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

Hey, good morning. Welcome to our next session. I'm really happy to have Lightspeed's here with me this morning, Dax as the Founder. That's even a greater honor for me to have you here. Since you -- since the story is probably a little bit on the newer side for a lot of U.S. investors, maybe give us a little bit of background on like what was the idea when you started the company and how does that evolves in this.

Yes, thanks for having me. Yes. So Lightspeed started 15 years ago. I was the original developer for the original version of the software. And we've always served the complex merchant, starting with retail. So our first customers were complex retailers, a variety of verticals, actually, verticals that we still serve, like electronics and bike and apparel. And I built that first system on the Mac. Apple was on the -- was ascending back in 2005. But there wasn't great business tools, and people did want to run their businesses. And if there were complex needs, there just wasn't any options, and that's the gap that we filled with the first version of Lightspeed.

And remind me, is this -- was this like a point-of-sale, was this e-commerce? Like what did you kind of address initially?

It was really a commerce tool. I did everything from quoting and invoicing and purchasing and then realized that people did want to use it in-store settings. And so point-of-sale became an element of the solution.

Yes, yes. And how -- if I think about it like how difficult is it to take like something that you developed as an e-commerce solution and bring it into in-store, et cetera, so I'm coming back from the backbone of like we have like now the old world and the new world. But you're kind of bridging the gap for both of them. Like just talk us through like how it's different for you.

Yes. So we've always been building for -- we started building for these complex businesses, but they were -- they all have physical presences. And so the physical inventory, the repair shops, the corporate sales, but also the floor sales, all these different aspects of the physical business. And then as we moved beyond 2005 into blending into today, more and more digital channels, more and more omnichannel were brought into the system and the system migrated. We brought it into the cloud in order to enable what the modern consumer expects from a retailer or hospitality business, which we later also expanded to hospitality. We wanted to serve all the complex businesses on our main streets.

And that's like for -- like we're not quite as deep as you're in there. When you say complex, what do you have to think about like what's different compared to like a simple guy? Like -- I don't know if you have examples of something, but help us understand it a little bit better.

Yes. We think about our merchants, so we used the word complex. But it's a more sophisticated and more established merchants. They're, on average, one signifier is the amount of transaction volume that they do per year. So our merchants do on average of USD 600,000 per year. So quite a bit of a different segment than other point-of-sale systems that are sort of tablet based. Because we're serving, let's say, a retailer that's maybe got tens or hundreds of thousands of SKUs in inventory. And they're managing all the flow of that inventory. In the case of hospitality, they may have -- it could be fine-dine or multi-location, and they've got complex workflows or they may be integrated with a hotel or a golf resort. And so there's specific workflows there. So that's the complexity and that shows up in the amount of transaction volume. These are more established businesses in there, and they have different needs. Those needs have been really well served by legacy. Systems built over 20, 30 years by the NCRs and the Alohas and the Microses of the world. But those systems don't let these businesses adapt, obviously, to today's reality.

It's like there was a good -- I mean if you think about it, like everyone talks about like Shopify and how they changed the world, but like actually like you starting like in this segment, actually gives you a really, really good way to establish yourselves, and it must be relatively tough to copy what you're doing because like you need to understand each business really well. So there's a lot of process knowledge, et cetera, that you need to build over years. Is that the right way to think about it?

Yes. And I think what -- when it comes to where we are strong, we're not the general system. We go very deep in verticals. So we've got a solution set that's really deep for bike, for pet, for toy, for apparel, for a number of like inventory-centric verticals in retail and then there's about 5 or 6 for hospitality. And then golf is a hybrid of both because it's got elements of -- there's pro shops and there's hospitality businesses. So we -- in the past, in the legacy world, you would have had specialized systems for jewelry or for electronics or for bike. And today, we have -- now we have a system where we've got specialized tools, and we actually integrate with the suppliers in a lot of those verticals, which is the next step for making the ecosystem even better for those merchants.

Yes. And its like the -- I mean on the one hand, it sounds like niche. On the other hand, I would assume that niche is actually pretty big. So I think if I look around me in terms of the guys that are complex retailers in all the different geographies, et cetera, and then think about hospitality, it's still a very, very big market. Is that...

Yes. So we look at the market this way. There's about 47 million SMBs out there and that includes restaurants. And we're focused on -- there's 7 million to 8 million that we would consider in our verticals that were more complex that had those needs, had those deeper operational needs. And so it's not the vast majority of SMBs, but it's a very important segment that's underserved. And that we're very, very focused on designing, not just software for, but also designing a particular go-to-market, designing a how we sell, how we support, how we onboard. All of that's designed around that merchant.

