Lightspeed Commerce Inc. Subordinate Voting Shares

Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Lightspeed first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. I would now like to turn the call over to Gus Papageorgiou. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Lightspeed's fiscal Q1 2024 conference call. Joining me today are JP Chauvet, Lightspeed's chief executive officer, and Asha Bhakshani, our chief financial officer. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were applied in respect of conclusions, forecasts, and projections contained in these statements. We undertake no obligation to update these statements except as required by law. You should carefully review these factors, assumptions, risks, and uncertainties in our earnings press release issued earlier today, our first quarter 2024 results presentation available on our website, 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 and ratios. 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, on CDER.com, and on the SEC's EDIUR system. 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 JP.

Thank you, Gus, and welcome everyone. Thanks for joining us this morning. Overall, I was very happy with our results this quarter. Revenue came in better than expected with revenue growth of 20% versus the approximately 14% contemplated in our outlook. Our GPV volumes increased by 56% year over year, and our adjusted EBITDA loss of $7 million came in lower than our outlook of adjusted EBITDA loss of $10 million. As I mentioned in our last conference call, this year, fiscal 24, Lightspeed is focused on execution and better aligning ourselves to the rule of 40 financial metrics. Our main goals for the year remain the same, namely, reap the benefits of one Lightspeed, accelerate revenue growth for financial services, including both Lightspeed payments and Lightspeed capital, continue building products that solve our customers' problems and help them run their businesses, particularly with our supplier network, and finally, accomplish our goal of becoming adjusted EBITDA breakeven or better for the full fiscal year. In terms of One Lightspeed, we are closer than ever to deploying our flagships in all key markets. At the end of the quarter, we attained fiscalization approval for Belgium, one of the last remaining markets where our flagship hospitality product was not available. And we expect to receive approval in the province of Quebec for a full launch. One Lightspeed has allowed us to simplify our operations and reduce costs and complexity across the organization. But I think more importantly, it's helping us win the right customers, the customers with higher sales volumes and more complex needs. Our data shows that these complex SMBs adopt more software and churn less. Growing our customer base with the right customers remains an important goal for Lightspeed. In this quarter, we saw ARPU reach all-time highs. Our flagship products are allowing us to attract customers who can take full advantage of our software platforms and whose high volumes drive our payments revenue. Let me share a few examples of new customers who joined Lightspeed this past quarter. In retail, we are pleased to welcome Spice and Tea Exchange, with over 80 locations across the U.S., adopting our Lightspeed retail offering. Women's designer clothing, Sole Amore, with two locations in Maine, also adopted our Lightspeed retail solution with e-commerce. And in the U.K., Bath House, a luxury fragrance skin care provider with six locations, has become one of our newest Lightspeed retail customers. In the world of hospitality, we welcomed Australia's Kick On Group, an organization with six locations that operates large venues that range from full table service to classic pubs. We continue to expand our footprint in the important U.S. markets by adding March 1st Brats. March 1st runs four breweries and tasting rooms locations in Cincinnati and have adopted our light speed restaurant offering along with Insights. And we were honored to be chosen by Chef Theo Paul to power his four locations in the greater Toronto area, including Michelin-recommended restaurant Union. In golf, we were chosen by the Cove K Golf Course in Clearwater, Florida, who are now using our retail and hospitality platforms to run their golf academy, restaurant, pro shop, and golf course. I'm thrilled to keep adding more names to our roster of customers around the world. but I also think it's worthwhile reflecting on the sheer scale and impact our platforms have had on growing our customers' businesses. In the 12-month period ended May 2023, Lightspeed's hospitality customers have served over 1 billion meals and facilitated over 300 million dining experiences globally. It's very satisfying to me and the entire Lightspeed team to be a partner of growth and build innovative products and technology that impact both SMBs and their customers around the world. On the topic of scale, I also want to touch on Lightspeed's continued commitment to growing our sustainability impact as a global company. To date, we have planted more than 1.4 million trees through our carbon-free dining initiative, and our industry-leading inventory and ingredient management capabilities are helping reduce waste and streamline our merchant supply chain. In July, we published our second annual sustainability report, which is available on our website and showcases how our customers are leveraging Lightspeed technology to transform the world and build vibrant, diverse communities. Moving back to One Lightspeed. This strategy has allowed us to attract the right kind of customer, but it has also led us to more successful R&D efforts. In this quarter, we were able to deliver several new products and releases that are directly responsive to our customers' needs. In hospitality, we were very excited to launch our Advanced Insights module in Europe. Advanced Insights gives our customers real-time access to their data and offers proactive suggestions for how to run their businesses more efficiently and in a way that helps them comply with their obligations under GDPR. It is one of our best-selling modules in North America one that often commands a higher monthly fee than the POS itself, and we hope to see a similar level of success in Europe. Advanced Insights is a major differentiator for our offering and something that separates us from the competition. In our continued commitment to create a best-in-class unified payments offering, we enabled next-day payouts for many retail customers using Lightspeed Payments globally, giving merchants access to their cash faster than we have ever done before and twice as fast as many legacy systems can provide. We're hearing great feedback from customers who made the switch. Customers like Melissa Joy Manning, an ethically made jewelry store with two locations in New York City.

