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

Hi. This is Josh Baer, a research analyst at Morgan Stanley. Welcome. Good afternoon to the first day of the Morgan Stanley Technology, Media and Telecom Conference. I'm joined today by the Founder and CEO of Lightspeed, Dax Dasilva. Welcome, Dax.

Hey, Josh. Thanks for having me.

Excellent. So before we begin, I wanted to get the disclosure out of the way. For important disclosures, please see the Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosures. So thanks again for joining us. I really appreciate it. I think Lightspeed is relatively new to the U.S. public market, so it might be helpful to get a brief overview of your platform, what you do, who you serve. That would be a good place to start.

Yes. Thanks, Josh. So Lightspeed provides -- we're an advanced commerce platform that provides omnichannel solutions to more complex small- and medium-sized businesses in the verticals of retail, hospitality and golf. And so those merchants are typically doing an average of $600,000 in GTV a year, a bit bigger, more scale, more inventory, more complexity, more locations. And yes, so that's where we're really focused and have about 115,000 merchants on the platform globally, driving around $40 billion in transaction volume a year.

Perfect. And then like thinking back to when you founded Lightspeed in, I think, in 2005, what are some of the more significant milestones or transformational initiatives, product rollouts, M&A, just as you think about where you've been and to your place today and looking forward?

Yes. Some of those big milestones, definitely, we're making the move to the cloud as we saw the omnichannel future for our brick-and-mortar customers. So that was a big one that we did beginning in 2013. So we're very ahead of the curve on retail. And we started in retail, and then moved into hospitality. That was another big move that we made through acquisition, made it into Europe with some European hospitality-oriented solutions. Over the years, we've really built out this kind of one-stop shop for this merchant by expanding software modules and expanding the platform so that these merchants can get all their core needs from Lightspeed. And then one of the latest things that we've rolled out is -- since our IPO on the Toronto Stock Exchange before New York was Payments and just layering on payment solutions onto this rich platform. And that's been a great story for us.

Perfect. So we're going to dig into a lot of that. Definitely, we want to step through the growth drivers. And starting with customer location, acquisition -- customer acquisition, I think this last quarter was a record for you, 4,000 organic net new customer adds. And this is during a pandemic and just by the nature of your customer base, SMB, mid-market, retail restaurants, so with physical store presence so impacted and a record organic customer add. So if you could provide some context on where the strength is coming from, what markets or geographies. Like what's driving this location growth?

Yes. So where we're seeing it coming from is -- Australia has been strong. E-commerce has been strong. Retail has also been holding in there. And where we've seen some challenges, of course, is hospitality in Europe and places where there's lockdowns. But in general, what we're seeing with the market is that we've been pitching omnichannel for many years, more than 5 years. And that's gone from being a nice-to-have to being an absolute necessity through the pandemic. And new businesses that are forming or businesses that are currently using established legacy systems are moving on to new systems like Lightspeed, and so that's where we're seeing a lot of the uplift, especially where there's a reopening.

That makes sense. Are your customers getting larger? Like is that a driver at all as far as location growth?

So I think if you look at core Lightspeed outside of the acquisitions, the number of locations per customer has been growing. People are doing more locations. And some of the companies that we brought in, on average, have lower multi-store. But yes, as we converge to flagship products, I think you're going to see more multi-store across the base.

Got you. And you mentioned e-commerce. Is that a driver of new customer acquisition?

Yes, absolutely. And with our retail product, it's really retail and e-commerce. We call it collectively omnichannel. And so we've seen great success with that. And in the last quarter, we showed 100% growth on revenue coming from -- GTV coming from the e-commerce product. So that's been a big element of what's been growing and what's been driving growth in this period.

Sure. So in the context of customer acquisition, I wanted to bring up your supplier network. If you could describe how you think about the supplier flywheel, what you've built with the supplier network offering, that would be a great place to start.