Yes. Okay. Okay. That's really interesting. And then how -- if you think about what you address today, like how does that change or will that change from a geographic perspective? Like at the moment, I think, yes, we have a really good footprint in the U.S. and expanding it, Canada, Europe, et cetera. Like talk about that a little bit.

Yes, Lightspeed is -- we're a truly global business. We do have more hospitality in Europe. More of our retail is in North America. And we have a very strong hospitality business in APAC, in Australia, New Zealand and expanding to other countries. So that's the general mix. But as we expand, we cross-pollinate and we're bringing more hospitality into North America, bringing more retail into Europe and expanding our footprint. We want all of our teams and all the different cities we're in, all the hubs that we're in to be able to sell the whole product line. And then, of course, all of our e-commerce tools in our curbside pickup or delivery tools, all of those loyalty, all of the digital tools are -- span those solutions and help these merchants adapt.

Yes. Okay. And then if you think about the future of your industry in terms of like your product offering where you started out in terms of what you did for a merchant to where you want to go with in terms of what you -- the areas that you want to solve for your clients, like can you talk a little bit about the journey? You started -- you talked about the beginning in terms of like commerce and point-of-sales, but I think it's broadening now even more.

Right. So today, we see ourselves as we are the operating system for these businesses. We're with what these businesses require and the kinds of workflows they require and the complexity of managing inventory across channels and across locations, we're really sort of a scale-down ERP. We don't use that term with our customers, but we're the nerve center for everything. And then as -- when something like a pandemic hits these customers, they can leverage the platform, leverage tools that they hadn't lit up to really make sure that they can adapt. So it's a tool to future-proof their business, make sure that as new ways to pay are introduced, those are things that they can quickly adopt as we roll them out in the system. And they can stay ahead of not just the competitors that they have on the street, but they can stay ahead of big e-commerce competitors or big box. So it's really democratizing this technology for these complex merchants. It's giving them sort of ERP power that's omnichannel.

Yes. Okay. And then you mentioned omnichannel, and I remember when I was still a good bit younger. We were kind of doing like omnichannel is the future. And for a long time, there was a lot of -- like, there's dream and like everyone kind of said you do omnichannel, but they do like one aspect of it. Like, talk a little bit about what you really -- what's really happening out here. And I guess, like COVID probably was kind of the catalyst as well to really think omnichannel around.

So COVID been a massive accelerant. We've been preaching omnichannel for 5 years. And even our early systems had omnichannel capability in -- even in the early days of combining e-comm and retail. But what we've seen is, I've never seen 9 months like I have in the last for the company in terms of innovation. We saw omnichannel adoption be brought in by 3 to 5 years. So that's interesting to see. Customers who had bought into the idea of the platform and we're planning on going on this journey with us, but started with the in-store, the in-restaurant tools. And then we're going to -- we had the intention to leverage the full omnichannel platform. With COVID, we had request to light it up overnight to help them get going. And one of the things we're really proud of and it shows the power and flexibility of the platform is by April, 3/4 of our merchants were transacting with their -- were still transacting with their customers. So they were able to quickly spin up delivery or e-comm. And over the course of 9 months, we added more and more omnichannel workflows because what we realized is now that there was -- now that the demand for it was -- had been so concentrated in and bought to light many new scenarios that would work for one kind of merchant, but not another. That would work for one kind of hospitality business. But for another, they would rather do instead of delivery, they'd rather do an e-comm store for meal kits and other things or they might do one new curbside pickup and take out, and they wanted different kinds of nuances to the workflows. And we build these things in response, and then they're used very creatively. We rolled out another thing called subscriptions in retail, which lets our businesses create recurring revenue streams. And the creativity we've seen around that has been amazing. You give small businesses the tools and give them the power and have those tools connected to the entire platform, and you can see real new wave business models happening out of that creativity.

Yes, yes. That's -- it must be amazing. And the other thing is also you -- I guess you can learn, if someone had a great idea or you can bring it to the installed base as well, which is like for sounds like subscription idea, sounds like crazy, but really interesting.

There's now over 100,000 Lightspeed merchants, and there's no -- we see stuff every day that's exciting, that's new, that's a new application of the platform. And it is an exciting part of this journey.

Yes. And then like last question on COVID there. I mean I have to admit like initially, when I saw COVID hit, and then I was like, "Oh, yes, these guys are retail and restaurant, good luck to you. Goodbye." The -- but it didn't play out like that. Actually, it was like -- it played out completely differently. Like talk a little bit about maybe what it -- given the focus you have a more complex and slightly larger, probably kind of made it a very different play for you than for some of the other guys.

