Thanks for coming back, everybody. My name's Dan Perlin, and I head up the Fintech practice here at RBC, and I'm delighted to have Lightspeed up with us next. From the company, we have Gus Papageorgiou.
Right.
Right. Did I get that right?
You did.
Okay, I blacked out there for a second. Who's the head of investor relations, and I'm sure if any of you know the company, you've talked with Gus extensively. So thank you very much for being here and making the time.
Thanks for having me.
I really appreciate it. You know, what I wanted to start with was your interpretation as, like, someone inside the organization. You have this returning founder, CEO, you know, in Dax.
Yeah.
What are you seeing, you know, as you, see him come into the role, that's different than what you had at the prior, prior management?
Yeah, I think, well, obviously, much more focused on profitability and profitable growth. You know, I think the numbers last quarter kind of speak for themselves, where, you know, we did kind of come in stronger on a profitability level. And the guidance for the year, at a minimum of $40 million EBITDA, shows that we are, you know, serious on taking costs out and, you know, making sure that we drop some profits to the bottom line. And I think, but I also think, too, I mean, Dax is a product guy, right? He used the. He created the original version of Lightspeed back in the day. He is very much more involved in the, on the product side. I think he's got great vision for where he wants to take these products.
And I think he's much more practical on just the, on sales and marketing, about, you know, where, where do we play? Where are we strong? And focusing the company's resources on, on those areas. And he's a big believer in verticalization, right? Like, we do very well in, retail verticals like bike, and we want to kind of expand that success in other verticals, like vape, like pet, jewelry, sporting goods, where we can... Where we become, in, in fact, the default, choice for retailers in those verticals.
Yeah. And that's kind of been what you've had at some of the other ones, if I might just dive, but, go ahead.
Yeah, there we go.
Awesome. Thank you. So, you know, the overall 25 guidance, at least 20% top line.
Yep.
You got the $40 million, at least, you know, call it $40 million EBITDA. That was a much bigger number on the EBITDA side than I think people had anticipated.
Right.
And so the question ultimately is: What kind of reinvestment dollars or rate do you have to have in order to sustain kind of that 20% top line, but also be able to deliver on the promise of profitable growth that, as you say, the new-
Yeah
... CEO is very focused on?
I mean, you know, we, like we said, we think on the payment side, as Dax likes to say, we, you know, we've trained the muscle on how to get people onto payments-
Yeah
... and how to get them onboarded and transactional. So that is part of our culture now. You know, there are things that we're gonna do this year. There are some non-competes that will come off that will allow us to continue to expand payments penetration. A lot of customers, a decent chunk of our customers are on annual contracts, and we didn't force them onto payments last year, but as their contracts come up, we're going to get them onto payments. And then all new customers are coming on with payments in the countries where we offer payments. So, you know, payments penetration will continue to go higher. And so...
And, in addition, you know, we think, you know, we've said we're gonna grow OpEx roughly in a 3%-4% range this year.
Mm-hmm.
We think there's lots of opportunity to continue to take costs out. You know, we've done the easy stuff. We did the RIF, but we've done the easy stuff, but I think we could probably consolidate some locations. But, you know, we made 9 acquisitions. There's still some duplications in costs that we could take out. So I think that, you know, there are costs we can take out. We can increase payments penetration. We also want to increase software growth, and so we expect that the top line will grow faster than our OpEx, which will expand profitability and allow us to kind of reinvest in the business.
Yep. So as you say, you had nine, you know, acquisitions.
Yeah.
Many of those platforms, I think, still exist out in the wild.
Well, I think they-
They're still in the wild, right?
They all still exist, yeah.
How much of the R&D dollars have to get committed to something like that, and where do you want-
Yeah
... that to go over time? Because I suspect that that can also drive some costs.
Well, over time, we want to go to zero, right? But,
Yeah
... right now, I'd say 10%-15% of R&D costs go to maintaining the, call it, the non-flagship platforms. I'd say that in the short term, there's not a huge financial motivation to get those customers onto the flagships, largely because, you know, they're very profitable, right? They, if you've been on the platform for more than a year, your odds of churning are very low, and you tend not to call support.
Mm-hmm.
So, you know, in that aspect, you're the ideal customer. You're not gonna churn, and you don't call us. Perfect.
