Lightspeed Commerce Inc.

Thank you for standing by and welcome to the Lightspeed third quarter 2021 earnings call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Gus Papagiorgio. Thank you. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Lightspeed's fiscal third quarter 2021 conference call. Joining me today are Dax De Silva, Lightspeed's founder and CEO, Brendan Newsey, 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 issued earlier today, as well as in our filings with U.S. and Canadian securities regulators. 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, comceder.com, and on the SEC's EDGAR system. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Such key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies. And finally, note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Dax. Thank you, Gus, and thank you, everyone, for joining us this morning. Lightspeed had another strong quarter as we continue to support the efforts of our customers to adopt the omnichannel strategies that are helping them navigate the global pandemic and position themselves for eventual recovery. Thanks to the dedication and tenacity of our remarkably committed employees, a solid and ever-improving product offering, our global footprint, and the success of service offerings such as payments, Leipzig was able to deliver stronger than expected results. In addition, we were also able to complete two major acquisitions and accelerate our innovation initiatives. At times, the pressure on our people has been noticeable with our employees pushing themselves to the limit in order to deliver new solutions aimed at helping our customers. Despite this pressure, our employees have risen to the challenge and I could not be prouder of them. I believe that their strong dedication is largely due to the fact that we, as an organization, deeply believe in our mission as a company. ISV was founded on the belief that the resilience and entrepreneurial spirit of small and medium-sized businesses is fundamental to maintaining vibrant cities and communities. As difficult as the current situation has been, we know that it has been that much harder on our customers. We are proud to be the technology partner of choice for nearly 115,000 customer locations globally as they reinvent their business models and embrace our cloud-based platform. Notable customer wins in the quarter included Group Archelage, with hotel, restaurant, and spa properties in Lyon, France. Ski Banff, a legendary Canadian ski resort, where we will be supporting their four existing retail shops, with plans for three more to open shortly. And Lan Kwai Fong Group, a household name in Asia, with 21 restaurants and hotels in Hong Kong. Our team's dedication continues to pay off for our customers and investors in Q3 as Lightspeed, on their year-over-year basis, delivered revenue growth of 79%, relocations by 74%, and expanded GTV by 48%. Although the addition of Upserve and Shopkeep boosted our performance for the quarter, even without their contribution, we delivered revenue ahead of our previously established guidance and reached software and payments organic revenue growth of 47% year over year, accelerating from the 42% we saw last quarter. We had a very busy quarter, but I want to highlight some key themes. The continued success of payments, the official launch of our supplier network, the completion and planned integration of our latest acquisitions, and finally, a view into what a post-COVID world can look like for Lightspeed. Payments had another stellar quarter with year-over-year revenue up almost four times the levels of the same quarter last year. Adoption of our payments offering amongst our customer base is growing rapidly, both in terms of the number of customer locations and the proportion of GPV. Payments remains a priority for us, and we expect to have the offering rolled out in all of our key geographies, including the UK, Australia, Germany, the Netherlands, Belgium, and France in calendar 2021. Payments is a highly compelling service offering for our company. It can simultaneously increase the long-term value of our customers and further entrench Lightspeed into their operations. It can also act as a gateway to other financial services, such as capital. And although we have seen great success so far, the proportion of our total GDP that flows through payments is still in the single-digit percent range. And as such, we have a long runway and sizable opportunity ahead of us. In mid-January, we announced the initial availability of the LightSuite Supplier Network. I'm very excited about this initiative. We believe it will revolutionize how SMBs order and manage inventory, interact with their suppliers, populate their e-commerce sites, eventually pay invoices. This is a product years in the making that places our independent merchants on the same strategic footing as enterprise retailers and e-commerce giants, an offering that truly speaks to our mission as a company. The supplier network will eliminate the time-consuming and frustrating experience of managing multiple B2B supplier portals, allow SMBs to more easily discover new products, keep merchants up to date on the latest product offerings and inventory levels, and allow them to import high-resolution images directly from their suppliers onto their own Lightspeed-powered e-commerce sites. In short, for our SMB customers, the supplier network offers a seamless supply chain that will save them time and frustration and hopefully help increase sales through better inventory management and e-commerce capabilities. But the benefits of this initiative are not only limited to our existing customers. In order to create a network effect, we need to offer value to all the participants in this ecosystem. In launch, we had signed over 100 suppliers to the network in key verticals. The motivation for these suppliers to join the network is clear. Not only does it simplify product discovery and ordering for their customers, it also provides them with real-time sell-through data. The benefits of this data should not be underestimated. as suppliers can now see almost instantly what products are selling at what prices and where. This data should grant them far superior supply chain agility, ensuring that they are manufacturing the products that consumers are demanding so that they can maximize their revenue and profitability while minimizing working capital requirements. I know many of you have been asking how we plan to monetize this initiative. For now, access to the supplier network is free for our customers And that is unlikely to change, but it is already having an impact. For example, it