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

Welcome to the Deutsche Bank Tech Conference. My name is Bryan Keane, I cover the payments processors and IT services for DB. And we're excited for the fireside chat today with Lightspeed. CFO, Brandon Nussey, will join us. So there is a Q&A box below. So we're happy to take any questions that you have, just fill it out into the box, and we'll try to get to it, especially as we get towards the end. So with that, Brandon, thanks for joining us.

Thanks for having us.

So what differentiates Lightspeed's cloud-based point-of-sale and omni-channel offerings from the competitor?

Yes. So we're a software company first and foremost, and more recently have become software with integrated payments, which has gone well, and I'm sure we'll hit that later on. But we've really built our software to really differentiate ourselves in core retail and hospitality verticals. A lot of customers in areas like bike shops and sporting goods stores and home and garden centers and things like that, where a lot of inventory to manage, a lot of inventory management needs with complexity in these businesses, and we've become essentially, and many ERP almost for these businesses where we've really felt like having a one-stop shop for the core software needs for these companies is critical. And that's really how we differentiate. On the hospitality side, it's been more full-service restaurants, a little less quick serves and cafes in the simpler use case. But restaurants inside hotels and as I mentioned, full-service restaurants with bars and kitchens and things of that nature.

And that how does -- how long does it take for integration to set up and give us some kind of idea for cost for a restaurant or hospitality to sign up with Lightspeed?

Yes. So the majority of the market, given we're serving the more complex end of the SMB market, has traditionally been served by legacy platforms put out by companies like Micros and NCR. And those folks had kind of depth of functionality that these complex businesses would require. Of course, they were on-prem solutions. They were hardware-first solutions. And we saw an opportunity to move all this to the cloud, get these businesses better connected to online and digital services. And as we've done so, we've introduced our product. You can get into Lightspeed, you run it on an iPad and you can get into our software starting at around $100 a month. And by virtue of that, because we're trying to hit that high velocity or easy-to-use price point, onboarding has been important as well to be easy and simple. Our onboarding is all virtual. You'll -- shortly after you become a customer, you'll set up an online session where we'll walk you through the 101 of Lightspeed and get you up and running just that quickly. And of course, that's been a tremendous benefit. During the past 18 months, we've all endured where merchants and restaurants have used this opportunity to switch to more modern platforms that can better serve them. But without being able to get face-to-face, having a virtual and online onboarding has been a huge asset for us.

Yes, I was going to ask about the go-to-service sales strategy and thinking about the vertical exposures versus in-store online, how do you guys go about that?

Yes. We've always felt this market is a vast one. Tens and millions of retailers and restaurants around the world. And by virtue of that, we've always felt focus is important. So we very much focus on within retail, again, focused on complexity merchants around those verticals. We outlined 12-ish verticals on our website that we target, bike shops, home and garden, sporting goods, home electronics, et cetera. There's a category on the hospitality side, as I mentioned as well. So our whole go-to-market motion is around those communities of interest, and we really -- it's all virtual. We don't have feet on the Street. It's marketing's job to create brand awareness and get folks interested in Lightspeed, and then we have a completely virtual sales team that will qualify and close the opportunity. And as I mentioned, once done, we pass you over to a virtual onboarding and customer success team to make sure you get up and running.

And you touched on this, talking about it, it's been 18 months really of the pandemic. Can you talk a little bit how sales have shifted from maybe the beginning of the pandemic to where we are now?

Yes. I mean, the pandemic has been so -- it's completely changed our industry for obvious reasons, serving retailers and restaurants. And I'd be lying if I said that in March of 2020, the executive team wasn't sitting around the table with the Board, scratching our heads going, I wonder how this is going to play out. But we made a decision that -- at that time that we felt like we had already seen this move from legacy to cloud start to pick up steam. And we felt like in the long run that this was only going to further kind of accelerate that. We weren't sure what the short term was going to look like, but we were -- we convinced ourselves that in long run this was going to be good for us. So what we saw happened in March and April were in certain months for sure in 2020, but then we saw our merchants adapt lot of demand for our digital tools. We have an e-commerce platform for our retailers, things like Order Ahead for our restaurants integration to the home delivery services. Anything that allowed these folks to kind of alter their business models to better serve a digital-first customer, we saw a huge demand for those things. We saw customers who have been deferring full system replacement, either use the time because they had the time to replace the system outright or just kind of acknowledge, okay, I can't put this off anymore. Omni-channel is no longer optional, it's mandatory. And so we saw after a couple of uncertain months, demand recover quite quickly. And of course, by virtue of us deciding to stay the course, we didn't go backwards. We didn't downsize. We just invested through those uncertain months, and it really served us well.

