The business 20 years ago, building that software, that original Lightspeed software. European Hospitality, where we started our journey with restaurants, complex at-scale restaurants, businesses 10 years ago. I think everything else that we brought into the company in that acquisitive phase in 2020, 2021, when the company was very much growth at all costs to try to solidify position within the market as the vendor for complex businesses, the go-to vendor in SMB, those are the real crown jewels. I think everything else can really contribute meaningfully to profitability. That is where we're going to have growth from these two growth engines and profitability from this efficiency rest of world market.
Excellent. We will dig into that strategy further and the focus areas. I do want to also ask about the strategic review that was completed, but a review of business and operations, and ultimately the decision was to remain a public company, obviously. Anything that you could unpack around that process or the outcome?
Yeah. I think there is an exciting transformation ahead for Lightspeed as we really transform the financial profile of the company by focusing on areas where there's high ROI and then focusing these other areas to offer profitability. There is going to be a journey. For that reason, our board decided to undertake a strategic review to see what is the best context in which to enact this transformation with no bias. We already had started the transformation, early steps. We did several waves of price increases, which contributed meaningfully to the 9% software growth that we saw in Q3. Early successes in the transformation. December 3rd, we did a reorg to match the organization to the strategy I just outlined with MDs leading growth in North America retail, growth in EMEA hospitality, and an MD for rest of world efficiency.
A lot of the elements had landed. We cut 200 headcount in areas where we were no longer trying to grow, like NOAM hospitality, and started to hire outbound for the two growth markets, which is super exciting and I'm sure we'll talk about. We had data points from the transformation already and could compare that against other alternatives. Over the course of five months, spoke to lots of different alternatives in terms of corporate structure, privatization, strategics, and made the determination that doing the transformation as a public company was a viable and attractive way to go for our shareholders. We could maximize shareholder return. Of course, I'm highly aligned with that because I'm the number two or number three shareholder. I'm the number two shareholder at the moment. That is, I think, a really good outcome for the company.
I think we also had to communicate and commit to doing a large buyback because we really believe in the plan. We believe in the transformation. We want to support our share price. We want to show that we have a path to profitability that we're confident in. We've been adding to our cash balance for the last couple of quarters. I think overall, this message was very well received by our top holders. I'm in full alignment with it.
Excellent. I want to stick to the reorg while sort of on the topic. You mentioned 200 as far as headcount reduction, but also hiring in the growth areas. How should we think about the bottom line impact, but also where are you in executing that restructuring?
Yeah. First of all, there's no way we can go backwards on profitability. We are cutting before we add because we've made tremendous progress on EBITDA. There's much more. We have a capital markets day March 26th where we're going to show investors and prospective investors what this looks like over three years. There's going to be a progression into greater and greater profitability. These outbound motions are really important to add new locations in the places where we have a right to win. Those things have to be balanced. Otherwise, we won't be a company that's really executing on this profitable growth operating goal.
Got it. Before we go forward, can you help to identify what is it about North America retail and the rest of world hospitality that you have more right to win, better unit economics? What is it about North America hospitality and rest of world, the non-core that makes it maybe less of a focus?
Sure. North America retail, it's where we started. I mean, I built the original software back in 2005. Our original customer set was Mac dealerships that had multiple stores, hundreds of thousands of SKUs, buying from multiple suppliers in multiple currencies, repair workflows, serialized workflows, has a lot of the same characteristics as a lot of our key verticals. The bike has a lot of those characteristics. Jewelry has a lot of those characteristics. There's some of that complexity in multi-brand apparel and sport and outdoor. We've always been serving this complex business that's doing more than $500,000 in transaction volume annually in their locations in each location. We've always had a service model, a go-to-market model, and a product development roadmap for this kind of customer. We've never really served the micro merchant with low complexity.
There are lots of tiers within retail for lots of players. We have served with a light ERP that is one step before you go fully enterprise. You can scale to 100 stores and even get to that point and connect to a NetSuite, for example, on the back end. You have with Lightspeed an inventory management and core POS that has front counter POS, but also mobile, as well as full omnichannel workflows. We have connections to your suppliers. For multi-brand apparel or sport and outdoor, we are connecting you directly to the suppliers with the same tools that we sell to Macy's and Nordstrom and Bloomingdale's to order from those same suppliers. We are now offering those suppliers to connect with independent retail. We have a very compelling and highly focused offering for this mid-market retailer.