is already helping to generate new customer leads as suppliers are recommending the Lightspeed solution as a system of choice. However, we are also developing plans to further capitalize on this initiative in ways that we believe will minimize the overall cost of sourcing, ordering, and paying for products for SMB customers and their suppliers. Connecting SMBs directly to their suppliers is one way like these innovative offerings can help level the playing field for our customers. But we also want to help them connect to consumers to spend much of their time searching for products online. Part of the challenges our customers have is displaying real-time inventory within search engine results and delivering high-resolution images for those searches. These are issues that large retailers have already solved but are still lacking for SMBs. Supplier Network will solve the issue of high resolution images and in the months ahead, we hope to deliver solutions that will display real-time inventory availability by location within popular search engines. We think this will go a long way in helping level the playing field for our SMB customers and highly differentiate the Lightspeed offering. Moving on to our recent acquisitions of ShopKeep and AppServe. Now that the acquisitions are complete, the teams are actively integrating into our operations and sharing best practices. As we mentioned before, ShopKeep maintains an advanced capital business, and we are working with that team to help develop the roadmap for Lightspeed Capital. With UpServe, we are actively looking to integrate their advanced hospitality analytics solution into the broader Lightspeed platform. On our M&A strategy, I want to make certain things clear. Firstly, Lightspeed looks at companies that have similar operations to our own, That is, they are cloud-based, have similar go-to-market approaches, and are well-run. Because they share a similar approach and structure, integrating these companies into our operations is considerably easier. Given that we have some experience here, I believe we are developing an expertise in integrating acquisitions. Secondly, I want to make clear that we have no interest in maintaining a portfolio of brands and solutions. The goal is to integrate all of our acquisitions and be in market with one LightSuite solution for retail and one for hospitality, all under one LightSuite brand. The pace at which we integrate the acquisitions will vary depending on several factors, but for shopkeep and up-serve, the integration is well underway, with operations expected to be fully integrated by April and product by end of summer. Finally, our approach to M&A is to look for companies that can expand or solidify our geographic footprint such as Gastrofix, Upserve, and Shopkeep, take us into compelling verticals, such as Chronogolf, or advance our technology offering. These three goals, market expansion, vertical expansion, and technology, will continue to drive our strategy going forward. Before I end, I want to discuss our prospects as we eventually put COVID in the rearview mirror. In the immediate term, things remain challenging as lockdowns remain in place, and in some circumstances are worsening. which negatively impacts our GTV churn and new customer additions. But our global footprint allows us, we believe, a greater degree of visibility into the potential of our recovery. If we look at markets with limited COVID restrictions in place, such as Australia, where they recently reopened the Sydney Opera House, we see very promising signs. Our overall hospitality business saw declines in GTV this quarter, but in Australia, we saw double-digit growth. Overall, Australia had the best quarter it has ever had. There are two main influences behind these strong results. The first is the positive impact from ending lockdowns and allowing consumers to flock back to restaurants, bars and retail. But the second is the ongoing migration of these small businesses from legacy to cloud-based commerce solutions. COVID is highlighting that cloud-based commerce solutions have moved from being a nice-to-have to an absolute necessity. We believe we will see similar trends in Europe and North America once vaccines are distributed and these markets emerge from the shadow of COVID. We cannot know how long the pandemic will continue to impact us, but we are optimistic not only about our prospects and an eventual recovery, but the role our resilient merchants will play in driving a reopening economy. Finally, before I pass it over to Brandon, I want to highlight the addition of Manon Brouillette to our board of directors. Manon brings solid strategic and operational experience with her as the former CEO of Videotron and is also an experienced board member. Her addition clearly strengthens our board, and I look forward to working with her. And now I will pass it over to Brandon.

Thanks, Dax. Today we reported another terrific quarter, once again in a very challenging macro environment. Given the many moving pieces this quarter as the result of our recent acquisitions, encourage you to refer to our investor presentation on our website our mdna as well as the appendix of our press release where we have added several summary charts to show a more normalized view of certain figures all told as you'll see we had a great quarter across the board the strength of the quarter was led by the four primary drivers of our business model First, continued growth of our customer base, which as you have heard is now just under 115,000 total locations at December 31st. We saw another strong quarter of organic customer location ads, which I believe is one of the most important metrics for us. Second, ARPU expansion. As we grow our customer base, our land and expand strategy kicks in, and we saw continued success there. ARPU for the quarter was our highest ever, as more and more customers adopt a broader portion of the solution set. Third, Lightspeed Payments. With $29 billion in overall GTV, we have a tremendous opportunity for Lightspeed Payments. The number of customers contracting for payments alongside their course subscription were an all-time high this quarter. And lastly, acquisitions. We believe that smart acquisitions will accelerate our leadership position and unlock many revenue, expense, and technology synergies. Our past acquisitions have proven to be highly successful, and our recent acquisitions of Shopkeep and UpServe are landmark deals that significantly alter our scale and market presence. We believe all four of these drivers have substantial runways still ahead of us. Our market is large, fragmented, and we're working hard to build a category