Yes. So I think, as I said before, this has accelerated the move to omnichannel. So we definitely saw that amongst our base. Churn has been slightly elevated, but what we have learned about this segment through this experience is that they are resilient. They are more at scale, and they're going to use every tool in the toolbox that's available to them to continue transacting. And so -- and we've also seen during this period, something very surprising is it's also not so surprising, which is that people that were on legacy and that are having -- that had a legacy system and that may be lit up delivery or one of these other online channels on the side, realizing how difficult that was to have that be separate siloed systems. And so we actually added a lot. We added a lot of new stores. And new stores in our last quarter, and I think the market really responded well to show that yes, current customers are doing much better than we expected because through lockdowns and through restrictions because of the tools that we're providing them, but also people are moving towards the platform. And we're very optimistic about there's -- we're anticipating a reopening, a surge in demand for the reopening. Hence, our acquisitions that we've done, we do see a little bit into the future with what's happening in some of our markets that are already seeing reopenings like Australia and South Africa. So we -- yes, we think that omnichannel is now a must have, not a nice to have, and I think that, that's good for the creativity and resilience of businesses. And ultimately, it's great for us as a tools provider.

Yes. And then like talk a little bit maybe about how does it -- like how long does it take for -- or like in terms of first yield cycle, but then also in terms of like for emergence to kind of e-comm over to your platform, like -- and has that changed during the COVID that you had to go more virtual, et cetera?

Yes. So Lightspeed has always been a virtual sales model. The only time when where there's feet on the street is if we're doing some of the implementation via a partner, when there's complex hospitality setups like in a hotel or golf. But for the most part, we're doing everything virtually. And I think that, that model that we built was very well suited to COVID. So the sales cycle typically is less than a month because we're speaking with the business owner. If they're in a buying mode, it can be even much less. And then the onboarding, what we tried to do, there's a great modules journey that our customers take over time. We don't try to load up our customers with all the modules at the beginning. We try to bring them on to the main platform, perhaps right off the bat, they're going to want payments -- our own payments because that gives us -- that gives them a ton of new capability. And then potentially delivery and e-comm is where they'll start. Over time, they'll graduate to loyalty, into analytics, into other parts of the platform. But each one of those has an onboarding. So they'll do 1-2 hour virtual onboarding for every one of those components. And so they'll continue to be onboarded with us as they grow with the platform.

Yes, yes. Okay. That's also -- and you mentioned one area that I wanted to touch next is on payment. So I remember like payment is for you, not -- it's not like you had it all the time. It's kind of our best -- one was it, when did you come out like about 1.5 years ago?

That's right, yes.

So talk me through that, so what was the -- what role the decision to go into payment? And what does it mean for you?

Yes. So we did have integrated payments, of course, as a point-of-sale system, but it was in a referral model, where our partner took a lot of the economics. And now we decided, with our scale, decided to become a payment, PayFac payment facilitator. And use partners, we still use partners to move money around and to be able to enable our payments system, but we're doing the sales support, the risk, the underwriting and so we -- that dramatically changes the balance of the economics. But it also creates a much, much better customer experience. First, the sales and service experience is not disjointed. It's not disconnected. We do a great job of high-velocity sales and really supporting that established business properly and throwing it over the wall to referral partners sort of breaks that continuity. But at the end of the day, the merchant gets one portal. They see all of their reconciliations and everything in one place. We've been able to layer on very rapidly in new innovations. So curbside pickup with our mobile tap device is layered onto payments. Subscriptions, which we just talked about, which is a really interesting new business model possibilities later on to payments and the Lightspeed Capital, which we announced is also layered on to payment. So it's been a better experience for the customer, where they can see all their business and their payments and deposits all in one place, eases reconciliation. But also, it's a source of real innovation. And also on the support side, it's one throat to choke. They only have one vendor to go to. And that's really the philosophy of Lightspeed is. These are more at scale than merchants, and they want a one-stop shop. They don't want to try to figure out whose issue it is if they're having an issue. Yes.

Yes. Yes. And the -- is it more -- the reason I think you 07:58 [indiscernible] and then later into payment, is it -- has it something to do with the maturity of your organization? Because like, in theory, it's like a no-brainer. Why didn't you handle all the services over to the payment guys? Why not do-it-yourself and your monetization is much better?

