Lightspeed Commerce Inc. Q1 FY2023 Earnings Call

Good morning. My name is Angela, and I'll be your conference operator today. I would now like to introduce Gus Papageorgiou. I apologize for your name. You may now begin your conference.

Thank you, operator, and good morning, everyone. Welcome to Lightspeed's Fiscal Q1 2023 Conference Call. Joining me today are JP Chauvet, Lightspeed's Chief Executive Officer; Brandon Nussey, Lightspeed's Chief Operating 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, risks and uncertainties in our earnings press release issued earlier today, our first quarter 2023 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. 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 sedar.com 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. Before I turn it over to JP, I would like to remind everyone that we will be hosting a webcast on our new flagship retail offering, Lightspeed Retail scheduled on August 30 at 2:00 PM, Eastern Standard Time. Please go to our IR website to register. With that, I will now turn the call over to JP.

Thank you, Gus, and welcome, everyone. Thank you for joining us this morning. Lightspeed reported another strong quarter today, our 14th as a public company, delivering revenues of $174 million, which was ahead of our previously established outlook of $165 million to $170 million. Overall revenue grew 50% and GTV grew by 36%. Revenues were strong this quarter as the return to in-person shopping and dining drove demand for omni-channel solutions. We continue to see success in our target markets of complex SMBs, especially among higher GTV customers. And thanks to our strong travel market, our European region, which is heavily slanted towards hospitality, also had a strong quarter. We saw GTV of EMEA growing faster than any other region. In hospitality, we signed several multi-location and marquee customers, including Panos, one of the leading bakery groups in Belgium with 100 locations, which will adopt Lightspeed's flagship restaurant platform. The Parker Palm Springs in Palm Springs, California, one of the premier independent luxury hotels in North America, which will adopt Lightspeed's flagship restaurant platform with Payments. And the Holland Group in Covington, Kentucky secured using our outbound sales force, which will use a host of Lightspeed's offerings in their five locations, including Payments. In retail, we were happy to find the following customers: Kualoa Ranch in Hawaii, where many of the Jurassic Park movies were filmed, they will adopt our retail offering in addition to e-commerce, analytics and Payments. Long-standing Lightspeed footwear customer, The One will be adopting Lightspeed Payments across their 40 locations in Australia. And within Lightspeed B2B, we were happy to add a world-renowned luxury brand, Michael Kors. We were also very encouraged by the reception of our new flagship products this quarter. I believe we have the most compelling products in the market, particularly for our target customer base. Lightspeed Retail and Lightspeed Restaurants are the result of thoughtful integration of some of the leading solutions in the market built by developers with extensive experience in hospitality and retail software. Lightspeed Retail and Lightspeed Restaurants are both modern modular software platforms with advanced APIs, which will allow for expanded features that can either be developed internally or through our development partners. Our new products are fast, stable and easy to use, and I believe this is why we are seeing strong reception from our end customers. I recognize that like ourselves many of you are concerned over the macroeconomic environment. As you'll have noticed from our press release, and as Asha will outline in greater detail, we continue to be confident in the annual outlook, which we provided in our earnings call last quarter. We are not immune to macroeconomic conditions and we are not downplaying the risks. However, I believe it's important to emphasize that the return to in-person shopping and dining are positive influences for Lightspeed that should at least partially help to offset any challenging macroeconomic conditions. With an increased focus on execution and because of the various growth levers at our disposal, we believe Lightspeed can maintain strong growth through challenging conditions. Even in this scenario of an economic downturn, our approach to market does not change. We will remain focused on adding higher GTV locations of complex SMBs that can take full advantage of our comprehensive software platform and adopt Payments. These customers generally deliver higher ARPU, lower churn and superior lifetime value. And in addition, they're much better positioned to weather any economic downturn. I will also remind investors that the proportion of our GTV that is growing through Payments remains in the low double-digit range. The Payments will be available to the majority of our customer locations. Our focus is to get as many of these locations onto our Payment solution as possible. Brandon will discuss this shortly. In addition to executing our Payments opportunity, I believe Lightspeed is benefiting from two other strong trends in the industry, which is currently dominated by legacy systems. The first is that merchants are turning to technology to help them do more with less. With supply chain issues and labor shortages causing disruptions in every industry, Lightspeed technology can help merchants automate and simplify their operations, better manage their inventory and improve their profitability. Lightspeed can help merchants and their employees become more productive so they can better serve their customers and drive growth for their businesses. The second is that we believe merchants are increasingly looking for a one-stop shop for all of their needs, and this will likely become more important if economic conditions deteriorate. If merchants are relying on separate vendors for their POS, e-commerce and payment solutions, as an example, they can create unnecessary complexity in their operations through valuable insights because of siloed data, generate extra work to reconcile these disparate systems and can end up paying more for them. Lightspeed can deliver a comprehensive platform where the shared data can deliver valuable insights, remove the need for manual reconciliation of these systems, simplify operations and generally do so for a lower price. We are increasingly seeing both new and existing customers come to us for this reason. And again, I believe this is part of the reason we are experiencing solid demand for our software solutions. I will now pass it over to Brandon to take us through some operating highlights. Asha will then take us through the financials and outlook, and I'll wrap it up before we go into Q&A.