Yes. In the last quarter, I saw that the big spike in new client additions. How much -- what explains that? Is that some of that retention as well that now that you've gotten through the anniversary of the pandemic? And what's the outlook to continue to grow that base at that kind of level?

Yes, I do think. So look, we're super confident in -- that we're on the right track here and that this replacement of legacy is well underway. Coupled with, we're seeing tremendous new business creation activity in the U.S. There's obviously been casualties in retail and restaurant and the independent side of things. And now we're seeing new businesses pop back up. And those new businesses, in our view, are only going to come look at the more modern solutions. They're not going to look at the on-prem legacy systems. So those things have certainly benefited us. In the most recent quarter, we also saw a bunch of customers. Primarily, we have a large European hospitality business. So a lot of our restaurant customers are in Europe. Of course, that region of the world was impacted quite significantly by the pandemic, and governments there took some pretty swift and decisive lockdown measures. And as a result, we did see customers come back to life as lockdowns restricted. Customers who would have previously written off as churn, they went dormant, those came back to life in the most recent quarter, which was wonderful to see. We always hoped and suspected they might, but that certainly helped the numbers as well. So that does feel -- that aspect of the customer growth does feel more onetime in nature as these economies reopen. But with that said, kind of the macro factors are in our favor as well right now.

And Lightspeed has launched Payments now offering an all-in-one solution. And I think you guys have reached 10% penetration of the GTV monetized through Lightspeed Payments. How quickly can you penetrate a larger base of volume with Payments?

Not quick enough for my liking, such an important part to the business, the strategy, the business model. We've always felt that the customer experience model is broken and that a customer was almost forced to decide what software platform to use and then forced to secondarily have to pick a payments processor for what in their eyes is essentially the same. It's a continuous flow. The fact that you're buying a bike from a bike shop and they've entered that into their point-of-sale software solution from Lightspeed, to have that system not see all the way through to being able to accept the Visa card, we felt was a broken customer experience and that we can do much better. So with the -- as some of these platforms have enabled software companies like Lightspeed to offer a payment solution in a seamless integrated manner, we were early to take advantage of that and get to work on that. So we're pretty pleased with our progress. We're obviously very excited about the potential of this. 10% to date has been largely because we've only had the offering available in North America, so we're pleased with the uptake and the progress so far. We've really only been able to sell it to a little over half of our customers right now. Most -- in our most recent quarter, we've now launched our Payments solution in Europe. And in the foreseeable future here, we'll be in Australia as well, and that will enable us to make our Payments offering more ubiquitous across our entire business. And we're all really excited here to make that happen because just going back to solving a customer pain point that it's a win for them and of course, it's a win for us as well.

Are most all new sales start with the payment package now?

Yes. So getting close to 70% of new customers that come to Lightspeed where we've had the payment solution working are available, I should say, take Payments alongside the initial software purchase. We haven't yet gone to the step of making it mandatory. So where there's a retailer who's got an existing processing relationship who -- maybe they've got a remaining contractual term, maybe they just want to simplify life for a period of time and get going on the software, we do, we make it, we incentivize that to bundle in Payments. But if they're -- if they want to just get started on software, we haven't mandated it yet, knowing full well that, in our view, the value prop is strong that if we don't get you on day 1, we've got an account management team that we think will be there to sweep up that business at some point in the near future. So -- but yes, to answer your question, the majority of new customers taken and were quarter-by-quarter chipping away at the existing base as well.

Is the competition more on the software side you see it? Or is it on the folks that already have the combination of software and payments that you're competing with?