I think Lightspeed benefits our business daily, and we're saving a lot of time in the reconciliation process. We're also saving a lot of money in fees, and it's made the business much faster, much easier, and so much cheaper to operate on that end.

We also enabled self-service capital for all eligible customers in Canada and expanded Lightspeed capital into new regions, including Australia. In retail, we enabled multi-layered pricing that allows our retail customers to charge different prices by location or customer group. A feature we believe is unmatched by our competition and highly sought after by high-volume merchants. And at new order by Lightspeed, we released assortments for brands, allowing brands that operate their own retail outlets the ability to visualize inventory in the cloud, optimizing inventory allocation, and identify merchandising gaps. This technology has been successfully used by our retail partners, and we're excited to bring its benefits directly to brands themselves. Moving on to unified payments. Last quarter, we announced the introduction of unified payments, our initiative to combine the power of POS and payments into one platform. By making it mandatory for eligible new and existing customers to adopt Lightspeed payments, we are confident that more and more Lightspeed customers will soon experience the positive impact a unified platform can bring to their businesses. Last quarter, we notified eligible retail and hospitality customers in North America that they will have to adopt Lightspeed payments. And for new eligible customers, we made payments mandatory. We will continue to launch this initiative to customers around the world during Q2 and throughout the year. I know many of you are interested in our progress. We are still very much in the beginning stages of this rollout, but overall, I'm encouraged by what we are seeing. First of all, I'm very happy to see that our close rates have remained relatively consistent since we made payments mandatory for all new eligible customers. This tells me that the new customers see the value in Lightspeed payments and understand the benefits of embedding payments with the POS. What's more, sales cycles also remain unchanged, with deals closing very much within our typical timeframe. Thirdly, as I mentioned previously, our proof is now reaching all-time highs thanks to our deliberate efforts to target high GDP customers and to unified payments. And we are getting these customers transactional faster thanks to our efforts to improve the onboarding process. Finally, our biggest concern was that we would see customer churn increase substantially as a result of this initiative. So far, that has not been the case, as it remains within historical ranges. What has also become very apparent is how cost competitive we are. At this stage of our rollout, we are quite confident in telling our customers that we are able to meet or beat their current payments rates. And even though we aren't really competing on the cost, the fact that we can deliver a superior experience at a similar or lower cost is an added benefit to our customers. Overall, I'm convinced that unified payments will be a success. The big question in my mind really revolves around timing. For our larger customers who command the bulk of our GCV, we are being as accommodating as possible. If they require longer than two, three months to switch to payments, we are, of course, willing to work within their timelines. In the end, the goal for us is to get all of our eligible customers onto Lightspeed Payments no matter how long it takes. I also wanted to address our supplier network, which continues to be a key strategic priority for this company. We were happy to add John Shapiro to our product and technology team as our new senior vice president in retail to help further integrate the supplier network into our core platform. John recently joined us from Wayfair, where he was responsible for the global supplier product and design organization, and was previously at Intuit, where he was director of the product management for QuickBooks including serving as the GM for QuickBooks payments. I expect John to help advance our ambitions here. I remain encouraged by the feedback we are seeing from our customers and the potential for increasing monetization of this network. Lastly, in terms of profitability, again, we are committed to being adjusted EBITDA breakeven or better in fiscal 24. Given that the year started off better than expected, I believe we are in a good position to reach this goal. And at the risk of repeating myself, I want to make it clear to investors that we are 100% committed to achieving it. I intend to place this company in a position that highlights the sheer potential of our business model while still investing in our growth opportunities. I will now turn the call to Asha to take us through the quarterly results and provide outlook.

Thanks, JP.