Thanks, JP. I'll speak briefly about some of our main operational focuses as we look to see progress on our core drivers continue. As you heard from JP, we remain cautious on where our customers' GTV heads from here given the backdrop and have set our plans with this cautiousness in mind. With that said, our focus is on the things we can control. One of the biggest opportunities we have is to drive Payments adoption. Payments continues to trend well for us with our GPV in the quarter at $3.3 billion, almost doubling year-over-year. But with over $22 billion of GTV across our business in the quarter, we have plenty of opportunity still ahead. We've made good progress in making our Payment solutions available to the vast majority of our customer base outside of Ecwid. And with that in place, we're now doubling down on our efforts to drive Payments uptake across our install base, along with as many new customers globally as possible. We have a number of strategies in place to achieve this that incorporate incentives for customers, adjustments to our selling and onboarding processes, and ongoing support from our partners in this space. The timing is right here with uncertainty looming for our customers, having Payments and POS together and a streamlined workflow becomes more compelling to them, helping them to save time and money and freeing them up to focus elsewhere. With ongoing good execution on this opportunity, we believe it will help serve to offset any weakness that may lie ahead within our customers' volumes in aggregate should they face a toughening macro economy. We also remain focused on growing our share of this significant market opportunity with 166,000 customer locations, excluding standalone e-commerce customers brought on through the Ecwid acquisition; we believe we have substantial opportunities still ahead. As we've said before, our main focus is on finding and winning the customers with the best long-term value for us. That means more established customers that are less susceptible to churn that drive good GTV volumes and that eventually will play an important role in our networked supplier strategy. The customers highlighted by JP earlier are good examples of this. This quarter, we added approximately 3,000 net customer locations as we continue to target these customers that meet our desired profile. We saw our overall churn remain in line with our historical trends. However, I want to provide some further context to this number as we integrate our various acquisitions and get closer to having a single flagship product for both retail and hospitality. With some of our acquisitions, we inherited a base of customer locations that are not representative of our desired profile. Examples of these are customers that have been sold through white-label OEM relationships where we will not be able to monetize the GTV; customers in non-core verticals, such as concession stands, convenience stores and food trucks or customers using a small standalone product with little opportunity for upsell. These customers typically have a lower ARPU than our average, have lower GTV and do not represent a compelling fit for our supplier strategy. Excluding customer locations acquired through Ecwid, we estimate that between 1,000 to 2,000 customer locations are churning per quarter in these categories, and we estimate that we have up to 10,000 more that we expect will continue to churn over the next 6 to 8 quarters. This category of churn is incorporated into our plans. And despite this, we expect we will continue to grow our customer location base at healthy levels given the opportunity that lies ahead. I provide this context to be helpful for those who are tracking our overall customer location stat and our related progress on that. And finally, with respect to our acquisitions, I'll speak quickly to our progress on our integration efforts. Our primary focus to date has been on integrating the underlying technology and ensuring a seamless go-to-market effort with the acquired resources. We're pleased with our progress here. Our flagship products are now in market for both retail and hospitality in most of our markets around the world. With that now largely complete, we can finalize our brand transitions, which is important to ensuring we are getting the maximum benefit of our increased scale. This effort, internally called One Lightspeed, is expected to be complete by the end of this calendar year. Other integration efforts we are focused on relate to internal systems, production environments and customer support centers. We're tracking well on these thus far as well. And lastly, one of the primary benefits from our acquisitions has been the addition of some of the industry's most talented people. With the integration of these teams into broader Lightspeed now largely complete, we're seeing the output of this effort in our product velocity and on delivering value to customers. These synergies are important as we continue on our path to profitability will allow us to redeploy resources into areas of growth and innovation while keeping our overall costs in check. I'll pass it over to Asha now to take you through the quarter's numbers and our outlook.