No. We compete with software companies. Again, this is serving a -- I keep using the bike shop because for continuity because it's easy. But to power a bike shop that's got service desk and repairs and lots of inventory, maybe they've got multiple locations, increasingly, they want to sell online and in-store, that's a software challenge. And these are real businesses. These are micro merchants, these are start-ups, these are real businesses doing real revenue, and they need real software to power their business. So things like loyalty programs, analytics offerings that we offer, how we integrate into your accounting package, all these things are very important to the more sophisticated, more established end of the SMB spectrum. And so we compete with software companies, first and foremost, for sure.

I saw in the quarter that ARPU was up 44%. Can you talk about your strategy to cross-sell new modules to that existing customer base to continue? I mean, I assume a lot of that has to do with Payments as well. But how much can you continue to cross-sell to continue to grow that ARPU number?

All very core to the model. We've always felt like there was a tremendous opportunity here to become a one-stop shop for the independent business that they were being asked to be superheroes of if you're an independent business and you had to run an online website, you had to run a customer loyalty program, you had to run in store, you had to manage inventory, and we had multiple applications helping you with all of that, you were expected to somehow stitch those all together even though you don't have IT departments, you don't have staff that can do that, and we felt there was an opportunity to really come in and just be that one-stop shop for the core needs. And we were not trying to be anything and everything. But certainly, the core things that we believe every customer needs. So we felt there was an opportunity to be that provider for them. So core of the model is getting in, getting you started with the point of sale, and hopefully, Payments at that time as well. And then starting to help you with some of these other business needs and helps these businesses compete at the end of the day with Amazon and with Big Box and everything else. So that's really core to the model. 50% of our customers have purchased more than 1 software product from us. And while we've grown overall ARPU 44% and you're right, Payments is certainly a huge contributor to that. The software-only ARPU was up 14% in the quarter as well, which we view as highly encouraging. So yes, we see a lot of opportunity to continue to do that. We see opportunity to do even more for these folks and think that our position as kind of that central heartbeat of the business from a technology perspective really puts us in a privileged spot to be able to go do some of these things for these customers.

Do you have pricing power in software that you can actually raise price?

I suppose we do. We haven't. Our view to date has been, we'll grow our ARPU by offering increased functionality. We have not, to this point, undertaken a broad-based price increase strategy. And we're not trying to be cheapest by any stretch. We've resisted the urge to discount software, secure payments. We've resisted the urge to discount payments to attract the business. We just don't think it's necessary the value prop for what we do, we're quite confident on, and we believe there's future opportunity. But no, we haven't tried to take advantage of that pricing power, I guess, to this point.

Yes. It just seems like the return they're getting and the product and probably the fact that it's so sticky, there's probably some pricing power there. I wanted to ask about international, moving outside of North America, how fast can you expand there? And what does penetration look like in some of your guys' countries?

Yes. So about 40% of the business is outside of North America. So it's always been a core part of Lightspeed. It's in part just how the company has evolved and growing up over the -- over its existence. But yes -- no, international markets is very important for us. It's been a huge help for us, to be honest, especially going through what we just went through a diversification where at times, Europe was down, but Australia was firing on all cylinders. Even the U.S. was in a tough spot for a little bit. And we had other markets kind of step in and helped to offset some of that. So that diversification has been really important for us over the past 18 months. And yes, we've also seen just this opportunity outside of North America that is obviously a different competitive environment in North America. And we saw given our position in Europe and Australia, in particular, we saw an opportunity to go really build market share while kind of some of those North American competitors aren't yet focused there. So we really like our position there, and it's an important part of our future for sure.

Wanted to ask about other products. I know one of them is Lightspeed Capital. Can you talk about the growth in that business and how you can see or how you see penetration there?

