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

Welcome to our next session. I'm really happy to have the team from Lightspeed on. It looks like the AWS problems yesterday in the U.S. now are somewhere in Canada. So Brandon has now issues with phone carrier outage. So he's here on a cell phone. So thanks for still making it, Brandon, I really appreciate it. So you can look at a lot of me while I ask a question and kind of focus on Brandon's kind of words, which is also good, actually. Brandon, thanks for making it.

Well, thanks for having me, and apologies for the logistics problems.

It seems to be these days like yesterday it was kind of a lot worse, Brandon. So this is all, we can still talk to you, and that's more important anyway.

Brandon, let's start at a high level because a lot of U.S. investors that I talked to are still not kind of overly familiar with Lightspeed, and I apologize for that. But it's -- I think it's a nice opportunity. Can you talk a little bit about the background for Lightspeed? Like what was your roots and talk a little bit about the journey that you're on to become like a much broader player?

Yes. So Lightspeed started as a point-of-sale provider -- point-of-sale software provider to largely the retail community and always focused on complex retailers. So not the simple use cases, but retailers that had a lot of inventory, maybe multiple locations and real complexity to the business in the SMB space. And that's the part of the -- those roots are true today. We now serve not just retail, but also hospitality, but very much focused on the more complex end of the SMB spectrum. So started as a point-of-sale software company but saw an opportunity to move beyond simple point-of-sale software and to becoming a more wholesome commerce platform. The first step there for us was to launch our own payments platform. This was a major pain point for our customers, having to buy a point-of-sale software from one vendor and point-of-sale payments from another vendor. And we saw a real opportunity there to solve a customer pain point and drive a lot more revenue per customer for Lightspeed. So that was the first step that we took into becoming a broader commerce platform. And more recently now, we've got kind of a bigger ambition of just helping these SMBs better connect with the suppliers they interact with and better interact with the consumers they interact with, with Lightspeed kind of serving that commerce platform across the network, recognizing the software benefits, the financial services opportunity and as well unleashing some real interesting data potential for us as well. But anyway, always rooted in retail and the complex and serve hospitality as well with the aims of being a commerce platform across the industries for these folks.

So the -- so Brandon, from your perspective, like in a way, we have like we have Shopify as one that grew up like this big monster in the positive sense in the kind of low-end SMB space. In a way, you are kind of a little bit like more specialized, slightly higher up the market, but seeing longer-term ambition to kind of add more and more functionality. Is that the right way to characterize it?

Yes, absolutely. And our customers are folks like on the retail side are folks like bike shops and furniture stores and sporting goods. And just picture those shops, they -- their omnichannel and need, but they've got a lot of inventory they're managing. They've got kind of a complexity to the business, and that's our customer.

Yes, yes, yes. Okay, makes sense. And I mean I guess that's a really nice if I say niche, then you get angry with me, but it's a subsegment of the market, I would say, to kind of deal with because it's kind of relatively specialized as well.

By our count, the opportunity is about 6 million merchants around the world would fit this description across retail and hospitality. So it's a big market opportunity. We like this segment. They drive meaningful GMV, which creates a nice financial services opportunity. And because they're more established, they churn less. And so we do think it's a really nice part of this market overall. And of course, like our position in it as well and how our technology suits it.

Yes, yes, yes. Yes, I'll take that niche. That's a big market, yes. All right. Okay. Talk a little bit about acquisitions because that would be -- that has been a very decent part of your strategy. And maybe talk a little bit about kind of why it makes more sense for you and what your criteria is for acquisitions.

Yes. So we've always -- so first of all, the company is growing very quickly organically, [ 6% to 8% ] organic growth last quarter. Certainly, our focus is on continuing to drive good, strong organic growth. But we've always felt that we were going to achieve everything we wanted to achieve here that scale would matter. Scale matters in terms of our ability to drive meaningful margins on the financial services side of things. Scale matters from our ability to attract new customers in an economical way. These are SMBs after all. Running RFPs are consulting Gartner reports, brand recognition goes a long way in this space. So we've done some acquisitions to help bolster that scale. And as you think back to us becoming a broader commerce platform in the verticals we serve, we become relevant to the suppliers to a given vertical like bike when we get customer concentration in that vertical. And so just one more element of scale that's important. So we did bring together a select group of companies that we admired, that we knew quite well. We track their progress. We knew the management teams. We knew that -- we assessed kind of their alignment to our broader vision. And we did do a handful of acquisitions that help to bring these teams together, really to try and create a global leader in this space. We're not interested in running a portfolio of point-of-sale companies. This has always been about deep integration and doing something better together. And so we did a handful of acquisitions in that space, and then more recently, some technology purchases to help accelerate the vision as well.

