Lightspeed Commerce Inc. ($LSPD)

Ladies and gentlemen, thank you for standing by. Welcome to the Lightspeed business update call. [Operator Instructions] I will now turn the conference over to Gus Papageorgiou, Head of Investor Relations. .

Thank you, operator, and good morning, everyone. Welcome to Lightspeed's conference call to discuss the divestiture of the Upserve U.S. hospitality product line. Joining me today are Dax Dasilva, our CEO; and Asha Bakshani, our CFO. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were applied in respect of conclusions, forecasts and projections contained in these statements. We undertake no obligation to update these statements, except as required by law. You should carefully review these factors, assumptions, risks and uncertainties in our press release issued earlier today. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures and ratios these should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 can be found in our earnings press release, which is available on our website on SEDAR+ and on the SEC's hedge system. Note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Dax.

Thanks, Gus. Good morning, everyone, and thank you for joining us. Today marks a significant milestone in the evolution of Lightspeed. We are announcing the divestments of our noncore Upserve U.S. hospitality product line to SkyView equity a move that sharpens our focus and aims to expand our gross margins, further strengthens our balance sheet and accelerates our path towards profitable growth. This transaction is a direct reflection of our focused strategy doubling down on our core strength of retail customers in North America and hospitality customers in Europe, where we have a proven right to win. The total value of this deal is structured to deliver immediate and ongoing capital totaling up to $81 million. Total cash consideration of $44 million, not subject to any earnout and up to an additional $37 million in earn-outs over 24 months as the business hits performance milestones. The transaction closed yesterday at the close of business. It is critical to note that while we are divesting the legacy Upserve merchant base, the sophisticated analytics technology acquired with Upserve which form the foundation of Lightspeed insights will remain a core component of Lightspeed's flagship restaurant solution. This technology remains a primary driver of new customer adoption at Lightspeed. A strong contributor to software revenue and a key competitive advantage for our flagship restaurant platform. We will continue to retain and further develop this technology. . I will let Asha take you through the financial impacts of the transaction.

Thanks, Dax. As noted earlier, this divestment sharpens our focus on the areas where we are strongest. With upside removed, the strength of our core business becomes clearer, a business characterized by faster growth and higher gross margins. From a P&L perspective, for fiscal 2026 we expect to report that removing Observe will reduce revenue by approximately $140 million, gross profit by approximately $26 million and GTV by roughly $5 billion. As part of this transaction, approximately 3,200 U.S. hospitality customer locations and around 70 vacated team members will transition. We are grateful for their contributions to Lightspeed I'm confident they are well positioned for continued success in their next option. . With respect to our 3-year financial goals established at our Capital Markets Day in March of 2025, the divestiture is expected to impact this outlook by approximately 5% on the absolute value of each of gross profit, adjusted EBITDA and free cash flow for fiscal 2028. We expect the compound annual growth rate forecast presented at Capital Markets Day to remain unchanged. Most importantly, as a noncore asset within the company's efficiency portfolio, the divestiture of Observe is consistent with Lightspeed strategy and expected to meaningfully improve the company's revenue growth and gross profit growth trajectory. I will provide a more thorough update on these 3-year goals when we report our fiscal Q4 on May 21 of this year. The divestment also further fortifies our already stellar balance sheet. Our priorities in terms of capital allocation remain the same. Approximately $200 million remains under our broader Board authorization to repurchase up to $400 million in Life shares, and we continue to be opportunistic in evaluating further share repurchases, as a reminder, our normal course issuer bid program that we have used to buy back shares is limited to 10% of our public float for a 12-month period. We fully utilized our 2026 NCIB program and expect to renew it in May 2026, subject to Board and TSX approval and market conditions. Aside from the potential buybacks, we will continue to grow our merchant cash advance business. There were $106 million in NCAs outstanding as at the end of our fiscal Q3 and we intend to continue to grow the high margin business in our upcoming fiscal year and beyond. With respect to M&A, we will continue to be opportunistic in evaluating potential small tuck-in acquisitions to help accelerate product development, but large-scale acquisitions are not a strategic priority for us. For the $44 million cash payment, $20 million was paid back closing with the vast majority of the balance payable within 90 days, fully committed and not subject to any condition. The earn-out payments of up to $37 million will be paid over 2 years based on achievement of performance target. In closing, I want to reiterate that with this transaction, Lightspeed is leaner, more focused and better positioned than ever to lead in our targeted growth engines of retail in North America and hospitality in Europe. With respect to our fiscal Q4 and full year 2026, we expect to deliver revenue and gross profit ahead of our previously established fiscal Q4 and full year outlook with adjusted EBITDA in line with our outlook. Lightspeed remains committed to improving our adjusted EBITDA performance. Following the divestiture of Upserve, we expect fiscal 2027 adjusted EBITDA and in the range of $75 million to $95 million. Because we remain in a quiet period, I would ask that you please keep your questions focused on the transaction we are announcing to date as we will not be able to comment on the quarter. We look forward to discussing our Q4 results with all of you on May 21. We could now take your team.

