch briefly also to Lightspeed Capital? So this is clearly another way to help your merchants grow. It helps the relationship. You mentioned earlier the already relatively attractive retention or reduced churn within your portfolio given the merchant size, but I suppose this is another way to even further support that. But maybe you could talk a little bit about the mechanics of Lightspeed Capital. How that works alongside your partner in Stripe Capital and what all the benefits are to both Lightspeed and to your merchants?

Yes. So I think if you start and you step back, think about Capital. Capital is very important for our customers. Because what makes -- what makes a retailer or restauranteur when you're more established is you need a lot of capital to be able to stock the right inventory and then optimize your profits as you sell those. So for us, we've always wanted to do Lightspeed Capital. And I think what's interesting is the relationship we have with Stripe is where we're using the payment terminal to withhold money once we lend. So what we're doing now is we very recently launched Lightspeed Capital. And so what we're doing is we're basically lending money to our merchants. And here, we have a number of criterias to define the profile of the merchants where we want to lend the money. And then from there, inside of the platform, we do offers. So we'll -- customer is going to log in, and they'll see that they can -- we're enabling them to access Lightspeed Capital for a certain amount based on those. But I think what's interesting here is we're using the, let's say, the rails of Stripe. So which means once we lend the money, we're then withholding funds every time there's a transaction that happens, so that we can pay back the capital. So it's a very interesting mechanic for us. It's still early days. And we're using our partnership with Stripe, which is also our vendor for Lightspeed Payments. And all of those bundled together are very interesting. But again, it's very early days, but we're very happy with the initial results and very happy with the relationship with Stripe.

That's great. Okay. Well, that's probably a good segue into a follow-up question here around -- so clearly, Stripe is your payments partner and also you're working with them on Stripe Capital. Maybe you could talk about potentially some of the other aspects of the Stripe platform that are attractive that could help you in terms of further monetization. Are there any other potential use cases that you'd call out for your merchant base that might be attractive for Lightspeed, for your merchants, things along the lines of payouts or perhaps the Stripe issuing product or others that you might call out longer term?

Yes. So I think the next logical 1 for us is instant payout and same day deposits of funds. I think as I said, capital is everything in our industry. So if I can enable our merchants to access capital and access the funds faster, they're all going to go for this. I think it's -- when you think about how people operate there, it's very interesting because you enable the merchant to have access to the funds the same day and you take roughly 1% or 100 basis points. So it can be extremely lucrative, especially for the merchants who need capital. So I think that's really the next 1 we've looked at, and you can expect some of that. But I think, for us, right now, the most important is to continue expanding Lightspeed Payments across the geographies. And that's really the focus of the teams right now. Because when you think about the returns, that's where we have the best. If I can double ARPU 60% of all my new customers in all geographies globally, there's an incredible return. And then I think the other piece is, when you think about Australia, we have 10,000 customers. If you think about Europe, we have almost 20,000 customers. So we have a very, very strong footprint and there, there's a big base. And I think the simple next step for us is really to just get to the Lightspeed Payments. And then once Payments is there, then there's a number of derivative products that you can launch. But Payments is the first step because that's really the plumbing, and that's how you get -- how you start moving into the financial services world.

All right. That's excellent. So let's bring a lot of that together into some of it related to Lightspeed Payments and some of it perhaps not. But maybe you can help us just talk through a little bit more on ARPU expansion. Clearly, as you just mentioned, the payments aspect meaningfully increases the ARPU. But what else can be said around ARPU expansion ahead, given some of the other premium services that you offer, whether it be around analytics or loyalty or other modules? What are some of the other factors that could help to drive ARPU higher over the longer term, in addition to some of the items that we already mentioned?