Mm-hmm.
But, you know, there is 10%-15% cost in maintaining those platforms. Over time, we want it to be more like an upgrade cycle. Like, you know, you're growing your business. You want more features. Well, why don't you move to the flagship? And we want to make it easier for them to do so. We're building tools, so if you're on the, let's say, ShopKeep POS, and you want to add a new location, ShopKeep can't handle more than one locations, so you're an easy upgrade, and here's a tool that will automatically upload your data into, and your inventory, into Lightspeed Retail, right?
Mm-hmm.
So we're gonna do that over the next few years. At some point, we will have to pull the plug, but it's not in the immediate future.
Okay. Let's move to a unified payment strategy. Like, this is something that was originally announced, I think it was met with a certain amount of skepticism. Again, you guys have proven your penetration rates are 32%-
Right
... you know, exiting, which is up from, like, 19% the year prior. ... has been successful. But the next leg of growth is in a lot of international markets, like that next-
Right
-ten points.
Yep.
There's some questions as to whether or not, how easy that would be to attain. A lot of people are trying to go after that market as well.
Yeah.
But I think unlike several of your competitors, you actually do have operations in many of these-
Right
European markets. So maybe spend some time explaining why you're confident-
Sure
In that end point in the international, and then maybe why you're differentiated.
Sure. So, I mean, just on versus the competition, I mean, I think what people have to realize is that, in Europe, fiscalization is imperative in order for you to offer a point of sale. And I mean, it's basically illegal to offer a point of sale that isn't fiscalized. And when I say fiscalized, it- the point of sale has to integrate into whatever the equivalent of Revenue Canada is in that country, right? So... And how the Germans do it is completely different than how the French do it, which is completely different than how the Swiss do it, which is completely different than how the Brits do it.
Yep.
Every country has its own unique aspects of how you integrate into the tax authority. We've solved that because, you know, we grew through acquisition, and the companies we bought had solved that fiscalization issue. It's not trivial. I mean, I think for somebody to go into those markets, it's years of programming to get the software fiscalized properly.
Mm-hmm.
So I think that's why, you know, we’re seeing success in Europe. In terms of getting them onto payments, yeah, I mean, I’d say that, you know, in the US particularly, we found we were very cost competitive. It’s a little tighter in Europe, but fundamentally, it just doesn’t make any sense to separate your payments from your software. You gain nothing, right? You have to maintain two disparate systems. You have to, you know, at the end of the day, you have to consolidate your POS with your payments provider. You lose the data insights, because the way you find out who your repeat customers are or what they’re ordering is by tokenizing the credit card. And in the end, it doesn’t cost you anything.
Like, our, you know, our, our pricing in Europe is very competitive.
Mm-hmm.
So it just doesn't make any sense to separate the two, and I think that... And, you know, that, that is resonating with our customers. And if we look at, you know, new customers in Europe, brand-new customers are coming on the platform, we are mandating payments, and we have not seen our close rates change at all, so.
Yeah. I mean, one of the things is that the churn rate was definitely better than I think…
Yes
- a lot of people expected.
Yeah.
So what do you think was attributable to that, and even with small merchants?
Yeah, I mean, that was very encouraging for us. I mean, we went into this thinking that, you know, gun to your head, do you get rid of your POS or your payments provider? And we thought, for sure it's the payments provider, and we were right. Right? So because we basically function as an ERP- as a mini ERP solution for these small businesses, and so changing payments providers is relatively easy. Changing your POS, I mean, you're talking about training your staff, about reentering all your inventory. It's a pretty big lift.
Mm-hmm.
So yeah, it gave us... It's very encouraging to see that, people saw the value in our software, and that I think they see the value in integrating the software with payments, because, I mean, nobody likes being told what to do, obviously, but once it's done, we have very good feedback from the customers.
Yep.
Right. They're glad they did it-
Yep
I think.
Cool. The, you know, part of the strategy is to pivot the sales force back to selling software again.
Right
away, in North America in particular-
Right
- as opposed to just really focusing on the payment, penetration rates. So maybe talk about how that decision came to be, like, why now?
Sure.
Maybe what are some of the incentives that help you to accelerate that growth?
