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

Guys, welcome to our next session. I'm really happy to have JP here from Lightspeed. If you think about it, a lot of things have happened in the last few weeks, we had the on-cycle guys [indiscernible] is everyone is still nervous. Now the off-cycle is reporting and everyone is really excited about [indiscernible]. But to put everyone back on track, talk a little bit about what you saw in your Q2 results -- look very, very healthy there. So it's nice to see kind of coming together with you.

Yes. Thanks, Raimo. So look, we have a great business. We have incredible quarter. We grew 25% year-over-year. We reached a big milestone where we surpassed $1 billion run rate [indiscernible]. Second biggest milestone also is -- you're now [indiscernible] positive, [indiscernible] price in the market. And so yes, the company is in a great position, higher growth, great quarter. We exceeded our expectations and ahead in terms of [indiscernible].

Yes. Okay. And you guys have been at your Analyst Day a while ago, like we talked about, you guys have been on a big during the pandemic to consolidate the market a little bit and there was like [indiscernible] that kind of has a lot more customers. Talk a little bit about your strategy and how you thought about that?

Yes. So in our space, so we do restaurants and retailers, so hospitality and retail. And there's a lot of merchant -- a lot of players in the micro merchants. We do the more established SMBs, more than 10 employees. And in our space, it was a very fragmented market. So every country in the world has a different subscale, little vendor. And so what we did is we said we're going to do an IPO because we want to consolidate the market. If we want to go through brands to the more established SMBs in the world. So that's what we did. We went public 4 years ago and we ended up acquiring 4 companies. So very active. And the goal for us was to, of course, gain market share but also we wanted to be sure that we could put together all the best minds in the industry. And so we acquired the company and then the first project we had is to say, well, let's rebuild the platform with all of these acquired companies that would remove technical debt [indiscernible] and so that's what we did. So we acquired companies all around the world and we completely rebuilt from scratch a hospitality product. So for managing all the restaurants and a retail product that does omni-channel and sells online and off-line, and we've now released those products. So I think you're right, there was a -- because we acquired a lot of companies, everybody at some point then were in mind set of is this a roll-up? Or is this truly a technology company? And is there truly organic growth that we always have to disclose organic versus non. I think there were 2 big questions [indiscernible]. And there's no doubt today we have about a year organic growth 100% and we have now released those 2 products that are -- we've broadened -- we have broadened the gaps in the top 5 host and the squares with the new platform. The big difference now with a lot of the players are truly global. We have offices around the world, customers around the world and a hyper local go-to-market.

Then just to reconfirm today, like on product side, that revised, the rework [indiscernible]?

It's released. And what I said last quarter is our close rates are better. ARPU is up in quick time. And yes, and so I think we've rolled with our competitors.

And what are you doing with the customer base? Like do they get upgraded or moved over under the hood? Or is that like still -- is there a migration only for...

So it's going to be a migration. The goal for us was to create all new customers. When we acquired all these companies, we have different products in every region, different floors, different [indiscernible] selling. So we normalize everything with one product. So now Germany and Switzerland, I mean Paris, I mean Auckland or I mean in Sydney, it's the same software I'm selling everywhere. The same methodology, same process for new customers. And I think pros here, the bet was to say, am I going to keep the same close rate? Am I going to grow ARPU? Am I going to attach payments and those the 3 statements of ARPU. So we're attaching payments to almost 100 of new customers. We're increasing ARPU and we're seeing incredible [indiscernible]. Now the second part of the strategy, which is what we're going to be doing in the coming year is we need to now bring all these customers that are on the legacy systems onto the new platform. So it's going to be a mix -- we actually don't call it internally a migration. We call it an upgrade because I think it says a lot about how we want to do this because we want to build a ton of tech and software so that they can migrate on in the new environment. The good news is all the companies we acquired have the same hardware because in our world, there's hardware and software because they're all running on iPads, they're all iOS. It's a much easier task to upgrade software that has to change the hardware in every one of the customers and that was one of the objective. The acquisitions was are we acquiring companies that have the same environment? And the answer is yes. And so now what we're going to be doing in the coming years is migrating the customers or upgrading the customers onto the new process. And we have started doing it. So some of our products are e-comm now, started to be migrated to our new platform, Lightspeed e-com, and that's going very well. We've also started migrating ShopKeep, which is an American player to act who we're learning and we're going forward, but there's a material amount of customers that have already moved over. So we're -- we know how to do it. So what's going to happen...

