This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk13: 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, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Gus Papagiorgio, Head of Investor Relations, to begin the conference. Gus, over to you.
spk09: Thank you, operator, and good morning, everyone. Welcome to Lightspeed's fiscal Q2 2024 conference call. Joining me today are J.P. Chauvet, Lightspeed's Chief Executive Officer, and Asher Bakhshani, 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 second 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 on our earnings press release, which is available on our website, on CEDAR Plus, and on the SEC's EDGAR 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.
spk08: Thank you, Gus, and welcome, everybody. This quarter, Lightspeed made great progress towards achieving our key goals for fiscal 24. Thanks to our powerful products and strong execution in our unified payments initiative, we delivered an excellent quarter with revenues of $230.3 million and 25% year-over-year growth. This is well ahead of our previously established revenue outlook of $210 to $215 million. We're making tremendous progress executing on our unified payments initiative with our GPV now exceeding 25% of our total GTV. And so the first time since we went public, we delivered positive adjusted EBITDA in the quarter. This again was well ahead of our previously established adjusted EBITDA outlook of negative 4 million and positions us well to meet our goals of adjusted EBITDA break even or better for fiscal year 24. At the beginning of this year, I promised that fiscal year 24 will be the year of execution. The results from this quarter firmly show that we are delivering on that promise. As a reminder, let me walk you through our main goals for the fiscal year. One, reap the benefits of One Lightspeed. Two, accelerate revenue growth from financial services, including Lightspeed Payments and Lightspeed Capital. Three, continue building products that solve our customers' problems. and help them run their businesses, particularly with our supplier network. And four, accomplish our goal of achieving adjusted EBITDA breakeven or better for the full fiscal year. In terms of One Lightspeed, we continue to see good progress. By the end of this quarter, excluding Ecwid customers, our new flagship products accounted for approximately one-third of overall customer locations. GTV from flagships grew 35% year-over-year, and total revenue for flagships grew 124% year over year. Our flagships are now code complete, compliant with regional regulatory requirements, and will very soon be available in all of our global markets. In fact, our two flagship products are the best code base we've ever delivered. With these two products in market, the competitive gap between our flagships and others in the market continues to grow. Delivering two industry-leading products in the last two years would not have been possible without the M&A strategy we deployed. We moved quickly to integrate some of the best technologies from our nine acquisitions into the flagships, such as industry-leading analytics from Upserve, ingredients management from Counter, advanced blockchain technology from ICAN2, and best-in-class headless commerce from Ecwid. We simply could not have developed these features on our own in such a short period of time. In part, thanks to these acquisitions, we have developed an organization with unparalleled depth of management and technical talent in these game-changing products. With industry-leading products that have scale and global reach combined with our continuously improving financial performance, Lightspeed is in its strongest position ever. This is helping us attract and win more high-GDP customers. Let me share a few examples of these who've joined Lightspeed in the last quarter. In hospitality, we were incredibly honored to add the iconic Joël Robuchon International as one of our newest customers. With dozens of owned and operated locations across Europe, North America, the Middle East, and Asia, the Joël Robuchon Group has been awarded more Michelin stars than any other restaurant group in the world, with over 15 current Michelin stars. They came to us looking for a global player that could manage their complex workflows under one integrated software and payment platform. We were also happy to add Gustoso Group in Germany, with over 100 restaurants operating under six different brands. We started rollout of a number of their restaurants on Lightspeed Restaurant. In the US, after a very competitive sales process, we signed seven locations with Indiana State Park Inns for both Lightspeed Restaurant and payments. And in Sydney, Australia, we were selected by Kensington Street, operator of nine Asian-inspired food vendors, two bars, two event spaces, and six full-service restaurants. Kensington Street is the exact type of complex SMB that can leverage the full power of our products to simplify and scale their operations. Kensington Street's management chose Lightspeed to deliver more data-driven decisions for their business. On the retail front, we had an incredible quarter. Lightspeed Retail is emerging as the leading cloud platform for complex multi-location, high-GTV retailers the world over. Notable wins this quarter included Getboards, the ski and snowboard retailer with three locations across California, wanted to upgrade from their legacy solution, and they've now adopted both Lightbeat retail and payments. Bluestar Eyewear, the independent high-end eyewear retail who chose Lightbeat to power their businesses across its four locations in Australia. And finally, Les Jumelles in Antwerp, Belgium, With 250,000 Instagram followers, this women's apparel boutique chose Lightspeed to power their two locations. In golf, we added two big wins. After an extensive due diligence process, we were selected by Great Life Golf to power 14 of their 56 U.S. locations. And Bluestar Resorts & Golf selected Lightspeed for all 15 of its Arizona courses. Both organizations will be using Lightspeed Restaurant and Retail in addition to golf to manage their dining facilities ProShop, as well as Lightspeed Payments. And finally, we were able to sign up several new brands to our supplier network, including Jordache, Ashley Lauren, and Esprit. Moving on to Unified Payments, we made great progress this quarter. Although too early to comment on the international rollout, I want to specifically call out our North American teams for their excellent execution this quarter. We onboarded a record number of payments customers, and September was our strongest month ever. I shared earlier this year that we were prepared for potential bumps along the way as we launched Unified Payments. Our biggest concern