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

Okay. My name is Josh Baer, software analyst here at Morgan Stanley. We have the pleasure of having Dax Dasilva, Founder and CEO of Lightspeed with us today. Thank you for joining.

Thank you. Thank you for having me.

Before we get started, some important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. So I was hoping to recap a little bit about the last year. We were sitting here a year ago, and you were just back in the CEO role. A lot of changes and I guess the way I want to ask the question, if investors that are listening online, are here today knew Lightspeed at different points in time, there might have been a different strategic focus. There was a lot of acquisitions and growth and then payments attach. So how would you describe your strategic focus? And how are you thinking about your priorities looking ahead?

Yes. So thanks again for having me. So when we spoke a year ago, I came back with the goal of leading a profitable growth phase. And having that as an operating goal, it actually necessitated this operating review that we did across the company. And as many of you may have heard, if you've tuned into the story lately, our best markets, our highest close rates, best -- proven right to win, best unit economics are North America retail, where I started the business 20 years ago, building that software, that original Lightspeed software; and then European hospitality, where we started our journey with restaurants complex, at-scale restaurants businesses 10 years ago. And I think everything else that we brought into the company as -- in that acquisitive phase in 2021 when we -- the company was very much growth at all costs to try to solidify a position within the market as the vendor for complex businesses, the go-to vendor in SMB, it's -- those are the real crown jewels. And I think everything else can really contribute meaningly to profitability, and that's where we're going to have growth from these 2 growth engines and profitability from these -- from this efficiency rest of world market.

Excellent. And we'll dig into that strategy further and the focus areas. Do want to also ask about the strategic review that was completed but a review of business and operations. And ultimately, the decision was to remain a public company obviously. Anything that you could unpack around that process or the outcome?

Yes. So I think there is an exciting transformation ahead for Lightspeed as we really transform the financial profile of the company by focusing on areas where there's high ROI and then focusing these other areas to offer profitability. But there's going to be a journey, and for that reason, our Board decided to undertake a strategic review to see what is the best context in which to enact this transformation with no bias. We already had started the transformation, early steps. We did several waves of price increases, which contributed meaningfully to the 9% software growth that we saw in Q3, so early successes in the transformation. December 3, we did a reorg to match the organization to the strategy I just outlined with MDs leading growth in North America retail growth in EMEA hospital and an MD for rest of world efficiency. And so that -- so a lot of the elements had landed. We cut 200 headcount in areas where we were no longer trying to grow like NoAm hospital and started to hire outbound for the 2 growth markets, which is super exciting, and I'm sure we'll talk about. But we have data points from the transformation already and could compare that against other alternatives. Spoke -- over the course of 5 months, spoke to lots of different alternatives in terms of corporate structure, privatization, strategics and made the determination that doing the transformation as a public company was a viable and attractive way to go for our shareholders. We can maximize shareholder return. Of course, I'm highly aligned with that because I'm the #2 or #3 shareholder. And so -- yes, I'm the #2 shareholder at the moment. So that is like, I think, a really good outcome for the company, but I think we also had to communicate and commit to doing a large buyback because we really believe in the plan. We believe in the transformation. We want to support our share price, want to show that we have a path to profitability that we're confident in. We've been adding to our cash balance for the last couple of quarters. And so I think, overall, this message was very well received by our top holders, and I'm in full alignment with it.

Excellent. I want to stick to the reorg while sort of on the topic. You mentioned 200 as far as headcount reduction but also hiring in the growth areas. How should we think about the bottom line impact, but also where are you in executing that restructuring?

Yes. Well, first of all, there's no way we can go backwards on profitability, right? So we are cutting before we add because we made tremendous progress on EBITDA. There's much more -- like we have a Capital Markets Day, March 26, where we're going to we're going to show investors and prospective investors what this looks like over 3 years, and there's going to be a progression into greater and greater profitability. But these outbound motions are really important to add new locations in the places where we have a right to win. But those things have to be balanced. Otherwise, we won't be a company that's really executing on this profitable growth operating goal.

Got it. Before we go forward, can you help to identify what is it about North America retail and the rest of world hospitality that you have more right to win, better unit economics? And what is it about North America hospitality and rest of world, the noncore that makes it maybe less of a focus?