Yeah. So just a little background. So we, our sales force is split up into two groups, business development, which lands new customers, and account management, whose job is to upsell software and payments. So when we undertook the unified payments initiative, to basically make payments mandatory for both our new customers and our backbook, we knew there was gonna be a lot of onboarding of these customers. So what we did is, we took the account management team, who already had relationships with our established customers, and their job last year was to basically onboard all of our customers onto payments. And so they were not focused on upselling software. You know, they would usually account for half the new software revenue in any given quarter.
So, so that was their role last year, and again, it was different regions at different times that, that were focused on onboarding payments. We think by the end of Q2, all the account managers will be back to upselling software. And again, they can easily account for half the software growth, so we believe that once they're back at it, we will see improvements in our software growth. I'd say, I'd say for the first half of the year, I think the business will be characterized by what you saw in Q4, which is growing payments penetration and better profitability.
Mm-hmm.
Don't expect a lot for software growth in the first half, but as several initiatives kick in for the second half of the year, we do expect software revenue to accelerate in the second half.
Yep. Any concerns about would that pivot the payments fall off because, you know?
Not really, no.
Yeah.
I mean, so there's kinda three things. First is, there's some non-solicits that fall off this year-
Mm-hmm
... in the U.S. and Australia, which, and we'll go after those customers.
Is that meaningful? Is that a sizable-
I mean, it's... Yeah-
It's helpful.
It's helpful, for sure.
Yeah.
So there's the non-solicits that fall off. Secondly, there's a decent chunk of our customers, not quite a third, that are on annual contracts. And again, if you sign an annual contract, we didn't force you onto payments, but when it comes up for renewal, you have to go to payments. So those will come at us. And then again, all new customers have to take payments. We won't sell the software without payments. So, you know, those three things together, you know, give us a glide path to higher payments penetration.
Yep. So maybe you can update us a little bit on where you stand in terms of adding outbound sales and how that also should translate into software sales?
Yeah. So in outbound, we're a big believer in this, where we have—we toyed with it in the past. We did see success. There's kind of two initiatives in outbound. So on hospitality, where it's basically feet on the street, right? It's people going, knocking on doors, trying to convert them into customers. And we just, it's just more effective at targeting higher GTV customers, right? With, with—
Mm
... our traditional inbound, I mean, we would, you know, do, you know, search engine optimization and advertise on social media platforms, but you can't really discriminate by size, right? So, you get lots of leads, but they may not be the leads you want. With outbound, it's, you know, a salesperson can identify the restaurants in that city that are doing well and go after them. So they're much better at landing those higher GTV customers. We are doing it across North America, across Europe, Sydney, Australia, and Sydney and Melbourne in Australia, so we, you know, we're continuing to grow that. We should be fully ramped, I'd say, I don't know, by the end of Q3-ish type thing. The other outbound initiative is with retail, and there it's a slightly different approach. It's not feet on the street.
It's, it's basically outbound calling. You know, retail is a little different, right? In hospitality, there's a lull between lunch and dinner, and you can kinda go see the customer and talk to them. In retail, you know, there's foot traffic all day, so you're kind of annoying them-
Yeah
... when they're trying to run their business. But we're doing more calling outbound, and there, our first target list is, there's a lot of retail SMBs that are using NuORDER by Lightspeed to order from the brands, right?
Mm-hmm.
And so, we're—and a lot of them, most of them, the vast majority of them, are not using Lightspeed as their POS. And now that we've done the integration work, you know, we're going to them saying, "Hey, you know, you order from six brands through the Lightspeed, through the NuORDER by Lightspeed platform. Wouldn't it be cool if when you ordered those, items from those brands, it automatically populated your point of sale? So you didn't have to sit there and re-enter in all these, the volumes and the product codes, and it would just upload automatically with rich images of the, of the products, and, you're off to the races." And, you know, retailers love that-
Right
... 'cause it saves them a lot of time. So we're targeting, you know, you know, there's tens of thousands of customers that currently are using NuORDER but are not using Lightspeed. And so, we're reaching out to them to kind of try to convert them, and that will get built through the course of the year as well.
Okay. And so as you think about the progression for the second half, call it ramp within subscription, you know, starting in the year at 7%, I think the exit rate you've talked about is getting to 10%-15%.
Right. Yeah.