Overall, Lightspeed started the year strong, delivering revenue and an adjusted EBITDA loss that were better than our previously established outlook. We continue to execute on our strategy of attracting high GTV customers and expanding our payments offering across our new and existing customer base. On today's call, I will provide a recap of the quarter, discuss the progress of our unified payments launch, and then provide an outlook for the upcoming quarter and full year. I was pleased with the progress we've made this quarter. Despite the attention and resources that our unified payments initiative is demanding, we were able to maintain our discipline on costs, increase the number of high GTV locations, and drive towards our goal of adjusted EBITDA breakeven or better for the fiscal year. I was also happy to see our total cash balance, excluding merchant cash advances, went down by less than $10 million in the quarter. In the quarter, revenue came in at $209.1 million, an increase of 20% year-over-year and ahead of our previously established outlook. Subscription and transaction-based revenues grew by 21% year-over-year. Subscription revenue increased 7% year-over-year to $78.7 million. Gross margins on subscription revenue remained consistent with last quarter at 75%, the highest in the past two years, thanks to a dedicated effort to consolidate cloud vendors and improved overall efficiencies. I want to stress again that in the quarter, our account management team, which is usually focused on upselling our customers on software, has been temporarily assigned the job of onboarding new payments customers. Our account management team historically accounts for half of our added software MRR in any given quarter, and so it was encouraging to see that despite their temporary reallocation of duties, subscription revenue grew by 7% year-over-year. Transaction-based revenue grew 32% to $121 million. In the quarter, we saw gross payments volumes increase 56% year-over-year to $5.1 billion, as a greater portion of our GTV went through our Lightspeed payments platforms. Gross margins for transaction-based revenue came in at 26%, down from the previous quarter and year-over-year. There were several factors that negatively impacted transaction-based gross margins this quarter, including costs associated with unified payments. We expect many of these factors to dissipate next quarter. Total adjusted gross margin, which excludes the impact of share-based compensation and related costs, came in at 43%, down from the previous quarter and year-over-year. Adjusted gross profit dollars came in at $89.8 million. an increase of 13% year-over-year. Adjusted EBITDA in the quarter came in at a loss of $7 million. This is much improved from an adjusted EBITDA loss of $15.6 million in the same quarter last year. This improvement is the result of our continued focus on prudent spend across our organization, including the efficiencies we identified and implemented through actions like our reorganization done in our fourth quarter last year. Total adjusted R&D, S&M, and G&A costs increased by only 5% from last quarter, despite the added costs of our sales summit and annual salary increases that were put through this quarter. We had an adjusted loss of $2.2 million versus an adjusted loss of $17.6 million last year, thanks largely to the improvement in the items driving our adjusted EBITDA loss performance and growing net interest income in the quarter which increased by approximately $8.4 million from a year ago. Share-based compensation and related costs came in at $18.7 million, down from $38.3 million a year ago, coming in at approximately 9% as a percentage of revenue, down from 22% in the same quarter last year, and flat to our previous quarter, once removing equity accelerations included in restructuring. In the past few years, Share-based compensation has been elevated partially due to equity incentives granted to employees of the various acquisitions we have undertaken. GTV in the quarter came in at $23.4 billion, up 6% year-over-year. Omnichannel and Hospitality GTV both grew at similar rates in the quarter. This quarter, we also continue to grow our complex customers with higher GTV tiers, customer locations with over $500,000 a year in annual GTV grew by 10% in the quarter, whereas those with under $200,000 a year in GTV declined. Again, in this quarter, the fastest growing cohort was locations with over $1 million in annual GTV, which grew 11% year-over-year. As we focus on more complex higher GTV merchants, we expect the under $200,000 GTV cohort to decline. As a reminder, This cohort of customers continues to represent approximately 5% of our overall GTV. I want to add a little more color on what is happening with new location wins. As we keep stressing, our goal is to attract larger, more sophisticated customers who can take full advantage of our software platforms. If I look at the ARPUF, it has continued to increase, reaching all-time highs in the quarter. At the same time, our acquisition costs have remained relatively steady. We're also seeing our churn rates remain very much within our historical ranges. As a result of this increase in ARPU, we expect our payback period and LTV to CAC ratios to continue to improve, which bodes very well for our ambitions of being adjusted EBITDA breakeven or better for the fiscal year. As I mentioned, churn rates in the quarter remain consistent with last quarter despite challenging macroeconomic conditions as well as the launch of unified payments. Also, the vast majority of our overall customer churn is in the cohort of customers processing under $200,000 in annual GTV. We continue to grow the capital business in the quarter. Under normal circumstances, we would likely be pushing capital even harder. However, given the current macro environment, we are being conservative on the ramp. There is no lack of demand from our customers, and we believe our high GTV customer base is an ideal demographic to use this financial service, especially in the long term. Risk of business failure is much lower with high GTV customers, but the need for capital is still substantial. In terms of our balance sheet, Lightspeed closed the quarter with just over $780 million in cash and cash equivalents, down from approximately $800 million in the previous quarter. The largest uses of cash were working capital items and the increase in merchant cash advances of $11 million during the quarter. Turning now to our unified payments effort. As JP mentioned, we're still very early in this process and are only now beginning to launch this initiative outside of North America. As a reminder, international markets account for approximately half of our total customer location. In terms of our existing base of customers, What we are seeing is a strong contingent of customers adopting our payment solution almost immediately. In addition, the number of customers that are turning is lower than we expected. However, there is still a large number of customers that have not taken any action. In the coming months, they will see the new transaction costs on their monthly statements, and we expect that will act as a catalyst for action. Based on our experience, we are confident in our ability to match or beat rates for most of our customers, but we are not competing on cost alone. Lightfeed Payments allows our customers to save time and money and gives them unprecedented insights into their operations. Our value proposition is very strong, and in addition, we continue to deploy technical support, contract buyouts, and free hardware to our customers to help them in this transition. That is why we believe this initiative will be a success. Now, on to Outlook. I was encouraged by our performance this quarter. We believe that our business remains incredibly strong, with abundant opportunities for sustainable long-term growth. We continue to add higher GTV customers, and our new platforms, combined with the Unified Payments Initiative, is helping ensure our LTV to CAC ratios are headed in the right direction. I believe we have established the foundations to accelerate towards the Rule of 40 financial metrics as we exit the fiscal year. Our key concerns remain the overall macroeconomic environment as well as the timing of unified payments. Transaction-based revenue is over 50% of total revenues and highly dependent on GTV growth. Despite the growth in GTV we saw in the first quarter, we are being increasingly cautious on the macroenvironment given central banks continue to increase interest rates. As a result, we are keeping our GTV expectations modest. Additionally, although the signs are promising, it is still too early to determine the full impact of our unified payments efforts on our fiscal year. Our key concern here is on timing. Our end goal is to get our eligible customers onto payments, but we want to be as accommodating as possible. After all, we are here to try to help our customers. This may impact the overall time it will take to get our customers transactional. For the second quarter of fiscal 2024, we expect revenues between $210 to $215 million and an adjusted EBITDA loss of approximately $4 million. For the full year of fiscal 2024, given the macro uncertainty outlined above, we continue to expect total revenues of between $875 million and $900 million, with break-even or better adjusted EBITDA. We expect both revenue and adjusted EBITDA performance in the second half of the year to be significantly better than the first half. With that, I will pass the call back to JP.