Sure. So North America retail, it's where we started. I mean, I built the original software back in 2005, and our original customer set was Apple Mac dealerships that had multiple stores, hundreds of thousands of SKUs, buying from multiple suppliers in multiple currencies, repair workflows, serialized workflows, has a lot of the same characteristics as a lot of our key verticals, right? They -- like bike has a lot of those characteristics. Jewelry has a lot of those characteristics. There's some of that complexity in multi-brand apparel, and sport and outdoor. So we've always been serving this complex business that's doing more than $0.5 million in transaction volume annually in their locations throughout their -- in each location. And so we've always had a service model, a go-to-market model and a product development road map for this kind of customer. We've never really served the micro merchant with low complexity. And there's lots of tiers within retail for lots of players, right? So we've served with a light ERP that's one step before you go fully enterprise. So you can scale to 100 stores and be very -- and even get to that point and connect to a NetSuite, for example, on the back end. But you've got, with Lightspeed, an inventory management and core POS that's got front-counter POS but also mobile as well as full omnichannel workflows. And then we have connections to your suppliers, right? So for multi-brand apparel or sport and outdoor, we're connecting you directly to the suppliers with the same tools that we sell to Macy's and Nordstrom and Bloomingdale's to order from those same suppliers. But we're now offering those suppliers to connect with independent retail. So we have a very compelling and highly focused offering for this mid-market retailer. And I think that where we've been distracted is by trying to take that retail product all over the world in areas where we didn't have as much of a right to win because it was a new market or a smaller TAM instead of focusing on North America, where we always do super well with close rates. And we're very, very competitive. It's the best close rates in the company. And so rather than continue to go integrate for all these different countries and go broad with feature sets, let's close the gaps in feature sets that we have with the legacy players because there are legacy players that go very deep for jewelry, that go very deep for home and garden, where you have to manage a live inventory and replenish it on certain cycles. None of the down market broad solutions are anywhere near thinking about those kinds of things. And so we need to close the gaps for -- with those legacy players and really truly be the go to because everybody in those different verticals is saying it's default Lightspeed. They've got the best tailored omnichannel for us. They've got the best inventory management flows for us, and it all ties into our suppliers as well as well as financial services.

Perfect. And any insight on the hospitality side?

Yes. And that's -- I'm really excited as well about where we are with hospitality. We're the only pan-European fine-dine table service solution in Europe. So whereas we started in really NoAm retail for 20 years, we started in Europe with an acquisition in Belgium like 10 years ago. So I think part of where we overextended and went wrong is like trying to bring that solution to the U.S., where we -- where Toast had a good product market fit already, and we were still trying to adapt the product. Where that product is super successful is Europe. It's built with a blockchain-inspired back end so that it can quickly fiscalize into the different countries. Every country in Europe has a different tax regime that you have to connect electronically to. So we have a whole system built for that. We have -- we're optimized for all of their workflows and tipping workflows and their local partners and their -- so I think that our move is that -- to really just focus on where we have that right to win. And there is no pan-European competitor for this offering in Europe. Every country in Europe has a short list of country-specific, like not at-scale player. And so if you're a Joël Robuchon, you want to bring your MICHELIN Star restaurants across the European capitals, there's only one option, right, Lightspeed.

Perfect. Got it. So I want to stick on thinking about these different market segments and locations, ultimately, location growth. It's, I think, for us a great indicator of competition, TAM, execution, go to market. And so the metric that we can see, in addition to focusing on those 2 markets, you're also focusing on higher GTV customers, and we can see low single-digit growth in that cohort. But how should we think about location growth across these core areas, both today, looking forward? And what does that mean for noncore growth and impact on location?