And then the last question on that one is, if you think about moving the customers over, is there like a -- is there an element of charging differently or an opportunity to then upsell better or upsell something as part of the journey or like right after? Like how do you think about that?

Yes. So -- the capabilities have expanded on the new platform. So we acquired a lot of the point solution vendors at one piece. And now we have a platform that does a much broader scope. What we're seeing is part of the upgrades is ARPU on the smarter basis is expanding because they can buy more modules. So as an example, if I was an Upserve, which was the U.S. POS for hospitality and I moved them to [indiscernible] has an analytics engine, has a kitchen display, winning more modules, we're seeing as we migrate them, ARPU expansion on software and of course [indiscernible].

And then you mentioned payment a few times ago and then that's kind of one of the stories that a lot of the investors get excited about. The payment attach [indiscernible]. Talk a little bit maybe about the journey because like it didn't fully start out in them, but it was a -- I remember like around IPO and see IPO always [indiscernible]. Talk a little bit about that journey.

Yes. So maybe let's start with the easy one. We did the IPO 2 years ago. And the total GMV is likely to the total volume of our platform when we did our IPO was $13 billion. And at the time of the IPO, we said we think that in the next 4 years, we can get to 50% penetration. But today, we have $25 billion on [indiscernible] or I think we've overachieved fairly broadly on payments. But the reality is today, why did we not do it or why, first of all, we wanted one payment platform that works globally. We're not a U.S.-centric company. We're working everywhere in the world. And there are not many companies on the planet that do card present, one present, debit, credit, everywhere that's where we operate through. We wanted to have one code base that worked everywhere so it took more time. And then from the moment we had that, we wanted to have critical mass customers and did get the feedback, we sure it works. We then kick in what's happening today, which was Unified Payments, which is now we're telling our customers you need to use like payments to use like -- just maybe high level numbers today, like we have $100 billion of GMV roughly going through the platform, which is roughly half of Shopify and it's not the same as though. The only difference between us and then is that they are monetized at a much higher rate than [indiscernible] . So for us, now the strategy in the coming 18 months is to go -- we get to 50% penetration on payments because that is going to be extremely lucrative for Lightspeed [indiscernible] and it's also going to generate a lot of free cash flow. And so maybe just a high level, the customer on payment is double the net ARPU. So we've doubling the revenue per customer on a net basis, what we bring them payments without doing much and so that's why for us, the easy path to free cash flows sustain growth and profitability, easy path there is to bring customers to payments and then inject more money and go to market so we can go faster.

Yes, yes. And then there is a stick in carriage in terms of the installed base, like I would assume like new customers have to do a repayment with you guys. The installed base, a lot of them would have like a payment provider. Like how do you manage that relationship?

[indiscernible] exactly the term. So for new customers, it's simple. You cannot buy Lightspeed anymore if you don't use Lightspeed payments in the areas where we offer our paying platform, okay? For existing customers, we're going to them and we're saying, look, it won't use Lightspeed payments, we will be charging you a gateway because the reality is we are developing integration with a number of payment platforms [indiscernible]. I think also for the industry, they need to do more or less with going to the roof. And we know that when customers are using Lightspeed payment, we remove a ton of manual tasks. So we're going to our customers and saying, look, we will accommodate, we'll beat the current rate that you have beat or match that you have to move the Lightspeed payment. And so there's a huge initiative called Unified Payments which is going on. And actually, it's been on for 2 quarters now. And if you look, we have increased penetration 3% in the quarter, in the last 2 quarters sanctioned up but we're going to them, we're saying we will accommodate the rates. We'll give you payment terminals, we will send somebody on site or buy out your rates, your current contracts. So only positive. Now of course, it's -- there's a rigorous process to get there. It's going to take time, but our customers are generally moving forward with...

And then the -- like it's not in that space, like how difficult is that decision to change your payment provider for a customer -- like mine, I guess, like for you guys more medium for that business, but like it's still a disruption -- is it in the disruption of business like how is that going?