Thanks, Sasha. Before we take your question, I thought it's worth highlighting one more item from our sustainability report. A third of the executive roles at Lightspeed are occupied by women, which is approximately three times the average of the tech sector for women in leadership roles. An accomplishment I am proud of. We are committed to hiring and promoting the best and brightest in this company, and maintaining a diverse workforce is crucial to obtaining this goal. So far, our fiscal 24 is off to a good start, and our goals are simple. One, benefit from One Lightspeed. Two, expand payments. Three, build great product for our customers. And finally, four, get to profitability. We are fully committed to meeting these goals. With that, I will turn it over to the operator to take your questions.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. And we will take our first question from Daniel Chan with TD Cohen. Your line is open.

Good morning. Nice to see some good progress on the payments front, but it sounds like there's some uncertainty on the timing going forward. Are you still on track to get the majority of customers on payments by the end of the year?

Hey, Daniel. Thanks for your question. It's Asha. What we had committed to was a North America launch in both hospitality and retail, and then APAC and Europe follows. We had mentioned that we expect the the penetration to be in the 30 to 35% range as we exit the year. And we're still very much aligned with that trajectory. We have to keep in mind that when we say the majority of our customers, we have to keep a couple of things in mind. There's still certain verticals that we don't underwrite and certain regions where light speed payments is still not available. We plan to unlock those regions in the coming quarters and verticals as well. But the goal that we had outlined at the beginning of the year for fiscal 24, we're still very much aligned with that.

Great. Thanks for that, Asha. And then on the fiscal 24 guidance, you reiterated that despite the beat this quarter relative to the guidance that you had. Anything to call out there that's changed that you think in the next three quarters? You called out macro and timing. Have those gotten worse than what you expected last quarter, considering the beat this quarter?

No, not at all, actually. The beat in our first quarter really resulted from two things, as you mentioned. The first is gross payments volume growth better than expected, and that's just given the verticals were well penetrated on payments, as well as some early signs that are quite encouraging on unified payments, such as lower churn than we forecasted, as well as time to transact much more quickly in certain contingents of customers. However, as we look forward into the following three quarters, we're choosing to remain very modest on our GTV assumptions. We do believe that the end consumer hasn't fully felt the impact of rising interest rates and inflation, so we're actually being more modest on our GTV expectations for the next three quarters. And with respect to unified payments, we have to keep in mind that 50% of Lightspeed's customer base is international, and we haven't yet fully launched in those markets. So we're not, you know, we don't want to take the early encouraging signs of unified payments and apply it to those regions. We feel it's still early days, and we're choosing to remain cautious.

Thanks. I'll pass the mic.

And your next question comes from Andrew Jeffrey with Truist Securities.

Hi. Good morning. Appreciate you taking the question. I wanted to dig in a little bit on retail versus hospitality trends. Interesting to see that both categories are sort of growing at the same rate right now, and I appreciate, Asha, the high-level macro commentary, but that's a notable change from recent periods. How would you sort of anticipate those two categories growing? It sounds like there may be a shift back to more sort of discretionary spend from experiences, and maybe you could parse that by geography a little bit, just a little more color on expectations.

Thanks.

Do you want me to start, Asha, and then we can? Look, I think it's very similar to what we talked about last quarter. What people are wearing to go to restaurants, those categories are doing well. So we're seeing luxury apparel, footwear, and also jewelry going very well. And we're continuing to see, call it the COVID net positive, not do that well. So outdoors, sports, bikes have still not recovered and are still down year over year. And on the hospitality side, we're seeing still good demand globally. But I think for us, we just want to remain cautious because we think there might be, you know, we don't know what's going to happen, but we want to be cautious as we get into the second half of the year.

Okay. I can appreciate that given the uncertainty. And then just wondering whether or not some of the sort of fee issues that have arisen, customer fee issues that have arisen in the U.S. with sort of a nominal competitor and some of the noise around that has helped, has hurt, has made your selling motion any easier? I know you're not big in U.S. restaurant, but I wonder just generally the cost of payments for merchants. It sounds like you think you have a price advantage. I'm wondering if you're sort of seeing anything in the market that's notable in that regard.