Yes. So for noncore growth for rest of world, the efficiency market, we're -- the goal there is positive revenue retention. There will be some location growth, but we're really trying to keep those customers, which have been maybe on those platforms for several years. Those are foreseeable platforms. We need to keep them happy. They will receive some feature updates as we upgrade our general financial services or e-commerce, omnichannel or brand platforms. They get those updates, but they're not going to see the progression that they do on the flagships. If they want to move to the flagships, they can. But we're really trying to keep them happy and retain them as customers. They represent a good proportion of -- it's about 1/3 of revenue between payments and software. Now for the growth markets, we really have to show location growth. Now overall location growth has been muted because there are so many things happening in the overall portfolio. But the positive and what we want to present to Capital Markets Day is this picture is starting to clear up, right? We have -- 50% of our locations across Lightspeed are now on these 2 flagship products. And the flagship products are what has the perfect market fit for NoAm retail and EMEA hospital, right? So we've got our flagships. They're now at 50%. The 2 growth markets represent 70% of revenues. So we're at a nice time where we can say let's track -- like for those of you that want to understand whether Lightspeed is competitive in its core growth markets, we're reaching an inflection point where the growth with the outbound motions for those 2 growth markets on flagship locations, that's going to start to exceed some of the drag from the things that we're now trying to grow in terms of overall location count. So that's what we'll sort of detail and what that's going to look like over time. But the outbound motions are pretty important. Historically, Lightspeed's done inbound direct sales model, which is you advertise online and folks -- you get the leads, which are qualified, et cetera, and then closed by an inbound team. The challenge with that is, as you mentioned, there's this ICP customer, this $500,000 and above customer that has the level of complexity that you can justify Lightspeed. Otherwise, you don't need as deep of a system, right? And so that's hard to do with digital advertising. And we've been able to refine that over the last year to capture more ICP customers, but it's still maximum you can do is optimize that to 30% of that spectrum is your target customer. So there's a lot of wasted money. It's an inefficient way to go after this customer. What is a more efficient way is an outbound motion. In the case of hospitality, where the business owners often inside the restaurant, a field sales motion makes a lot of sense, right? So in the major European cities, we're growing and deploying this field sales rep force, right? In North America retail, it's different. The business owner is not typically -- and we've tried experiments with field sales over the last year. The business owner is not at the business. They're just run differently, right? So you have what we call an outbound remote rep, so somebody at an office location calling out on prequalified lists that are from our different verticals. And they might -- and those reps might have some specific domain knowledge around those verticals. And we also go to all of the trade shows, the running show, the golf show, the -- where you don't see any of our competitors because they don't have detailed enough workflows. And that's where that feeds that outbound motion. There's the list. There's the verticalized marketing. And so it's a different motion, but it's -- we're already seeing it's highly effective. It just needs to be scaled. The field sales motion in Europe, effective but just needs to be scaled.

Okay. That's really helpful. You mentioned -- what did you just mention? Bikes or golf. But in my head, it's these verticals where you're really well known and sort of have a terrific market share. Which other verticals like that would you add to the list? And what does that do just from kind of -- maybe it's like the network advantage, the efficiency around word of mouth. So what are your like key retail verticals? And how does that impact?

So golf and bike are sort of in the sport and outdoor where we're actually really great in a lot of sub-verticals of sport and outdoor. There's running. There's a lot of different areas where we do -- where we're excellent. And actually, we're integrating with a lot of the brand catalogs through new order, which is our supplier network. Home and garden, very, very, very big vertical for us. That includes decor. That includes some elements of furniture. We need -- want to build more workflows there. Multi-brand apparel, where it's something like a boutique that's ordering from multiple different suppliers, different brands, that's like -- that is a very good fit for our feature set. I would say that jewelry, pet, toy, vape and smoke, these all have characteristics where there's gift -- where there's lots of SKUs. There's more complexity. There's serialization, in some cases, repair, in some cases, service where the feature set is a really good fit.

Got it. And you mentioned new order. And thinking about the supplier network, like where are you as far as monetizing versus having it be a benefit that helps with retention or new logos?