was that we would see higher customer churn as we made payments mandatory. Fortunately, this risk has not materialized. On the contrary, our churn levels remain very much in line with our historical ranges. We were confident that our customers would much prefer Lightspeed's Unified Commerce platform over their commoditized and dated payment solutions. And we were right. Lightspeed's commerce platform is at the core of our customers' operations. We act very much like an ERP system, managing inventory, employees, customer loyalty, payments, and accounting integrations, while also offering valuable data insights into their business. Changing your POS is far more complex and disruptive than changing payments provider. It's only when you combine payments with software that you can create real value for your customers. I'm also very encouraged that our close rates for new customers remain very consistent, and in many cases, better than historical levels. New customers understand the benefits of buying a unified solution. Our new customer funnel remains strong, even as we become more rigorous on marketing spend. Our ARPU is the highest it's ever been, given the impact of flagships commanding higher ARPU, unified payments, as well as our focus on targeting higher GTV customers. This is the best case scenario for us. close rates remaining consistent with historical levels while ARPU on new business is growing. I think it's safe to say that Unified Payments has been a great success in North America and we are now turning our attention to international markets. Market dynamics internationally are different than North America. European SMBs have a closer association with their regional banks. However, the value proposition of Unified Payments is the same no matter where our customers are located. There is absolutely no reason for our customers to isolate their payments offering from their software. An embedded solution allows them to reduce the time and effort needed to reconcile two disparate systems. It delivers far greater data insights into their business, and more often than not, comes at minimal to no additional cost. Although we have more to do, I am very encouraged by what we saw this quarter. Our new business is thriving, our teams are onboarding a record number of customers to payments, and churn remains in line with historical levels. Our focus now will be to keep the momentum going through the rest of the year as we expand this effort internationally. On the product side, we continue to deliver innovative features that help our customers scale their businesses. In hospitality, we created Smart Items, an AI tool that creates menu descriptions and even generates images for online ordering. Compelling descriptions and images can increase revenue for restaurants but many of our customers lack the time and expertise to properly develop these. We believe smart items can help them solve this problem and make our restaurant's customers more successful. It will also translate menu items into other languages, such as French or Spanish. It is also worth repeating that our Advanced Insights module is now fully available for our hospitality customers globally. We solve for regional regulatory and privacy requirements which our global scale and footprint are uniquely positioned to address. Advanced Insights has proven very popular with our North American customers, and because it requires payments in order to collect data, we believe it will be a driver of both higher ARPU and higher payments adoption for hospitality customers in EMEA and APAC. Delivering an advanced solution like Insights to a global audience requires a broad range of expertise that we do not believe any other organization can match. In retail, the company delivered new omnichannel capabilities for multi-location merchants that accommodate complex workflows around inventory management for physical and digital customers. For new order, by Lightspeed, we enabled vertical assortments, which allows brands with their own retail locations to merchandise, assort, and visualize their own products. Lastly, in terms of profitability, again, we are committed to being adjusted EBITDA breakeven or better in fiscal 24. This quarter, we came in with a positive adjusted EBITDA ahead of our outlook, which places us in an excellent position to meet our goal of breakeven or better for the fiscal year. I believe we will continue to drive operating leverage in our business. We are expanding financial services such as payments and capital, and we're seeing our strongest ever unit economics with new customers. As we continue to monetize more GTV, we expect to better align ourselves to the rule of 40 metrics focusing on balancing both sustained growth and profitability. And we are at the right path to get us there. I will now turn the call over to Asha to take us through the quarterly results and provide outlook.
spk05: Thanks, JP. Lightspeed had an excellent quarter with revenue and adjusted EBITDA coming in well ahead of our previously established outlook and our unified payments efforts continuing to gain traction. On today's call, I will provide a recap of the quarter, discuss the progress of our unified payments efforts, and then provide an outlook for the upcoming fiscal quarter and full year. Overall, I was very happy with our progress this quarter. We achieved positive adjusted EBITDA for the first time since becoming a public company. In addition, we're seeing many of our key performance indicators move in the right direction. Revenue and gross profit growth accelerated from the previous quarter. ARPU hit record highs this quarter with 26% growth year over year. GPV grew 59% thanks in large part to our unified payments efforts. Churn was lower than anticipated and remained within historical ranges. And again, I'm happy to report that total cash burn in the quarter was under $10 million excluding cash used to fund our merchant cash advance business. We continue to grow our high GTV customer base, although not at the rates we would like to see. We believe there is room for improvement here, and this will be a continued area of focus for us. In the quarter, revenue came in at $230.3 million, an increase of 25% year over year and more than 8% ahead of our previously established outlook. Subscription and transaction-based revenues grew by 24% year-over-year. Subscription revenue increased 9% year-over-year to $81 million. Gross margins on subscription revenue remained consistent with last quarter at 75%, and when removing the impact of share-based compensation expense, gross margin on subscription revenue was 77%, consistent with last quarter and at its highest in over two years. thanks to a dedicated effort to consolidate cloud vendors and improved overall