Good morning. My name is Chris. I will be your conference operator today. At this time, I'd like to welcome everyone to the Lightspeed first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Chris Mammone , Investor Relations, you may begin your conference.
Thank you, operator, and good morning, everyone. Welcome to Lightspeed's fiscal first quarter conference call. Joining me today are Dax Dasilva, Lightspeed's founder and CEO, Brandon Nussey, Chief Financial Officer, and JP Chauvet, President of Lightspeed. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our earnings press release from yesterday, as well as in our filings with Canadian securities regulatory authorities. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures.
Reconciliations between the two can be found in our earnings press release, which is available on our website. Finally, note that because we report in US dollars, all amounts discussed today are in US dollars unless otherwise indicated. With that, I will now turn the call over to Dax.
Thanks, Chris, and thank you everyone for joining us. We're pleased to announce another great quarter for Lightspeed as we continue our journey of building a recognized market leader for SMB retailers and restaurateurs globally. This past quarter demonstrated solid execution on a number of our stated growth strategies to ensure Lightspeed remains the leading cloud-based solution in our segment. The result was accelerated top-line growth during the first quarter. Total revenue grew by 38% and topped $24 million. Approximately 90% of this base consists of recurring software and payments revenue, which grew 40% during the first quarter. We continue to be extremely pleased with the overall pace of business expansion as we soundly execute on our mission of helping complex small and medium-sized businesses thrive in a world with rapidly changing consumer expectations.
Our core belief is that cities and communities are built on the success of the local SMBs, and our work as their key technology partner is more important than ever, particularly as today's consumer demands a delightful in-store or in-restaurant experience. We believe the complex SMB is seeking a recognized global market leader for the solutions we provide, and we're pleased with the progress we're making to be known as that go-to player. GTV growth of greater than 30% over the last 12 months to approximately $15.6 billion is an effective gauge of a healthy, growing customer base that is finding increased success through partnering with Lightspeed. As we look forward, we will continue to grow organically in three primary ways, attracting new merchants, entering new markets, and expanding ARPU. First, continuing to attract new merchants within our existing core markets.
Our market is vast and underserved by cloud technology solutions, and we will leverage our growing global brand to attract an increasing number of new merchants to the Lightspeed platform. During the first quarter, more than 2,000 net new retail and restaurant locations joined the Lightspeed ecosystem. We were particularly pleased with our progress in North America this quarter as we saw a considerable uptick in our new sales and top-of-funnel activity on the back of increased awareness of Lightspeed and our focused investments to drive those results. We are well-positioned to continue growing our overall location count by greater than 20% per year while simultaneously generating solid underlying unit economics. Our second organic growth avenue is to selectively enter new markets, leveraging our sales and marketing expertise in our core markets. We believe new countries and new end markets all represent a compelling opportunity for us.
With just about 1/3 of our revenue coming from outside North America today, we see tremendous runway to continue to grow that overall contribution over time. Although we prefer to pursue new end market growth organically, we also won't hesitate to buy meaningful scale and market leadership in new geographies when it makes financial sense to do so. That was certainly the case with our acquisition of iKentoo, which I'll discuss further in a moment. The third way we grow organically is through ARPU expansion. We've amassed the industry's broadest set of functionality for our customers. We continue to see a significant percentage of new and existing customers paying for more than one Lightspeed product, and increasingly, multiple modules being adopted initially by customers, which are encouraging signs.
Lightspeed Analytics, Lightspeed Loyalty, and Lightspeed Payments all continue to be notable success stories for us, affirming our strategy of being a one-stop shop for the core commerce needs for our customers. On Lightspeed Payments specifically, our encouraging launch continues. This past quarter, close to 50% of new U.S. retail customers bought payments alongside their Lightspeed software subscription. Meanwhile, hundreds more customers from our existing base made the decision to adopt Lightspeed Payments over their incumbent solution. Our early successes here serve as a welcome validation that this is the right strategy to deploy. To ensure we continue to see this new customer momentum continue, we announced numerous product innovations, which I'll discuss later in my remarks. First, I'd like to highlight some recent successes with our channel partner strategy as yet another lever we are utilizing to bolster our go-to-market approach.
We work with many great channel partners to help our complex SMB customers manage all aspects of commerce in their business. Recent strategic partners brought into the Lightspeed ecosystem include Faire, which has integrated its marketplace for buying wholesale products into the Lightspeed Retail solution, and Affirm, to offer point-of-sale financing options for shoppers at Lightspeed Retail locations. In addition to these three primary organic growth vectors, we believe a targeted and opportunistic approach to M&A is also important to solidifying our leadership position globally. Our M&A strategy is to look for targets that will accelerate our product roadmap, increase our market penetration in a way that doesn't slow us down with complicated integration efforts, and add significant value for our shareholders.