[Operator Instructions] Your first question comes from the line of Stephen Milson with BMO Capital Markets.

Can you give us a better triangulation of the EBITDA contribution from observe?

Okay, yes, sure. I'll take that question. Observe did contribute meaningfully to the fiscal '26 adjusted EBITDA, but this contribution was a diminishing one. If you remember, Upserve as a noncore asset outside our growth engines. So it was declining year-over-year. So its contribution to fiscal '27 would have been lower than fiscal '26. We don't disclose EBITDA by product line. But just given the allocations that go into that number and the indirect cost that go into calculating that, but with upside of the picture, we expect adjusted EBITDA for the upcoming fiscal year to still improve, and we gave a range of $75 million to $95 million, which is a meaningful step-up from fiscal '26.

Great. And I do see that you disclosed the transaction-based revenue related to Lightspeed in that $140 million. Is there any other payments revenue that would have been in the $140 million? I'm just trying to get a sense of the software versus payments mix in the business.

No. There's the $140 million includes the software payments, it encompasses all the revenue of that Upserve portfolio and the net to gross that you saw in losers.

Okay. Okay. So that $15 million, that's the gross.

Correct, correct. And that $15 million is really just an accounting presentation for a small portfolio of customers for which we're still keeping the net revenue. So there's a presentation change. There's no change in gross profit or cash received.

Okay. And just final question. So does this reflect all of the customers who are still on the legacy Light serve payments, i.e., it wouldn't include the ones who switched over to the new Lightspeed platform.

Yes. These include all customers that were previously observed customers. There are some of those customers that were on a legacy payment provider and some of those customers that were on 1 of our new payment providers. But all of the 3,200 locations that were tied to that Upserve entity have now been divested.

Okay. Sorry, I mean like I don't know if I misspoke, but just the Lightspeed software like none of the if they transition to the new light speed platform. That's correct.

Our Light flagship platform is not a part of this divestiture. This is just the legacy Upserve portfolio. .

Your next question comes from the line of Martin Toner with ATB Cormark.

Just further to the EBITDA question, like what kind of OpEx savings do you think come along with this deal?

Martin, thanks for the question. The EBITDA contribution, like I mentioned earlier, to fiscal '27 was meaningful. And fiscal '27 is declining from fiscal '26 as this contribution was a diminishing one. When we think about OpEx, we think about the many people that are transitioning over. And then obviously, there's sales, a little bit of marketing and G&A as well. I think the best way to look at it is really looking at the adjusted EBITDA range that we gave of $75 million to $95 million for the upcoming fiscal year. And you'll see that as a meaningful step up from our fiscal 2026 ex Observe.

Your next question comes from the line of Andrew Harte with BTIG.

Just 1 for me. I guess when you look at the rest of the portfolio, what are the noncore assets are there that you could consider a strategic alternative for..

Yes. Thanks for the question. So yes, obviously, this is all about focus for us. This is all about focusing on our 2 growth engines where we're investing. We're focused on creating really meaningful value for our customers and improving the operational and financial proposal of our business and also returning capital to shareholders. We continue to balance our growth and efficiency engines and we're going to continue to evaluate all options through the lens of long-term shareholder value creation and strategic fit. .

Your next question comes from the line of Suthan Sukumar with Stifel.

One question [indiscernible] .

Suthan we can't hear you very well.

Can you hear me now?

Yes, much better.

All right. Perfect. This is [indiscernible] Suthan. Just a question on U.S. hospitality earlier quarter with hospitality, the efficiency market effect a healthy are performing well. Just curious, what are some of the KPIs required as you plot could be [indiscernible].