It takes about 3 minutes.

It's a very big disruption.

You can see we have a number of videos online that just show the steps because, of course, we're trying to make it as easy as possible but the more complex part is not the installing, it's the logistics around it because we need to get the [indiscernible] to pair the keys in the terminals, you get the terminals to the customer, they have to take it out of the box, SMBs, plug it in. But then when they plug it in, it's literally 3 minutes, you connect your payment terminals in the network using your WiFi. You then go into the POS, we recognize the terminal there, you pair it. So there's very little disruption. And that's why the view here is that there is only benefits -- brand-new terminals that support all the new work. They save hours every day because we have one integrated reporting for every transaction that they do, and then they're much efficient because there's almost an instant integration between the payment for online transactions. You scan your item. You [indiscernible] and so you can process more customers and if you're a waiter, you can basically wait on more tables with a platform like ours.

Okay. That's interesting. And then the -- I mean, maybe it's not a question for you -- if you think about like how does that change your relationship with the payment providers that are there at the moment, like because obviously, they are not going to kind of be overly happy being slowly migrated out. Like does that -- is that kind of a healthy competition that everyone talked about? Or like how do you think about it?

I mean, let's start with the industry. I think everybody in our space, you mentioned [indiscernible]. They consider the POS and the payment [indiscernible]. And actually, if you look at the -- I think the harsh reality of workflows post-pandemic, it's really software meets payments. Payments are becoming invisible. You have your online meets your off-line. You've all been to restaurants where you have the QR code. So just start there, this logic of I have a piece of hardware on my like that, that is not greater than software is the only way for you to pay that is obsolete. So if you take that in mind, the reality is verticalization side of our industry of software implement is happening. And actually, in the interest of the customers, we need to use more modern payment for us. And the reality is the majority of the market are with these old ugly unintegrated terminals and that's because at the time, the only way to pay was physically in your store, whereas now it's about bolting credit cards like it's a completely different world. So with that in mind, we are doing what's right for the customer and of course, if I'm a legacy payment in Canada, [indiscernible], I mean we have them everyone here and everywhere in the world. And actually even in Europe, your bank gives your a terminal when you open it again. Crazy, but that is going to disappear. There's no first course, are they happy? They're not happy because they're going to be losing customers because there is so much more value to be integrated. So they're trying to play -- they're trying to play the cards so that they can stay there as long as possible. You're putting in, say, penalty quarters to leave them. They're trying to adopt the right customers because ultimately, they know that they have lost them. And for me, it's very interesting because 2 years ago, it was a commoditized conversation before the pandemic 3 years, 4 years ago. Everybody is like, okay, I'm going to go with the provider that gives me the best. That is gone. The data conversation is how much time are we going to help do? How much I am going to save, I use like, integrate the new workflows where I can order online, pick up in store, how easy is refunding and as soon as you start digging into any of these workflows, you'll realize that, that's why I think that analogy I found for now. It's the difference between a fixed phone and a mobile phone. And the world of non-smart devices versus the world of smart devices, I think it's the same disconnect that's happening in the market right now.

And then you mentioned rates that was the other thing that came up a little bit is like that while the transition happened, you have -- does feel like a pressure on rates. I mean the volumes are like what they are in this cycle, [indiscernible]. Do you think that the temporary thing as kind of bought out through this in terms of migration and then kind of mobilizes or how do you see...