Longer term, we believe the increased scale will drive significant opportunities for the business to upsell modules, unlock strategies using the immense amount of transaction-level data our systems generate, and monetize an increasing base of GTV. Last quarter, we announced the acquisition of Montreal-based Chronogolf, which brought us instant leadership in a vertical sub-segment, adding hundreds of golf course operators, primarily in North America. The integration of Chronogolf, which has been a large software partner of ours over several years, is now completed and went very well, as expected. More recently, we announced the acquisition of iKentoo, a rapidly growing cloud-based POS system specializing in the hospitality segment in Europe, with close to 4,000 customers. iKentoo is compelling to us for many reasons. Number one, it brings further platform breadth, capabilities, and upselling opportunities in EMEA, in new countries such as Switzerland, France, and South Africa.
Number two, iKentoo brings Lightspeed complementary technology and experience well-suited for large and complex deployments, enabling Lightspeed to further accelerate the displacement of legacy POS providers globally. Number three, we're adding a talented team of passionate people with a similarly disruptive mindset to Lightspeed, which will help drive us forward to take even greater advantage of the structural tailwinds at play in this marketplace. Brandon will comment further about the financial details surrounding this acquisition during his prepared remarks, first I'll speak to how some customers operating in complex environments have benefited through integrating iKentoo's advanced solution. iKentoo recently replaced a legacy system for a 5-star hotel group to manage all of their food and beverage POS needs by deploying more than 100 devices across several properties.
This summer, iKentoo has been powering two large European music festivals attended by more than 500,000 people, in one instance, functioning as the centralized POS for managing more than 50 food vendors, and in the other case, used on more than 500 devices during two very high-volume weekends. Turning now to some of Lightspeed's most exciting recent developments on the new customer and product innovation front that further our position as the leading cloud-based end-to-end solutions platform in our space. Lightspeed continues to enjoy strong customer momentum from complex retailers and restaurateurs in North America and around the world, many of whom continue to select Lightspeed given our ability to manage their omni-channel business needs seamlessly.
Customers such as Herschel Supply Co., an affinity backpack brand with dozens of retail locations, U.K. acclaimed Crosstown Doughnuts, and luxury hotel operator, The Perle Oban Hotel in the Scottish Highlands, all selected Lightspeed in the quarter. Additionally, KemperSports, one of the largest golf course operators in the world, selected Lightspeed to replace their multiple legacy systems and power their golf courses, restaurants, and retail pro shops for over 100 properties across North America. Kemper will be making the full transition to Lightspeed over the coming months. Turning to our product innovation efforts, one of the main reasons customers in retail choose Lightspeed over other cloud-based solutions is our unmatched capabilities in helping a complex SMB manage their most important asset, their inventory.
It follows that during the first quarter, we rolled out a multitude of enhanced data-driven inventory management control features and next-generation reporting capabilities to all Lightspeed Retail clients, further distancing Lightspeed from other solutions in the marketplace and giving our complex retail SMB more mastery over inventory tracking across all of their omni-channel workflows, including tighter management over pre-sales, back orders, and overselling. We have other major new product releases and enhancements coming within both the Lightspeed Retail and Lightspeed Restaurant platforms throughout the year. I look forward to sharing with you more of the details around this rapid product velocity, which is an absolute hallmark trait of Lightspeed, in future earnings calls. Lastly, I'm thrilled to have our new Chief Product Officer, Jean Chassé, join us in a few weeks to help us go even further. To sum up, it was another great quarter.
I've never been more excited about the future for our business, and I'm really proud to see the hard work from the entire Lightspeed team translate into stellar results for our company and our customers. We have the momentum, the team, the vision, and the technology to be the clear leader for complex SMBs globally. I'll now turn it over to Brandon to provide greater detail around the financials for the quarter, as well as to provide our updated outlook for fiscal 2020. Brandon?
Thanks, Dax. Our strong first quarter results are a reflection of the solid progress we continue to make across all of the important areas of the business. Before I cover the numbers, just a quick word about how our financial model works for anyone that may be new to Lightspeed. Approximately 90% of our revenue is earned through recurring subscription and payment revenue streams. Our subscription revenue is priced on a per location, per month basis, with rates that increase as customers adopt incremental functionality offered by Lightspeed. As customers open new locations or adopt new modules, our subscription revenue grows. We also generate recurring payments revenue, which is earned as a percentage of the underlying transaction value, to date, mainly from payment referral partners.
With the introduction recently of Lightspeed Payments, we now have the ability to earn a much larger portion of the transaction value, and this will become a growing portion of our revenue over time. Turning to some of the key metrics we use to track our progress, total customer locations grew to greater than 51,000 as of June 30, 2019, up from approximately 42,000 a year ago, representing growth of 20%. It should be noted that Q1 is our seasonally slowest selling quarter of the year in terms of net merchant additions. That activity typically ramps throughout the year and ends with Q4 as our strongest selling quarter.
