Lightspeed Commerce Inc. Subordinate Voting Shares

Good morning, my name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lightspeed third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Gus Papagiorgio, head of investor relations. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Lightspeed's fiscal Q3 2024 conference call. Joining me today are J.P. Chauvet, Lightspeed's chief executive officer, and Asha Bakshani, 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, and uncertainties in our earnings press release issued earlier today, our third quarter 2024 results presentation available on our website, as well as in our filings with US and Canadian securities regulators. Also, our comments 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+, and on the FCC'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.

Thank you, Gus, and welcome, everyone. Lightspeed continues to deliver on its key objectives for the year in Q3. Our Unified Payments Initiative helped us deliver revenue of $239.7 million up 27% year-over-year, and above the high end of our previously established outlook of between $232 to $237 million. Adjusted EBITDA of $3.6 million also came in stronger than our outlook of $2 million. This is our second consecutive quarter of positive adjusted EBITDA performance. GTV as a percentage of GTV was just under 30% this quarter, which is a noteworthy improvement from 25% last quarter and puts us well on track to meet our goal of 30% to 35% by the end of our fiscal year. Given that we are in the final stretches of 2024, I feel very confident that we will meet all our key objectives for the year. As a reminder, these objectives were, one, reaping the benefits of One Lightspeed, two, accelerating revenue growth from financial services, including lightspeed payments and lightspeed capital, Three, continuing to build products that solve our customers' problems and help them run their businesses, particularly with our supplier network. And four, achieving adjusted EBITDA breakeven or better for the full fiscal year. As fiscal 24 is drawing to a close, we are beginning to turn our attention to next year. I will provide a more detailed outlook of our goals for fiscal 25 in our next earnings call. However, I want to recap the tremendous achievements our organization has accomplished since completing our initial IPO five years ago. We consolidated our industry by acquiring and successfully integrating nine companies into two industry-leading platforms. We rolled out Lightspeed payments to our global customer base. We grew revenue over tenfold and GTV over fivefold. And we undertook the necessary measures to achieve adjusted EBITDA profitability having now emerged as a profitable company with strong organic revenue growth. These significant accomplishments took years of effort and a lot of hard work. I want to thank everyone at Lightspeed for their dedication and commitment. Of course, there is still work to do, but going forward, Lightspeed's main focus will be on growing its top line while maintaining adjusted EBITDA positive performance. But I want to stress that growth will be our top priority. We intend to continue to generate positive adjusted EBITDA on an annualized basis, but as we balance the priorities of growth and profitability, the scale will tip towards growth. We operate in a space with a massive opportunity, and many of our target customers continue to use dated legacy systems. We believe the majority of these customers will adopt cloud-based offerings in the next few years. We are well positioned to benefit from this shift And with payments now tightly integrated into the software platform and mandatory for all eligible customers, we believe our unit economics will only improve. Clearly now is the time for us to keep our foot on the gas. In terms of One Light Beat, our code complete platforms are now available in almost all of our target global markets. I want to stress again that these are the best products we've ever shipped, and we continue to believe that the competitive gap between us and others in the market continues to widen. Expanding and innovating our product offerings continues to be a priority for Lightning. And as we look at our product roadmaps, we will continuously assess whether it's better to build or buy. M&A is part of this company, DNA, and I believe our track record demonstrates that we know how to successfully identify, execute, and integrate meaningful acquisitions. M&A was critical in our ability to deliver the most compelling platforms for both retailers and restaurateurs, allowing us to offer best-in-class features such as analytics, ingredient management, and e-commerce within the timeframes that would not have been possible if we had developed these on our own. But at the same time, they did not hinder our business momentum. We continued to deliver very strong organic growth rates and achieved adjusted EBITDA profitability all while acquiring and integrating nine organizations. We also continue to focus on adding more high GTV customers. Let me share a few examples of our customer wins during the quarter. We are excited to announce the addition of three new Michelin star restaurants. First, the River Cafe in the UK, which is known to have trained some of the greatest chefs in the world. In Germany, we signed the iconic Hebel in downtown Hamburg and Prism in Berlin, all of whom chose Lightspeed restaurants. Also, Attica, a regular in the world's 50 best restaurants list, has selected Lightspeed to operate their fine-dine restaurant in Melbourne. On the retail