Yes. So this is -- so the end this is not recreating constellation in one subsegment, this is really bringing them all together into one coherent product basically that kind of serves clients, correct?

Absolutely. It's always been about that. We have one of our top objectives, one of the things we hang on the wall, so to speak, around the company is One Lightspeed. This is very much, when we do an acquisition, we quickly move to integrate the brands, the go-to-market, the development teams to align on a common platform moving forward. And we are proud to show off the fruits of our labor there in the hospitality space at our most recent Capital Markets Day, where we launched our new hospitality product, which was a culmination of bringing together some of the best attributes of these companies and the one flagship offering for us that will become our standard globally around the world.

Yes. Okay. Yes, it makes sense. And then the -- talk a little bit about payment. It's like payment as kind of another factor of layering on a different -- another service for a client like, as you mentioned earlier, you launched that a few years ago. How important is that? And where are you on that journey?

It's very important. Payments is, if we look at -- take a step back and look at this market, as I mentioned, they kind of grew up in 2 separate silos. They were the software companies helping these businesses run their operations. And then there were the payment companies who were simply providing a service to allow these merchants to ultimately accept Visa and Mastercard and so on. The only reason these 2 things grew up separately, because that's a very unnatural split for a customer, right, for a customer who's using software to record a transaction, to have to use an entirely different technology platform, to assess the payment for that transaction is very unnatural. And the only reason these grew up separate is because the infrastructure wasn't there to allow them to be one. That's a solid problem in the world now. And that was something we recognized a few years ago and quickly moved to launch our own payments offering to solve this. But the majority of the economics, to get to your question, Raimo, we're going to the payments companies. Software companies, of course, feel like we do all the hard work, but the majority of the economics was going the other direction of the payments companies. So it's very important. It's very important for 2 things. One, it's a more compelling customer offering. So customers want to see these things in our view together. And for every customer that we bring on, that takes payments alongside software, our gross profit per customer more than doubles. And so it's very important to our financial model as well. We launched -- we started our journey with our U.S. retail customer base. We are now processing more than 20% of the GTV of that customer base with our own payments, and that's about after 2.5 years of work or so or progress or so. So proud of that progress overall. When we look across our entire GTV around the world, 11% of that GTV in our most recent quarter was processed by our payment solutions. So good progress, but lots of runway, lots of opportunities still ahead.

Yes. And the -- I mean if you think about it, what drives that further penetration? Is it just time? Is it in a way like just time for you to kind of have the solution kind of roll it out? Are we still in that [ place ] or are there other factors to consider already?

Yes. When you break that problem down, there's a couple of components. So first of all, I should say that in a market where we've launched payments, use U.S. retail as an example, we talk about our attach rates. So as a new customer to Lightspeed, how many of those take payments when they buy our software. And our attach rates in that segment are approaching 70% -- between 60% and 70%. So in terms of new customer uptake, that's moving along quite nicely. Then there's all the rest of the existing customer base that we are through renewal cycles, just through regular touch points with those customers, creating offers and trying to upsell them on to our payments platform. And that's also obviously going well given the progress. Overall, though, when we talk about how we move 11% to something better than 11%, we've stated publicly, we think in the not-too-distant future, we can see that moving from our current 11% to something closer to 50% payments penetration. What needs to happen? We need to have payments available, first of all, to all of the markets we serve. So a market like Europe, we just launched in a quarter ago. And those are big milestones for us. We'll be launching in Australia here in this current quarter. That's a big milestone for us where we can then start to sell to new customers and start to move our existing base. And yes, we're now at a point where we've got our payment solutions available in most of our major markets around the world. By our accounts, better than 70% of our existing customer base is now in a market where we can offer payments to them, which is good news. And I think given our past track record of converting these customers bodes well as we look to continue to penetrate this around the world.