As Dax mentioned, we are particularly encouraged by the early returns we saw in North America on the back of the growth-oriented investments we guided to last quarter, and which were primarily focused in this geography, as well as the increased brand recognition we've seen since our IPO. We'll continue to track and monitor the conversion rates of this investment over the coming quarters, but we view this early progress as quite encouraging as we push to build a global leading cloud-based brand. As many will recall, ARPU expansion is an important metric for us as well, and we saw that continue to grow by double digits versus the year-ago period. Total GTV processed by our customers during the first quarter was $4.6 billion, up more than 30% from a year ago. This is an important measure for us as we roll out Lightspeed Payments.
On Lightspeed Payments, we saw continued strong overall customer receptivity for this important long-term growth driver to our business. In the quarter, we saw continued progress in new customer adoption of payments, with close to 50% of new U.S. retail customers contracting Lightspeed Payments at the time of purchasing Lightspeed's core software. In addition, we saw hundreds of existing customers make the move from their incumbent solution to Lightspeed Payments. This is another quarter of very encouraging progress, but again, I will stress that we remain in the early days of launch and still have much work to do. Nevertheless, the early signs during this initial rollout year are good ones.
Turning now to overall financial results for the first quarter, revenue for the quarter was $24.1 million, up 38% from the same quarter a year ago, and ahead of our previous guidance of $23.0 million-$23.5 million. Software and payments revenue was $21.3 million, or 89% of total revenue, and up from $15.2 million in the same quarter a year ago. This represents growth of more than 40%. Gross profit from software and payments revenue was $15.5 million, up 33% from the prior year quarter. Hardware and other gross margin was 7%, reflecting the hardware subsidy we are providing to new Lightspeed Payments customers in this initial launch phase. Overall gross margin was 65% of revenue.
Adjusted EBITDA loss for the quarter was $5.1 million, as compared to $2.9 million loss a year ago, and came in slightly better than our guidance. The increased loss from a year ago reflects the incremental costs in G&A of being a public company and the results of our purposeful investment in marketing in the quarter to drive greater brand awareness, primarily in North America. As mentioned, we are quite pleased with the initial results from this investment, but expect it will take several quarters before we can fully ascertain the overall effectiveness of this campaign. Net loss for the quarter was $9.1 million, compared to $8.1 million loss a year ago.
Cash used from operations was $6.3 million for the quarter, in line with our guidance and compared to $2.9 million a year ago. We ended the quarter with $191 million in cash on the balance sheet and no debt. As Dax mentioned, on July 2nd, we completed the acquisition of iKentoo, a leading cloud-based point-of-sale solution provider based in Switzerland. The purchase price for iKentoo was approximately $18.5 million in cash on closing, plus the issuance of just over 400,000 shares in Lightspeed to the key founders of the company. There are additional cash-based incentives payable over the next two years tied to continued employment of key team members. From a growth technology and go-to-market perspective, iKentoo closely resembles the Lightspeed model in many ways.
iKentoo brings Lightspeed close to 4,000 more hospitality customers in the European region and deepens our presence in new countries that are important to our long-term growth plans. From a financial perspective, while the impact to the current year's revenue will be modest, we expect this acquisition to help us accelerate our growth in EMEA, given the large markets that they are helping us open up. We are very excited by the potential this new platform brings us from an overall talent and market expertise and successful track record of complicated high-end customer deployments as an important building block towards Lightspeed's objective to be the undisputed leader in serving the complex SMB market. I'll now conclude my prepared remarks by discussing our financial outlook.
As a quick note on our currency, our guidance does not consider any potential impact with foreign exchange gains or losses, as we do not try to estimate future movements in foreign currency rates. For the second quarter ending in September, we expect between $26.5 million and $27.0 million in total revenue, representing growth of between 42% and 45%. For the full fiscal year ending March 2020, we now anticipate between $112.0 million and $115.0 million in total revenue. This represents annual growth between 45% and 48% compared to our fiscal 2019 revenue. Turning to Adjusted EBITDA and cash flow, our recent acquisition does bring an amount of incremental loss in the current year, which we expect will be eliminated on a run rate basis by the end of the year.
Factoring this in for the full year, we expect operating cash flow to be a total use of approximately $9.5 million to $11 million and an Adjusted EBITDA loss in the range of $18 million-$20 million. For our fiscal Q2, we expect operating cash flow to be a total use of approximately $5 million and an Adjusted EBITDA loss in the range of $5.5 million-$6.0 million. With that, we are now ready to take questions. Operator?
Thank you. At this time if you would like to ask a question, please press star then number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Your line is open.