front, we added a number of locations for Lole Clothing, the Canadian athletic apparel designer that switched to Lightspeed from one of our cloud-based competitors. In the US, we signed Fit My Feet, from their on-premise legacy POS system. In the UK, we signed two locations from the high-end bike brand Finarello. Family-owned and operated since 1952, Finarello has one simple objective, to make the world's best bikes. In the quarter, Lightspeed was proud to be the retail POS for TwitchCon, the annual conference for the widely popular livestream video gaming platform Twitch, with over 60,000 attendees hosted in Las Vegas. And finally, we signed up several new brands for our supplier network, including casual lifestyle brand Tommy Bahama, Canadian footwear brand Baffin, and the casual men's apparel company Untuckit. The list of high-value brands on our supplier network continues to expand. We remain focused on building an integrated supply chain that links high-value brands to retailers and end consumers. We continue to invest in our supplier network and remain highly confident It'll be a significant differentiator for our retail platform, as well as a valuable source of new revenue streams. Moving on to Unified Payments. At this stage, I'm confident we will meet our goal of GPV representing 30% to 35% of GTV by our fiscal year end, and that our Unified Payments initiative has proven to be a success. We continue to see ongoing progress in North America and rolled out our efforts in Europe and APAC in Q3. As expected, converting customers to payments in Europe and APAC will likely take longer than in North America. We are one of the first players to unify software with payments in Europe, particularly in continental Europe, and so there is more effort involved in educating our customer base. We remain a very strong business in Europe and APAC and face less competition in those markets. Getting these customers onto payments improves our unit economics. So despite a lengthier time to transact in these regions, we are confident this is the right strategy and beneficial to our customers. The benefits of combining payments with software are undeniable. It saves our customers time and delivers much greater insight into their business operations while adding no cost the majority of the time. These advantages are just as applicable to our customers in EMEA and ABAC as they are to customers in North America. As we exit our fiscal 24, our account management teams in North America will gradually go back to upselling software in addition to payments. But we expect to continue to make progress on expanding payments throughout fiscal 25. So while we expect to end 2024 with GPV as a proportion of GTV at between 30 to 35%, we foresee this number continuing to grow throughout fiscal 25. On the product side, we continue to deliver innovative features that help our customers manage and scale their businesses. We had several exciting new product launches this quarter. In the US, we launched instant payouts, allowing retailers to access funds immediately, no matter the date or time. Although still in the early stages, this offering saw very strong initial reception. We launched Lightbeat Capital into France, the Netherlands, and Belgium this quarter, and Germany shortly after the quarter, expanding our global footprint for this high-margin offering. For our customers in the US, we launched Lightspeed Tableside, a compact, portable, and flexible POS and payments processing device for restaurants. With Lightspeed Tableside, servers can instantly process orders and accept payments on an iPhone, reducing wait times, increasing table turnover, and improving customer satisfaction. And we also launched Tap to Pay on iPhone in both the UK and the Netherlands, allowing customers in those regions to accept payments right on their iPhone. We introduced Lightspeed Retail and New Order integration into the flagship retail offering, allowing our retailer customers to order directly from thousands of brands through the New Order by Lightspeed platform, giving our SMB customers the power of an advanced technology platform that was recently only available to enterprise customers and saving them several hours per week. Within Lightspeed Retail, we launched enhancements to advance insights. which will allow retailers to make even better decisions on what to stock, what to discount, and what to promote through new inventory and sales reports. Finally, on the topic of profitability, again, we are committed to being adjusted EBITDA breakeven or better for fiscal 24 and believe we are well positioned to meet that goal. This will put us in a strong position as we advance into next year with breakeven or better adjusted EBITDA and growing top line. As I mentioned at the start of the call, we will balance the dual priorities of growth and profitability, and our focus will be on growth. Though we are focused on adjusted EBITDA profitability, as our GTV continues to grow, some of the incremental profits will be channeled towards expanding our outbound, our feed on the street sales motion. We expect that the unit economics on outbound will be better as these salespeople are more efficient at targeting high GTV customers. I believe expanding outbound can improve our growth rates, however, I want to highlight that the investment year will precede the growth. It takes time to hire and train salespeople, and it generally takes 6 to 12 months for them to become highly productive. I will now turn the call over to Asha to take us through the quarterly results and provide outlook.