Yes. So supplier network is something that we just announced, and it's the culmination of many years of work. We've been building tools for merchants in these complex verticals, especially where there's complex inventory. Think about a bike shop or jewelry shop, where there's tens or hundreds of thousands of inventory items. So we've gotten to know the suppliers in a lot of these verticals. And on the retail side, we operate in 12 inventory-heavy verticals. And so by building tools through the supplier network for -- that help create seamless supply chain between these SMBs, complex SMBs and their suppliers, we can create a number of benefits. First of all, suppliers get sell-through data from their SMBs and maintain brand consistency when you've got your catalog of items and your -- these suppliers are now feeding descriptions and product imagery, that then those merchants can upload to their e-comm stores. So it's reducing a lot of manual work for both sides. The retailers, on the other hand, get real visibility into inventory. So they're not going back and forth and trying to place orders for inventory that doesn't exist. And by the suppliers getting the sell-through data, they're also able to plan their production cycles better over time. And then, at the end of the day, those stores are more successful because consumers get the products that they want stocked on the shelves. So we're just trying to close the loop between these suppliers that really have never had visibility into their independent merchants partners. And so this is -- and also these merchants, of course, have had a tougher time getting online because of all the work it takes. And so this all kind of streamlines that. And I think, at the end, we're -- we benefit because what we're seeing already is that these suppliers are pitching Lightspeed to these merchants more and more.

Got it. Yes. I mean that's why -- like the way I think about it and why I brought it up in the customer acquisition section is because -- correct me if I'm wrong, but there's no direct monetization from the supplier product. There's a lot of value, as you mentioned, to merchants, to consumers and obviously, to suppliers. But is the right way to think of it as a very efficient -- in addition to all that value, an efficient channel for [indiscernible]

Yes. We want to be the go-to brand in these key verticals for us, in these complex verticals. And I think that we -- the best thing we can do right now is provide a ton of value and optimization for these suppliers and these merchants and ultimately benefiting the consumers. Large e-commerce players use data to benefit their own supply chain. And so we're doing it for independent SMBs.

Perfect. Moving on to the next growth driver, organic software ARPU growth, so ignoring the Payments piece for a moment. That would come from an adoption of module like Loyalty, Analytics, you mentioned e-commerce. I mean what has been driving ARPU uplift? If you could talk a little bit about that and your view of how durable that double-digit ARPU growth is looking forward.

Yes. In terms of location growth, we like to see a 15% to 20% location growth a year. And then there's the 10% of software ARPU growth that we kind of have targeted. And then there's the benefit of Payments and M&A on top of that. If you look at the journey that merchants take with Lightspeed, they -- it's sort of a land-and-expand proposition. We try to land them on the base platform. But then over time, their ambition, why they choose Lightspeed is because they see a road map ahead of them that gets them into more omnichannel workflows, that gets the -- like it could be e-commerce, Delivery, it could be curbside pickup, Order Ahead, Analytics, Loyalty. So all of these new options, all of these new drivers for growth or drivers for operational efficiency are available on the platform, in addition to our ecosystem. So that's what drives the ARPU growth, is we've got a land team, a team that lands people on the platform, the promise of being able to grow on this platform, grow across channels, grow across locations. And then, over time, we'll layer on -- the expand team will layer on the additional modules when those customers are ready to go to those levels.

Got it. And do you have any context for how a merchant in the retail vertical would differ from restaurant as far as the land-and-expand motion, how they're engaging with the platform and how many products they're adopting over time?

Yes. Well, I think a lot of the retail modules have been in market longer. And the conception of omnichannel being something that people do later is changing rapidly. So right off the bat, a lot of customers will buy the Lightspeed-based platform and then will buy Payments and e-commerce on retail right off the bat. And the same thing may happen on the hospitality side, with getting Payments and Delivery or getting Payments and e-comm for restaurants, if that's more of a better fit, or Order Ahead. So -- and then from there, I think it depends on the ambitions of the business. They could be growing more through locations. They could be leveraging analytics, they could be leveraging loyalty programs. So I think that's sort of the progression. There's accounting integrations as well depending on the sophistication of the business.

Perfect. A next growth driver I wanted to cover is Lightspeed Payments. And we just see a massive opportunity ahead there and still early days. I guess starting from the customer perspective, it seems like it would present faster and sort of an easier sales process, maybe better reporting and analytics. What else am I missing as far as the benefits of Lightspeed Payments integrated into your platform?