You know, the question is, is there a lot of location growth, like net new location growth that's embedded in that just for those-
Some, for sure.
... new? 'Cause I know there's churn.
Yeah.
Maybe even talk about that dynamic, 'cause it, it's a KPI that gets a lot of attention-
Yeah
... but probably shouldn't.
Yeah. So again, so we did 7%. I'd say the lull will probably be, the low water mark will probably be Q1, and then we'll kind of ramp from there. But yeah, so I think we're thinking 10%-15% software growth by the end of Q4, by Q4. I'd say, you know, location growth for sure, upsell for sure, as the account managers come back, and then also putting in some price increases. So I don't know, call it roughly a third, a third, a third.
Mm-hmm. You know, speaking of pricing in and around software-
Yeah
...let me, can you talk about the strategy for maybe like net new versus maybe some of the legacy book?
Sure.
What those dynamics might look like and maybe how that's resonating in the market.
Yeah. So for net new, we've already put through the price increases. Have not seen any change in close rates, so that's encouraging. For the back book, it's very surgical, I'd say. Again, we have 9 products that are currently running different geographies. We did a pretty thorough analysis last year of our prices versus the nearest competitor, based on feature sets in each geography. We found we are underpriced generally right across the board, higher in some regions, lower in others. So we will start to implement those price increases to some of our customers. You know, if we were forced onto payments last year, we might leave you alone for a year.
Yeah. Sure.
So it's very surgical in how we're doing this, but we do expect to see some benefits in the second half.
Any order of magnitude as to what those price increases might look like?
I-
... or average?
Yeah. I think, probably want to keep it in the single digits %. But again, it's all gravy, right?
Yep, that's all new. Let's talk about ARPU for a moment, and we can talk about it in the aggregate with-
Sure
... shipments rolled into it, but I also want to talk about ARPU growth and expansion expectations for just software.
Right.
So obviously, in the quarter, it was up like 29%, very strong. How much was software ARPU up in that?
I think it was up around 10%.
Double digits, right?
Yeah, it was around 10%. Yep.
Right. So maybe just think about what does that trajectory possibly look like?
Yeah.
Is it gonna hold in that market? How does that trend relative to the new subscription revenues getting to 50%?
Yeah. I think 10% is a nice target for us. I... You know, one of the factors that's definitely gonna help us is with the flagships, with Lightspeed Retail and Lightspeed Restaurant, all the innovation is occurring on the flagships, right? So if you're a customer on the flagships, you'll have a much broader choice of software modules to choose from, which definitely helps, software ARPU. And so, you know, as more and more of our base gets onto the flagships, the ability for us to upsell increases.
Yep.
And I think in the past, Lightspeed has been very good. Again, our sales teams are split into business development and account managers. The account managers have always been very good at upselling software, and I think that you know, again, as the flagships expand through the base, we're pretty hopeful that will definitely benefit software ARPU growth.
Okay. I wanna spend a minute in terms of the distinction between the GTV numbers that you, you provided. Like, overall GTV, I think, was up 2%, but the flagship was up, like, 29%.
Yeah.
Like, here again, help us kind of-
Yeah
stack up why this flagship can grow at 29 and
Well, first of all, most of the churn is on the, on, let's say, the non-flagship products, right? So that's dragging them down.
Yep.
But the other thing, the other stat that was encouraging is when we looked at that 29% growth, is that same-store sales in the flagships were actually up versus the base that was down. You know, we see... So our ideal customer profile, who are tending to adopt the flagships, and again, that's customers with north of $500,000 a year-
Yeah
... they tend to be doing better than our overall base, and that is where we are gearing the business. You know, these customers tend to have much lower churn. They tend to adopt more software, and obviously, the payments revenue is better. So yeah, we're very encouraged on those stats, and the challenge now is to kind of increase the number of ICPs or ideal customer profiles that are in our customer base.
Yep. All of that said, though, it should all be funneling forward, given the new salespeople to outbound.
Yeah.
But all of that, that momentum should be pushing that number higher.
Yeah.
How much of the portfolio, again, is in flagship?
About a third, a little over a third-
Okay
... is, on flagships.
Okay. Is there, like, an expectation over the next year or two that you think you can get that number to be higher?