Thanks, JP. Lightspeed had another great quarter, with both revenue and adjusted EBITDA coming in ahead of our previously established outlook. and our unified payments efforts continuing to accelerate monetization of our trailing 12-month GTV of $90.2 billion. 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 remainder of the year. We achieved positive adjusted EBITDA for the second quarter in a row, and our goal is to continue to generate positive adjusted EBITDA. In addition, we're pleased with the progress on our key performance indicators in the quarter. Revenue and gross profit growth remain strong. Our booth hit record highs this quarter, with 28% growth year over year. GPV grew 69%, thanks in large part to our unified payment efforts, monetizing 29% of our GTV. Our overall cash burn continues to decline, Excluding cash flow tied to our merchant cash advance business, cash used in the quarter was under $5 million. On customer locations, we continue to shift our customer base towards high GTV customers. Although we are seeing positive initial traction with respect to this initiative, we are focused on accelerating this shift in fiscal 2025 through initiatives such as investments and outbounds. In the quarter, revenue came in at $239.7 million, an increase of 27% year-over-year and ahead of our previously established outlook. Subscription revenue increased 9% year-over-year to $80.9 million. Gross margins on subscription revenue came in at 76%, an increase from 73% in the same quarter last year. When removing the impact of share-based compensation expense Gross margin on subscription revenue was 77%, consistent with last quarter, thanks to a dedicated effort to consolidating cloud vendors and improved overall efficiencies. I want to reiterate that for this entire fiscal year, the vast majority of 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 approximately half of our new subscription revenue in any given quarter. This quarter, our account managers continue to focus on unified payments, with teams from North America, EMEA, and APAC all working on this initiative. As we move into our fourth fiscal quarter, most of our North American teams will begin to return to upselling software as well as payments. We expect that by mid-fiscal 2025, the majority of our account managers will return to their traditional roles of selling software modules to existing customers, and as a result, we expect software revenue growth to benefit in fiscal 2025. Transaction-based revenue grew 38% to $147.8 million. In the quarter, we saw GPV increase 69% year-over-year to $6.6 billion. as a greater portion of our GTV went through our Lightspeed payments platform. We also saw strong growth in the capital business in the quarter, with revenue more than doubling year over year. Referral fees continued to decline in the quarter as customers moved on to Lightspeed payments. Gross margins for transaction-based revenue came in at 30%, up from the previous quarter but down year over year given declining referral fees as a proportion of the sales mix, and partially offset by rising capital revenue. Lightly payments gross margin also improved thanks to an increasing mix of revenue coming from international markets where gross margins are better. Total adjusted gross margin, which excludes the impact of share-based compensation and related payroll taxes, came in at 43%, flat to the previous quarter and down year over year. Adjusted gross profit dollars came in at $103.2 million, an increase of 18% year-over-year. Adjusted EBITDA in the quarter came in positive at $3.6 million. This is much improved from an adjusted EBITDA loss of $5.4 million in the same quarter last year. This improvement is the result of our continued focus on prudent spend across organizations, 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 R&D, selling and marketing, and G&A expenses were up 7% from a year ago. Adjusted R&D expenses were flat to last year. We increased investment in sales and marketing in order to capture more of our tap. Much of this is for outbound salespeople. Adjusted G&A costs were up largely due to increased operating expenses tied to the growth of our capital program. As a percentage of revenue and gross profit, total adjusted R&D, sales and marketing, and G&A expenses declined year over year. We had an adjusted income of $11.8 million versus an adjusted income of $0.4 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 $2.6 million from a year ago. We continue to actively manage our share-based compensation and related payroll taxes, which were $23.6 million, down from $34.5 million a year ago, and approximately 10% of revenue, down from 18% in the same quarter last year. Overall GTV in the quarter came in at $23.1 billion, up 3% year-over-year. Growing categories were partially offset by certain retail categories such as bike and home and garden that declined year-over-year. GTV growth was more modest this year owing to a challenging macro environment and given management's attention was focused on unified payments. In fiscal 2025, however, increasing our high GTV customer base and growing our GTV will be a major focus for both retail as well as hospitality, as you heard from JP. The good news is that GTV from our flagships is up 29%, demonstrating that for our target customers and with our flagship products, we are seeing good success. This quarter, we also continue to grow our sophisticated higher GTV customer base. Customer locations with GTV exceeding 1,500,000 a year both grew by 7% in the quarter. whereas those with GTV under $200,000 declined. 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 impact our net location growth. However, the overall health of our customer base will continue to improve. Total ARPU in the quarter came in at $447, up 28% year-over-year. Unified payments is helping increase overall ARPU, as we mandate payments for all eligible new and existing customers, and we're seeing healthy growth in software ARPU as well. Churn rates in the quarter are still below the levels we had anticipated for unified payments, and the vast majority of our overall customer churn is in the cohort of customers processing under $200,000 in annual GTV. We had prepared for churn to increase as we rolled out unified payments. Yet, 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 under $750 million in cash and cash equivalents, down slightly from approximately $761 million in the previous quarter. Merchant cash advances used $8.3 million of capital during the quarter. If we exclude the growing capital business, overall cash burn in the quarter was just under $5 million, down from under $10 million last quarter. Turning now to our unified payments efforts. At this stage, I believe that Unified Payments has been a success, and we are on track to end the year with GPV between 30 to 35% of GTV. Although we are happy with how Unified Payments has progressed, we will continue to focus on monetizing more of our GTV through our payments offering in the next year. I am very proud of everyone involved in Unified Payments. It has been a significant initiative for Lightspeed and our employees continue to execute. It demonstrates how effectively this organization can achieve its goals once we set our mind to it. Now on to outlook. In the quarter ahead, most of our payments efforts will be focused on international markets, which as expected are taking longer than North America to convert. It is also worth noting that our fiscal Q4 is our seasonally slowest quarter from a GTV perspective. Given transaction-based revenue is over 60% of total revenue and highly dependent on GTV growth, we remain conservative on our GTV growth assumptions given a still subdued macro, and we have not seen any signs of improvement in the first month of the calendar year. For the full year of fiscal 2024, we are increasing the lower end of our outlook and narrowing the range to total revenues of between $895 and $905 million with break even or better adjusted EBITDA. With that, I will pass the call back to JP.