efficiency. I want to reiterate 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 subscription revenue grew 9% year-over-year, despite their temporary reallocation of duties. Once our unified payments efforts are complete, we expect software revenue growth to accelerate. Transaction-based revenue grew 36% to $137.7 million. In the quarter, we saw gross payments volumes increase 59% year-over-year to $5.9 billion. as a greater portion of our GTV went through our Lightspeed Payments platform. We also saw good growth in the capital business in the quarter, with revenue up over 120% year over year. Referral fees continued to decline in the quarter as customers move on to Lightspeed Payments. Gross margins for transaction-based revenue came in at 28%, up from the previous quarter but down year over year given declining referral fees. Total adjusted gross margin, which excludes the impact of share-based compensation and related costs, came in at 43%, flat to the previous quarter and down year over year. Although the increased transaction-based revenue is putting pressure on gross margins, this is being partially offset by growing capital revenue. Adjusted gross profit dollars came in at $97.8 million, an increase of 17% year over year. Adjusted EBITDA in the quarter came in positive at $0.2 million. This is much improved from an adjusted EBITDA loss of $8.5 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 that was completed in our fourth fiscal quarter of last year. Total adjusted research and development, sales and marketing, and general and administrative expenses were relatively flat to last quarter and up 6% from a year ago. Our one light-speed efforts are increasing sales productivity as sales growth is greatly outpacing any increase in sales and marketing costs. We had an adjusted income of $6.4 million versus an adjusted loss of $7.5 million last year, thanks largely to the improvement in the items driving our adjusted EBITDA performance and growing net interest income in the quarter, which increased by approximately $5.9 million from a year ago. We continue to actively manage our share-based compensation and related costs, which were $23.3 million, down from $34.9 million a year ago and approximately 10% of revenue, down from 19% in the same quarter last year and roughly in line with our prior quarter. GTV in the quarter came in at $23.5 billion, up 5% year over year. Hospitality growth was stronger than retail. We saw strong growth in Europe, which is dominated by hospitality customers, and GTV in North America and APAC remained relatively flat. This quarter, we also continued to grow our sophisticated, higher GTV customer base. Customer locations with GTV exceeding $500,000 a year grew by 8% in the quarter, whereas those with GTV under $200,000 declined. Again, in this quarter, the fastest growing cohort was locations with annual GTV exceeding $1 million. This customer cohort grew 9% year over year. As we focus on more complex, higher GTV merchants, we expect the under 200,000 annual GTV cohorts to continue to decline. This churn is planned for, and as a reminder, these customers represent only 5% of our overall GTV. As we churn off these lower value customers, we expect it will continue to mute our net location growth. However, the overall health of our customer base as a whole will continue to improve. Currently, unified payments is dominating our attention and resources, but growing our high GTV location count is very important to us and remains a core focus for Lightspeed. Total ARPU in the quarter came in at $425, up 26% year-over-year. Although unified payments is helping increase overall ARPU as we mandate payments for all eligible new and existing customers, We're also seeing healthy growth in software ARPU as well. Churn rates in the quarter remain consistent with last quarter and within our historical range, despite challenging macroeconomic conditions and 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. Again, we were expecting churn to increase, as we rolled out unified payments. But it is encouraging to see that the majority of our customers recognize the benefit of an integrated software and payment solution and the value of the Lightspeed Commerce platform. In terms of our balance sheet, Lightspeed closed the quarter with just over $761.5 million in cash and cash equivalents, down from approximately $780.3 million in the previous quarter. The biggest uses of cash was the increase in merchant cash advances of $10.1 million during the quarter. Again, if we exclude the growing capital business, overall cash burn in the quarter was under $10 million. Turning now to our unified payments efforts. As you heard from JP, we were very happy with the progress we made this quarter. We saw a record number of customers become transactional and our onboarding teams really executed well. Our efforts in North America thus far have been very successful and we saw less churn than we expected. We will continue to encourage the remaining existing customers with software only to add payments. Our attention will now turn to international markets. We expect markets such as the UK and Australia will act much like North America. However, continental Europe may be more challenging as customers there are generally more conservative. In Europe, we expect the recent launch of our Insights module will help encourage customers to adopt payments, as that module requires payments to provide meaningful insights. We're also armed with strong customer testimonials that are helping convince our European customers that switching to Lightspeed Payments will simplify their operations, save them time, and deliver better data insights into their business. Now to our outlook. This quarter illustrated that our strategy of pursuing high GTV customers, mandating payments, advancing our capital business, and making profitability a priority is working. Given transaction-based revenue is over 50% of our total revenues and highly dependent on GTV growth, we are being conservative on our GTV growth assumptions. We remain cautious on the macro environment given central banks continue to suggest potential future rate hikes. Also, we believe that there are increasing signs that consumers plan to be more frugal this upcoming holiday season. For the third quarter of fiscal 2024, we expect revenues between $232 to $237 million and an adjusted EBITDA of approximately $2 million. For the full year of fiscal 2024, we are increasing our outlook to total revenues of between $890 and $905 million, with break-even or better adjusted EBITDA. Despite the macroeconomic backdrop, we expect both revenue and adjusted EBITDA performance in the second half of the year to be better than the first half. With that, I will pass the call back to JP.