Hi, good morning. Now that you've been selling payments for a couple of quarters, have there been any key lessons learned? I mean, any sort of tweaks to the incentive structure, the pricing, the go-to-markets that you've had to make, or is it all kind of rolling out as expected? You mentioned also more penetration into the existing base, which I think that's coming sooner than some of us had expected. Can you comment on what you're seeing there as far as adoption from existing customers and how that's being received?
Yep. Good morning, Thanos. It's JP speaking. I'll take this one, and then if Brandon wants to jump in or Dax. I think the payments is going according to plan. I mean, as we know, we have a pretty large base that is non-integrated. Also, the market expectations more and more is to change their payment solution when they are buying a point-of-sale. For now, we see no changes. We are excited about what we're seeing. I think the adoption with the existing base has been a bit stronger because we're realizing our customers are not happy with their current solution providers.
We're starting to push, and we're being prudent about it, but little by little, you know, we are trying to put in place strategies as the product matures to go and do two things, have stronger attach rates on our new customers and penetrate the existing base of non-integrated customers.
In terms of the, GMV profile you're seeing of customers adopting payments, is that very consistent with your overall averages, or is that skewing, any different?
No, it's absolutely in line with the averages. We see penetration on larger customers, medium-sized customers and smaller customers.
Okay. Can you update us on the timing of the launch of payments into the restaurant market into Europe?
Yeah. I mean, our goal is to have payments available to our entire North American merchant base by the end of fiscal 2020. You know, we'd like to, you know, to have beta for restaurants in the next 90 days. Europe is also a goal for the end of the fiscal year.
Great. In terms of the verticals, can you provide some color in terms of relative growth rate between retail versus restaurant?
Yeah. I mean, we don't disclose the growth rate, but, I mean, we're seeing high growth in the two verticals. Restaurant is the smallest, in terms of number of users, but is the fastest-growing, but retail continues to grow very fast.
Great. Then one last one for me. In terms of iKentoo, you mentioned that they have an ability to handle large complex deployments. So to clarify, how large is their average customer in terms of location count? Is that on average similar to Lightspeed? You know, how large of a deployment can they do as far as location count?
You know, as we said in our strategy, we really are focused on the more complex restaurateurs and retailers. When we look at an acquisition, it has to be in the sweet spot of Lightspeed. It's, you know, we're not interested in the smaller coffee shops or low SKU count. In that sense, iKentoo is at least what Lightspeed is in a sense that it services, you know, complex restaurants with complex routing. What it does slightly better than Lightspeed is when you think about volume of transactions, and we gave the example of some of the big events happening in Europe, it can process extremely high volumes of transactions per second.
I think for us, this means that it can help us go slightly upmarket, and it can help us really pursue this replacement of, you know, all of the legacy systems, and it gives us a broader aspect. The last piece about iKentoo is that there's a lot of technology that's complementary to ours. It's also gonna help us with all of our products in terms of understanding how to scale the back office and provide more capabilities basically for more complex institutions.
Great. Thanks. I'll pass the line.
Thanks, Thanos.
Your next question comes from the line of Richard Tse with National Bank. Your line is open.
With respect to iKentoo, I guess given that you are looking at other acquisitions, I'm curious, are they gonna be running on their own platform going forward or is there a path that there's an in-integration onto your platform and it sounds like you'll take pieces of what they're good at and incorporate it into your platform. Am I kind of on base there?
Yeah, iKentoo is its own platform, but there's, you know, this existing Lightspeed technology that we'd like to bring to their base, to their geographies and vice versa. I think that there's a lot of technology that we're acquiring here in iKentoo that's going to be very valuable with the current Lightspeed products. Over time, I think you're gonna see some conversions of technologies and that's part of the reason the technologies themselves as well as the teams and the expertise that we're gaining here.
Okay, thanks. I guess over the next year, I was wondering if you can maybe elaborate a little bit in terms of your priority areas when it comes to operating investments.
Yeah. Hey, Richard, sorry, it's Brandon. I think, you know, what we're doing right now seems to be working pretty well, and we're pretty pleased with the progress. Continuing to drive net new location adds organically, we're finding kind of, you know, the Lightspeed brand and the top-of-funnel progress is working the way we had hoped. I think you'll continue to see us do more there. Obviously, lots to do in terms of market. We're in the early innings here of a really big market opportunity. Expect to continue to see, you know, that R&D line being an important one for us.
Of course, we gotta make sure that this payments thing continues to be a success, and we penetrate as much of our GTV as we can as soon as we can. You know, those are all things we have underway. We're pretty happy with our progress, and I think, you'll see those continue for us.
Okay. You mentioned on your call the funnel seemed fairly robust. Could you give us some perspective on what that funnel coverage may be today versus what it was last year?