I think pressure is on rate, but the only thing you can offer is a commoditized terminal. There's no doubt. But if you start giving you an example, in the hospitality space, our analytics uses the data from the credit card to give insights to our restaurants [indiscernible]. And for me, the restaurant is not going to come to us because we have the best rate. They're going to use Lightspeed payments because they want to have access to the advanced analytics that tells them, hey, this is the real behavior of your consumers. And so I think that's really what drives the adoption, and it's not the warning and I think that's why my view is if you're commoditized and if you're a nonintegrated payment terminal on a counter, the only way price is the rate, and you're going to see huge pressure there, whereas I think the software companies that have an integrated platform that drives more value than just transactional payments is going to [indiscernible] another example is we do distribution. We work with all the biggest brands in the world where we [indiscernible], and all these people, they basically use Lightspeed as a distribution network to SMBs school. But their worry is I don't want to have an SMB, we present my good if it's not the right consumer. And I'm using tokenization on credit cards and how to go and say, "Hey, this store is actually attracting profile of users and buy your brand today." So I guess to me, that's why it's around removing friction, which what we're doing for our customers, but I think it's not a commodity. It's around the value add you can bring from bringing Lightspeed customers. Another big example is capital. As soon as you are on Lightspeed payments, we have a capital offering. As soon as you are on Lightspeed payments, where we can now give you a capital offer where you can decide to use the funds or not. It's almost a look at it you have not credit, you're pre-approved for a certain amount. Your fridge breaks or you have an extraordinary expense, I can now instantly withdraw and have the money deposited. So there's a lot of -- we're doing a lot of derivative products that use like your payment for the quarter.

And then that was going to the out of my next question. You mentioned earlier that the monetization of the customer and then some of your competitors like or players in the market have a much higher rate their. Payment is one option. Are there other things that we should think about, I guess, capital is warning...

The big one is payment and everybody knows that because it's still lucrative. It's -- it's easy money with that way in an easy expansion of ARPU. But you're right, there's way more. I think capital is incredible. Capital is for us a 90% gross margin business. And the hold rates are very low because we work with the more established merchants. And that huge kind of the driver here to actually keep gross margins at a good rate. But then there is software, like we have an advanced analytics engine. We do an Insights platform that nobody else knows. That's another [indiscernible] and so I think for me, it's about expanding software ARPU and there's so much we need to do and then at the same time is expanding capital and financial services. But I think any way you look at it, there is so much room for ARPU growth. And so that's why we set our priority right now, which is we want to bring payments to -- from -- we started the year at 19%. We want to go from 19% to 50% penetration in the coming years and that will bring us a lot of free cash flow, which we can then reinjected to go to market. And in parallel to that, a number of projects that we're working on to expand ARPU that our main new software. We talked about suppliers, another huge one where we're doing an integrated supply chain for these where we are basically connecting the best brands in the world to the best stores. That again is huge. I mean just when you look at the monetization we can make from that piece of the business over time. It's absolutely correct.

And then last few minutes, I wanted to shift gear a little bit. Like you guys -- we just are kind of in the middle of what's going on in the world a little bit. We just had a Black Friday, Cyber Monday et cetera like I don't know how much you can share, like, but at least in terms of at the moment, a business update out there?

So being a public company, we haven't said anything around Black Friday and -- so we wait until we -- but I'll think and that's what I said last quarter, at the end of last quarter. Let's start with hospitality. Hospitality, we do high-end -- as an example, [indiscernible] in the U.S. I think the big quarter in hospitality is summer. That's where you have your best. And that was a very good quarter for us and we saw people spending and going out. And what I said at that time is merchants are doing well and anything you need to wear to go to a restaurant is doing well. So luxury goods, watches, how luxury apparel, restaurants, and it was a very good quarter. Now I think it's fair to say that the macro, there's a lot of instability. And we are forecasting in a very conservative way because we think macro is not -- we don't think the macro is going to be great. Now this being said, who knows? I think for me -- yes, what's happening in the Middle East. Even though we're a bit sheltered because we do kind of the high-end brands, I don't think it's going to be the most exciting time in the history for purchasing. And what I can say about this is we have forecasted the second half of the year in a very conservative way. And we have strong confidence that we'll reach what we said even in unstable map.

Yes. Okay. And then the other thing we probably want to kind of talk about is over the last year, there has been a kind of a much greater focus on profitability cash flow from you guys. Can you talk a little bit about the motivation here and also the action you've taken because the numbers will be kind of going through?

Yes. So look, if I go back, we went public, used our public currency to acquire a lot of companies at a relative much lower value than ours at the market together, bring the unit platforms onto the market. Launch globally. So I think now it's really around execution. It's a year of execution. And what we said for this year is we would be for the entire year, adjusted EBITDA positive or better, and we gave our forecast in terms of revenues and we have strong confidence in growth we will meet that. I think going forward, now that we know we're an organic growth story, we know that we're a great business. You have to look at the market. And even if you look at the more established [indiscernible], those with more than 10 employees, there's about 3 million to 4 million globally, and we have 170,000 customers. So there is a huge runway to go and get that market. And I think also in my mind is as you get to the more established merchants, most of them are still on legacy.