Well, eventually, it's gonna be 100%, but a year or two, no, I don't think we've set any short-term targets.
Okay, fair enough. You know, the gross margin profile of the business actually held up better-
Yep
than I think a lot of people thought.
Yep.
Myself included, last quarter. That's despite having really strong payments growth-
Yep
-which tends to wanna pull that down a little bit. So let's talk about the interplay there-
Sure
... and how you were able to sustain a margin.
I don't think we get enough credit for our gross margin performance, which is, I'd say, much better than some of our direct comps.
Yeah.
But, yeah, so if you look at software, I mean, we're at 77%. I think there's some room there, and like, our goal is to get it to 80. Hopefully, we get it there, but I mean, not a lot of, not a lot of upside there. We have very strong gross margins in the software business. If you look at transaction-based gross margin, let's call it three different areas. There's payments, right? As we expand into international markets, the gross margin on payments is higher, right? So as the mix shifts towards international markets, it'll definitely help the gross margin profile there. Secondly is capital. We did just under $18 million in capital revenue last year. We expect to see aggressive growth this year. It's a 90%+ gross margin business. That will definitely help.
Offsetting that, yeah, the referral, our legacy referral business, which was 100% gross margin, is in decline. As we convert those customers to payments, I think that'll be pretty much gone. All the damage will be done this year. It was mostly done last year, some this year, so that's a negative. And then also, we are launching other financial services, like instant payouts, which is very high gross profit, which we hope to expand further this year and into next year. So I'd say overall, you know, I'd like to think that transaction-based gross margins have bottomed or are bottoming. You know, I think that 42%-43% gross margin range that we've been hovering with, I'd say that's probably the right range right now.
Mm-hmm.
And then over time, we think we can probably lift it higher as capital grows, as the international payments grows, as instant payouts grows. We hopefully can get it higher, higher, back in the 30% range, 30%+ range.
Yep.
Yeah.
Can you talk about the, the difference in terms of, net gross margin for international? Because a lot of people look at the take rates, and they go-
Yeah
... "Well, they're lower than the States.
Yeah, the net-
But maybe the-
The net take rates are lower, but the gross take rates are lower as well. So in the U.S., it's about 2.5-2.6. We clear 65 basis points, roughly, so about 25% gross margins. In the international markets, the gross take is 1-1.2, but you're kind of getting about 35% gross margin on that. So-
Yep
... so.
Yep.
So lower net take, but better gross margin.
Yeah.
Yeah.
Lightspeed Capital, I think, is on a lot of people's minds these days.
Yeah.
It is incredibly high margin, as you point out. It's also very nascent-
Yeah
... in a lot of places, so-
Yeah
... there's huge opportunity. So how do you think about, I would say, putting capital at risk, so to speak, to go down that path in order to attain those-
Yeah
... levels of profitability? And then at what point would you wanna kinda pull the rip cord and allow for a third party to come in? I think maybe you're-
Sure
... exploring that today, so.
Yeah. I mean, we see a lot of potential in the capital business. Again, if you look at some of our competitors, they're extending about 1-1.5% of their GTV in commercial cash advances. I think we're at 0.27, so we could, you know, triple, quadruple this business. You know, we are currently being very cautious on the risk. I think our default rates are still sub 2%. We just hired a head of capital. We're investing in the infrastructure to make... There's still a little too much manual input.
Mm-hmm.
We wanna make it completely automated, with just, you know, a small team overseeing it. We're investing in the infrastructure to do that. We think we wanna put ourselves in a good position where we can, you know, get that to at least $100 million in revenue. I'm sorry, the last part of your, the final part of your question on capital was?
Just, so if you get it to $100 million, is it $100 million or is it $200 million? At which point where you don't want to commit that much on the balance sheet, you want-
I think in the last quarter, we committed about $70 million, I believe, is the right number in terms of merchant cash advances outstanding. I think we're comfortable going up to $200 million.
Mm-hmm.
After that, we'll seek partners. I mean, the downside of partners is you give up some of the economics. The upside is you get rid of the risk.
Yeah.
Again, in terms of the risk, you know, we're in a very good position to extend these cash advances because we are the POS, and we are the payments provider.
Right.