Yeah. I mean, without getting into the specifics, Q1 for us is a seasonally slow quarter. You know, us being new as a public company here, some of these things are new for the markets I suppose, in how we communicate. Q1 is a seasonally slow quarter, and for us to see the lead flow we saw in Q1, the new location adds we saw in Q1, all pretty encouraging for us. You know, without getting into the precise growth rates of what's happening on the funnel side, Richard, really happy with the underlying unit economics and the early returns we're seeing from those investments.
Yeah, we think we're set up well for the back half of the year, and hopefully you see that in our guidance and in some of the messages you heard from us today.
That's great. Thank you.
Your next question comes from the line of Josh Beck with KeyBanc. Your line is open.
Thank you for taking the question. You know, first one, Dax, it'd be for you. I know you mentioned that you viewed innovation velocity as a, as a hallmark of the company. I mean, as you look out the next couple of years, you know, are there certain areas, without disclosing the roadmap, whether it's front end, back end, you know, enhancement to existing features that you are, you know, particularly focused on in terms of innovation?
Yeah, I think that you know, we view Lightspeed, the platforms as one-stop shops for complex SMBs. You know, we're the recent rollout of features for inventory management in retail represents a strengthening of the core and further distancing ourselves from other, you know, cloud-based vendors. This is inventory is a, you know, a huge competitive advantage for our retail product. As you've seen from our, all of our module, our success around modules, there's additional capabilities that customers are looking for from Lightspeed as this one-stop shop. We've seen amazing, you know, adoption of those modules, analytics, loyalty, payments, accounting integrations, there's more opportunities. There's, you know, there's areas around employee management, around scheduling. I think you'll see the core being strengthened.
You know, things like omni-channel are becoming more and more in a part of the core. You know, e-commerce has been a big module, but it's also becoming a core part of retail. You'll see the core strengthen, and you'll see new capabilities, you know, building out through both the retail platforms and the and the restaurant platforms.
Okay, very helpful. Wanted to follow up on the payment strategy. Obviously, you've had a nice uptick in terms of adoption of new customers, which I'm guessing is mostly driven by execution. As you look forward and look out, you know, are there opportunities to bring in other partners potentially? Is that something that could maybe even boost that rate further? Maybe just help us kind of run through how you're thinking about that.
Yeah. Hey, Josh, it's Brandon. Yeah, absolutely. We've always, you know, having multiple processing partners is important for us, as we look to make this available across our global client base. Lots of activity and progress happening there. We do see opportunities to continue to grow attach rates. It is early days, so, you know, don't wanna get too far ahead of ourselves, but we're only a few months into this. We're pretty happy with the progress. And, you know, we're still learning and finding the right messages and the right way to position and sell and upsell customers. We see some opportunities. There's some things we need to do on our side. There's some things that additional partners will provide to us. So far so good.
Okay, great. Last one for me. You know, when I look at the revenue guidance, seems like there's a pretty nice acceleration in revenue growth as we go into fiscal Q2. Maybe just help us think through what some of those drivers are, if M&A is important, that would be helpful. Thank you.
Yeah, the guidance does not reflect any future M&A, this is kind of the outlook of what we have kinda inside of Lightspeed right now. I think, you know, just to echo some of the earlier messages, we're just seeing good momentum in adding new customers into the business. We're seeing good momentum with payments. You know, even with the acquisitions we've done, Chronogolf, Dax gave a good example of a big customer win that happened post-acquisition there, where we like to think we were helpful in making that happen. Yeah, I think it just reflects good, strong strength in the core and some of the initiatives we've had under the way.
Great. Very helpful. Thank you.
Your next question comes from the line of Todd Coupland with CIBC. Your line is open.
Yeah, good morning, everyone. I wanted to ask about the new customers you spoke about on the call. Like, the profile seems to be quite a number of locations across different industries. Can you talk about what they're actually buying in terms of modules? Do you have to do any customization for these large organizations? How long does it take to roll the platform out across their businesses? Thanks.
Okay, yes. I think I'll take this one. Hi, it's JP. I mean, very simply put, you know, the customers are in line with what we're looking for. Here, when you think about it's typical customers. For us, the most important thing is complex retailers. Complex restaurateurs. That means that these are institutions that have, if you're in the restaurant space, pretty complex routing rules. If you're in the retail space, that means, you know, you have a lot of inventory.
It's true that a lot of them here have multiple locations, I think that the strength of Lightspeed is as you go from one location to just two locations, regardless if it's restaurant or retail, that's where you start seeing the strength of all of our products, and that's where we start distancing ourselves from all the other cloud-based systems. Couple of points. First of all, we do not do any customizations in a sense that the code base, regardless of the customer, is always the same. What we do is we have implementation. We have implementation partners, we have implementation teams, really what we're deploying is the same thing everywhere.