Yeah, so maybe on payments, what we're seeing is once customers use likely payments, they love it. So I think that's very encouraging to us. They're saving time. They love the consolidated reports. They love the actual hardware and the ease of use and, you know, mobility and all of these are important. And I think what they like also is they're getting all of that. at a rate that is very competitive. So we're so confident now with our rates that we're telling our customers we're going to match or beat your rates, regardless of what happens. So I think what we're seeing is that people view LightSuite as a very good choice at a good price. And again, we're seeing our close rates, and I think maybe that's the most exciting to us. As you know, with unified payments, we were really looking at making payments mandatory for all new customers. And here, what we're seeing is our close rates are just as good. Our times to close are just as good. And ARPU has gone up pretty significantly because a lot of our customers are now using payments. So, nothing to add, except that we're very happy with the outcome for now. But we want to stay just cautious for the rest of the year.

All right. Appreciate it.

Your next question comes from Thanos Moschopoulos with BMO Capital Markets.

Hi, good morning. With respect to the costs for transitioning customers to payments, such as buying out their contracts, the hand-holding required to get them up and running, are those trending pretty well as expected or is there anything to call out in that regard?

Hey, Thanos, thanks for the question. Those costs are actually trending slightly better than the expectations. What we are finding, and again, it's only really the North American launch because it's very, very early days for the others, But we are finding in North America that there is a lot less hand-holding that our customers are requiring. Many customers are not requiring on-site installations. We still have some significant cost of unified payments in the quarter, and we expect to have some in Q2 as well, but they are lower than the original expectation.

Okay. And then as far as... Subscription revenue, just given some of the puts and takes you referenced, how should we think about the trajectory? Would you expect growth to be sort of similar to what we saw this quarter for the remainder of the year or any color on that line?

Yeah, for the first half of the year, we expect a softer subscription revenue growth. We do expect that to improve slightly in the back half of the year. But, you know, as we said last quarter, fiscal 24 for us is really the year of execution on unified payments. And so, you know, even for the full year at large, we do expect overall subscription revenue growth to be softer than what we've seen in previous years. And once we exit the year, we expect that to improve to historical, more historical levels.

Great. Pass the line. Thanks.

Your next question comes from Koji Aikido with Bofe Securities.

Hey, guys. Thanks for taking the question. I got a question on GTV here as a percentage of GTV. So in the quarter, 22%, you know, that's great, an increase of three points quarter over quarter. And the way I understand it is much of that near-term growth is fueled by payments adoption. But as payments get more and more penetrated within your base, GTV becomes a – it should shift back to GTV as a driver of growth. That metric grew 6% year-over-year this quarter. So how do we think about the puts and takes with GTV growth over the next 12 to 24 months?

Thanks for the question, Koji. So you're absolutely right. The relationship between GTV growth and GPV growth today for Lightspeed is quite disconnected because we're only 22%, 23% penetrated at the end of the quarter. And as we become more and more penetrated, GTV growth will become much more aligned with our gross payments volume growth. What we need to keep in mind with the 6%, which was single-digit, year-over-year growth, not super high, is the fact that 50% of our locations at Lightspeed are outside North America. And so we do have some FX hedge wins that are impacting that number. In addition, there are certain verticals where We're well penetrated from a GTV perspective, like as JP mentioned, and they're still declining year over year. And so that is impacting our overall GTV growth. We do find that as we focus more and more upmarket on the over 500K cohort of customers, as you know, is our main focus, that we do expect that Lightspeed's GTV growth year over year should be better than overall GTV growth in the SMB market.

Got it. Thanks for that. And one follow up if I may here. In your prepared remarks, you were mentioning capital and you mentioned that you would be pushing harder, but given the macro, you're being conservative on the ramp. But then you also mentioned that there is demand for it. So if there is demand, why not push a little bit harder for capital?

Yeah, you're absolutely right. Capital is a very promising business for us. But what we have to keep in mind is that it still represents today a low single digit millions in terms of revenue. And so, you know, when the company is fully focused, our sales teams are fully focused on unified payments. There was some distraction in the quarter on capital. And in addition, we want to make sure that, you know, in today's macro, that we're not rushing anything. We want to make sure that we ensure that we stick with the very, very high rated credit rated customers for eligibility. But you're absolutely right. There's tons of demand. We are taking our time intentionally. Given the macro, our default rates still remain extremely low. But we definitely should see that pick back up in the back half of the year when unified payments is behind us.

Got it. That makes a lot of sense. Thank you so much.

Your next question comes from Matt Code with Autonomous Research.

Hi. Hey, guys. Thanks for taking the question here. Just one on unified payments. You guys mentioned that the gateway-like fee that's going to be implemented is going into effect in a couple months. Just curious if you could kind of like bifurcate for us. Is that strategy just focused on the smaller customers, or will that be impacting the larger customers as well? Like any color there on your strategy would be helpful.

Yeah, so that fee is really the stick. So when you look at our unified payment strategy, what we're trying to do is we're trying to get all of our customers on payments. And I think that's the expected outcome is we want everybody on unified payments. But what we're doing there, the carrot is we're giving away hardware. We're giving away installation. We're beating your race. You know, we're committed to matching or beating your race. We're sending people on site. So we're giving a lot. But the stick here is we're saying, well, if you don't move to likely payments, we're going to be charging you a transaction fee of 50 basis points. And so that's been now communicated to our customers. We have a certain percentage of our customers that are now paying this fee. But just being very clear, we have a whole set of people that are actually reaching out to those customers that are paying this transaction fee and telling them, hey, you shouldn't be paying the fee because you'll be paying way less if you're using likely payments.