Yes.

Okay? And that's a huge opportunity for us. We're the only vendor on the market that has real sophistication workflows that can compete with the legacy system with the cloud-based platform. So we have to go and own that market globally. So why am I saying this is -- of course, we will be profitable and we passed the profitability gap last quarter and there's no going back. But I think we need to go and get that market. I think it's easy to generate free cash flow in our business. I think the more exciting and more complex part is to have high growth and profitable high growth. And I think the market is so vast that I don't think now is the time to wait too much on free cash flow and profitability. I think we still need to grow at a strong rate. But I think in my mind, we want to get to the rule of 40, and that's what I told the market. I think we want to be a growth-oriented rule of 40. So we won't lose money on [indiscernible], thought we will be heavily weighted on growth. Why because the market is up for grabs. And the majority of the market is still on legacy and the time is right for us to go get that.

And then the -- if you think about it, the -- but a part of that better profitability, you did think about customers, which customers you want to deal with, et cetera. Like can you speak to that a little bit, like...

Yes. I mean look, it's very simple. In the SMB space, the closer you get to micro merchants, the more churn goes to the roof. The more you get close to established merchants, the more churn is very low because the majority of churn, we are the ERP. So we're the central with a nerve root, the central system of everyone who works with us. It's tough to implement, but once you've implemented it, you never want to change it. And the only reason why you were churn is if you run out of it okay or you go out of business. So we have been very clear that we want to work with more established. And that's why when I say my addressable market, it is 3 million to 4 million, even though there's 65 million retailers and restaurants in the [indiscernible]. The rest of them, I think, are very well suited for other players in the market that are focusing on the micro merchants. We want to do the well established. So if you look at some of our brands or even in the restaurant space, [indiscernible] like 31 locations around the world, all Michelin Star Restaurant. [indiscernible] restaurant on Lightspeed. So we want to do the well-established ones for the restaurant and the retail space because they don't churn. And that means, for us, we will bear a cost of acquisition, but they'll stay with us forever and we will see ARPU expansion forever and that is a good job.

Yes. Okay. Makes sense. And so how does the -- it does sound like [indiscernible]. I just wanted to kind of be sure I ask it directly, like -- so M&A versus organic, it sounds like now a lot more organic.

Yes. Look, let's go back. Yes. We know how to do M&A. We know how to integrate businesses. We know how to find leverage from good M&A, which is what we've done. We multiply pretty much every number I know by 10 in the last 3, 4 years and we can now on the other side as a strong growth, profitability, great business. So we have to keep our eyes open on M&A. There's no doubt because when you look at the share of wallet inside of a customer, there's still a lot of platforms that we do not have today that we need to offer to our customers. And I think for me, it's always the same question. It's build to buy. How much is it going to cost to build? How much is it going to cost the buy? And I think, ultimately, it's also a question of relative value. And when you look at our multiple today, I don't think we have reached the full benefits of everything we've done. We need to continue executing for last 2 to 3 quarters before we even talk about anything else. So there's no doubt in my mind there. But there are great companies, and I -- maybe sorry for my long answer, but the last piece of my moment is the private market has not reestablished the value as a public company has done. So I think there's going to be opportunity in the coming years when those private companies are overvalued are going to come for more funding. They'll probably reset their expectations. I think for us, it might be a better option to build versus buy. But in our mind, right now is to build. We're going to build modules. We're going to build capabilities. We're going to rebuild trust and value Lightspeed and then we'll talk about that.

And guess, I guess the other thing to that time gives you time to shoulder to the market and like you can integrate you have like one technology solution...

We've had a year now of a very strong organic growth in 4 quarters. And I think the lowest we were with 25% growth. We are a strong organic story, but I think continue [indiscernible] same. I got to rebuild value of the stock, so I can start entertaining good M&A at relative values that are lower than ours.

Yes. And then maybe last question -- Actually, actually, I'll let you go because our time is up actually. JP, I really enjoyed our conversation. Thank you.

Thank you for having me.