Thanks, Asha. At this stage, I'm highly confident that we will accomplish the goals we set ourselves at the beginning of the year and particularly in the area of unified payments and profitability. Our attention is now turning to next year. As I stand back and look at our prospects, a few things stand out for me. One, our TAM is very large, numbering in the millions, and we maintain only a few hundred thousand customer locations. Two, our products are industry-leading, especially for the more complex IGTV customers. Three, our global reach for complex retailers and restaurateurs is unmatched. And four, our scale allows us to invest in our business without sacrificing profitability. It is very clear to myself and the senior management team that the metrics we must focus on in fiscal 25 are GTV growth and increasing the number of high GTV locations. We will approach this challenge with the same level of commitment and execution as with unified payments, and I'm confident that we will deliver similar levels of success. With that, I will turn it over to the operator to take your questions.

Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We also ask that you limit yourself to one question and one follow-up, and for any additional questions, please re-queue. Your first question comes from the line of Dan Perlin from RBC. Please go ahead.

Thanks. Good morning. I wanted to spend a second just back on Unified Payments for a second. You know, you've mentioned several times, and as you have in prior quarters, that the international market needs a lot more education. It's going to be slower to adopt. I guess I have two questions there. One is, does the pace of payment adoption in the international market in any way, shape, or form act as a gating kind of mechanism to slow your software growth, or were you willing to sell software first and then come back and get payments later? So that's kind of the first question I have.

Yeah, so good morning. I'll take this one. I think when we think about unified payments in Europe, there are two sequences. The first sequence is new customers. So new customers buying our software. And on that front, you know, we bundle both. So, you know, you could not buy software without payments. And on that front, we're seeing close rates that are strong, adoption that's strong. So I think that's the first good news is we are seeing on the new customer front that they are buying payments. Then the second big block here is existing customers and upselling existing customers to payments. And here, as you know, we had planned for a slower adoption because it's just simply put more conservative market. So, but again, I just want to point out one data point here that's very interesting is, you know, planned slower growth, but still, you know, if at light speed, it's up about 250% year over year when you look at European GPV. So there is strong adoption. and it is very much in line with what we had planned.

Okay. No, that's super helpful to kind of, I guess, bifurcate those two pieces to it. The second, just quick follow-up question is the idea around expanding outbound sales to go after higher GTV locations. And it sounded like, you know, it was pretty clear investments are going to outpace revenue growth. And so the question I have there is there, I know you're not giving guidance for 25, but is there a risk, maybe not a risk, is there just a cadence that we should be mindful of that EBITDA could be negative in the first half and maybe as that gets expounded and then it re-accelerates materially in the back half, or should we be expecting a more kind of positive cadence throughout the next year? Thank you.

Thanks, Dan. I'll take that. You're absolutely right. You know, we did talk about outbound. We are planning to make some significant investments in our field outbound. You know, we found, because we have field reps today, and found that the unit economics on a field rep's customer that they sign are much better because they're much more efficient in going after our ideal customer profile. So while we do expect that the investment will precede revenue growth, we're very confident that we're still going to be generating adjusted EBITDA profitability next year. And we do expect to pivot a little bit more towards growth than profitability, as you heard from our prepared remarks. but still very confident that we'll be generating EBITDA margins next year.

That's great. Thank you so much.

Your next question comes from the line of Andrew Bausch from Wells Fargo Securities. Please go ahead.

Andrew, your line is open.

Sorry about that. Thanks for taking the question. Just want to dig into the GTV trends. in the quarter and what you've seen thus far in the first couple of months here. And I know you called out some weakness relative to macro. But maybe I could clarify your comments, Asha. I think you said that, you know, the trends haven't improved into this quarter. Does that mean that there's further deterioration that you've seen? But any additional color there would be helpful.

Yeah, absolutely. Thanks for the question, Andrew. So GTV was really a mixed bag. I'll talk about the performance in Q3 and then I'll talk about January in a minute. The overall GTV as you heard from us was up 3% and that was largely driven by the macro in retail North America. Even though the holiday season was better than we had forecasted for last year, it was still year-over-year growth was lower than we've seen historically at Lightspeed for the busy holiday season. We did have strong GTV growth all across Europe, and we had double-digit GTV growth in APAC hospitality as well, but that again was muted by the declines we saw in several retail verticals such as bike and home in North America. In January, we actually saw similar levels in the retail side, but we saw declines. you know, larger declines when it comes to our U.S. hospitality portfolio. I don't think that's a Lightspeed-specific stat, but, you know, at Lightspeed, we did see in U.S. hospitality declines year over year. And so, you know, when all told, we put that together and we look forward to our Q4 guide, we want to remain prudent and conservative to make sure that we put out a commitment that we're confident that we can meet.