So it is just a stick and it's...

I think we lost JP.

I'm going to continue, but I think to answer your question, I think JP answered it, but we are ensuring that the transaction fee at 0.5% is across the base. It's not just for the smaller customers. And so we are finding that there's a large contingent of customers that have taken the transaction fee. still very early days on unified payments. And what we are doing is reaching out to those customers to ensure that they understand the implications and trying to, you know, again, reiterate the benefits of light speed payments. But so far, you know, there's no concern on our end there.

Awesome. Super helpful, Asha. One other one, just on the transaction-based gross margin, you mentioned the one-time items there. But could you just kind of like walk us through the puts and takes of Should we be modeling that similar to what we've seen in the past couple quarters? Should that be coming down a little bit due to mid-shift, maybe payments has grown faster than capital? Just any puts and takes there would be helpful.

Right. So the transaction-based gross margins, you're right, there were several temporary items impacting the margins this quarter, one of which is the one-time cost or the launch cost on unified payments. We do expect that to dissipate in the coming quarters. There will still be some launch costs in the second quarter. But beyond that, we expect that to dissipate. The commentary on Lightspeed Capital, we should see that improve in the second quarter from the print that you've just seen in Q1 and to further improve in the back half of the year. So those are the one-time items that will improve. And we do expect transaction-based gross margins and overall growth. gross margin growth year over year to improve in Q2 and then improve even further beyond. We have to keep in mind referral fees are declining as expected. That's not one time, and that will happen every quarter as we take those cohorts of customers onto Lightspeed Payments. But we do expect Q2 and beyond transaction-based gross margin and overall gross margin to improve given the one time.

Thanks, Ashley.

Your next question comes from Richard Say with National Bank Financial Markets.

Yes, just had a question on payments adoption and obviously with a focus on larger merchants. What are your existing large merchants saying in regards to adoption? What do they need to be condensed on? What are any obstacles for their adoption? I'm sure you've had conversations with them, but if you'd be willing to share that, that'd be helpful.

Yeah, I'll take this one. Sorry, I got kicked out earlier on. The higher GMV merchants are actually more inclined to go with like, it's a much easier conversation. It's a business conversation. And at the end of the day, what they want is they want, they're really focused on optimizing productivity and optimizing, you know, number of transactions per employee, basically. And so here the conversation is very easy. It's like, if you can accommodate my rate, cool, let's go, let's do it. So I think the conversation is actually easier with the big ones than the small ones. The only thing with the larger ones that have multiple locations, you know, like, you know, I don't know, well, what happens there is there's a rollout. So, between the moment they say, yes, we're ready to go ahead and we roll it out to all of the 80 locations, it takes time. But generally speaking, we're feeling very confident with the high GMB merchants because the conversation is really a business discussion and there's no emotion that's really around productivity. Okay, thanks.

And then I think you touched briefly in your, prepared comments about New Order. Can you give us a sense of, you know, what that revenue model may look like going forward now that you've sort of had a bit of time with it and then also, you know, the potential timing of, you know, when that sort of commercial model would be available?

Yeah, so as you know, New Order is a business by itself inside of Lightspeed. They work with brands and they basically are the pipeline for distribution of all their goods, you know, to all the networks for the brands. So that's been in place that's continued to generate revenue. Every quarter we're continuing to find big brands. But here, the real value of New Order for Lightspeed is the network between the brand and the store. And so we have nothing for this year that is in our revenues for that. So we're continuing to develop. But what we are seeing is that for the stores that are using Lightspeed and New Order, they're seeing tremendous value. We're seeing the NPS score of those customers much higher. And they actually think this is, you know, we heard it better than sliced bread for them because of all the time they're saving and removing pen and paper and being more efficient. So we're confident in New Order for the future. We are investing a lot this year in the development to continue to integrate it in a very tight way into Lightspeed. We actually hired John Shapiro, who's now going to be leading this initiative for Lightspeed. He's a pretty senior executive with a lot of technology background with suppliers and POS. So we're progressing well, but we're being cautious again. There's no revenue this year recorded for the integration. We think we need to, you know, spend another, you know, until the end of this fiscal year, continuing to do these integrations before we see the benefits. Now, the benefits, we're going to see, as I've always said, through distribution. We will be between the brand and the store, so we will help brands to find or identify new stores. We will also help brands see sell-through, you know, throughout the entire Lightspeed network so that they can They can readjust manufacturing. And finally, for the store, we think there's huge value there as a differentiator where we're going to automate everything that's manual with our competitors. So I think it's a very exciting, as we've always said, a very exciting product. I mean, we're building history here, and it's going to take time, but we are very confident in the outcome once this is done.

Okay. And just quickly, last one for me. no doubt your balance sheet is strong, so you've got a lot of financial flexibility and with this sort of path to break even or positive EBITDA exiting sort of the year, you do have sort of increasing flexibility. So what do you think, you know, in light of the relative valuation on the stock, any possibility of kind of buying back some of your shares?