Thanks, Brandon. It was another strong quarter from the business. Our omni-channel balance has proven to be well-positioned to accommodate the ongoing shift from e-commerce to in-store, and our hospitality presence is benefiting from the rebound in restaurant spending globally. As you heard from JP, we were able to deliver $173.9 million in revenue, ahead of our outlook of $165 million to $170 million, with subscription and transaction-based revenue, up 38% from last year on an organic basis and total revenue up 50% overall. First, I'd like to address a few observations about what we saw in the quarter, both positive and negative. Then I'll get into the financial performance for the quarter, including a discussion around our key metrics. Finally, I will end with our outlook for our Q2 fiscal 2023 and for the full fiscal year ahead. The first observation is that the diversity of our business continues to serve us well. By this, I mean our diversity in verticals, geographies, and revenue streams. Our expanded Payments availability in both the EMEA region and for hospitality customers helped boost overall growth this quarter, whereas in previous quarters, we were more reliant on retail customers and primarily in the North American region. We expect to continue to diversify our revenue base by putting more of our customers on Payments, expanding our international retail customer base through our new Lightspeed Retail offering, and further increasing our North American hospitality presence through our new flagship hospitality offering. We continue to benefit from multiple growth levers, growing our revenue through the combination of location and ARPU growth, and expanding our Payments and Financial Solutions across the almost $80 billion of GTV our customers collectively processed in the trailing 12 months. As you have seen by now, we do not need our levers to be hitting concurrently, and the opportunity for each remains compelling. Secondly, I would like to discuss the trends we are seeing in GTV. For the quarter, we saw GTV grow organically by 25% and 36% overall, with hospitality showing stronger growth than retail and EMEA showing the highest GTV growth of any region. In the quarter, our customers processed over $22 billion of GTV. Within retail, we are seeing some of the end market growth decelerate. For the most part, it appears as though the sectors that benefited during COVID, such as bikes and home & garden, are seeing lower growth while end markets such as apparel and footwear that generally saw more challenging conditions under COVID are performing better. We also believe that factors such as rising interest rates and persistent inflation are impacting retail more than hospitality as consumers prioritize spending in areas such as travel and entertainment. Despite this, overall retail GTV still grew 15% organically and 32% in total. Hospitality GTV more than offset this as consumers resume spending on travel and dining out across the globe. Hospitality GTV grew 40% in the quarter organically. And although we saw a particularly strong uptick in Europe, hospitality GTV remained at healthy levels in all regions. We remain cautious in terms of GTV growth as we believe rising interest rates and higher inflation will impact our end markets. But as Brandon mentioned, increasing our Payments adoption, which is largely under our control, can offset any challenges we face in GTV growth. Finally, I will note that this quarter's results in which we reported 38% organic growth in subscription and transaction-based revenues now fully lap or easier comparative periods that were heavily impacted by COVID as well as all of our acquisitions, except for new order and equity, illustrating the business's ability to deliver strong organic growth while integrating our acquisitions. Going deeper into our results reported today, overall revenue for Q1 was $173.9 million, ahead of guidance of $165 million to $170 million. Subscription and transaction-based revenues for Q1 were $165.1 million, representing 95% of total revenue and growing 38% organically over a year ago. Gross profit dollars grew by 35% in Q1 from the same period a year ago. As a percentage of revenue, gross margin for Q1 was 45% as compared to 50% last year, owing to a greater portion of our revenue now coming from our Payment Solutions, which carry a lower gross margin but provide us important incremental gross profit dollars per customer location. Our gross margin percent was impacted by increased hardware subsidies in the quarter, which we are addressing and which we expect to taper down to more normal levels through the rest of the year. Adjusted EBITDA loss was $15.6 million, in line with our outlook of $16 million. This loss was higher than a year ago, reflecting the impact of the adjusted EBITDA losses from our recent acquisitions and includes costs associated with our annual sales, customer and partner summit, which we moved to a virtual format during COVID and which we brought back to in-person this year. Turning to some of our additional business indicators, customer location, excluding those standalone e-commerce customers brought on through the Ecwid acquisition, grew to approximately 166,000 from 163,000 a quarter earlier. These customer locations provided ARPU of approximately $320 per location, which is up from $230 a year ago. Subscription-only ARPU was $136, up from approximately $113 a year earlier. Both of these exclude the Ecwid standalone e-com customer base, which carries a significantly lower ARPU. As you heard from Brandon, net location adds were impacted by the churn in our non-core customer categories. And given our continued focus on the type of customers we onboard, we are pleased with the quality of customers we have successfully added this quarter. Looking at our Payments, gross payment volume was $3.3 billion, up 96% from last year and up 48% from our Q4. Although our Q4 is historically our seasonally slowest quarter for processing volumes, and this sequential increase was expected, the fact that we were also up 47% from Q3 of our fiscal '22, which is historically our seasonally best quarter is actually a very positive sign of progress overall. Our cash position in the quarter declined to $915 million from approximately $954 million in March. This was a result of operating losses in the quarter, certain working capital movements and an increase in cash advances deployed for Lightspeed Capital. Subsequent to the quarter end, we paid off the $30 million of debt arising from the loan drawdown made in connection with the acquisition of Gastrofix in January 2020. I view our strong balance sheet as a source of strength in the current environment and will continue to ensure we remain in a strong cash position. As we look forward to the remainder of fiscal 2023, although we remain optimistic on the things under our control, we believe there are several reasons for caution given the trends we're seeing in consumer spend, inflation, foreign exchange exposure and the overall macroeconomic backdrop. While impossible to predict the severity of any recession, we have stress-tested our forecast based on various economic outcomes. And while we do expect inflation and continued softness in consumer spend will continue for the rest of the year, given our multiple growth levers, the diversity of our customer base and the Payments opportunity ahead of us, we are confident in our ability to meet our previously established revenue outlook. In addition, we continue to focus on finding efficiencies across the business through continuous integration of previously acquired businesses, as Brandon mentioned, and we continue to remain disciplined and intentional on operating expenditures, reducing spend in lower-priority areas. For Q2, we expect to achieve revenue in the range of $178 million to $183 million and an adjusted EBITDA loss of approximately $10 million. For the full fiscal 2023 year, we maintain our previously established outlook on revenues at $740 million to $760 million and an adjusted EBITDA loss of approximately $35 million to $40 million or 5% of revenue at the mid-range of our guidance, which has improved from 8% last year. We remain committed to adjusted EBITDA profitability in our next fiscal year. As a reminder regarding this outlook, we expect seasonality to continue to have an impact on both our revenue and our adjusted EBITDA performance, whereby Q3 will be our seasonally strongest quarter and Q4 our seasonally weakest quarter. Furthermore, as we continue to realize ongoing synergies, we plan to reinvest in core areas of the business, allowing us to invest in growth areas while improving EBITDA performance throughout the upcoming year. We believe our balanced approach to growth and profitability is the right one, given the opportunity we see ahead, the strength of our balance sheet and our desire to run a disciplined long-term business. With that, I'll hand it over to JP for closing remarks.