Yes. So I think the main benefit right now is new logos in those verticals because the more catalog items -- we have millions of catalog items from thousands of brands. The more you have density in a particular vertical like bike or the multi-brand apparel stuff, the more you get a pull from the suppliers that like this is a workflow that you cannot find anywhere else, where it's end to end. You can sell -- you can order a brand, finance it with Lightspeed Capital, and it all fits together. And so I think new business acquisition, new logo acquisition is the primary, but we have all of the infrastructure in place now for us to monetize that side of the payments opportunity because our stores are buying large -- there's a large amount there. There's about $10 million in volume of flow between the store and the brands, and that's just going to grow, right? So it's not as big as the $90 billion that we're doing from like merchant to consumer, but it's a big attractive TAM to go after that we have already the infrastructure. Now we just want to continue to monetize. So there's that. That side of payments can be -- we can start to really start to think about that, but it is bringing us new logos, and it is a great application of our capital program. If you want to do another turn of inventory, our analytics and insights tools recommends if you did another turn inventory of this stuff that looks like it's in stock at this supplier, you can be that much more profitable. Well, we can identify that opportunity. We can finance it with capital. You can bring it in directly into the POS. And it's all received, and there's no double entry. There's -- the whole thing was facilitated and basically impossible without Lightspeed.

Perfect. I did want to ask about kind of EMEA hospitality, rest of world hospitality and Toast. They're in U.K., Ireland and Canada, and they're talking a lot about international. Probably not the only 3 countries that they'll be in over a number of years. Just wondering if you are seeing Toast or if that's changing the competitive landscape.

Yes, I think we see Toast in London proper but not in -- not as much in -- not at all in the continent. I think we have a strong lead there.

Great. Wanted to come back and to overall macro, your sort of insight or transparency in the consumer spending, GTV. We've seen some GTV, like, I think, low single-digit GTV growth most recently, talking about some pressure in some of those verticals that did -- had stronger sales a year ago or through COVID. What's your view? What are you seeing from consumer spending and sort of the health of your customer base?

So the first thing I'll say is same-store sales growth, like the general retail -- if we're looking at retail in the U.S., there's been muted GTV growth. But if you look at customers that we've onboarded on to our flagships, we're seeing like 23% in terms of GTV growth. So what does that say? At-scale retailers that are leaning into technology are having higher rates of success, dealing with the current context than maybe the broader market. And so -- but we still should be concerned about the overall macroeconomic environment. I mean if there are -- if there's a lot that's going on that creates uncertainty, which we see in the current news cycle, with news that are coming out of Washington and other countries. There's just potentially uncertainty that shakes consumer confidence and ultimately, where our customers are serving retail and hospitality customers, right? So that, I think, is leading to some caution due to the macro.

Related to tariffs, potential tariffs, tariff volatility, any -- is any material portion of your business cross-border? And also, do you have software solutions that sort of help address the complexities around tax?

Yes. I mean tariffs, as they're currently being discussed right now won't affect us as a business, maybe potentially some small portion of hardware. But for the most part, an iPad is a big part of our hardware kit. You could buy that in whatever country that you're in, right? But what I think is more -- what is more top of mind for us is that we have customers that might -- you might have 2 bike stores in a city, right? One might buy from a vendor that's U.S.-based. And this, let's say, it's a U.S.-based city, might buy it from a U.S.-based vendor and they would have no tariff. Another might have been specialized in a German vendor for a lot of bike accessories, and that's a totally different story for them, right? They have a totally different impact. And so it's going to be very difficult for us to tell what is the overall impact because it's quite case by case in terms of how businesses have built. But what I think we need to offer and what we're starting to really start as a dialogue with our customers is we have the new order supplier network. You can source alternative supply, right? So this gives you a lot of flexibility for discovery of other potential sources of supply that maybe aren't as subject to some of the tariffs.

And so your customer is brick-and-mortar store. You also have some e-commerce. I guess that was more of what I was thinking of. Is there -- is that significant in any way, cross-border e-commerce?

I would say most of the business is physical first. But yes, I mean, that's going to be -- that will have some impacts as well.

Okay. Great. Wanted to talk about software. That was sort of one of your big focus areas in calls, "look, we're going to see accelerating software growth," and then we did see accelerating software growth as you predicted and called out. And in your opening remarks, you talked about pricing. We've been sort of throwing out the idea of the flagship. So wanted to kind of roll it all together. And ultimately, what is driving the accelerating software growth? And what should we expect looking ahead?