Yeah, thanks for the question. We, you know, we talk about, we've talked about a stock buyback. We're always evaluating our options there. You know, we discuss it with our board regularly as well. It's very important to us that we maintain flexibility around our options, whether it be M&A or anything of the sort. It's not, you know, we're not going to be likely raising anytime soon in these markets. And so we want to, we're trying to balance buying back our stock with what we need the cash for. Things like our merchant cash advance business is thriving. But, you know, we continue to evaluate our options there, but no real decision yet.

Okay. Thank you.

Your next question will come from Tianxin Hung with JPMorgan.

Tianxin Hung, your line is open.

Hey apologies, hope you can hear me now. Thanks for the good detail here. I think Andrew asked you JP on the toast consumer fee that they initiated and then they subsequently had to retract that. I'll just ask you more explicitly, any lessons learned from that? I know you're going to the transaction fee intro and you're bracing for and expecting a good outcome, but I'm just curious if there's any lesson learned from that and how you might respond to any negative feedback.

Yeah, I think the only comment I can make, this is not a short term. We're not here for the short term. And I think you have to be careful when you just jack up prices, you know, just because it's a fairly easy exercise, you know, to grow revenues by just increasing fees in a way that's not acceptable to the customer. So I think for me, the feedback is we have to be cautious. And we look at our customers as a long-term relationship. And so we have to act well, and especially in the context of unified payments, you know, we want our customers to know that we will not, you know, because I think it's a question of power. Once you have the power and you do everything for the customer, you have to behave well. And I think for us, we just have to be cautious in how we do price increases, and they have to be reasonable, because if not, the customers are going to react very poorly to that.

That's fair. Thank you.

Your next question comes from Adhir Kadve with 8 Capital.

Thanks, guys, for taking my question. Maybe just one on the unified offering. And then the new product development that you guys talked about this quarter. Can you give us a sense of how the unified platforms are now kind of helping your cross-sell and up-sell in motion? Are you finding that customers are much more recipient to it, given this tougher macro in terms of labor and everything around that?

Absolutely. So actually, the reason why we launched Unified Payments when we launched it, when you look at the market, basically prices are going up, you know, cost of labor is going up, cost of goods are going up, margins are tightening. And the only way out for our customers is to do more with less. And that is really the main driver of Unified Payments is we are helping our customers save time. And, you know, we have numbers like productivity gains of 20% in some instances of customers. So the idea of unified payments is to say it's one solution. So if you're a clerk and you're selling or you're a waiter, you don't have to, you know, pull out multiple things. Everything happens within one environment. And I think when you look at the back office capabilities also, when you look at reporting and you look at, you know, If you have a payment platform in a POS, you need to consolidate those Excel sheets and figure out where the funds are going, whereas we give you a simple report at the end of the day. So time-saving everywhere you look, productivity gain wherever you look. So I think that's really what's driving our customers today. And the last piece is access to funds. So we have a number of derivative products that are using likely payments. The first one is capital. Once you're on likely payments, We underwrite you for capital so you can have access to capital. That is a big win for them and our customers. And I think the last one that comes to my mind that is really important is our insights engine, our advanced analytics or insights platform. That uses payments to give insights that they've never seen before. And by the way, we just launched it now in Europe, insights with GDPR or helping our customers comply with GDPR. So all of these are products that are really good and are really helping our customers. with productivity and understand how to run a better business. And we are deriving a lot of products that are using payments at the core.

Excellent. Thank you. And for my second question, just on the customers who have immediately opted for the 50 basis point transaction fee, do you see an opportunity in the future to re-engage those customers to kind of keep the conversation going? Or is it more of kind of like a one and done and then you guys kind of leave them alone?

No, no, no. It's an ongoing. And I think that's really, when you look at our, when you look at unified payments, every customer that goes under, you know, we don't have time, we're paying transactional, we'll look at this later, etc. Those are the customers we really want to bring on to payment. A lot of our customers are just using the, you know, transaction fees because they don't have time right now. They think it's the wrong time. You know, if I'm a restaurant and I'm in France and, you know, I do all my money in summer at the beach, well, I'm not going to use Lightspeed Payments. I'm going to pay transaction fee. So what we're trying to do, at the end of the day, we do not want any customers paying transaction fees. We think that is not the right way to run the business. So we're doing everything we can to bring them on to Lightspeed Payments. So as soon as they take it, we have a whole set of people that are calling them and trying to work out timeframes to bring them on to Lightspeed Payments.

Thanks. I'll pass the line.

Your next question comes from Kevin Cresceronte with Scotti Bank. Your line is open.

Hey there. Good morning. I had a couple questions on software. You mentioned that the cohorts under $200,000 are 5% of GTV. Any sense of how much of your software revenue they account for?

Hey, Kevin. Thanks for the question. You know, we haven't typically disclosed the percentage of software revenue from that cohort. The way we look at our customer cohorts are, you know, total, the total net revenue that we get from the customer. And when we look at it from that perspective, you know, the ratios are quite similar from the GTV, right? Because obviously the larger GTV customers with payments and, you know, payments is embedded now into our platform. The larger GTV customers with payments obviously is very representative of the split. So that's typically how we look at it. In a typical customer, if I just gave you an example of a very small customer, we have customers that are paying us $50 in ARPU a month on software. We also have very high GTV customers that are paying us $500 a month in software. So it's difficult for us to just cohort those customers. Because even in the over 200,000 bucket, there's quite a large range.