Just to answer maybe the first part of your question, what we see is customers normally start with a bundle, and then what happens is, over time, they buy more from us. If you look at the typical customers that bought from us would have bought, omni-channel, going back to what Dax was mentioning. What we see with time is customers, once they have implemented the core, which is the POS and sometimes the e-commerce platform, then what they end up doing is they look at the new modules. They'd look at analytics, which will help them, you know, call better decisions because they have a much better insight on their business. Maybe they might move into, you know, to other platform. It really depends on the businesses.
Generally speaking, the customers we mentioned are very much in line with the target base we're going after, which are complex retailers or restaurateurs with one or more locations, but really the core of it is they need to have complex needs. If you take the case of Kemper, that's slightly higher than what we normally do. We do have customers with more than 100 locations that are currently existing customers. Here, I don't think nothing is outside of the norm. The last point is around implementation. This is cloud-based, regardless if you have one store or 50 stores, once you've programmed the setup for one store, then deploying new locations is very simple.
All you have to do is just have a browser or an iPad connected to the web, and we just deploy more stores as we go. The real challenges are mainly around training and training of the employees more than anything to do with the code base.
In terms of competition for, particularly for these multi-location wins, is it typical point SMB cloud solutions that you're competing with, or are you actually seeing companies like Demandware show up and compete for this business?
First of all, I mean, we deploy in many different countries, many different geographies, and I mean, the market is so big that every geography has, you know, its own set of local competitors, exactly like iKentoo would have been a competitor in Switzerland a year ago. Primarily, the market is a replacement of legacy platforms. Here, if you look at, you know, Kemper, which is a very good example, this was really legacy property management with legacy POS for the retail store and probably a MICROS or the likes of in the, in the restaurant. These are really the competitors. I think the choice for established businesses is really, do I continue with the legacy?
Do I renew my maintenance, or do I select Lightspeed? Here I think the real advantage of Lightspeed is when you think about the breadth and the depth of what we offer, there's not many cloud vendors that have what we have. Now, when you think about new businesses, the majority of the new businesses nowadays want to go with a cloud-based platform. Here, really, when you think about it, the complexity of the business is gonna drive the decision. Here we'd be really a good fit for the more complex retailers.
That's helpful. I just had the one financial question, if I could. Last quarter, you called out two quarters of heightened marketing spend to accelerate payments attach rate. Just wondering if you could update your views on that, whether or not you would expect to continue beyond this quarter in terms of you know, continuing encouraging signs, or will you reevaluate heightened spend levels once you close Q2? Thanks a lot.
Well, I think our guidance reflects our current intentions, Todd, for both the quarter and the year. As we said earlier, pretty happy so far with what we see. Not all of this spend is meant to be an immediate ROI and will benefit, you know, quarters beyond the initial outlay. So yeah, there is, as you can tell on the guidance for Q2, there is expected ongoing investment through that quarter. But we do expect that to produce overall returns throughout the year such that the guidance we've given for the annual will be how we see the year going.
Great. Thanks a lot. Appreciate it.
Yeah.
Your next question comes from the line of Tien-Tsin Huang with JP Morgan. Your line is open.
Thank you so much. Just building on that last question. With the success or the early success of the growth initiatives, does it change your thinking at all in terms of customer acquisition costs or how you wanna invest there, or even the pricing of your base products or the pricing of payments?
Not, not on pricing. What is, what is going on, of course, is we're seeing the average revenue per customer increase. As we get more and more success and confidence with payments and can more accurately predict that, as you know, modules like loyalty continue to roll out, we're seeing that average revenue per customer grow. I think as you know, we run the business on that underlying unit economics. As that ARPU grows, it does allow us to increase the cost we would otherwise spend to acquire customer, and that's where some of that incremental investment has gone. Yeah, all told, I would see we purposefully are allowing ourselves to bump up the CAC a little bit, but purely because we're seeing ARPU expansion.
No, that makes sense. The nice acceleration you're showing throughout the year that's implied in the outlook, I heard the momentum comment, but I'm curious, did you give us how much is coming from the acquired revenue? Is there a way to rank some of the other factors that's changing the outlook, perhaps, you know, earlier eligibility of more merchants on payments or, as you mentioned, ARPU units? Just maybe if you can rank it for us, that'd be great. Thanks.
Well, I think it's a balance of both. Certainly nine months of iKentoo is contributing to the overall outlook. A good chunk of that guidance increase is the strength in our organic business and what we're seeing in net new locations and adoption of Payments. Of course, we're going to continue to remain, you know, conservative in how we forecast and how we outlook, especially in these early quarters here. It is a balance of both.
Got it. I really, I like the prepared remarks. Thanks for going through all of that. Thank you.
Thank you.
Your next question comes from the line of Daniel Chan with TD Securities. Your line is open.
Hi. Good morning, guys. From the MD&A, it looks like the free payments hardware has been a popular promotion. Do you provide these to all potential customers, or are there some analytics you do, for example, on a customer's GTV to determine if they qualify?