Well, yes. So I think that if you look at the -- we've done 9 major product launches in the last, let's say, 18 months or 2 years. And a lot of it is built on top of the payment stack, in addition to the retail tech stack and the hospitality tech stack. So more and more, you're not going to get the full value of the Lightspeed platform if you're not on Lightspeed Payments. So things like Order Ahead or digital wallet or Mobile Tap, all of these contactless payments, all of these new innovations we're rolling out are the merging of Software and Payments. And so that's -- the value is more and more tied to us being deeply integrated with Payments in our workflows. And so that's becoming more and more compelling because why would somebody want to sign up for a platform but not really be able to truly unlock it. And so that's why I think that it's becoming more and more a default. And I think, over time, we'll probably see that trend.

Got it. Are there incentives in place for customers to adopt Lightspeed Payments?

Yes. I mean there's certainly lots of opportunities for us to talk to customers about Payments when they're renewing. There's some pricing discounts if customers adopt Payments right off the bat. In some verticals, integrating Payments, like hospitality, it's very normal for it to be sort of a default competitively on the market. And in markets where we have really high penetration like bike, we're seeing very high adoption rates. So I think that as we go on, as we light up new markets, we're also seeing that we've gotten better and better at this. And the software in Payments is becoming more and more indistinguishable. It's really just converging.

That makes a lot of sense. And then like taking a step back and thinking about the broader opportunity and long term, I mean, how should investors really think about the potential attach for new customers that come on board, existing Lightspeed customers, also customers that were acquired through recent acquisitions?

Yes. So about half of Payments -- half of new Payments customers are coming from our base. And our penetration rates -- we're proud of the penetration rates. We're about 15% in U.S. retail, about 12% in Canada, but there's still a ton of runway to go. So about half are coming from the existing base, and we think that the bulk will convert over time. We're seeing about 60% of new qualified customers adopt the solution. That's up from 30% where we started. And I think our perspective is if a customer comes to the Lightspeed platform, and they're using another provider and they're locked into a contract, and we -- usually, we can buy out those contracts or offer them new hardware, we're building a relationship with that customer. We can get them as a Payments customer down the road. And we see that, over time, when we look at the companies we've acquired that have high penetration of payments or some public market -- some public company competitors that have been in market with their payment solutions, within a few years, there's very high adoption. So we're seeing that track similarly for us.

Great. I wanted to shift gears and talk about competition for a bit. I mean you certainly have a part of the market where you talked about complex SMBs, complex retailers, restaurants. I mean how do you frame your differentiation versus other vendors in the space, whether they're coming more from the e-commerce side or the physical payment side. Like what is your differentiation within those markets that you outlined?

Yes. I think that the amount of transaction volume per location is quite a different segmentation than some other -- some of the other players that are more e-commerce-focused or payments-focused. And the -- part of that is that we focus on the sophisticated customer that's got higher levels of inventory. They've got multiple -- many -- multiple SKUs, sophisticated workflows. If it's in hospitality, they could do -- it could be a restaurant that's serving all the hotel rooms. It could be a golf resort. There's a lot of different complex workflows that legacy had done quite well, but then is not well adapted for the current reality of needing to have omnichannel. And so our solution can -- also does multiple locations very well, 90-plus. And some of the other offerings will max out much, much lower than that. You can't run a lot of these businesses on some of the more e-commerce payments-targeted solutions. A lot of our value is in having that deep back end and then having all these rich front ends for omnichannel.

Got it. So essentially, you're saying that you're best suited to serve merchants that have some sort of complexity, whether it's -- those kind of complex workflows that you're outlining or higher inventory or higher inventory turnover. And you're able to move sort of upmarket a little bit from SMB, with higher GTV. And so with all that in mind, you're not necessarily running up head-to-head versus some vendors that have -- are more downmarket or best suited for more simple merchants.