Yes, I think it's 2 parts. One is that we -- because we did this unified payments motion trying to bring our whole customer base on to our payments platform, some of which we're using partners, payments partners, we hadn't -- there was a couple of years there where we didn't have our account managers upselling software, right? And we also didn't focus on price increases because we were already asking the businesses that use Lightspeed to change over payments hardware. So there was a lot of -- too many things to ask for at once. So now that a lot of that transition is done on payments, this software growth piece was super important. I think in my listing to different stakeholders in the market over the last year, they want to see profitability where we've had great progress. They want to see payments penetration, really have a consistent upward trajectory. I think we get a tick box there. The next one is software growth, which we'll talk about now. And then the last one is locations. And I think the story works -- starts to work for investors when all those pieces come together. So I'm really proud of the software growth piece because we were telling the market, our teams have been working on payment penetration. It's important for our overall profitability, and that's all true. But now we need to get back to software. That's where how we built this company, is selling software, right? So it's twofold. One is the price increases. So we did 3 waves of price increases and now a fourth 1 coming. And we just -- first, we started with new front book pricing for both retail and hospitality, in a lot of cases, 30% higher than what people were paying because we hadn't done one for so long. And because there's so many different elements in our portfolio in a couple of different platforms, some inconsistency. So having front book pricing for retail and hospitality and then doing very targeted and smart, we've built a data layer that really allowed us to do a very targeted set of waves of pricing. And that's been really successful. I think we were stuck at 6% software growth for 2 quarters, and we bumped up to 9%. And now I think with the macro, it's TBD in the next couple of quarters, but we'll -- over the course of fiscal '26, we'll get into the double digits and start to keep going upwards from that. The other half of the software growth increase of that 9% is really that we've been shipping so much amazing software and modules on the flagships. We chose these 2 flagships because they are the most modern architectures. And there's been moments in our 20-year history that I've -- that we've heard a lot of grumbling about technical debt. We can't move fast enough. That's one thing that we don't hear in this era with the 2 flagships. This is like the highest velocity platforms I've ever seen at Lightspeed that we can build on and rapidly, right? So we've been shipping a ton of software on both. On the retail side, new iterations of our Scanner app, which is our mobile retail app. RetailInsights is a huge hit. On the hospitality side, there's been some stellar releases with Tableside, which is a mobile table side device, which is basically the same kind of experience at a Toast restaurant experience in the U.S. We have that for the European customer, which is several -- maybe a decade behind in terms of restaurant tech. So it's quite exciting for them. KDS, kitchen display, so that's the front of house. The back of house is the kitchen display. So it communicates front of house, back of house, very much in sync. That's a huge revolution for restaurants. And then there's a third piece to hospitality, which is called Pulse, which is so that the management layer of the restaurant can get a real pulse on what's happening with daily metrics. So that suite of tools, a lot of that is shipped in the last 24 months -- or the last 12 months. So a lot of really amazing modules. And then we've put these into tiers and had our account managers that are now back on software growth really upsell, really upsell people on higher tiers.

Excellent. I did want to clarify it for myself. Is the pricing increases that you're referring to, is that associated with the shift to -- or the onboarding onto the flagship? Or is that separate?

No, the price increases could apply to any number of platforms that are flagship or non-flagship.

Got it. And then so with regard to flagship, I think you mentioned 50% adoption. Like where can that go? And what is the impact, the pricing uplift presumably when someone does switch over to flagship?

Yes. So that's -- as part of the operating review, we made the decision that we're not going to try to do mass migration to flagship. These platforms have enough differences and a lot of inventory history and purchasing history and workflow differences that doesn't make sense. People can move to flagships if they really want the functionality and they're on one of the non-flagship platforms. But for the most part, that number is growing because every net new customer is being onboarded onto a flagship platform with payments default.

Okay. Got it. And you mentioned we're at 9%. So we're looking -- we're going to get to double digit. Just wondering if these pricing impact -- like should we think about durable double-digit growth in software? Like is that feasible? Or is this...

Over the long term, yes.

Got it. And you did talk about payments attach. And I think the target is 40% to 45% attach to end the year. And in this past quarter, the level sort of stalled and maybe that was just based on the seasonality of the certain businesses where there's higher -- but could you unpack that a little bit? And like what gives you confidence that we'll see a step-up next quarter? And like where can that ultimately go?