I think that where we've been distracted is by trying to take that retail product all over the world in areas where we didn't have as much of a right to win because it was a new market or a smaller TAM. Instead of focusing on North America, where we always do super well with close rates and we're very, very competitive, it's the best close rates in the company. Rather than continue to go integrate for all these different countries and go broad with feature sets, let's close the gaps in feature sets that we have with the legacy players. There are legacy players that go very deep for jewelry, that go very deep for home and garden, where you have to manage live inventory and replenish it on certain cycles.
None of the down market broad solutions are anywhere near thinking about those kinds of things. We need to close the gaps with those legacy players and really, truly be the go-to because everybody in those different verticals is saying, "It's default Lightspeed. They've got the best tailored omnichannel for us. They've got the best inventory management flows for us." It all ties into our suppliers as well, as well as financial services.
Perfect. Any insight on the hospitality side?
Yeah. I'm really excited as well about where we are with hospitality. We're the only pan-European fine-dine table service solution in Europe. Whereas we started and really NOAM retail for 20 years, we started in Europe with an acquisition in Belgium like 10 years ago. I think part of where we overextended and went wrong is trying to bring that solution to the U.S., where Toast had a good product market fit already and we were still trying to adapt the product. Where that product is super successful is Europe. It's built with a blockchain-inspired backend so that it can quickly fiscalize into the different countries. Every country in Europe has a different tax regime that you have to connect electronically to. We have a whole system built for that. We're optimized for all of their workflows and tipping workflows and their local partners.
I think that our move is to really just focus on where we have that right to win. There is no pan-European competitor for this offering in Europe. Every country in Europe has a short list of country-specific, not at scale player. If you're a Joël Robuchon and you want to bring your Michelin star restaurants across the European capitals, there's only one option: Lightspeed.
Got it. I want to stick on thinking about these different market segments and locations, ultimately location growth. It's, I think, for us, a great indicator of competition, TAM, execution, go-to-market. The metric that we can see, in addition to focusing on those two markets, you're also focusing on higher GTV customers. We can see low single-digit growth in that cohort. How should we think about location growth across these core areas, both today, looking forward? What does that mean for non-core growth and impact on locations?
For non-core growth, for rest of world, the efficiency market, the goal there is positive revenue retention. There will be some location growth, but we're really trying to keep those customers, which have been maybe on those platforms for several years. Those are stable platforms. We need to keep them happy. They will receive some feature updates as we upgrade our general financial services or e-commerce omnichannel or brand platforms. They get those updates, but they're not going to see the progression that they do on the flagships. If they want to move to the flagships, they can. We're really trying to keep them happy and retain them as customers. They represent a good proportion of, it's about a third of revenue between payments and software. For the growth markets, we really have to show location growth.
Now, overall location growth has been muted because there's so many things happening in the overall portfolio. The positive and what we want to present to capital markets today is this picture is starting to clear up. We have 50% of our locations across Lightspeed are now on these two flagship products. The flagship products are what has the perfect market fit for NOAM retail and EMEA hospitality. We've got our flagships. They're now at 50%. The two growth markets represent 70% of revenues.
We're at a nice time where we can say, "Let's track." For those of you that want to understand whether Lightspeed's competitive in its core growth markets, we're reaching an inflection point where the growth with the outbound motions for those two growth markets on flagship locations, that's going to start to exceed some of the drag from the things that we're now trying to grow in terms of overall location count. That's what we'll sort of detail and what that's going to look like over time. The outbound motions are pretty important. Historically, Lightspeed's done an inbound direct sales model, which is you advertise online and you get leads, which are qualified, etc., and then closed by an inbound team.
The challenge with that is, as you've mentioned, there's this ICP customer, this $500,000 and above customer that has the level of complexity that you can justify Lightspeed. Otherwise, you don't need as deep of a system. That's hard to do with digital advertising. We've been able to refine that over the last year to capture more ICP customers. Still, maximum you can do is optimize that to 30% of that spectrum is your target customer. There's a lot of wasted money. It's an inefficient way to go after this customer. What is a more efficient way is an outbound motion. In the case of hospitality, where the business owner's often inside the restaurant, a field sales motion makes a lot of sense. In the major European cities, we're growing and deploying this field sales rep force. In North America retail, it's different.
The business owner's not typically, and we've tried experiments with field sales over the last year. The business owner's not at the business. They're just run differently. You have what we call an outbound remote rep, somebody at an office location calling out on pre-qualified lists that are from our different verticals. Those reps might have some specific domain knowledge around those verticals. We also go to all of the trade shows, the running show, the golf show, where you don't see any of our competitors because they don't have detailed enough workflows. That's where that feeds that outbound motion. There's the list. There's the verticalized marketing. It's a different motion, but we're already seeing it's highly effective. It just needs to be scaled. The field sale motion in Europe is effective, but just needs to be scaled.