Yes. And it's funny like if I listen to this, payment can drive your growth and success for quite a few years, like if you just think about the opportunities there. And then my payment analyst goes like he wants to cover you because then payment becomes like a much bigger part of the total. So I need to fight back. So I need to kind of address have a point, like talk a little bit about like what are you doing on the supplier side? Because I think to me, you're a software company that just have add-on services around and payment is one of them. So like kind of need to break some of the other areas of growth. So talk a little bit about the supplier network.

Yes. We're really excited about this. It's a big initiative for us, and we saw it come from some of the concentration we were building in verticals where we were strong. We talk about our bike vertical often in this example where we've got a lot of bike shops. A lot of the independent bike shops run Lightspeed, and we're building critical mass in that segment in North America. And we were approached by some of the key suppliers to those bike shops, think companies like Specialized or Giant. What they're interested in is when they sell into the SMB channels, they lose all visibility from that point on. They know they get orders every season for 10 bike frames from this customer, 20 sets of pedals from that customer, et cetera, but they lose all sight as to what actually happens at the point of sale. And of course, that's all as a cloud-based offering. That's all stuff we have. We know what's happening at the point of sale, what the price points are, what's in the basket, what the sell-through rate looks like. We have all that data. And we were approached by these suppliers to see what -- how we could help each other. And so that then spun a bigger initiative for us, which was around, gosh, what if we could do this across all of our important verticals where we can connect the important suppliers to a segment to our network of retailers. And we're now at 156,000 customers globally -- customer locations globally. And so we are starting to get to that point of having meaningful critical mass there. And if we could do this for the key suppliers to this space, we give them access to information and data and insights that they just simply don't have today, other side of the coin, we give our network of merchants access to catalog, inventory levels, deeper integration to those suppliers. There's a ton of benefits that come to the network of retailers as well around being able to discover new products, reorder things at the right time and a host of benefits there. So we're really excited about the potential to just modernize the supply chain for the SMB space because right now, it's as manual as it gets. And of course, the opportunity for Lightspeed falls in a few different categories. One, we think there's a really compelling flywheel effect there, of which we're already seeing it in some of these verticals like bike where the suppliers are motivated to get more merchants on the Lightspeed, merchants become more motivated to join the network because of some of the benefits that come from it. So we see the flywheel potential there as being a strong benefit to Lightspeed. And then, of course, as we think about monetizing that, right now, when we talk about payments, we're talking about the B2C side of things. So when a consumer comes into a shopper, a restaurant and buy something, we're monetizing that flow now. But the opportunities there to get into the order volume the other way as well, the B2B volume between what's happening between our retailer, let's say, and a supplier and Lightspeed can facilitate that order and start to monetize some of that as well. So really, really interesting growth opportunities. But at the core, we think it's a really interesting strategy, a compelling strategy for our network of customers.

Yes. And the -- like obviously, they have these discussions around like you guys in recent weeks about like how we have to think about acquisitions, et cetera. Maybe you kind of bring in new order here as well as a way to kind of show us like look this is not random stuff. It's kind of all fits together what they're doing.

Yes. So new order, what new order does is effectively what I just described. New orders sole reason for existing as a company was to connect retailers to their suppliers. They focus primarily on apparel, though they do have brands and other segments that they serve as well but they've got all the functionality of what it actually means to facilitate, manage, enable order volume between retailers and suppliers. And what we were finding when we launched our own supplier network is a lot of interest from our suppliers and our retailers without making this happen. But b, when you get into the details of, okay, for this to really work, here's what kind of functionality you need and all the details of it, it was going to be years of work for us and new order accelerated that time line by that order of magnitude. So yes, new order has been -- it's basically that build-buy decision as to, all right, we've got commission around the supplier network and new order has a ton of traction in that ecosystem already. They serve thousand new brands already. And solved a lot of these problems already. So yes, we're excited to bring them on board and get that team engaged.