Yes. I think the goal is like 40% for the end of the year. There is seasonality. For example, golf is not really -- you're not seeing a lot of payments transaction volume from golf in this Q4, which is this is Q4 for us. But yes, Q1 definitely has better characteristics. We'll start to see -- we'll continue to see progress. It's not going to be as much as we saw when we had dedicated teams on payments penetration over the last couple of years. But we're -- our goal is 40% by the end of this year. And in future years, it will be 50% and above.

Got it. I'm going to ask another one and then pull the audience for questions. So sticking on payments, are new customers coming in? Like is that attach 100%? Or is there still an option?

It's pretty high, but there's -- there are people coming in on noneligible industries in which sometimes adding in Stripe or the rails underneath Lightspeed payments, the customer doesn't see them, but those are our payments providers and -- although we are the acquirer. So there are industries that they're not interested in touching. We have alternatives. And so it's upon us to try to onboard them on to alternatives. But sometimes, that might happen at a later date. Sometimes there's already a payments agreement with a vendor -- sorry, with a customer, and we'll try to buy out the contract. There's a lot of things that we do, but we don't always have a solution for them if they're in a particular country or if they're in a particular industry. So that, I think -- over time, I think we'll be able to close those gaps more and more as Stripe and Adyen move into new regions or we have more solution options under the hood to accommodate ineligible industries. Vape and smoke is a very big industry for us, and they are -- that's one example.

Perfect. Any questions? Microphone is coming.

Dax, exciting time. So 5 years from now, you're looking back, you're here. What are the 5 metrics that really helped you out? Like what's keeping you up? Like is it free cash flow? Is it -- what percent of revenue is the growth stuff? Is it win rate against competition? Is it net retention of customers? I don't know, like what are the 5 things...

All of those are pretty important. So I think close rates to know that we're competitive because I think that's for now -- right now, like what we really want to show the market, that last piece of locations, being able to add locations means if we can do that at a fast clip, that means we're competitive. I already know the close rates are very, very strong in our 2 growth markets. That needs to translate into location growth that starts to exceed the drag of some of the things that we're not trying to grow in terms of the overall accounts, right? I'm always going to look at the close rates. I'm always going to look at that organic growth rate of new locations and software growth because that's like the platform on which we can add more modules later. We can add more financial services later, those -- that core location count as well as -- yes. All of like the capital program, all of that is based on adding new logos, right? So that's super important. But being able to do it all in a way that's balanced with the -- with our goals for profitability. For now, it's adjusted EBITDA, but we're getting close to adjusted free cash flow positive. So we'll have more news about that at the Capital Markets Day on March 26 at the NYSE when we get there. And I think the other metric that's really important is, for many years, when we were acquiring a lot of companies and we were growing inorganically, top line growth was something that we were always chasing. I think that's going to shift more to gross profit. And so the quality of growth is going to be measured based on gross profit growth, EBITDA growth and eventually free cash flow growth.

And why do you win and why do you lose? And what percent of revenue is on the growth side versus the more -- the mature sort of just maximized cash flow side?

Okay. So why do we win? Why do we lose? I think in retail, it's because we are -- we're a steal for what you pay. We're like a light ERP for these complex verticals that the next step-up is an enterprise system. So it's a real steal. And I think that what we charge, it's like 33% of a percentage point of their total GTV. That's lower as a percentage of GTV than what Square, Clover or Shopify paid, and they're further down market. And what was your second question, sorry?

I don't know. Yes, it was a really good one though.

It was a great one. Yes.

Is it quick? Okay. Last question.

Just on these new sales reps that you're putting out, what's the payback period that you expect on that time?

I think -- yes, I think that's something that I would have to get back to you on. I think we're going to detail the outbound, but it's a new -- relatively new motion, right? I think that when you factor in payments and it's default payments, that closes in the payback time. And if you -- we have more modules, and we talked about all the modules on hospitality, I'm just talking about hospitality here, that really closes in on the payback time. If it's just the core system, that ends up being too long, right? But if you can layer in payments, you can layer in all these parts of that suite, the front office, the back office and the management layer, then now -- and then you multiply that by devices at the restaurant, then you have a much more attractive payback period.

Great. We'll stop there. Thank you, Dax.

Thanks.