Yes. I think we -- I think scale matters, being able to negotiate the right thing. The maturity of the tools to become a payment facilitator, especially in the omnichannel model, which combines digital and physical, we're only ready really around the timing we started. And we were very focused on building the best software platforms. We're really a software -- we're a software company. Now we've -- now we're a bit of a hybrid with how important payments is to the business and to our customers. But I think the time was right in terms of availability of what we could build upon with our partners and also just our scale.

And how far are you down the path on the round payment? I mean where you are? Like maybe really it started like -- how much better of the monetization? Is it when you have a customer that also has payment versus not payment? And then how far are you with the penetration?

Yes. So a customer with -- that has payments, I think it dramatically increases ARPU, I would say. I think it's at least doubled. We are very early in the penetration, and we're exceeding our own internal targets in terms of penetration. But we're only 10% penetrated in U.S. retail where we started. That's our biggest market. And so of our base is 10%. Remember, there's about -- now with ShopKeep and Upserve, there's about $39 billion in transaction volume going through our systems. A part of that is U.S. retail, it's about 10%. Canada -- and this is -- and Canada retail is 4%, U.S. restaurant is 3%, and that's not even including the Upserve and ShopKeep merchants. So there's a big runway for us to penetrate with payments, and we're quite aggressive in trying to move our base over to payments. And what we found during this period is that there's been lots of opportunities for us to speak to the base as they brought on new upgrades to future-proof themselves. Payments is usually a part of that solution, and that's been a nice surprise during COVID as well.

And the -- what's the Upserve motion for payment? So are you kind of wait -- are you kind of visiting it now already? Or do you wait for renewal? And then say, look, as part of the renewal package, you say like, "Oh, look, I can give you a payment now. It's all coming from one vendor. Thank you very much?"

Yes. I think it's definitely in the renewal cycle. It's -- there's always -- we're always marketing to customers and especially when there's new features such as subscriptions or Mobile Tap or Capital, that's -- that may spark an interest in payments. People may want new devices that are mobile. They might be having a number of conversations with us. Definitely, new merchants -- we have really great attach rates for new merchants.

Yes. Okay. Perfect. And then in the last couple of minutes, I wanted to -- you have like 2 decently-sized acquisition in the last few months. Can you talk a little bit about that? I mean it seems almost like you're doing better than some of your peers. We know we're coming out eventually, hopefully. So now it's the best time to be active. Is that kind of the right way to think about it?

Yes. I mean ShopKeep and Upserve are acquisitions 10 and 11. We think that Lightspeed has a strong organic growth story as well as an innovation story, but we think that M&A is also part of part of creating this category leader. We want to be a global champion for this segment. And that's going to take also a bit of consolidation for some of the companies that we admire that are also in the space that may be concentrated geographically or concentrated in a vertical. So our M&A strategy is geographical. It's in verticals and it's 4 new capabilities. ShopKeep and Upserve, one is a bit -- ShopKeep a bit more retail in the U.S. Upserve is more hospitality in the U.S. This gives us more scale in our biggest market. The U.S. is our biggest market and gives us more scale, gives us the teams and technology to really take that market when we -- as we anticipate the reopening. And they've got a great merchant base that we can bring a lot of value to as well, bring them on a Lightspeed journey. And so these acquisitions, I think, are -- make a lot of sense and allow us to also grow the brand in the U.S. We want to lower our cost of acquisition, having less competitors and working as one team and really grow the brand.

Yes. And it's like -- and that's the last question for me, and I need to let you go then. How do you think about the integration? It's like the -- I guess, in Canada, you have constellation. It's just like you kind of buy everything, just milk them for cash. Thank you very much. But this sounds different. This sounds more like bringing them into the Lightspeed for all.

Yes, there's no interest in having a portfolio of different solutions where we have an internal project called One Lightspeed. And that means moving to one -- we very rapidly moved to one -- to our go-to-market model, which is highly effective. In combined marketing effort, we sunset the brands fairly rapidly. And then we have the vast majority of the developers and engineering talent working on converged -- on the converged flagship product. We don't want to have multiple products in retail and hospitality. So that's we want -- that's the plan. And actually, during COVID, we were able to accelerate some of the acquisitions, the Gastrofix, Kounta, iKentoo and Chronogolf and so we saw the benefits of really quickly integrating all 4 of those companies did their best quarter in their history under the Lightspeed banner post integration. So there's a really good playbook for integration, and we anticipate seeing those gains with Upserve and ShopKeep.

Yes. Okay. Perfect. Hey, that's all. I could talk for longer, but like I have to let you go for the next meeting. Thanks for attending. It was really, really helpful. Thank you.

Great. Thank you.

Thank you.