Yeah. And I'm sure that weather probably had something to do with that.

Yes. And in our retail North America, sorry, our hospitality North American portfolio remained, you know, very much impacted by the weather in January.

Got it. I guess my follow-up is, you know, the disclosure that you guys give around the customer locations by GTV tier, you know, isolating the, the smaller merchants, the sub 200,000. Remind me if we, gotten that data point on a percentage of volume of overall GTV? Meaning, and if we have, can you remind us what that was and if it's changed over the last year or so?

Yeah, absolutely. The under 200K annual GTV customer cohorts represent about 5% of the overall company GTV. And that, you know, it hovers between 5%, it goes down to 4%, but it's always in that range. So again, from a customer location standpoint, it's a larger percent for sure. It's about 30%. But overall, you know, it represents 5% of our GTV. And as you've heard from us, this is a cohort of customers that we expect will turn over time. They don't represent a large monetization opportunity for us. So these are, again, customers that we acquired through the nine acquisitions that we did over the past few years.

Yeah, it's good to hear that if they do churn, it's not a major GTV headwind. All right, I'll jump back in the queue. Thank you.

Your next question comes from the line of Andrew Jeffrey from Truist Securities. Please go ahead.

Hi. Good morning. Appreciate you taking the questions. I want to try to dimensionalize long-term or just reconfirm maybe the unified payments aspirations. JP and Asha, do you think that GPV can be a 50% attach? Is that still a reasonable long-term goal? What would be the timing for achieving that? And what's the geomix look like? Maybe you could help us by talking about where GPV attaches in North America versus Europe today and where you think that could go.

Absolutely. As we always said, our next step and our ambition is to get to 50%. As we said, this year we'll get from 30% to 35%, and we're fairly confident we're going to get that number. What we said is the following year we'd go between 40% and 45%. We are very much on track for that, and we believe that there's nothing stopping us. Even going back to the question we had on Europe earlier on, We had planned for a slower adoption in Europe, but the adoption is happening. And just when you look at the attach rates on new customers, which is very close to 100%, that just over time, when you look at the churn and how it works, will bring us to 50%. So there's no doubt in our mind. I think maybe just answering the second question, of course, we're way more advanced in the US. We started unified payments before. I think it's a less conservative market. And there now we are actually working hard at light speed to actually, you know, unleash all the verticals that we couldn't unleash, you know, like high risk. And so we're really working hard now at expanding the TAM in the U.S. so we can continue having very strong penetration.

Okay. That's helpful. Thank you. And then, and I appreciate the emphasis on revenue growth, especially given your size and the TAM. and also the outbound sales efforts. But, you know, and again, I recognize you're not guiding 25, but as we think out over the next several quarters, did we expect kind of a hockey stick at some point in software revenue growth? Because pre the subscription revenue, pre your unified payments efforts, you were growing really fast. So I wonder if you could just maybe qualitatively talk about whether or not we see a real kind of hockey stick kind of inflection in your subscription revenue growth when you get everything sort of pointed in the right direction?

Yeah, so again, just setting the table here is we said that this year we would focus on unified payments. And so when we say that, that means that all the account managers that traditionally are upselling customers on software, that are traditionally expanding the capabilities of our customers with software, they have been almost 100% focused just on selling payments. So that's why what happened this year is penetration rates on payments went up, revenue on payments, as I said, even in Europe, up 250% year over year. But that means that the software growth is not as strong as it would traditionally be because people are just focusing on payments. As we exit this year and we start now, especially in North America because it's getting close to job done, We are now going to have our account managers that are going to go back into, hey, here are all the modules and software that our customers are not using and expanding that. And I think maybe the last piece that I think is very interesting is Lightspeed Capital, where we are with, you know, commands a very strong gross margin. That's also going to be kind of one of the focus points for next year. So there is a, what you will see is as we go into next year, you'll start seeing software growth go up again and go back to historical levels.

Great. Appreciate that. Thank you.

Your next question comes from the line of Sanos Miskopoulos from BMO Capital Markets. Please go ahead.

Hi, good morning. Can you provide some color on your churn experience in Europe as you're ramping up unified payments? Is that consistent with what you've seen in North America or are there any regional nuances there?

Yeah, I mean, churn has been consistent, so it's under what we expected, and we haven't seen much movement in churn from after unified payments versus before. And the same thing is happening in Europe. We are, again, at the end, we want to keep the customers, so we are going to sequence it to ensure that we lose as few customers as possible. And I think maybe just going back to one of the comments Asha said, where we're seeing a more emotional decision is in the low GMV bucket. And those are the ones that, you know, could potentially churn, but they're not really important to us given it's only 5% of our GMV. So not seeing any movement, not seeing any changes, and we are actually kind of putting the motion in place to ensure that we don't lose our good customers.