Okay, no, no, I appreciate that. And that kind of leads to my second question just on the larger merchants, you know, over 500 or over a million. You mentioned, you know, $500 as an example, but, you know, maybe bigger picture, even medium to longer term, how much do you think you can extract out of your best merchants in terms of ARPU? Like, where do you think it can go?

Yes, I think we're early days, frankly. So I think just look at a customer that has 10 million of GMV and add payments in there, and you'll see that basically the software becomes a small fraction of whatever their payments. And I think that's why we're doing unified payments. But I think that's where we are obsessed. If we look at the basket, we look at all the tech that these customers are buying, and we think there's room to go well above $1,000 a month just for software. for those higher ARPU customers, and that's per location. So there's a lot of room to grow. One thing is certain is we are, and I said that a number of quarters, but we are doubling down the high GMV merchants, all the way from marketing to onboarding to supporting to how we position ourselves. We are going up market, and that is really good for LightSeed because ARPU is much higher, and we're seeing it actually. The new customers that have joined LightSeed have a much higher ARPU then, you know, in every quarter, the RP seems to be growing. The new platform command a much higher RP. So we are doing what's right. We know that we could get to much higher levels than we have today. And the first step for us is, as we said, is unified payment because that really moves the needle quite significantly, especially for the high JMP merchants.

Got it. Appreciate the color, JP. Thanks.

Your next question comes from Suthansu Kumar with Stifle.

Good morning.

I just had a question here on merchant growth. You saw fairly solid double-digit growth in large merchants this quarter. I'm just curious, has that been changed from a selling motion here for you guys? And also, what are you seeing from a competitive intensity perspective as you continue to focus on large merchants?

I think the good news is the larger the merchants, the less competition. That's very simply because if you look at the larger merchants, you know, none of the other cloud-based competitors can offer what we do. So I think that's why we're really focused on that because it has lower churn, higher ARPU, and lower competition. We have adjusted our sales motion where now, you know, we're working very tightly with the Googles and the Facebooks of the world to actually feed back GMV so that we can do a better job of just targeting them. And then what we're doing now is we are creating cohorts of salespeople based on the types of customers. So our more experienced salespeople now are talking to higher GMV merchants. And if you just joined Lightspeed, you're probably going to start with the lower GMV merchants. So we are equipping the organization in a way to just optimize the throughput of large customers. And we're very happy because it's working. Any way we look at it, we're seeing basically paybacks uh go down so we get paid back in a shorter in a shorter amount of time we are seeing close rates remain very strong and we are seeing our pool really strong for new customers so very happy with what we're doing and i think again it's a journey and you know it's a journey that started what a six six six quarters ago i think and it's going to just continue improving as we go forward daily i think we'll take one last question

Absolutely. And our final question will come from Romeo Linshaw with Barclays.

Great. Thank you. This is Jeremy on for RIMO. I just wanted to ask on the Lightspeed supplier network. So I understand that it's not being monetized now, but has it sort of been like rolled out to customers as a test use case? And if so, could you share a little bit on what the feedback has been there? Thank you.

Yeah, so when we look at the supplier network, the piece that is monetized is we work with the brand, they buy our software, and then we become the platform to distribute their goods for anybody who wants to place an order, and including our competitors, including big box retail and SMBs. So that piece has been in motion, it's going well. The piece that is still under test is really the, I'm taking the brand and I'm connecting those brands to like these stores, and I'm enabling customers the source to be way more efficient in how they operate. So instead of going outside of the platform as they would now and, you know, write POs and then receive half the goods because they don't have anything in stock, what we're helping them to do is we're helping them, first of all, identify how much they should be ordering through analytics of their sell-through. And then what we're doing is we're connecting that order directly to the brand. And then we're enabling them to place an order from the brand looking at the inventory levels of the brand. And then finally, what we're helping them do is when they receive the goods, they have no work. They just scan the goods and the descriptions are there, the videos. And that is really important for our merchants right now because if you want to sell online and you want to sell across multiple channels, you need to have rich packages that describe the goods with videos and images and et cetera. And I know this sounds obvious, but the reality is For this industry, nobody does this. And so why am I saying this is that the test case we've done, we have a couple of hundred customers now using the full integration, and the feedback we have from them is outstanding. They believe this is better than sliced bread. This is saving them hours and hours every day. And again, going back to my previous comment, any time you can help today retailers save hours of work, they love you because You know, they don't have the bandwidth anymore. They don't have the manpower. And it's all around doing, just optimizing and doing more with that. So that's why we're very excited about this. But we need to start the networks in all the verticals where we operate. And that's going to take time. But we know that once they're on it, the NPS score and the satisfaction, it's just through the roof. People are really happy.

Got it. Thank you.

And with that, I will hand the call back over to Gus for closing remarks.

Okay. Thanks, everyone, for joining us today. If there are any follow-up questions, we are around all day. Look forward to speaking to you again next quarter. Have a great day, everyone.

This does conclude today's conference call. You may now disconnect.