Yes. So I think let's start at the beginning. The early days of Lightspeed, really what we did is we offered the back office, so kind of the inventory management platform and then the in-store POS. And that was based on an iPad, and then we had everything in the cloud to manage this. And what happened over time is, by listening to our customers, we developed more and more modules. And basically, what we spent the last 8 years doing is listening to customers. And they -- what we heard from the market is they want to buy more and more from 1 merchant because they found it really difficult to have to work with multiple different vendors to fulfill all the needs of what they had to do. So over time, what we did is we expanded our portfolio. We started with the POS. Then we moved into -- we moved into e-commerce. Now we have a full-blown e-commerce platform. Then we moved into analytics, where we now have a full-blown advanced analytics engine. Then we moved into loyalty, where we enabled our customers to reengage with their customers after they had left the store or the e-commerce platform. Then we moved -- and so what happened over time is we developed a number of modules. And I think that's what's interesting with Lightspeed is, and Payments, obviously, is 1 of the latest of the modules we launched. But what's interesting is, if you look at ARPU over time, it's continuously expanded. And it's continuously expanded because what happens is customers -- we have this notion of a land product, which is the core product they start buying from us. But over time, they buy more and more modules from Lightspeed. And I think -- even think about COVID, the majority of our customers now are calling us and saying, "I want an e-commerce side. I want to do omnichannel loyalty because I want to reengage with my consumers across channels." So what's happened here is, over time, customers have bought more and more from Lightspeed. And even though we've seen ARPU expansion, there's still a ton of greenfield there. On average, customers who have more than 1 Lightspeed module is 40%. That's the stats we published now. But think about every customer could buy 6 -- up to 6 modules from Lightspeed. So there's still a ton of runway here where we can sell more to them, and they can buy more from us. And I think that's what's been interesting in the context of COVID, is we've seen acceleration of adoption of modules and mainly all the digital modules. So as an example, in the restaurant space, Order Ahead is a module of Lightspeed, enabling a customer to basically order online and pick up in store. Curbside pickup is another one. And what we've seen is our customers have expanded those modules through COVID because they need to interact with customers in many more different ways. So I think net-net, there's really a ton of runway here also when you think about ARPU expansions and modules that people could buy from Lightspeed. And the other reality about our business is, over time, ARPU has continuously expanded because we've developed all these modules that correspond to the needs of the market.

JP, thank you so much for that. Clearly, a long list of levers for ARPU expansion. Unfortunately, we only have about 2 minutes left. Of the remaining questions, I hope you don't mind, I'm just going to pick 1 here around -- and then we'll wrap up. Direct versus indirect distribution. I think you mentioned that you have a mostly direct sales approach, but you also clearly use channels and partners depending on the subsegment of the market or the geography or where it makes sense. Maybe you can just talk a little bit about the -- your distribution in general with that lens of direct versus indirect?

Yes. So I mean, generally speaking, we're direct. And what -- I mean, think about Lightspeed as a kind of a traditional software company. So we generate leads in marketing. Then those leads get qualified, and then we sell them internally, and then from there we also onboard them completely virtually, which has helped us actually in the context of COVID. We can do everything with Zoom sessions. So that's the majority of our business. But we also do have what we call a partner business. So what happens in the verticals where we operate, we have a number of partners. I'll give you 1 or 2 examples. The first 1 is Specialized, the bike manufacturer, is a good partner of Lightspeed. And here, the relationship we have with Specialized is Specialized is reselling Lightspeed to their -- to anyone who wants to resell their bikes. They're telling them you have to use Lightspeed. And that's because, thanks to Lightspeed, we can show them sell-through in real-time and they can readjust manufacturing. So I think that's very exciting and a very good type of partner that we have. Anheuser-Busch is another very good example in Belgium. Anheuser-Busch is basically promoting Lightspeed, and they're very well-known beer manufacturer. They're promoting Lightspeed to all the restaurants that are selling their beers. And the reason why they're doing this is that they want all the restaurants to buy Lightspeed because then Lightspeed will give them sell-through of all the beers in real time, and we can also make some advanced analytics on what kind of food are they eating when they drink some of their beers. So I think they're -- this is another very good of an partnership. And so what we're trying to do, generally speaking, is we're very obsessed by this flywheel between suppliers, stores and consumers. And what we want to do is to go very deep in those verticals and own those relationships and ensure that everybody within that flywheel benefits from Lightspeed and promotes Lightspeed for us. And so there's -- and you'll hear more about this. We've now developed a complete new supplier service, where anyone using Lightspeed can directly from our platform access supply levels and order directly from Lightspeed at the supplier levels. So what we're trying to do is basically an integrated supply chain inside of verticals for small businesses, which has never been done before. And that's why we have these kind of relationships. And then, finally, the last type of partners that we have is we have a number of resellers globally that are just operating in verticals where we're not and that are selling, installing and billing for Lightspeed.

JP, thank you so much. You squeezed it in there. It was excellent. It was really a pleasure speaking with you today and getting to know more about Lightspeed. I just want to thank you and also Gus from Investor Relations for joining us this morning. Thank you for being with us. We hope you have a great day of meetings, and we look forward to more ahead.

Thanks, Tim. Thank you very much. Have a good day.

Thank you.