Suthan, do you think you can repeat that? We're having a really hard time hearing you. .

[indiscernible].

It's not very clear.

Okay. Okay. I'll try this time just a question on U.S. hospitality. In earlier quarters, U.S. hospitality big in efficiency market was had to be healthy for as well. What are some of the KPIs required to hit that earnout if available?

Yes, I heard that. Thanks for the question. The earnout is based on performance targets, particularly adjusted EBITDA structured over the next 24 months. the U.S. hospitality, as you mentioned, was in our efficiency portfolio. Our growth engines, our Retail North America and hospitality in Europe. That's really where the majority of Lightspeed investments go in where our unit economics are strongest. We have the highest, the strongest right to win in our growth markets. So Upserve as the U.S. hospitality asset was really outside of those growth engines.

And just 1 last question for the capital allocation. I know you guys mentioned the NCIB. Just on M&A is there a potential to be more targeted on M&A looking ahead? I know you mentioned small tuck-in.

Yes. Thanks for the question. From an M&A perspective, all tuck-in acquisitions, we're always on the lookout for those things that can accelerate our product road map or increase our share from our merchants large-scale M&A is off the table for us, Susan, so for us, the uses of cash outside of these small tuck-in M&As will really the main uses of cash will be growing our MCA business and returning some of that cash to shareholders if the market conditions prevail, in the form of a buyback. We still have about $200 million outstanding from our board authorization, and we intend to file a new NCIB, the earliest that we can, which is in May. .

[Operator Instructions] Your next question comes from the line of Todd Coupland with CIBC.

Can you hear me okay?

Yes, loud and clear.

Great so I wanted to ask about qualitatively about a more focused go-to-market and how we should think about this divestiture's impact on that.

Todd, thanks for the question. I'll take a step back and just remind everyone that our growth engines for Lightspeed are Retail North America and hospitality in Europe that's where the vast majority of Lightspeed investment is going. That's where our unit economics are strongest and we absolutely have the strongest or highest right to win in those markets. And so with this U.S. hospitality asset removed, it really improves the strategic and managerial focus for us in go-to-market, in particular as well. It simplifies our operations. It improves our profitability, our growth, and it really allows us to deploy capital including in go-to-market towards our faster-growing and more profitable businesses.

Yes. And as you saw from this last fiscal year, we really doubled down on all of the outbound sales in the European hospitality with a lot of field reps deployed across Europe as well as outbound remote reps in North America retail, all of which have contributed to very, very exciting location growth numbers across these growth engines, and we continue to want to double down in those areas where we have a rate to win.

Is there any qualitative color you can provide on sort of looking back perhaps in an adjusted location growth excluding this, the declines, I guess, you've been fighting against with Upserve in the mix.

Yes, I'll take that one, Todd. I think the best way to look at it is, at the end of the day, it was a small merchant base. was 3,200 locations. So you take the 3,200 locations out of our total location. Upserve was declining year-over-year in lower double digits, I would say. So you can use that for the go-forward trajectory.

Your next question comes from the line of Dan Perlin with RBC Capital Markets. .

I wanted to just drill back down on kind of the contribution. So we're clear on the base jumping off point here. So Clearly, the gross margins, it looks like they're just under 19% for the business. That math was right. That's like 22% of your gross profit at 26% roughly. And you called out that's a meaningful contributor to EBITDA. So clearly, gross margins are a lot lower than your corporate average. I'm trying to get a sense of how much lower, if at all, the margin profile, the EBITDA margin profile of this was relative to your corporate average? I mean I suspect it's lower, but it's hard to reconcile that is.

Dan, thanks for the question. No, you're absolutely right. The gross margins were lower for this business overall. Software margins were lower than the corporate average corporate average is about 80%, a little over and the software margins for Observe were in the 70% range. The main reason gross margins were lower though, was the payments portfolio. User payments revenue was not with 1 of our main partners for the most part. And so the payments margins were lower there. So if you look all told, the overall gross margin of the observed business was lower than the corporate average. And again, because it was a declining asset, the EBITDA margins were declining as well.

Got it. but they were lower than your corporate average as well, just based on that commentary it just didn't sound like there's enormous okay for EBITDA, not for gross profit.

We didn't disclose EBITDA, Dan, just because business unit EBITDA has a lot of indirect costs going to calculating that. but I think you can triangulate from the lower gross margin.