Great. And then on the supplier network, can you update us on which verticals you now have critical mass in and for which it's proving to be a strong differentiator? I mean, so clearly... I would assume that's the case for bikes and for high-end apparel. But are some of the other verticals ramping up in that regard?

Yeah, you're right. Apparel and bikes, you know, the strong ones. We're now going out to sport and outdoors. But I think for me, again, just if you look at the number of customers on retail, the largest segment for light speed in retail is apparel. So we're actually working really hard to make that experience even better for all the customers in apparel. As you know, we hired John Shapiro, who came from Wayfair, who's now really focused on driving a better experience for our customers. And then, as you know, we historically had bikes, but now we're expanding, and the next one is outdoors and sports.

Great. That's the one. Thanks.

Your next question comes from the line of Josh Bearer from Morgan Stanley. Please go ahead.

Great, thank you, and congrats on hitting the high 20s payments attached, setting up for 30, 35 next quarter. Question is on subscription. The prior three quarters, we saw really nice sequential subscription growth, and this quarter was pretty much flat, very slightly down. I'm just wondering if there's any commentary around that change in trajectory this quarter.

Hey, Josh, thanks for your question. The subscription revenue, you know, being flat to last quarter is very much again driven by the account management team and the unified payments motion. You know, as you've heard from us, Europe and APAC were in the third quarter at the peak of, you know, the unified payments launch because we launched Europe and APAC at the end of the summer and early Q3. And so, you know, in that quarter, more than in previous quarters, we had the international account management teams now also fully focused on unified payments. And that's really all you're seeing in the quarter-to-quarter flatness in subscription revenue. As JP mentioned, with the unified payments launch behind us at the end of this fiscal year, we do expect our account management teams for the most part to go back to selling software, with all of them going back to selling software by mid-fiscal 25, and we're absolutely expecting subscription revenue to accelerate.

Okay, got it. So even in North America retail, where it had payments, the unified payment strategy, I guess, for a while, they're still focused on unified payments versus shipping back to software at this point in time?

Yes, absolutely, because Unified Payments launched in North America in May, but we launched in May in retail, and then we launched a bit later in hospitality. And as you heard from us on our last call, depending on the size of the customer, we're giving some customers two, three, four months to get live and transactional. And so the account management team in North America are still in large part focused on Unified Payments, and that's what you're seeing impacting software revenue.

Okay, perfect. And then the small customers, only 5% of GTV. I'm just wondering what percent of the software subscription does that cohort represent?

Thank you. Thanks, Josh. That's not something that we have disclosed, but what we have said in the past is at the end of the day, GTV for us represents the monetization opportunity ultimately that we get from these customers. And so I think, you know, 5% of the GTV, although that's not representative of the overall revenue, it is representative of the potential of this cohort of customers.

Maybe I'll just add that, you know, the smaller customers have, you know, normally one terminal instead of three, four, five. They have fewer users. So, you know, even on the software front, the subscription is much lower. with the smaller customers than it is on the larger ones.

Great. That's helpful. Thanks.

Your next question comes from the line of Dominic Ball from Redburn. Please go ahead.

Oh, hello, guys. Hello, Asher, Gus, JP. On software art, so obviously the higher the better makes your merchants a lot more sticky. What sort of level can we expect as you transition merchants more onto the flagship products? Are there any numbers... that you could help us with, especially as you onboard much larger merchants as well. Thank you.

Yeah, maybe I'll start. I mean, of course, the larger merchants have a much stronger ARPU. They buy more modules. And really, when you look at it, there's a lot of greenfield. There's a ton of room for growth inside of our customer base. I don't know, Ash, if you want to comment on this.

Yeah, we have been growing software ARPU. And that's really the result of software-attached new modules that we've been building. But to answer your question very simply, there's a large opportunity for software to increase 3, 4, 5x from where it is today. That is the reality. We've got customers that can pay us $400 plus in just software approvals. And as we continue to innovate and build more software modules, there's lots of opportunity for growth. When I think about the flagships in particular, ARPU Uplift can even be up to as high as 30% when we're migrating customers from a legacy to a flagship. And so there's lots of ARPU Uplift opportunity for us just from migrating customers to the flagships. And then on top of that is all the other software modules that we continue to build.

That's great. That's really good. Thank you. And just one more quick one. Is there any difference you see in software-approved between your retail merchants and your hospitality merchants?

Today, because we have several products in our portfolio, there's quite a difference depending on how many modules each of these products have to offer. But when we think about our flagship product, the ARB Co-op list is quite significant with retail and hospitality.

Cool. Thanks, guys.