spk08: Thanks, Sasha. Before we take your questions, I want to welcome Manon Brouillette back to our Board of Directors. Manon has over 20 years of experience as the head of global media and telecommunications company, including the last two years at Verizon, and is a proven leader in the industry. I'm very excited to have her back on our board. We are now halfway through our fiscal year. I'm encouraged to see that we are delivering on our key goals, particularly in the area of profitability, where in the quarter I believe we made tremendous progress. As we look beyond this year, I continue to see incredible potential for Lightspeed. We will continue to build a category leader for sophisticated SMBs the world over. With our acquisitions fully integrated, our industry-leading products, improving financial performance, and strong balance sheet, we are in a position of strength. And we will use this position to grow our business, expand our solution set, help our customers, and create value for our shareholders. With that, I will turn it over to the operator to take your questions.
spk13: Thank you all for the presentation. And 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 in the interest of time and to answer as many questions as possible, we do request to please keep your questions to one and one follow up. Again, to join the queue, please press star one. And your first question comes from the line of Andrew Jeffrey from Truist Securities. Your line is open.
spk12: Thanks. Good morning. Appreciate taking the question. JP, I want to understand a little bit maybe how you're looking at the unified payments efforts as you move beyond the U.S., and particularly in Asha, too, I guess your comments on Europe. Should we be thinking about perhaps attach rates slowing a little bit and software becoming more of the revenue and gross profit growth driver as we exit fiscal 24? I'm not asking you to guide. I'm just thinking directionally. Do you declare victory in North America this year and refocus the team on software? How does that all sort of balance out?
spk08: Yes, good morning. So just simply put, just to state where we are, when you look at North America, I think we have enough months and quarters behind us to think that this is going to be really successful. When we look at Europe... We're early on and, you know, in Australia and New Zealand, same thing. But for now, the early signs is that churn remains low and we have no reason to believe that it's not going to go well. And I mean, we're bringing the same value to customers. So I think for me, I'm just going to go back to this year. This year is all around unified payments. We want to ensure that the majority of our customers who are existing customers attached Lightspeed payments. And we want to also ensure that all new customers attach Lightspeed payments at almost 100%. And so that's really, it's going to be the focus. Once we have unified payments under our belt, of course, we're going to go back to selling more financial services, capital being one that has a really good gross margin. And of course, we want to continue selling more software. And with that in mind, we have a number of initiatives that are underway. The first one is analytics. We've launched analytics across Europe, which is a big module there. And we are also now launching our insights modules on the retail side, which is, we think it has some great success. So just answering your question directionally is we are going to focus on unified payments this year. And as we get into the end of the year, we will refocus all of our teams back on upselling software and growing our portfolio.
spk12: Okay, that's helpful. Thank you. And then just in terms of adding flagship customers, these more complex, higher GTV customers, a little bit of a downtick in the growth rates in those this quarter. Is that macro or is there something else going on? And can you re-accelerate the growth in those larger customers?
spk08: Yes, I'll take this one too. let's start with how competitive these products are. And here, you know, what we're excited about is that these products are the most competitive they've ever been. If you look at our retail North American market, that is a huge driver, huge demand. And I would say that the gap between us and our closest competitors has broadened and ARPU on new customers is up. And I would say payback is the lowest it's ever been. So we're really in a good position for competitiveness. Same thing with hospitality. When you look at Europe, this is our largest market. And we are extremely confident that K accommodates the more complex. And I think just look at the wins this quarter and it gives you a good idea. So for me, it's not around, you know, is this the macro or are the products competitive or not? It has to do with the year of two halves. The first half of the year for us, we were very clear, is going to be around unified payments. and focusing all of our teams on unified payments. And then the second half of the year, as we get into the end of this fiscal year, we will refocus everybody back on software. And maybe the last point, just to answer your question very precisely, is as unified payments becomes a success, that will generate more free cash flow. And we are going to take a portion of that and re-inject it into go-to-market So we can have strategies where we have people with foot on the ground everywhere, accelerating our growth with the higher GMV merchants.
spk13: Appreciate it. Thank you. Your next question comes from the line of Thanos Metropolis from BMO Capital Markets. Your line is open.
spk11: Hi, good morning. JP, maybe on that last point, how should we think about operating leverage as being profitable this quarter and as your profitability ramps? How do you kind of strike the balance between reinvesting the business versus ramping up the margins? Might you look to cap margins at a certain level and then drive it into customer acquisition given the strong feedback you're seeing? Or will we see kind of an ongoing ramp in margins as you're profitable?
spk08: Yep. So I'll start, and Asher, maybe if you want to jump in on the second half here. But for me, it's around rule of 40. And, you know, we've been very clear we want to get closer to the rule of 40. I think, so that's the first answer here is we will be getting closer to rule of 40 as we exit the year. And then for me, the second view is it's a huge market. It's up for grabs. Our products are extremely competitive. We know that from the feedback from our customers that we have the best platforms on the market. So now the question for us becomes, how do we balance out profitability versus this market that's up for grabs? And I'm a strong believer we need to generate you know, in the rule of 40, some adjusted EBITDA, you know, positivity. But I think we should favor owning this market and going back into a higher growth.
spk11: That's helpful. And then just remind us of the seasonal dynamics for this quarter and how that might influence the payments ramp. Just because, you know, given the Christmas season, could you have a dynamic where retailers are maybe more reluctant to change their payments provider this quarter? Might there be a lag in payments? switching on merchants who have committed to signing for payments?