Yes. Yes. Okay. And then just a second question, just any thoughts about how you arrived at this valuation it's as you said, $81 million, I get $140 million of revenues. You've got a 2-year earn-out potential. So it's got some time before you get the cash in. And again, depending upon this EBITDA, it's hard to know what kind of multiple is actually paid. So just can you just help us how you guys arrived at this being like a fair and equitable price for you guys as well as for buyer .

Yes, absolutely. We got you to observe on a discounted cash flow basis among other methods. And as a noncore asset outside our 2 growth engines with a declining growth trajectory, the discounted cash flow reflected what this business was worth to us on a stand-alone basis going forward, right? And so the transaction we negotiated really gave us conviction that this was the right time to divest and the right valuation, to be honest. And to redeploy that capital into other areas of the business that you've heard us talk about. I think when you look at the gross profit that we provided for fiscal '26, we are divesting the asset for our 3x LTM gross profit. . An even higher multiple when you're looking at the next 12 months gross profit, right, given that it was a declining asset within Lightspeed. Again, for us, then the important part was executing in line with our strategic focus as well. This simplifies operations for Lightspeed, and improves our profitability and growth, and it really allows us to deploy capital towards our faster-growing and more profitable businesses.

Yes. No, it's great. It looks like it really streamlines the business, and it's good to have the funds to push towards capital as well as buybacks. So congratulations on the transaction and thanks.

Next question comes from the line of Richard Tse with National Bank Capital Markets.

Just a really quick 1 for me. I'm wondering if you can maybe comment on the extent of how competitive of a process this was? Did you have a kind of a number of perspective buyers here for this asset? Or maybe just kind of give us a bit of color on that, please..

Richard, thanks for the question. Absolutely. We run a thorough process. We engaged Step Buzzer bankers, and we did engage with a number of parties. SkyGdid emerge as the best value for us. and the right home for the Upserve team and our customers. That was important to Lightspeed as well. When we think about the strategic logic, again, Upserve sits in our efficiency market, a market that we've made a deliberate decision, as you know, to not invest for growth. That's where our focus goes and the growth markets are where our focus goes and our right to win is strongest, like we said. And that's really what today's transaction reinforces.

Okay. If I could just get another 1 in. You sort of mentioned in the earlier comments about acquisitions still certainly not big ones. But in regards to some of the smaller ones that you may be looking at, is the focus is to lean in more heavily on sort of U.S. retail now? Or would the preference be to lean in on sort of European hospitality? .

I think those are both our yes, those are both our growth engines. So I think if we're doing tuck-in acquisitions, it would be in reference to our 2 growth engines, NOM Retail and EMEA Ossa, and these could accelerate road map or it could be ways to improve sulfur ARPU, software growth.

Your next question comes from the line of Kevin Krishnaratne with Scotia Bank.

Just 1 for me. I know that you referred to this as being in the efficiency market. But when you look at the average GTV, it's it looks like it's a little bit over $1.5 million. So it looks like on a financial profile I'm just wondering like what type of assets and locations these are? And I'm assuming it's just that you're facing a lot of competition in the markets where these locations are located. Just trying to get a sense of they seem like they're on the higher end of your profile. Just curious.

Kevin, I'll take that one. The average GTV, this portfolio of customers, the Upserve U.S. hospitality portfolio were customers, so bigger restaurants in U.S. hospitality. But if you remember, our focus was really when we split the company into the growth and the efficiency portfolio, our focus was really on the growth portfolio, North America Retail and EMEA hospitality, as you just heard. The U.S. hospitality, you're right, they were high GTV customers, but the competitive landscape in U.S. hospitality, we decided a couple of years ago to pivot to U.S. retail and EMEA hospitality more strongly and to optimize the U.S. hospitality portfolio for efficiency. So these are higher GTV customers, but they were not in our focus markets. We made the deliberate decision not to focus on U.S. hospitality a couple of years ago. Just given the competitive landscape and the fact that our money was invested, the ROI that we would get in Noam Retail and EMEA Hospitality was much higher, done in this efficiency portfolio. So it made a ton of sense to divest this asset at this time.

There are no further questions at this time. I will turn it back to Gus Papageorgiou for any closing comments.

Okay. Thanks, everyone, for joining us today, and we look forward to speaking to everybody on May 21, and when we report our fiscal Q4 and 2026 results. Have a great day, everyone. .

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.