Yes. There's -- the market's 48 million SMBs globally. We think that about 7 million of that is -- falls into the complex category. And so there's a ton of space for different segmentations and for other players to -- we're all pretty early in this journey. We're at about 115,000 merchants out of that potential 7 million. And that's largely on legacy. So what's happened with the pandemic is that this displacement of legacy has accelerated. We've pulled an omnichannel by 5 years, and more and more merchants have to move off of legacy. And so that's opened up an opportunity for us to increase that store count and become a go-to brand for complex SMB.

That makes a lot of sense. And it's definitely a large opportunity when you think about the legacy vendors. They also have cloud offerings, much -- I think, more recently, some rolling out over the last year or so. I assume they're trying to defend their customer base. So if you could talk a little bit more about competition from legacy vendors, is it when a merchant decides to move to the cloud, it's a big move anyway and that's the opportunity to adopt a more mature modern cloud offering? How does that work?

To be honest, I think in deal competitions, we don't really see them. And if they're only offering a replacement for the POS with no Payments or Loyalty or Analytics or e-commerce, any of the omnichannel workflows, we don't believe that's truly competitive for -- I think that what merchants today are looking for is a one-stop shop for the broader solution. And because the legacy approach of having a core POS than having other vendors do some of the other pieces, I think that ends up being very -- we believe that ends up being very suboptimal for the merchant. You then have to reconcile data. And you're not really operating in an omnichannel model. You're piecing together and reconciling data from all over and transactions. So I think that that's -- and also, the -- I think the legacy companies are really geared. Their business model is geared to acquire customers in a certain way, and it's not well adapted to the cloud, the way that cloud vendors go to market.

Great. So, so far, I think we've been focused on organic growth. I wanted to move into M&A, which has been a big part of your strategy. So the first question I wanted to ask is you've been very active. Like if you take out a few COVID quarters, there's been almost an acquisition every quarter for some time. The way I think about it, it's a 2-way market. These companies that you're acquiring, especially ShopKeep and Upserve, I'm sure that they're attractive assets. I'm sure that there are others approaching them. And ultimately, it's a decision on their part as well to be -- to kind of join your platform. So what is it about Lightspeed that you have a lot of vendors that are choosing to sell themselves and join your team?

Yes. We have become an acquirer of choice. And I think that -- I think these companies see a viable future with Lightspeed. They've served complex merchants in different regions, in different -- in particular verticals. And these are companies that we followed and talked to for years and admire. And so those are relationships that we've built. And we really truly believe that when they join Lightspeed, that we're all going to build something greater together. And so we do M&A with a mix of cash and equity so that we can build something that's bigger and bolder, and it's better for some of these companies to join engineering forces with us, join go-to-market forces with us, than all try to go it alone. We really want to build that go-to default name for complex SMB. And so the best-of-breed, I think, want to work together.

Got it. And I mean, as far as your strategy, like taking a step back, we've seen M&A where you enter new markets, new geographies. In some cases, you'll take a product and that will be the core Lightspeed offering going forward. Is that the right way to think about the strategy looking forward?

Yes. I think the strategy for M&A is we want to have one brand. We don't want to have -- be a portfolio of brands around the world. We want to have one offering, one technology offering for -- one platform for retail and one for hospitality. And eventually, all customers will be on a Lightspeed offering. But the steps are sort of change the branding, accelerate the go-to-market and merge all the product portfolios. And that's why we only really ever acquire companies that have really a similar go-to-market that's -- and a similar cloud technology kind of background, so the integration is really a lot easier. And so I think that that's how we quickly become -- move into a model where it's -- where these companies coming in are really adding to the picture. And when you look at ShopKeep and Upserve, we're really optimistic about the reopening in the U.S., and we want to have these best-of-breed teams as part of Lightspeed so that we can really take full -- be able to really serve customers as these markets reopen.

Great. So you mentioned one platform for each vertical. So what happens for customers that were using software that -- for one of your acquired companies? What's the time line to get to that one platform? Customers are -- eventually, are they pushed over to the Lightspeed offering? Like how does that work?