spk05: Hey, Thanos. I'll take that one. You're right. In the third quarter, which is our biggest quarter for retail given the holiday spend, we do expect merchants are not going to be switching over their payments provider, and that's why the North American launch is largely behind us. In hospitality, it's actually the opposite. We have the summer months, which is our highest seasonal quarter in hospitality. And that's why the hospitality launch, which is primarily Europe, happened at the end of the second quarter. And so, you know, we'll start seeing those merchants switching in the third quarter. So, you know, again, you know, keep in mind Q2, strongest quarter for hospitality. So we expect to see those merchants switching in the third quarter. And Q3 is the strongest quarter for retail. And so the majority of the North American launches behind us, which, as you know, is primarily retail.
spk11: Great. I'll pass the line. Thanks.
spk13: Your next question comes from the line of Matco from Autonomous Research. Your line is open.
spk01: Hey, guys. Thanks for taking the question. Just wanted to touch on the macro. You guys historically have taken more of a conservative approach, I would say, to kind of like your assumptions around same-store sales growth for your merchants. So I was just hoping that you could opine on, you know, like what's embedded in your guidance and then more broadly what you're seeing in terms of the consumer strength in terms of discretionary versus non-discretionary spend?
spk05: Yeah, sure. I'll start, Matt. So from a GTV perspective and what we're including in the guide, although we did see strong growth this quarter and particularly in hospitality, what we're thinking as we enter the very strong retail spend season is that we really don't believe the end consumer has felt the full impact of rising interest rates, inflation. We're hearing about student loan repayments as well. So we are keeping our expectations on GTV modest for the rest of the year, including the upcoming busy retail season. And when we think about verticals across our different verticals, what we're seeing is we are actually seeing in many of our retail verticals same-store sales declining. Things like bikes, home improvements, sporting goods, And even golf, year over year, the GTV is, you know, declining in many of these verticals. And so we are being cautious as we walk into the very strong holiday season. We're being cautious on what that year over year GTV growth is going to look like. On hospitality, as I mentioned just now earlier, Q2 is our seasonally strongest quarter. That's when, you know, folks dine out in the summer months. And so we expect to see Q3 to be down from Q2 from a hospitality perspective. So all told, given those factors as well as what we're seeing happen in the macro, we are being prudent on the guide.
spk01: That makes a ton of sense, Asha. Thank you. And then I may have missed it, and apologies if I did, but previously you've talked to the payment penetration ratio exiting this fiscal year at, I believe, 30% to 35% range. Do you have an update there? Yes.
spk05: Yes, that's correct. We've said in the past quarter that we expect to exit the year at 30% to 35%. You've seen us move the needle by about 300 basis points in Q1, a little more than that in Q2, and we do expect by the end of the year we'll be in the 30% to 35% range. Awesome.
spk13: Thanks, Asha. Your next question comes from the line of Andrew Bosch from Wells Fargo. Your line is open.
spk00: Hey guys, thanks for taking the question and a nice job on the payments processing strategy. Just, you've mentioned, made some comments around once the payments, monetization efforts are complete, then the software side of the business would accelerate again. I guess, could you put a little finer point on what you mean by the completion of that? I know it sounds like the back half of the year, you're going to start to pivot towards software, but just a little bit more color there would be helpful.
spk08: Yeah, I'm just going to try and reiterate what I said earlier on. So, of course, as payment becomes a success, we are doubling the ARPU per customer, just give or take on a net basis. So that frees a lot of money for us to be able to re-inject. And if you look at today, we are in a way throttling the engine because we don't have enough basically money to allocate to growth when we look at our overall balance sheet. So the idea here is to say, I'm now going to use, you know, call it three quarters of this year to get as many customers as possible onto payments. And then as the regions are fully done on the payments job, that means I can now redirect my salespeople into going after new customers and more salespeople instead of having them, you know, focus on unified payments. And at the same time, I can allocate enough cash for marketing and outbound strategies so that I can accelerate growth of customers. Today, if I had way more free cash flow to give to my marketing engine and my sales engine, I could intake way more customers than I'm taking today. So that's really the strategy. It's very simple, but we believe we're really going to be in a very strong spot. And especially with North America, we're going to start... with North America, because that's the first industry we went after with payments. And that means as we get into the second half of the year, we will be allocating more and more salespeople to going to get new customers, mainly in North America.
spk05: On the timeline, Andrew, the only thing I would add to what JP was saying is that, you know, this year is the initial launch of unified payments. So even though the migration of our back book onto payments continues into next year, we should start seeing the improvement in software in next year as well.
spk00: Yeah, I mean, it's a multi-year strategy. Just a follow-up one. In the 4Q, it looks like you guys are embedding some software assumptions for adjusted EBITDA, and I assume that's largely macro-driven, but are there anything else in the comps or other things we should be considering as far as investments in the back half of the year that would be kind of leading to that implied guide being a little bit lighter.
spk05: Yeah. So, Andrew, I'm going to refer back to what we talked about a little bit earlier on the rule of 40. You know, as we've mentioned, there's a huge TAM that's out there, and we want to make sure that we're taking as much of that TAM as possible. For sure, you know, profitability puts some parameters in place as to how quickly we can grow. And so we are being cautious or prudent, I would say, on the EBITDA guide so that we have the flexibility to reinvest in sales and marketing to get more of the TAM if, you know, that's what maximizes our rule of 40 metrics because that's really what we're anchoring ourselves around.