It's the beauty of Payments. Payments we view as solving a customer problem, opening up doors for us, expanding the average revenue per customer, allowing us to do a whole lot of new and interesting things. Once we're in that Payments flow, it opens many doors. We don't need to overthink this. Wonderful companies like Square have kind of shown the way there in a lot of respects. So one of those things is Lightspeed Capital where we've probably so much better information, so much more timely information than traditional lenders to this community would be. And we hit them every single day or we have the ability to reach them every single day because they're logging into our software every day. So we felt like Lightspeed Capital would be a really interesting product for our customer base. Again, given their inventory centric on the retail side, their capital intensive on the restaurant side, we felt like this was a product that had a good potential for our customers that the need was going to be there. And if we can do it right, that -- if we can do it, right, because it's early days, that it's going to be a nice growth driver for us. We're early in on this. We just launched it into our U.S. customers now. I think last quarter, we had just about 430 customers taking advance from us. So that's good, good early signs of progress and validation. That's, of course, not -- this isn't a product that's going to double the revenue stream by any stretch, but it's a highly profitable product that really makes a difference to other lines like EBITDA. And it's a product we're quite committed to and quite bullish on, but it's early days still. And so stay tuned for more there, but we're well on our way of getting that more prominent across our customers.

Yes, you guys recently just acquired, I think it's Ecwid, an e-com infrastructure provider for SMBs and new order who connects merchants and suppliers. And taken together, this extends omni-channel leadership and accelerates the valuation creation in the B2B space. Both these are especially moving into B2B is a wide, big, huge TAM. Can you talk about how these -- both these acquisitions fit in for you guys into the overall strategy?

Yes, absolutely. They're different in some respects, but connected in others. And we put out some slides that outline where we see our market going and how we can move from being simply a point-of-sale payments solutions company to our customers to being a full-scale commerce platform. Certainly, the last 18 months, what it means to be omni-channel as a retailer or a restaurant, that's changed considerably. Our customer base has been primarily a physical first customer base that having omni-channel capabilities was important, but the majority of their business would happen in physical and then the pandemic comes along and turns things upside down. And I think what it now means to be omni-channel and to be able to meet consumers in so many new and different ways is really critical for us to continue to be the trusted provider for these customers going forward. And that's what led us to Ecwid. Ecwid is a wonderful solution that unlocks the ability for our merchants to very quickly sell through marketplaces and sell to social media channels and very quickly and easily spin up e-commerce site. Our previously -- our existing e-commerce solution is more of a kind of a bolt-on to a physical store and the Ecwid solution is going to be a really important solution to allowing our customers to connect to consumers. NuORDER is a flip of that. It's certainly part of what we see us building in the long run around this commerce platform. But we were -- we have been approached for quite some time now by significant suppliers to the verticals that we would serve in retail. I'll go back to bike again. We've had some of the large bike manufacturers come to Lightspeed and say, because you have such a penetrated market share now of the bike vertical, because this all runs in the cloud, you've got a lot of data and information that would be really, really valuable to us. Now let's think of Lightspeed as effectively being a retailer to the underlying suppliers with multiple endpoints that we can consolidate and anonymize and aggregate and provide real-time feedback to these suppliers as to what's going on at the point of sale, what's being sold inside the baskets, how long do they sit on the shelves of data that we have that they're really thirsty for. So in response to that, earlier this year, we launched the Lightspeed Supplier Network, which allowed suppliers to integrate their catalog directly into the point of sale and allow our retailer to seamlessly order to that supplier in the point of sale and you can automate that whole thing if you needed to publish catalog pictures and descriptions that was now seamless into the e-commerce solution. And we saw good, good validation and confirmation of that strategy with the suppliers. Of course, now to really do this well, suppliers get started to give us feedback as to look, if you want to be our order management platform to our retail community, there's more you need to do than simply integrate into the point-of-sale, and NuORDER is a purpose-built company for that. So they've been -- they've served big global brands for their entire existence and really become one of the leading order management platforms for these brands, which is effectively what we're trying to do. So with those 2 in place now, we've got -- we call it the triangle, but merchants to consumers and merchants to suppliers and creating this ecosystem where all 3 corners of this triangle benefit from joining the community and of course, Lightspeed sitting in the middle with access to data and the financial services overlay, we think, is pretty exciting.

I've heard some investors ask about integration of these deals and just in management time because, obviously, this is some -- especially getting into the B2B supplier business as a whole other can of worms. Can you just talk about that on how long this will take to get this up and running and to scale where and how much time is it taking away from the core business?