I think that, that will happen over time. I don't think there is any -- that will happen in short order. Obviously, the majority of the engineering resources will be building a flagship. For example, Upserve has the best hospitality analytics on the market. ShopKeep had a very advanced capital offering. So those are going to -- those pieces of those platforms are going to become really important elements of our flagships. So we do want all of the main effort going into the flagships -- flagship products. And then for customers that are on platforms that are part of the portfolio, over time, they will be offered upgrades. And because it's cloud-to-cloud, we can offer new versions of the software in the future that give them more functionality.

Got it. And you mentioned your deals are usually cash and equity, and management teams are coming on board. But how do you think about efficiencies post-acquisition? Is it mostly on the product side, once you get to that single product offering? Or how do you think about cost-saving potential from some of these acquisitions?

Yes. There's a growth mindset to what we're doing here. So the idea is not to -- the idea is to build something bigger with these acquisitions. So typically, we rationalize where it would make sense, but we're typically growing these teams and making sure that we're positioned well to be the winner in this market.

Got it. I want to remind investors that they can ask questions. We have a few minutes remaining. I'll ask a couple more and hope to address a couple from investors. But looking ahead, when you think about investments and priorities, where are some of your major investment areas this coming year?

Yes. Omnichannel continues to be something that's extremely top of mind for our customers. So that's where we've had a lot of investment. I think that we are looking ahead to countries reopening, and that's having go-to-market in place for us to really capture that opportunity. I think we've really captured the imagination of investors with the progress on Payments, but also with what we've talked about with suppliers. So a lot of people want to know what are the next steps for monetization on suppliers and how are we going to integrate capital and how are we going to integrate B2B payments. So those are all things that are -- that we see in the future as growth drivers and of course, continuing on that M&A path to build that category winner.

Got it. With M&A such a big part of your strategy, I am just wondering how you make investment decisions whether to build or buy. When thinking about different geographies and product areas, what's the thought process there?

Yes. I think that there is -- sometimes, there's a great company that we admire in a geography and a particular vertical where it's like they make -- it makes a lot more sense to get a head start for -- to be that dominant cloud player. Kounta's a great example or Gastrofix -- Kounta in Australia in hospitality or Gastrofix in Germany. So we not only get a great base and we get a great team, but we also get a big, strong -- a big lead-in in not just that market but sort of the surrounding markets, too. There's a lot of intelligence, a lot of market intelligence and knowledge. And so that's something that we could build over time. We could build those teams in those areas over time. But we can also save 5 years or more and be in market when the market's changing. And the market's changing now, right? Legacy is irrelevant today. So we think that those are situations, where if there's a good company that we think has great metrics and will integrate well with Lightspeed, then it's a buy. For a lot -- on a lot of technology pieces, we would rather build. Payments is something that we've built. Supplier network is something that we've built. A lot of the modules as we're listening to customers, we're hearing these are the things that we're going to need, we're going to need deeper analytics, we're going to need deeper loyalty, and we need to be deeply integrated into the platform. So those might be more on -- of the build case.

Perfect. A question from an investor on supplier network. Hoping you could dig a little deeper on supplier network. Has there been any pushback? And separately, what is your long-term goal for adoption of a supplier network product?

Yes. So I think that pushback, there's no -- we haven't seen pushback. I think that -- we just released it. There's quite a bit of functionality there. There's rich catalogs. There's the beginnings of ordering. There's all of these tools. But I think that as we go into more verticals, and we've started just in a handful of verticals, as we go into more verticals, there's going to be more tool sets. Because there's complexity in supply chain, just as much as there's complexity in the kinds of merchants we work with. And so it's -- there's 2 elements to this. There's making sure that there's, all the way -- all the bases covered on the functionality side. But the scale part is really what's making it exciting for suppliers. Now that we're at 115,000 merchants, and we're the leader in complex -- in these complex verticals, suppliers are really excited. Suppliers are -- this is -- for them, it's worth putting a strategy behind. And so we're now at 100-plus suppliers signed, and it's -- we're getting good traction. The future is what do we do in terms of connecting it to Payments and so on, and that's all opportunity down the road.

Perfect. Dax, this has been really insightful. Thank you very much for your time.

Thank you.

I appreciate it.

Thanks, Josh. Talk soon.