spk13: Understood. Thank you so much. Your next question comes from the line of Martin Toner from ATB Capital Markets. Your line is open.
spk10: Thanks so much. Good morning, everyone. Wanted to ask a little bit about growth of large merchant locations. It's strong, but has decelerated a little bit. Can you talk a little bit to the extent to which up as a distraction, and do you expect that growth rate to re-accelerate going forward?
spk08: Yeah, so look, it's a year of two halves, so we were expecting less growth in the first half versus the second half, and just going back to what we just discussed, as I get more money to invest and I can free my resources, I'm going to accelerate that. I think the other piece for me that is very important is that it's not a question of numbers. And that number, I mean, you look at the profile of the customers we brought in this quarter, they're absolutely outstanding. You know, and Gustoso Group, you know, with 100 locations, Joël Robuchon. So I think those are the most important for us. And so what we're seeing, simply put, is we're seeing ARPU of new customers go up. We're seeing ARPU, which is revenue per user, of all the flagships be much stronger than the old products. and we're seeing higher attach rates. So even though the growth has been 9%, we're very happy with the profile and the ARPU that these customers bring in.
spk10: That's great. Thanks, JP. Follow-up is on cash flow. The cash flow burn, I think this quarter was about the same as last quarter. Can you talk a little bit about what those dynamics will look like for the balance of the year and what items are sort of holding you guys back from reducing that burn even further.
spk05: Yeah, sure, Martin. I'll take that one. So from a cash flow perspective, overall cash burn was a little under $10 million for the quarter, similar to last quarter. As we look forward, there are a couple of things that will, you know, improve that, but also certain things such as our merchant cash advance business growing that does improve that. Overall, their working capital items, such as the fact that about 70% of our customers pay us monthly, yet our contracts with our vendors are typically paid annually upfront. So those working capital dynamics does drag the overall cash flow down and causes it to be more negative than our adjusted EBITDA, for example. As we move into next year, our view is that we will be incentivizing our sales team to bring in more annual deals paid up front, and that should alter the working capital dynamics on that front. And then the only last thing to keep in mind is we do intend to continue to grow our merchant cash advance business, which is a large use of our working capital. But outside of that business growing and outside of the cash used to fund that business, we expect in a few quarters that cash from ops will align more closely with adjusted EBITDA as we start to align our incentive plans accordingly.
spk10: Thanks very much. Great quarter.
spk13: Your next question comes from the line of Dan Perlin from RBC. Your line is open.
spk04: Thanks. Good morning. I wanted to just kind of delve in a little bit on ARPU here. It was great to see up 26%. Obviously, payment penetration is a key component of that. But by our math, it also is like your software ARPU, I think was up mid to high single digits. So I guess one is that math kind of plus or minus correct. And then If it is, can you just talk about some of the incremental drivers, especially given all the commentary around the sales team being just so focused on unified payments and not so much on software? I suspect it's mixed as part of it, but any color there would be great.
spk08: Yeah, so I'll start, Nash, if you want to jump in. But just simply put, let's start with the new products. They drive higher R-proof for software. given that now the new products are more than 30% of our total store count and that we've been doing really well there, that just has a big driver on ARPU. So that's the first comment. The second comment is we are developing a lot of software modules that basically need payments to be unlocked. So as an example, our analytics engine for hospitality needs payments for this to become a module. So as we compound people onto payments, we're driving more software. So yeah, I think on all fronts, we're feeling good about this. And we think we're really in a position of strength because of those new platforms that are really attracting the right profile of customers that are giving us more on software.
spk04: That's great. Can I just... Yeah, sorry about that.
spk05: The only thing I would add, I just wanted to confirm that, you know, your math on the software ARPU uplift is right. It is very high single digits.
spk04: Excellent. That's great. The other thing I just wanted to kind of touch on in terms of subscription gross margins being steady, this is, I guess, really a question. I know you talked about vendor, you know, arrangements and improved efficiencies. But it also seems to suggest that the pricing environment around, you know, that software is pretty stable. And you're not having to give up kind of as much pricing as I think some had thought in order to kind of drive maybe some of that unified payment. So can you just talk to that point a little bit as well? Thanks so much.
spk05: Yeah, absolutely. So, you know, the subscription revenue growth, you know, we had said to expect modest growth. We are doing better than that expectation. And you're right. That's coming from the fact that we've had to discount the software less than we anticipated and but also the fact that churn has been lower than we had anticipated. Churn has been very much in line with historical levels, and we had expected an uptick in churn from the unified payments efforts, and we're not really seeing that. So all told, our subscription growth is better than anticipated.
spk13: Excellent. Thank you so much. Your next question comes from the line of Josh Baer from Morgan Stanley. Your line is open.
spk02: Great. Thank you for the question. Just wanted to... focus on the go-to-market and sort of overall strategy. I guess just to start, Asha, you mentioned that growth in like the key, you know, larger GTV customer cohort was not quite where you want it to be. Is that a reallocation of resources to Unified Payments or is there something else that sort of causing that situation versus your aspirations?