Okay. That's really helpful. You mentioned, what did you just mention? Bikes or golf. In my head, it's these verticals where you're really well -known and sort of have a terrific market share. Which other verticals like that would you add to the list? What does that do just from kind of maybe it's the network advantage, the efficiency around word of mouth? What are your key retail verticals and how does that impact?
Yeah. Golf and bike are sort of in the sport and outdoor, where we actually do really great in a lot of sub-verticals of sport and outdoor. There's running. There's a lot of different areas where we're excellent. Actually, we're integrated with a lot of the brand catalogs through Nu ORDER, which is our supplier network. Home and garden, very, very big vertical for us. That includes decor. That includes some elements of furniture. We want to build more workflows there. Multi-brand apparel, where it's something like a boutique that's ordering from multiple different suppliers, different brands. That is a very good fit for our feature set.
I would say that jewelry, pet, toy, vape and smoke, these all have characteristics where there's gift, where there's lots of SKUs, there's more complexity, there's serialization, in some cases repair, in some cases service, where the feature set is a really good fit.
Got it. You mentioned Nu ORDER. Thinking about that supplier network, where are you as far as monetizing versus having it be a benefit that helps with retention or new logos?
Yeah. I think the main benefit right now is new logos in those verticals because the more catalog items, we have millions of catalog items and thousands of brands, the more you have density in a particular vertical like bike or the multi-brand apparel stuff, the more you get a pull from the suppliers that this is a workflow that you cannot find anywhere else, where it is end-to-end. You can order a brand, finance it with Lightspeed Capital, and it all fits together. I think new business acquisition, new logo acquisition is the primary. We have all of the infrastructure in place now for us to monetize that side of the payments opportunity because our stores are buying large, there is a large amount there. There is about $10 million in volume of flow between the store and the brands. That is just going to grow.
It is not as big as the $90 billion that we are doing from merchant to consumer, but it is a big attractive time to go after that. We have already the infrastructure. Now we just want to continue to monetize. There is that side of payments we can start to really start to think about. It is bringing us new logos and it is a great application of our capital program. If they want to do another turn of inventory, our analytics and insights tools recommend, if you did another turn of inventory of this stuff that looks like it is in stock at this supplier, you can be that much more profitable. We can identify that opportunity. We can finance it with capital. You can bring it in directly into the POS and it is all received and there is no double entry.
The whole thing was facilitated and basically impossible without Lightspeed.
Perfect. Did want to ask about kind of EMEA hospitality, rest of world hospitality, and Toast. They're in U.K., Ireland, and Canada, and they're talking a lot about international. It's probably not the only three countries that they'll be in over the number of years. Just wondering if you are seeing Toast or if that's changing the competitive landscape.
Yeah. I think we see Toast in London proper, but not as much, not at all in the continent. I think we have a strong lead there.
Great. Wanted to come back and to overall macro, your sort of insight or transparency into consumer spending, GTV. We've seen some GTV, I think low single-digit GTV growth most recently, talking about some pressure in some of those verticals that had stronger sales a year ago or through COVID. What's your view? What are you seeing from consumer spending and sort of the health of your customer base?
The first thing I'll say is same source sales growth, like the general retail. If we're looking at retail in the U.S., there's been muted GTV growth. If you look at customers that we've onboarded onto our flagships, we're seeing 23% in terms of GTV growth. What does that say? At scale, retailers that are leaning into technology are having higher rates of success dealing with the current context than maybe the broader market. We still should be concerned about the overall macroeconomic environment. I mean, there's a lot that's going on that creates uncertainty, which we see in the current news cycle with news that are coming out of Washington and other countries. There's just potentially uncertainty that shakes consumer confidence. Ultimately, our customers are serving retail and hospitality customers.
I think that is leading to some caution due to the macro.
Related to tariffs, potential tariffs, tariff volatility, is any material portion of your business cross-border? Also, do you have software solutions that sort of help address the complexities around tax?
Yeah. I mean, tariffs, as they're currently being discussed right now, won't affect us as a business. Maybe potentially some small portion of hardware. For the most part, an iPad's a big part of our hardware kit. You could buy that in whatever country that you're in. What I think is more top of mind for us is that we have customers that might, you might have two bike stores in a city. One might buy from a vendor that's U.S.-based. Let's say it's a U.S.-based city. Might buy it from a U.S.-based vendor and they would have no tariff. Another might have been specialized in a German vendor for a lot of bike accessories. That's a totally different story for them. They have a totally different impact.