leader. It's worth noting at this point that challenging macroeconomic factors continue to face us. Increased lockdown measures in many of our core markets have muted new customer ads, reduced our customers' GTV, and led to higher churn in our customer base. Fortunately, the growth drivers of the business have more than offset these headwinds to date, but as I will speak to later, we will continue to take a cautious stance on our near-term financial results. For the longer term, though, our optimism continues to grow, and today's results reinforce that. So looking at the quarter in more detail, total revenues of $57.6 million were up 79% year over year, and were $49.3 million when excluding the recent acquisitions of Shopkeep and Observe. This exceeded our previously issued guidance of $44 to $47 million. Software and payments revenue represented 91% of total revenue in the quarter at $52.5 million, which was up 85% year over year. Excluding the impact of all acquisitions that were not in the company's results from a year ago, software and payments revenue grew 47% compared to that same quarter a year ago, an increase from 42% growth reported last quarter. Adjusted EBITDA loss for the quarter was $6.6 million compared to $5.2 million loss from a year ago. As a percentage of revenue, EBITDA loss was 11%, a 5 percentage point improvement from 16% a year ago as we continue to see the leverage of the business model even while investing for growth. This quarter, we are introducing an adjusted net loss and adjusted net loss per share metric to further align our investor community on a net income loss measure that excludes the impact of acquisition accounting and stock-based compensation, which is largely non-cash in nature. The adjusted net loss for the quarter was $7.1 million, or six cents a share, up from a loss of $5.9 million a year ago. You'll find a summary table of the calculations for both adjusted EBITDA and adjusted net loss in our press release, MD&A, and investor presentation on our website. We ended the quarter very well capitalized with unrestricted cash on hand of over $230 million. We have also shown an adjusted cash from operations metric in our press release, MD&A, and investor presentation to give a more normalized view of the cash flow of the ongoing business. This metric primarily adjusts for the impact of transaction-related expenses and liabilities retained at closing from our recent acquisitions that would otherwise have been cash earmarked for the sellers. For accounting purposes, settlement of these retained liabilities shows up as operating cash flow, despite this being a downward adjustment to the amounts we paid the sellers on these transactions. Adjusted cash flow from operations was negative $19 million in the quarter. This figure includes a payment for D&O insurance of approximately $10 million on the back of our recent NYSE listing. When excluding that, adjusted cash flow from operations was negative $9.3 million as compared to negative $7.9 million a year ago. While we are acquisitive, I expect there to continue to be a lack of consistency coming through in our financials, associated with the accounting treatment of the components of our purchase price, and I'm hopeful that some of this incremental disclosure will help normalize some of these accounting conclusions. Looking deeper at some of the specific business trends we saw in the quarter, as I mentioned earlier, customer allocations grew to 115,000 in total. Excluding shopkeep and up-serve, our customer allocations were almost 84,000 at December 31st, up from 80,000 three months earlier. This growth was achieved despite the ongoing impacts of the pandemic and various lockdown restrictions in our markets around the world. And I view this as highly encouraging progress. Also, as mentioned, overall GTV grew 48% versus the same quarter a year ago, and 29% when excluding shopkeep and up-serve. Within this, we continue to see strength from our retail customers, where overall retail GTV grew 41% versus the prior year. Retail GTV was aided by continued success of e-commerce, where GTV was up by approximately 100% versus the prior year. After a recovery last quarter, our hospitality GTV showed weakness in the quarter as government lockdowns returned to many of our markets around the world. Overall, organic hospitality GTV fell by 19% in the quarter, largely owing to a soft December. Last but not least, payments continues to be an outstanding performer for us. We now are processing 15% of U.S. retail GTV with light-speed payments and more than 10% of Canadian GTV in retail with our U.S. restaurant payments business still in early stages. I view this as great progress, but we have so much runway still to go, not only in existing markets, but with Europe and Australia approaching launch later this calendar year. So turning now to our Q4 outlook, the performance achieved in Q3 leaves us very confident in our business in the long term. However, our near-term outlook reflects the realities we are now facing in the core markets where government lockdowns, many of which are as restrictive as they were in the spring, are once again impacting our end markets. We expect that these lockdowns will increase customer churn, will impact purchase decisions by our prospects, will affect our customers' transaction volumes. We've seen the softness in our hospitality segment continue into January as our customers deal with these government restrictions. Our outlook also incorporates the seasonal impact in our business. January and February in particular are slow months in retail and hospitality, even in normal years, and we expect this year to be worsened by the lockdowns around the world. These drivers of lower volumes are a larger portion of the revenue now, given the acquisitions of shopkeep and up-serve, along with our own ongoing success of Lightspeed payments. So with all that in mind, we expect Q4 revenue in the range of $68 to $70 million. This represents growth of approximately 90% from a year ago. We expect Q4 EBITDA to be a loss of approximately $12 to $14 million. This estimate reflects the seasonally weak quarter on customer volumes, a cautious stance on the impacts of COVID-19 lockdowns, and the ongoing weakness of the US dollar compared to the Canadian dollar, which is leading to higher overall expenses. So while we will continue to take a cautious view of the near-term results, given the many uncertainties right now, we feel very good about the company's position for the long term. This quarter's results once again demonstrate the power of the business model. And with that, we'll turn it back to the operator for your questions.