Your next question comes from the line of Tianxing Huang from J.P. Morgan. Please go ahead.

Thanks for the question here. I just wanted to ask on the gross margin outlook. I should maybe get some help on that. On the outlook there, given some of the puts and takes, some of the transaction-based gross margins have been on the decline given the lower referral fees. Should we see that stabilize with the focus shifting back towards growing GDV in locations ahead?

Hey, Tenzin, thanks for the question. Yes, absolutely. We expect, and you know, you've heard this from us before, that overall gross margins will remain in the 40-plus percent range despite transaction-based revenue or payments revenue in particular becoming a bigger and bigger part of the revenue portfolio. And there are a couple of competing forces in there. First is on the negative side, there's the declining residuals that come in at 100% margin. But on the flip side, what we have is increasing international payments penetration. And even though international take rates are lower than North American, the gross margins are higher. They're about 36%, and that's what we're seeing, you know, in the gross margins from APAC and Europe. So as we increase international penetration, we expect payments gross margin to improve. And then last but not least is the growth of our capital business. Our capital business has, you know, it's grown, it's doubled for over a year ago, and we expect that trajectory to continue. And capital revenue comes in at a 95% gross margin. And so all told, we expect transaction-based gross margin to pretty stabilize, so the declining residuals will be more than offset by increasing capital revenue and better margins internationally. And what that means is that overall margin should remain over 40%.

Perfect. That's what I was looking for. And just my quick follow-up, just with the focus again back on GTV growth and high GTV unit growth, can you maybe be a little more specific on the type of locations, whether it be geography or the vertical? Just curious on that. Thank you.

So what we've said from a high GTV growth perspective or customer perspective, our ideal customer at Lightspeed are retailers and restauranteurs that process half a million and more in annual GTV. And those are complex merchants, complex retailers that need inventory management, kitchen display, ingredient management, the full suite of technology that Lightspeed has to offer. And so we consider those merchants our ideal customer profile. So when we think about investing in outbound, what we found is our outbound field reps are most efficient. in signing these high GTV customers because it's much easier for them to target the ideal customer of Lightspeed. And so the focus for Lightspeed in fiscal 25, as you heard from JP, is to double down on growing software revenue through increase in our high GTV merchant base, through software attach, and the best way to do that is through heavy investments in our outbound, which is our absolute focus for next year.

Got it. So no geographic bias. This is going after the larger retailer restaurants.

Understood. Absolutely. Absolutely.

Your next question comes from the line of Richard C. from National Bank Financial Markets. Please go ahead.

Yes. Thank you. Obviously, you've gained a lot of efficiencies over the course of the past year. Do you have a sense of the order of magnitude of how your LTV to CAC has kind of changed on a year-over-year basis?

So the LTV to CAC is not a set that we have disclosed publicly in this past year. However, what you have heard from us and then the reality is that with the increase in payment penetration, our unit economics has increased significantly. And what we've seen is for a customer that takes only software, versus a customer that takes software payments and maybe even capital, the LTV to CAC is more than double. And so this was a part of why we went down this unified payment strategy. Obviously, the unit economics are much better for Lightspeed. And then from a customer perspective, there's a ton of benefits that our customers are unlocking from having a fully integrated payment solution, and our customers are seeing that as well. And that is the result of why churn hasn't ticked up like we had forecasted because the customers are really seeing the benefit of having a full integrated payment solution.

Okay, thanks. And JP, in your opening remarks, you talked a little bit about acquisitions and your success in terms of the integration. So I'm not sure if I've been reading that right, but it seems like you're positioning that you may be restarting acquisitions again. If that's the case, what are your thoughts from an acquisition standpoint in terms of what you need, verticals or geographies that you would pursue. Thanks.

Yeah, thanks for the question. I think that the statement we wanted to make clearly is that these acquisitions have been very good for Lightspeed. And I know because we did a lot, we had a lot of questions around, hey, how are these doing? And so for me, I'm very pleased that it's been many quarters now of true organic growth with easy to read organic growth. And so I just wanted to make the statement that we are really good at doing M&A and they've helped us tremendously over the years. And we now have really strong platforms that we couldn't have had without the M&A. So now this being said, And I think a lot of the questions actually around this call were around how do we grow software, how do we expand our pool. And when we look at our portfolio, there are still a number of functionalities and big blocks that we do not offer. And I think I've been very transparent over the years, but there are categories that our customers want to buy from us that we do not have. And I think as we go through these with our product teams, we always have the same question. Do we want to build? Do we want to buy? And in most cases we build, and we've launched so many products this year, and a few examples, kitchen display, or even our advanced insights on retails, we built all of those. But there are categories that I don't think we should be building and that are a much better fit for an acquisition. Now, the question always remains, we have to be very prudent when we do these because we need to be sure that, of course, we buy them at very reasonable multiples, and we need to be sure that as we acquire them, that they are really going to create a good hockey stick inside of Lightspeed.