No, it's going to everyone right now, Dan. Just think it's important for us to do that in this initial launch phase. We more than anything just need to establish credibility, momentum, and get these customers onboarded. It's a piece of friction that to us makes just a ton of sense to remove in order to make that happen.
Yeah, that makes sense. Also it seems like a part of the sales and marketing increase was from reseller commissions and the prepared remarks, sounds like this is something that you guys are looking more into. How do you think about your channel as you scale and accelerate growth, and do you have a preferred mix of direct versus indirect sales?
Yeah, I think here, so JP., good morning. Here, the most important is the balance. When you think about, you know, market and you think about penetration of the software, and you think about how am I gonna support the customers, and you think about how am I gonna configure the platform, we really look at a balance between selling directly and also channel. Yeah, it, the growth comes from pretty much all vectors, and we're expecting this to continue. What we're seeing is that some of the more, let's say that the more tech-savvy customers can do everything themselves.
When we think about that there's a lot of kind of more old school customers, and there we need a lot of channel to help us deploy, implement, and support. We certainly believe in channel, we believe in partnerships. We think that channel, which are implementation partners, is one of the piece. The other piece is also alliances. As an example, we just signed an alliance with a company called Faire that has a marketplace. We're really looking at our core customers, and we're trying to figure out what is the ecosystem that is gonna make them successful. Here we announced a partnership with Faire, which really is a marketplace for our customers to go and buy their own inventory.
We announced a partnership with Affirm, and what they do is they do financing of transactions on the spot for consumers. We're really looking at the whole ecosystem, and we have a really strong focus on partners because it's really part of our success. We can't just imagine, you know, going direct without having the support of the ecosystem.
Okay. Just to follow on that, how do the margins or maybe customer acquisition costs compare for a direct versus indirect sale? How are they structured? Is it kind of like a one-time commission that you pay to these partners, or do they get renewals as well?
Again, there's no magic bullet. It really depends on the type of partnership. Generally speaking, what you look at are two things. The first is the cost of acquisition, so who drives the customer. Obviously, if the partner drives the customer and we have nothing to do to acquire the customer, that's a chunk that's removed from what we need to do and from our profits. The second piece we look at is implementation. If a partner does the implementation, we do not need to do it, so that's another chunk of the commission we would give. The third piece we look at is ongoing support.
Some partners, as an example, in regions where we don't have a strong presence like South Africa, are going to actually do everything from selling to onboarding customers and supporting them. Obviously, they take more margin than a customer that just does the identification or a customer that just does the implementation.
Great. Thank you.
Your next question comes from the line of Paul Steep, Scotia Capital. Your line is open.
Great. Thanks. How should we think about iKentoo into maybe fiscal 2021 building into North American more aggressively going after that base to build up the larger complex deals on and customers in this region? Thanks.
It's Maybe I'll start and then maybe Dax can jump in. For me, again, as we move forward, we're gonna see synergies between the platforms and you know, our aim is to actually merge everything into one Lightspeed front end. We don't typically look at it as, oh, we're gonna have multiple solutions in multiple countries. We're gonna have a go-to-market platform that's gonna be working everywhere. For the customer, I mean, it's gonna be one process and one seamless implementation. Now, when you think about iKentoo, I think the net result of iKentoo is you're gonna see probably more functionality that is gonna help us with the current Lightspeed platform in North America and vice versa.
You will see more functionality coming from Lightspeed that's gonna start surfacing in the iKentoo customers. So again, this logic of cross-pollination is very strong. Finally, for us, when we look at iKentoo, we look at payments, you know, as we deploy payments into Europe, which is a big uptick. Then we look at all of the modules because iKentoo is just the point of sale, but we have loyalty, we have a number of platforms that we can bundle onto iKentoo, which will be very synergetic on both angles.
I think longer term as well, you know, we view the value lying in the transaction-level data and all the strategies there. iKentoo brings us a lot of scale and a lot of new data in all these new regions. Alongside monetizing a growing base of GTV that they bring to us, that transaction-level data is also gonna be valuable for our long-term strategies.
Great. Last one for me. On payment adoption, have you set up sort of a team to go after your existing base and added additional resources to try to further ramp up the adoption and the switchover of the existing clients that we might have thought about maybe more into a 2021 timeframe? Thanks.
Very good question. At Lightspeed, we have two teams. We have teams that are handling net new. We call these land. Then we have a team of account managers who are in charge of making our customers successful and seeing if there's any modules that can make them more successful, and we call these the expand teams. When you think about payments, obviously the marching order is first we need to land new customers, and we wanna be very cautious as we move forward because, you know, we just launched the product, so we wanna be sure it's really a good market fit. As we see this is working well, we're gradually going into the expand teams.