spk08: Let's just start with the macro. A lot of the industries where we operate have still not recovered from the post-pandemic kind of scenario. So here, if you look at just GMV per merchant for bikes or for outdoors and sports and homeware, these are categories where we have a lot of customers and they are still in decline year over year. So I think that's going back to Ash's comments. on the new customer front, we're getting a lot of intake in those industries. I mean, if you look at bikes, I think we are the de facto leader. Anybody opening a bike store is going to buy from Lightspeed. And if you look at all the progress we've done in golf, we are gaining a lot of courses, and that means those industries are doing well.
spk02: Okay, I guess I'm wondering, like, it sounds like it's clear that the some of the resources on selling more software back into the base, like those are shifted toward attaching payments. I guess I'm just wondering the structure of the Salesforce, if the, if the reps that are, were responsible for going after new accounts, if like their focus is also on unified payments, like has, has the land of new customers been, you know, re reallocated toward the payment strategy also?
spk08: Again, just going back, it's a question of dollars. So, of course, we have allocated a lot of dollars in our go-to-market overall to upselling payments versus going off to new customers. And I think it goes back to the dynamics I described earlier on is as we get customers on payments, we will allocate more money on to go-to-market. And I think for me, maybe when I look at go-to-market, just talking about the dynamics, we have a strong belief that in North America for retail, there is a really good play to be had where we have people with foot on the ground in every city. So another way of saying it is we want to take kind of the hospitality approach that some of our competitors have been having and apply this to retail where there is nobody else than Lightspeed and the more sophisticated. So I think there's a real opportunity there and that's really what's going to happen As Unified Payments is behind us and we're getting more, I mean, we're doubling our net take rate from customers. We're going to take a lot of that money and we're going to actually hire people with foot on the ground for retail in North America. The other dynamics that's going to happen is for rest of the world, call it outside of the US. On the hospitality side, we want to take the exact same approach. As we get more and more of our customers onto payments and we free a lot of money, we want to have a lot of salespeople with foot on the ground in hospitality outside of the US. So in Canada, across Europe and APAC because those markets are up for grabs and there are no competitors in those markets. And I think that's a real opportunity for us. So I think you will see that on a dollar basis, we are going to allocate more and more money to our finding new logo kind of teams And we will also, over time, as we don't need as many people upselling payments, we will reallocate some of those into going off to new customers.
spk02: Okay, very clear. Thank you.
spk13: Your next question comes from the line of Raimo Lencho from Barclays. Your line is open.
spk06: Great, thank you. This is Jeremy on for Raimo. I just wanted to ask on the payments capture rate. So it looks like this quarter came in around around 2.3%, only slightly lower than Q1. And can you just touch on the different factors that are impacting that number and the direction going forward in terms of when you think it could sort of bottom out? Thank you.
spk05: Hey, Jeremy. Thanks for the question. Yeah, for sure. I think we should look at it from a gross margin perspective. From a capture rate perspective, there's a bit of noise because In North America, the growth take rates are between 2% and 2.5%, depending on the industry, and the net take rates are in the 50 to 65 basis points. In international markets, the growth take rates are actually between 1% and 1.5%, depending on the country, and the net take rates are between 35% and 45%. And so what we should focus on is really the gross margins. The gross margins, this quarter, the gross margins on transaction-based revenue was 28%, which was slightly up from Q2, sorry, from Q1. And that increase is what we should sort of expect slowly over time. You know, you've heard from us that melting referral fees or, you know, residual partner fees will put downward pressure on transaction-based gross margins, which is true. But the increase in our capital revenue, which comes in at 95% gross margins, in addition to the fact that when we go after international markets on payments, the gross margins are in the 30% to 35% range. So all told, the increase in international markets and the increase in capital revenue should more than offset any decline from the referral fees from here on.
spk06: Got it.
spk13: Thank you. Your next question comes from the line of Tianxing Huang from J.P. Morgan. Your line is open.
spk07: Hi, thanks so much for all the detail. It's good stuff. JP, I want to ask you about some of the new releases because we've been studying a lot of the restaurant tools that have been coming out. It looks like the Smart Items, the Magic Menu Quadrant, I think is solving a lot of the challenges around the menu items. How homegrown and how quick was that to develop? I'm just curious if that's giving us a clue in your focus areas within the verticalized retail restaurant areas that you're going after.