It's going to be very difficult for us to tell what is the overall impact because it's quite case by case in terms of how businesses are built. What I think we need to offer and what we're starting to really start as a dialogue with our customers is we have the Nu ORDER supplier network. You can source alternative supply. This gives you a lot of flexibility for discovery of other potential sources of supply that maybe aren't as subject to some of the tariffs.
Your customer is brick and mortar store. You also have some e-commerce. I guess that was more of what I was thinking of. Is that significant in any way, cross-border e-commerce?
I would say most of the business is physical first. Yeah, I mean, that's going to be, that will have some impacts as well.
Okay. Great. Wanted to talk about software. That was sort of one of your big focus areas and calls, "Look, we're going to see accelerating software growth." And then we did see accelerating software growth, as you predicted and called out. In your opening remarks, you talked about pricing. We've been sort of throwing out the idea of the flagship. Wanted to kind of roll it all together. Ultimately, what is driving the accelerating software growth and what should we expect looking ahead?
Yeah. I think it's two parts. One is that we, because we did this unified payments motion trying to bring our whole customer base onto our payments platform, some of which were using partners, payments partners, there was a couple of years there where we didn't have our account managers upselling software. We also didn't focus on price increases because we were already asking the businesses that use Lightspeed to change over payments hardware. It was a lot of too many things to ask for at once. Now that a lot of that transition's done on payments, this software growth piece was super important. I think in my listening to different stakeholders in the market over the last year, they want to see profitability where we've had great progress. They want to see payments penetration really have a consistent upward trajectory.
I think we get a tick box there. The next one is software growth, which we'll talk about now. The last one's locations. I think the story starts to work for investors when all those pieces come together. I'm really proud of the software growth piece because we were telling the market, our teams have been working on payments penetration. It's important for our overall profitability. That's all true. Now we need to get back to software. That's how we built this company is selling software. It's twofold. One is the price increases. We did three waves of price increases and now a fourth one coming. First, we started with new front book pricing for both retail and hospitality. In a lot of cases, 30% higher than what people were paying because we hadn't done one for so long.
Because there are so many different elements in our portfolio and a couple of different platforms, some inconsistency. Having front book pricing for retail and hospitality and then doing very targeted and smart, we built a data layer that really allowed us to do a very targeted set of waves of pricing. That has been really successful. I think we were stuck at 6% software growth for two quarters and we bumped up to 9%. Now I think with the macro, it is TBD the next couple of quarters. Over the course of fiscal 2026, we will get into the double digits and start to keep going upwards from that. The other half of the software growth increase, that 9%, is really that we have been shipping so much amazing software and modules on the flagships. We chose these two flagships because they have the most modern architectures.
There have been moments in our 20-year history that we've heard a lot of grumbling about technical debt and we can't move fast enough. That is one thing that we don't hear in this era with the two flagships. This is like the highest velocity platforms I've ever seen at Lightspeed that we can build on and rapidly. We have been shipping a ton of software on both. On the retail side, new iterations of our scanner app, which is our mobile retail app. Retail Insights is a huge hit. On the hospitality side, there have been some stellar releases with Tableside, which is a mobile Tableside device, which is basically the same kind of experience that a Toast restaurant will experience in the US. We have that for the European customer, which is maybe a decade behind in terms of restaurant tech. It is quite exciting for them. KDS Kitchen Display.
That's the front of house. The back of house is the kitchen display. It communicates front of house, back of house very much in sync. That's a huge revolution for restaurants. There is a third piece to hospitality, which is called Pulse, which is so that the management layer of the restaurant can get a real pulse on what's happening with daily metrics. That suite of tools, a lot of that is shipped in the last 12 months. A lot of really amazing modules. We've put these into tiers and had our account managers that are now back on software growth really upsell people on higher tiers.
Excellent. Did want to clarify for myself, is the pricing increases that you're referring to, is that associated with the shift to or the onboarding onto flagship, or is that separate?
No. The price increases could apply to any number of platforms that are flagship or non-flagship.
Got it. With regard to flagship, I think you mentioned 50% adoption. Where can that go and what is the impact, the pricing uplift, presumably, when someone does switch over to flagship?
Yeah. As part of the operating review, we made the decision that we're not going to try to do a mass migration to flagship. These platforms have enough differences and a lot of inventory history and purchasing history and workflow differences that it doesn't make sense. People can move to flagships if they really want the functionality and they're on one of the non-flagship platforms. For the most part, that number is growing because every net new customer is being onboarded onto a flagship platform with payments default.