Yes, we will see as we move into this year, the end of this year and into next year, we will see more adoption from the current base. The last piece maybe is when you think about the base, you need to look at about, you know, all geographies, all products. That is also the last piece of our strategy, is as we move into this year, we will be deploying Lightspeed Payments to more products, more regions. We will naturally start with the land. Then once everything works perfectly well, we will then move into expand. That is why we are starting to see now some adoption from our existing base.
Your next question comes from the line of Steven Li with Raymond James. Your line is open.
Thank you. Hey, on your ARPU, in the near term, so the next few quarters, the level of the double-digit ARPU expansion, is that sustainable? Or can it be a little bit more lumpy?
No, we think that's sustainable for sure. You know, that, with everything that we've seen by way of module uptake and so on and payments as well, you know, we see that as sustainable. We're, you know, just to reemphasize, it's early days for both of these new modules, let alone, you know, Analytics and some of the things that have been in market a little longer. There's lots of white space still in our customer base, and we see lots of good opportunities still to see that ARPU increase.
Okay, that's great. Brandon, on payments, I think before you mentioned there is a lag between signing merchants and actual processing starting. Does the free hardware, is that changing that at all or still the same?
No, I'm glad you brought that up, Steven, 'cause that's absolutely right. We're seeing good momentum on customer acquisition side and, you know, the time to transaction is still a learning process for us and how we accelerate that across the different types of customers. That new business has one time to transaction versus, you know, us replacing an incumbent solution is sometimes a little more quick. It doesn't have much to do with the hardware. The hardware is just simply something we ship and it's quick to enable and get up and running that way. It's just customer specific and, you know, our teams are all working to try and figure out how we can do our part to reduce that time to transaction across the board.
All right. That's great. Last one for me. The merchants that addition to 2,000, what's the rough split, retail and restaurant? Thank you.
Yeah. I'm not splitting that out. We're seeing good. JP talk a little bit, and Lightspeed Restaurant continues to grow, be the quickest grower off a smaller base. We are seeing good momentum across both product platforms and, you know, we'll leave it at that.
All right. Perfect. Thank you.
Thanks, Steven.
Your last question comes from the line of Andrew Jeffrey with SunTrust. Your line is open.
Hey, good morning, guys. I appreciate you taking the questions. A lot of good discussion here. You know, I wonder, given the competitive environment and the legacy providers from which it appears Lightspeed is taking share, whether there's maybe an upper bound on the customer that makes sense for Lightspeed, or if you're expanding that over time, if there's some way to quantify either by GTV or subjectively by complexity, where you kinda say, "All right, this is a good target for us, given our unit economic targets versus this is not a good target, and whether you can expand upmarket more effectively over time.
Yep. I think I'll just take it, and maybe if Brandon Dax want to contribute, that's fine. I think for me, well, first of all, let's start with the market. There's, you know, there's 47 million SMBs globally, there's wide space everywhere you look. When you think about the market, the vast majority of these are on legacy systems. There's bound to be segmentation in the market. There's bound to be players with the smaller vendors. There's bound to be players with the medium size. First of all, let's clear a few things. We are not looking at enterprise. That is not the segment.
When we look at a business, if you have more than 100 or couple of 100 locations, we will not be interested. Actually, when I talk about the $47 million, those are not included in there. Now, within that $47 million, as we always said, we really need to look at the complexity of the business. When you think about complexity, you think about retail stores that have a lot of SKUs, and, you know, we've mentioned over time a number of verticals. I don't know, you know, from pets to, to furnitures, to electronics. These are all stores that have very high inventory count. For us, those make sense even if they have one location.
Obviously, as you go from one to 10 to 20 to 50, those are very, very well suited for us. I think that's really what separates us from the rest of the market, is we have a lot of functionality in the platform that really is rich and that can work with that segment, where most other cloud-based systems don't offer the depth of that functionality. That's why we're continuing now when we think about analytics, I mean, this is a full-blown BI for very complex retailers. The restaurants is the same thing. You know, small, medium, large coffees, obviously, we can make it happen, but that's not the sweet spot of Lightspeed.
Our sweet spot are fine dine restaurants that have, you know, multiple printers, multiple rules, or restaurants that maybe are chains that have, you know, maybe some can be fast casual, some can be even quick serve, but that have some complexity. Here again, that makes a lot of sense. Finally, let's talk about, you know, Chronogolf and hotels and obviously those are the bigger segment of our customers. Here, to our knowledge, we're one of the only few vendors that can really offer all the capabilities, a very complex resort or hotel or operation that has a mix of actually quick serve, fine dine coffee shops, but need to have a centralized view of the P&L and need to have integration with the hotel management platforms. I think they're also the very unique segment where we are very strong.
Thank you. I appreciate it.
That concludes today's conference call. You may now disconnect.