spk08: Yeah, good morning. So just simply put, I'm just going to try and make it, we have brand new products that have very, very limited technical debt and that are in code bases that are easy to evolve. Okay, just start there. So here what you're seeing now is accelerated roadmaps. You're seeing accelerated delivery of features because that the code is new, you know, and when you're developing a new technology, I mean, the order of magnitude of speed is completely crazy versus what we had with our previous products that were, you know, 10, 12, 13 years old. In the world of technology, 13 years is a lot. And there's a real gap between the ability to execute with new platforms versus old. So that's my first point. And I think that's why I keep saying we're in a position of strength is we now have products that are the leading products on the market that are brand new. which means we're going to accelerate roadmaps. When you look at what we delivered this quarter, the value we're bringing to our customers has nothing to do with features for smaller merchants. It's for well-established merchants. And so here, when you look at what we were doing with AI and we're making smart descriptions and we're just basically looking at the flows of our customers and we're saying, how can I help our customers do more with less? How can I remove all kind of manual tasks And that's what resulted in us now automating descriptions of menu items. And then the second one you talked about, which is our quadrant, is I'm now helping... How can I help our customers do more with less? How can I remove all kind of manual tasks? And that's what resulted in us now automating descriptions of menu items. And then the second one you talked about, which is our quadrant, is I'm now helping... merchants identify returning visitors and actually what are returning visitors ordering versus when they order for the first time, which is extremely important for, you know, profitability. You didn't talk about this, but we also released on the retail side advanced workflows for omni-channel where now, you know, and that's not valuable for a mom and pop. It's valuable if I have multiple locations and now I can define how you know, my pickup in store or all my omnichannel workflows will work across locations. And again, not very valuable for the small merchants, very valuable for the merchants that are unlikely. So we're really just focused now on delivering value and focusing on where do our customers spend too much time, where are the workflows inefficient and how can we deliver. And I think for me, just saying it one last time, we are going to accelerate roadmaps because we have a code base that is brand new, and it's so much easier than, you know, I would argue our competitors or what we used to have in the past.
spk07: Got it. Yep. So product velocity is definitely accelerating. Okay, great. Thank you. Just one quick clarification on the North America side. Given what you've learned so far, the targeted customers that did not become transactional, that are choosing to absorb the higher fee, any surprise there, or does it change your thinking around maybe pricing philosophy in general? Thank you. That's all I had.
spk08: Yeah, look, I think, I mean, the bet we made was we don't think people are going to change their core operating system because we're giving them free terminals and accommodating their rates, you know, and we're saving them hours every day. So that was the bet going into this. And we had modeled slightly more churn because we were like, oh, maybe people are not going to like to be, you know, forced into this. And actually what we're seeing is the churn levels are within historical ranges, which is incredible news for us when you look at the North American market. And the other thing we're seeing is that customers are paying. Those who don't want to move are in agreement to pay the transaction fees. And I think for me, what we're hearing from the customers is not, I don't want to move. It's like, we're not ready to move now. Can you please work within our timeframes? And so we have cohorts of customers who are giving us the 50 basis points transaction fee and that are telling us, okay, let's work on a schedule because now is not the right time. Asha gave you an example of holiday seasons. Restaurants didn't want to move in the summer when they have all their terraces open. And I don't think the retail customers are going to want to move around Christmas when that's when they make most of their revenue. So I think we're taking all of these into account. But net-net, the bet we had made when we started this initiative has proven out 100% in North America for now.
spk09: Operator, we'll take one last question.
spk13: Noted. And your next question comes from the line of Patrick Ennis from UBS. Your line is open.
spk03: Hi, thanks for taking this question. I wanted to ask about the migration to the flagship restaurant retail products. I know you touched on this a bit in the prepared remarks around some of the more robust features that are being put in. But can you provide specifics around some of the advantages to sticking with Lightspeed as it relates to data transfer implications and maybe moving to a different provider and what some of the puts and takes there are? And then just had a quick follow up on pricing environment.
spk08: Maybe I'll just talk about the philosophy here. We call it an upgrade internally. I think it means a lot because it says we are going to find a path to least resistance to migrate our customers or to upgrade our customers to the new platforms. And so here, just going back to your question, we are now investing time and investing software resources and development resources to convert. And we are starting actually on some of the cohorts of customers. And so you can expect that over time, we are going to upgrade our customers to the new platforms. We will be cautious around these upgrades. We will go cohort by cohort and we will ensure that there's a lot of software to make it as seamless as possible. And I think for me, when I think about seamless, we don't want our customers to lose history. We don't want our customers to lose customer information. And of course, we want to port the inventory. So we are building tools. And over time, we're going to bring our customers onto the new platforms. maybe the last philosophy of the last belief internally is those products are so much better than the old ones that we believe our customers are going to follow, uh, follow us in, in, in their migration.
spk03: Appreciate it. Thanks for all the color there. And could you, I know you talked briefly about some of the puts and takes between, uh, Michael Bresalier, North America and international gross take rates, but can you comment on the pricing environment generally and how we should be thinking about lightspeed payments gross take rates, considering maybe some of the accommodations or concessions you're giving to some of the migrations and and mix shift to larger customers, as well as this international growth.
spk08: Yeah, so I'll just start by saying that I think it was 93% of the cases we are lower than what they're currently paying. So I think here you can expect that we maintain the rates that we have in the two geographies. I think for me, we're trying to get away from a commoditized rate to providing software value. And I'm just going to go back to there is a ton of value of using Lightspeed payments integrated with Lightspeed software. and the resounding feedback we're getting from our customers is that they're saving hours every day, they're running a more efficient business, and once they're on the other side, they love it. So I think for us, we are going to use this, the technology that we have and the capabilities with the software to maintain as much as possible the rates and not go into this commoditized war of rates. Great.
spk13: Thanks, Mark. That concludes today's Q&A session. I'd like to hand the call back over to Gus for closing remarks.
spk09: Okay. Thanks, everyone, for joining us today. We will be around if there are any follow-up questions. We will speak to everyone in about three months. Have a great day, everyone.
spk13: This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.
Disclaimer