Okay. Got it. You mentioned we're at 9%, so we're going to get to double digit. Just wondering if these pricing impacts, should we think about durable double digit growth in software? Is that feasible or is this?
Over the long term, yes.
Okay. Got it. You did talk about payments attach. I think the target is 40%-45% attach to end the year. In this past quarter, the level sort of stalled. Maybe that was just based on the seasonality of certain businesses where there's higher. Could you unpack that a little bit? What gives you confidence that we'll see a step up next quarter and where can that ultimately go?
Yeah. I think the goal is like 40% for the end of the year. There is seasonality. For example, golf is not really, you're not seeing a lot of payments transaction volume from golf in this Q4, which this is Q4 for us. Yeah, Q1 definitely has better characteristics. We'll start to see, we'll continue to see progress. It's not going to be as much as we saw when we had dedicated teams on payments penetration over the last couple of years. Our goal is 40% by the end of this year. In future years, it'll be 50% and above.
Got it. I'm going to ask another one and then poll the audience for questions. Sticking on payments, are new customers coming in? Is that attached 100% or is there still an option?
It's pretty high. There are people coming in on non-eligible industries in which sometimes adding in Stripe or the rails underneath Lightspeed Payments, the customer doesn't see them. Those are our payments providers and we are the acquirer. There are industries that they're not interested in touching. We have alternatives. It is upon us to try to onboard them onto alternatives. Sometimes that might happen at a later date. Sometimes there's already a payments agreement with a customer, and we'll try to buy out the contract. There are a lot of things that we do, but we don't always have a solution for them if they're in a particular country or if they're in a particular industry.
I think over time, I think we'll be able to close those gaps more and more as Stripe and Adyen move into new regions or we have more solution options under the hood to accommodate ineligible industries. Vape and smoke is a very big industry for us. And that's one example.
Perfect. Any questions? Microphone is coming.
Hey, Dax. Exciting times. Five years from now, you're looking back, you're here. What are the five metrics that really helped you out? What's keeping you up? Is it free cash flow? What percentage of revenue is the growth stuff? Is it win rate against competition? Is it net retention of customers? I don't know. What are the five things?
All of those are pretty important. I think close rates to know that we're competitive because I think that's for now, right now, what we really want to show the market, that last piece of locations, being able to add locations means if we can do that at a fast clip, that means we're competitive. I already know the close rates are very, very strong in our two growth markets. That needs to translate into location growth that starts to exceed the drag of some of the things that we're not trying to grow in terms of the overall counts. I'm always going to look at the close rates. I'm always going to look at that organic growth rate of new locations and software growth because that's like the platform on which we can add more modules later.
We can add more financial services later, that core location count, as well as, yeah, all of the capital program. All of that is based on adding new logos. That's super important. Being able to do it all in a way that's balanced with our goals for profitability. For now, it's adjusted EBITDA, but we're getting close to adjusted free cash flow positive. We'll have more news about that at the Capital Markets stand March 26th at the NYSE of when we get there. I think the other metric that's really important is for many years when we were acquiring a lot of companies and we were growing inorganically, top line growth was something that we were always chasing. I think that's going to shift more to gross profit.
The quality of growth is going to be measured based on gross profit growth, EBITDA growth, and eventually free cash flow growth.
Why do you win and why do you lose? What percentage of revenue is on the growth side versus the more mature sort of just maximized cash flow side?
Okay. So why do we win and why do we lose? I think in retail, it's because we're a steal for what you pay. We're like a light ERP for these complex verticals that the next step up is an enterprise system. It's a real steal. I think that what we charge, it's like 33% of a percentage point of their total GTV. That's lower as a percentage of GTV than what Square, Clover, or Shopify paid and they're further down market. What was your second question? Sorry.
I don't know.
Yeah. It was a really good one though.
It was a great one. Yeah.
Thanks.
Is it quick? Okay. Last question.
Just on these new sales reps that you're putting out, what's the payback period that you expect on their time?
I think, yeah, I think that's something that I would have to get back to you on. I think we're going to detail the outbound, but it's a relatively new motion. I think that when you factor in payments and it's default payments, that closes in the payback time. And if we have more modules, we talked about all the modules on hospitality, just talking about hospitality here, that really closes in the payback time. If it's just the core system, that ends up being too long. But if you can layer in payments, you can layer in all this parts of that suite, the front office, the back office, and the management layer, and then you multiply that by devices at the restaurant, then you have a much more attractive payback period.
Great.
Thank you.
We'll stop there. Thank you, Dax.
Thanks.