So that's really my commentary on this.

Your next question comes from the line of Timothy Chiodo from UBS. Please go ahead.

Great. Thanks for the big question. I know we hit on this a little bit earlier and in some of the questions around the expanding of the direct sales force. But you started doing this, I believe, in the fall of 2021. And I was just hoping you could give an update on the number of salespeople that you have today in the U.S. And then in terms of the expanded efforts this year, a rough number on how many that might ramp to. And then I have a brief follow-up.

Yeah. So, look, maybe just going back in time, we really only did that primarily in the U.S. until now and really around hospitality. um where where we we we had a competitor that had a lot of foot on the ground so we had to ensure that within the categories that worked for us and the high gmv that we had people also on with foot on the ground now this being said uh at the time it wasn't a significant number uh and even today you know you're talking about maybe 30 30 people um but now we have enough you know kind of uh enough time under our belt to know that these are really very good for light speed and the unit economics are very good. And I think maybe the last comment I want to make is there is nobody in the retail space that has foot on the ground, and there is nobody in the retail space that has the depth of our solution for a high GMV merchant. So I think there also, when we look at foot on the ground, we're going to heavily invest in retail in the U.S., where you will start seeing people with foot on the ground pretty much in every big metropolitan area in the U.S., And then the other piece for us is outside of the U.S. for hospitality. You know, if you go across Europe now, we're starting to have a lot of concentration and, you know, it's very frequent to go into restaurants where you see Lightspeed. And I think there we now want to double down, you know, in Canada, in Australia, New Zealand, and in Europe, double down on the hospitality space also and ensure that we can accelerate our growth.

JP, thank you so much. Really appreciate that. My follow-up is kind of related. So One way to go at it is to build a direct sales force, hire people, have feet on the street. But another is to work with third-party ISOs, agents, retail ISOs, wholesale ISOs, bank partners, et cetera. So more of a strategy that Clover has taken, sort of a multi-pronged distribution approach. Have you given any thought or how do you think about the pros and cons of using a third-party distribution that might give you a more immediate impact result in terms of that coverage that you were talking about nationwide?

I think the high-end answer is we do have a partner network, and we do use both, and about 25% of our deals are touched by a partner. So it's always been something really important to us, and you mentioned a few categories. I just want to make a comment with regards to Clover. Clover is micro-merchants. It's a very simple coffee shop. When we deal with restaurants, and we cited quite a few here, these are very well-established restaurants, Michelin stars, and they're very complex in essence on how to adopt the platforms because there's so many workflows. I think it's going to be a very different strategy from the Clover strategy, just being very clear, but we do believe in the partner ecosystem and partner networks and installation partners and all kinds of referral deals that we could have with banks and real estate agents. I think to answer your question very clearly, we believe that the blend of both is the most important. It's having people with foot on the ground to go and really convince a more traditional customer base that we are the right platform in parallel to having a lot of referral partners that are bringing us to deals.

Excellent. Thank you, JP. Thank you.

Your next question comes from the line of Ramo Lenzchild from Barclays. Please go ahead.

Great. Thank you. This is Jeremy on for Ramo. I just wanted to ask, in terms of verticals that are eligible for light speed payments, is there still more work to be done there? And if so, could you talk to what percent of overall GTV would be in some of these verticals that can adopt payments at the moment? Thank you.

Yeah, so I think first of all, you need to, when you look at GTV, there's a portion of cash. So let's start there. So just a portion of cash brings you, you know, to roughly 80%. So that's then the monetizable. And then I think within the 18, I would say probably 15 to 20% are still in industries that we can underwrite or industries where we don't yet have a presence or even countries where we don't yet have have payments for light speed. So for us, it's always the same thing. It's like the 80-20 rule. You start by going after the low-hanging fruit. And then after that, you compensate for all the rest. So just being clear, we are looking at solutions right now for high risk, which is a big category, roughly 10%. And that we are hoping to make some announcements in the foreseeable future on that. And then I think it's all around expanding. So as an example, I'll just give you a In Singapore, we have a lot of Michelin star and fine-dine restaurants that are on Lightspeed. Yet today, Lightspeed payments is not supported in Singapore or in Malaysia or Indonesia. And these are all markets that are strong for us, but we don't have a presence. Or Dubai, where we're only selling software. So that's why when you look at next year, it's going to be a mix of we're going to compound now all the industries with new underwriting players. to go into those. And then the second thing is we're just going to expand light-speed payments into new countries.

Got it. Thank you.

That's all the time we have for questions today. I will now turn the call back over to Gus Papagiorio for closing remarks.

Thanks, Kirsten. Thanks, everybody, for joining us today. We look forward to speaking to you on our next conference call for our Q4 results, and we will be around if anybody has any follow-up questions. Have a great day, everyone.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.