We only extend capital to merchants that are on payments. You know, we have custody of your cash, and we know everything about you. We know your sales, we know your inventory, we know your seasonality, we know how many employees you have. So we have very good data insights into who you are and how your credit risk is.
Gotcha.
Yeah.
For sake of time, I want to make sure I open up to the audience if they have any questions out there. Anybody, thoughts, opinions? Crickets.
Okay.
We're going to go crickets. Value-added services, in particular around Advanced Insights and some of the things you're able to do with the data that you guys have-
Yeah
... and how you might monetize that. So maybe spend a few minutes as to what that might look like, you know, in terms of-
Yeah
... how you're going about it. Obviously, payments are important, important part to be the-
Yeah
... linkage to that, so.
Payments, and then... Yeah, we do have a lot of data, right? We have a lot of data on our customers. We have a lot of data on consumers. So, you know, how we monetize that, I mean, currently, we're using that data for capital. That's a great example.
Yep.
Where we have the data on the customers, so we're able to extend capital. You know, our analytics in hospitality is a...
Lost the mic again. Okay, we can talk loud.
So our analytics engine in hospitality basically rank orders menu items by popularity and the ability to drive repeat customers.
Yep.
What you want are dishes that are highly popular and bring, keep people coming. That module is very successful. It actually, it actually goes for more than the POS itself, so
Okay
... a lot of it, we can do our, that data structured properly, and, yeah. Thank you. I think we need to structure it properly, but yeah, still lots of potential there.
Still early days, but lots of potential, right? Gotcha. And then for the last couple of minutes, we got capital allocation. Obviously, you talked about this $140 million buyback. Like, have you guys been in, you know, in market doing that? How do you feel about it? Is that a starting point, or is that-
Yeah, I mean, we can buy up to 10% of our float, as deemed by the TSX, which eliminates a couple of our big shareholders. We are active. I think at bare minimum, we want to offset the dilution, by from stock-based comp this year, at least. But we have much more room than that. And I think, you know, although we won't get to this, I think hopefully, we're in a position where we continuously offset the, dilution from stock-based comp in the future.
Yep. We're almost done, so it's all good.
Well, just so we can hear you on the webcast a little bit.
Yeah.
Okay. Sorry about that.
That's okay. So maybe just finish that thought for the-
Sorry, yeah.
'Cause I mean, they're on.
I mean, obviously, so again, we're, we want to at least offset the dilution from stock-based comp this year, but we have more room than that. And then in the future, I think we'd like to be in a position where we can, you know, offset the stock-based comp dilution with buybacks. I don't... We're not ready to commit to that quite yet, but I think that's kind of where our head's at.
Okay. And then just quickly on the Supplier Network, where do we stand on that? That seems like another,
Yeah
... very good long-term growth opportunity that hasn't maybe gotten a lot of attention.
Yeah, I mean, again, so with Supplier Network, we're starting to monetize, like, as I talk about the outbound efforts in retail-
Yeah
... is targeting those customers that are using NuORDER and had, do not have, the Lightspeed POS yet. And I think that's a no-brainer if you, if you're ordering from the multiple brands on, on NuORDER. Look, it's just, to, to us, it's very compelling, right? You, you as a retailer, instead of having to do all this manual work of, you know, the ordering process is archaic and broken, and then you have to manually upload everything into your POS. Well, you know, the Supplier Network takes care of all that. Everything is done virtually. The products come in the door, you, you scan them, and they immediately upload into your POS with rich images, everything. You get, you can update your, your e-commerce site. So it's... Retailers love it.
Yeah.
And then offsetting that is that from the brand's perspective, especially in verticals where most of the distribution is through SMBs, we can give you real-time sell-through data.
Yeah.
I'm not talking about, you know, weeks from now. I'm talking that day, we can tell you exactly what's sold through our network, right? And so the brands love this, right? Because then they can adjust production in season, right? So they can tell immediately what's selling, what's not. And so, you know, it's something that we're very excited about. John Shapiro has made a lot of progress on this, and it's a very, it's a key R&D initiative for us.
That's great.
Yeah.
Well, there's a lot of great things going on here at the company, and I feel like a lot of it's, you know, a tailwind at, at the back of this thing. And, so I'm looking forward to seeing where that trends. So thanks so much for being here, Gus.
Thanks, Dan. Thanks for having us.
Thank you.