Yes. So something like NuORDER and even Ecwid, the integration isn't anywhere near onerous in some of our previous acquisitions where we were -- we helped to consolidate our space at head and bring together some of the best point of sales systems, where situations where you're competing with a ShopKeep in retail, that's real integration work. We can't have 2 products out there competing with each other, 2 sales teams selling different products. And so that's very different from NuORDER where it's about connecting a supplier network into a point-of-sale network. And yes, I think that work is a lot easier to kind of comprehend, I think, for folks. And it's a little more I guess, arm's length to not use a great word, but a little more arm's length in terms of how we need to do the integration. So yes, for sure, some of this creates internal work that we have to work through. But the opportunity is, we think, really compelling and we certainly have the teams up for the challenge here.

I saw that you guys are targeting 20% EBITDA margin targets. At scale, I feel like those margins could probably even be higher than that than some other software and payment providers. Why 20%? Why is that the right level for you guys?

Yes, we did respond to some of the ask from the market and publishing a -- I guess we called it the longer-term model. I think we -- we'd like our shareholders to interpret that slide as being along the following lines that, a, we're at 10% Payments penetration today, and we see a path. I think my words on the call were in the foreseeable future to 50% Payments penetration across our GMV. And then once we get there, we think we'll drive 20% EBITDA margins. Neither one of those numbers are intended to connote a ceiling. So the finality of what we're trying to build here. But just to give folks a sense as to we're at 10% today, we've unlocked new markets on the -- you could kind of start to infer how long you think it will take for the business to get to 50%. And when we get there, we'll move from a minus 6% EBITDA margin today to plus 20%, and that's really what we want our shareholders take away from that slide.

Got it. Got it. What are the biggest trends to watch over the next year or 2 that we should watch to see how you guys are tracking versus peers?

Yes. Like the essence of the model is pretty simple. We think we've 150,000 customers today, and we think that has a potential to continue to grow nicely for us, and that's an important measure for folks to watch. We're going to continue to drive ARPU, continue to grow what we can do for these customers and the software that we provide to them, and we should see software ARPU continue to grow. We're going to continue to provide Payment solutions to a much bigger portion of our customer base now. Those are 3 really important metrics to watch for us. And that's the model kind of torn down to its most simplest version right there. Aside from that, we've got this now triangle I spoke of, where we think there's a real opportunity to move from being just a software provider to these customers. So really being a commerce platform that helps to modernize how these folks interact with their suppliers. And if we can do that well and start to really process meaningful order volume between Lightspeed merchants and suppliers to those merchants and then start to take advantage of the Payments opportunity from how a merchant pays a supplier on the B2B side of things because right now we're focused on the B2C side, that's a wonderful opportunity we've got our sights on. So yes, that's it in a nutshell. We're going to continue to work hard to grow our market share, grow our ARPU, get Payments more ubiquitous everywhere for us and then really start to move on this B2B opportunity.

And then I got to ask you the flip side of that question is what are the risks to the guidance or risk to the model things that could come up that you worry about as CFO that could change the dynamics?

How much time do we have? I'm totally getting it. Look, I think we really like our position. We've worked hard to move from when we took this company public in Toronto a little more than 3 years ago to where we are today. We've moved the needle so much. We've really put ourselves in a good position coming out of this pandemic as economies reopen to make sure that we become the leader in this space. Of course, we're always paranoid about competition and what's going on around us and how we stay ahead, and that's how we think moving to this commerce platform and the stickiness that we'll provide is going to be really important. But aside from that, we've got -- we're still not out of this thing, unfortunately, as much as we all want to turn the page and some countries are further along than others. Three, four months ago, we would have been posting about Australia and how well we're doing. And now that region of our business has been humbled again because of how the government has had to respond. So look, I don't think we're out of the woods. We've tried to stay cautious on that. We really -- just we've never gone through a pandemic, we never come out of one. And so that will keep us cautious in the numbers we put out, and it's extremely hard to predict. But of course, those are things we will watch closely.

All right, Brandon. We'll keep it there. Thanks so much for taking the time today. We really appreciate it.

Yes. Thanks again for hosting us. We appreciate you also. Thanks.

Thanks.