Yes, and it will make a lot of sense. Yes. No, that's a good one. Shows you how it all fits together. At the Analyst Day you talked a little bit about the 35% to 40% organic growth. Can you just unpack the different components a little bit, and that's the organic growth. So that's kind of the interesting part where the businesses will fail. And besides the growth we've seen, the total growth where there are some acquisitions, 35% to 40% organic is a very, very impressive number. Can you talk to some of that [indiscernible]

Sure. Yes, that's intended to be kind of the medium-term target. We've been delivering organic growth nicely in excess of that in every recent quarter where we've been reporting that. But the opportunities and how we think about that organic growth looking forward, it starts with customers and the opportunity to continue to grow the customer base, 156,000 customer locations today as mentioned by our stats, we see an opportunity of closer to 6 million of these around the world that we can target. And most of these retailers and restaurants that we target are still running legacy systems on-premise software. We call them the black plastic boxes that sit at the front of new shops. And that's really the opportunity is to continue to move these folks into the cloud and then enable some of these further benefits that we've been talking about here today. We also see opportunity to grow the revenue per customer. We offer a suite of modules, analytics, loyalty platform. If you're a retailer, we have a full scale e-commerce platform and so on. And so that allows us to grow the average software revenue we drive. Today, we're at about $130 a month in ARPU on the software side. We have plenty of customers paying us well north of $200 a month. And so lots of room we see to continue to grow that ARPU per customer. And then, of course, it's just continue to move that 11% payments penetration upwards. And that will get us to that 35%, 40% organic growth rate. If we're successful, things like supplier network and really enabling that and driving this ecosystem and starting to monetize the B2B order volume, I think there's potential for us to do even better. But we just kind of keep executing on those core pillars. That's how we build up that 35% to 40%.

Yes. Okay. Perfect. Brandon, in the last couple of minutes, I wanted to spend on more on the current situation because you guys are very much locked into -- not locked in, but exposed or whatever you want to call it, into the pandemic with having -- dealing with retailers, restaurants, et cetera. So you have usually a very good view of what's going on in the world in terms of lockdowns, reopenings, et cetera. What are you seeing at the moment in terms of like the global situation?

Yes. I'll be careful with my words because we're far away through the quarter, for sure. But look, at a high level, the pandemic and lockdowns have really kind of helped prove out the need for systems like ours. And I mentioned most of this market on legacy systems. Those legacy systems don't enable omnichannel workflows or enable retailers or restaurants to seamlessly go online. They don't connect to the online world at least very well. And so it really helped push along the urgency for this market to move to the cloud. And that's what enabled us to fare well through the pandemic as we saw a lot of customers as they pivoted and found ways to stay in business during lockdowns, they were finding their way to solutions like ours. They were buying our digital tools. They were doing all those things. Now there is a reality to the fact that when we're locked down, it does tend to stifle new business creation and so on until the reopening process begins. We saw that last quarter in a market like Australia where it was a strict lockdown. And so that has a near-term kind of speed bump for us. But the long-term effect of this, we think, is nothing but positive as more and more folks treat -- understand that omnichannel solutions, cloud solutions are no longer optional. They've become table stakes to run a successful business.

And the -- and I apologize, like the -- when you guided last quarter, you did call out a little bit of more uncertainty, and the world is moving so quickly. So I'm almost saying like you probably stand by that statement, I would think.

Yes. I mean there's just -- there is a lot of noise at the macro level. One of the things we called out was just we're hearing lots of supply chain challenges. And as we thought about our customer base of furniture stores and bike shops and electronic stores and so on, this is a really important time of year for them, of course, around the holiday seasons when they're driving off a lot of their own revenues. And so we did give the market a view into some of the things we were considering as we forecasted our own business around some of those uncertainties. We've tried to always be cautious and conservative as we set expectations in the market and just some of those macro things that we did try to convey in our most recent quarter's guidance. And yes, we're part of the way through the holiday buying season here. We're, of course, watching it closely. And we still got a big chunk of that season to go here, a very important chunk. And so we'll continue to watch it closely. And of course, we'll update the market accordingly after we close the quarter.

Yes. Perfect. Brandon, that was kind of a great summary as well, and I know my time is up. Thanks for still kind of making it despite all the carrier issues on your side, but I really enjoyed our conversation, and it was like really, really insightful and hopefully give people the appreciation like of the great opportunity you guys have ahead of you. So thank you, and thanks for making it.

My pleasure, Raimo. Thanks again for having me, and I look forward to seeing you again in the future.

Yes, exactly. Yes, yes. Well, yes, I mean, if AWS figures all that stuff. Yes. All right. Perfect. Thank you.

Okay.