Thanks Asha. There is no question that the economic outlook has grown more pessimistic in the last few months. And again, I do not want to downplay the situation, but we believe Lightspeed will continue to perform despite these challenges. Our new flagship offering, Lightspeed Retail and Lightspeed Restaurants are the best we've ever delivered, and I believe the best in the industry. Lightspeed Payments is now available to most of our customer base and our go-to-market teams are more experienced than ever in selling that offer. And finally, what I cannot emphasize enough is that we believe the return to in-person shopping and dining is by far the biggest macro influence on this company's success. And here, I'm very encouraged with what we are seeing. Before we go into the Q&A session, I want to take a moment to recognize all of the employees at Lightspeed, and the incredible job they are doing. In the last two years, we were able to digest five acquisitions, launched two new flagship products, rolled out Payments globally and continued to deliver strong growth throughout. It's because of them that I remain confident in our ability to execute and optimistic about our prospects. And with that, we will take your questions.

We will now take our first question from Dan Perlin with RBC Capital Markets.

I just wanted to drill down a little bit on your commentary around Payments really driving the offset potentially if clients weaken. You talk about doubling down to drive that opportunity and you talked about incentives for those customers to meet your onboarding. I'm wondering if you could go into a little more detail in terms of what that means from an incentive base, what you're doing specifically? And is this a function of going back into your existing book and giving clients or are you just finding that there's more success as you bring on new clients?

Brandon here. Given the current macro environment, we are being cautious about customer volumes moving forward. This has led us to focus on aspects we can control to mitigate any impacts. We have implemented several initiatives aimed at ensuring we have the right incentives from the initial selling process. We have tested different strategies for our customers and explored ways to better motivate our sales team, as well as how to expedite customer onboarding. You'll notice that during the past quarter, we made significant progress, and some of these initial efforts have already started to yield positive results. This gives us confidence that as we continue through the year, these initiatives will have a cumulative effect and help to counter any industry-wide macro challenges we might face.

I definitely noticed trends in the quarter. As a follow-up, I'm curious if you could share any recent trends you observed, especially through July, and whether you maintain a cautious outlook on the consumer. Are you actually seeing that manifest in July? Additionally, are you noticing an acceleration in hospitality?

It’s important to remember that our customer mix has been affected by shifts in consumer spending that we began discussing last quarter. During our last call, we noted that spending was moving away from certain retail categories and into others like hospitality. This trend continued into Q1, as Asha mentioned earlier. In July, we haven’t observed any significant changes; it seems like the trends in those retail categories have stabilized. This is crucial as we consider our customer base and the broader concerns about retail in the current macroeconomic environment, as we have been navigating these challenges for a few months now.

I appreciate you taking the questions. I wanted to ask a little bit about, Brandon. I appreciate the color kind of on the customer focus. One of the things that I think about in this industry, given the competition and the way that Lightspeed continues to try to differentiate itself is what the TAM can be? And it's certainly a huge market, especially given your international footprint. Can you just maybe frame it up in the context of the customers you're going after, which seem to be more and more specific, which makes sense to me? But I'm just wondering some of the questions we get is around the TAM given your very focused customer profile.

I can take this one. We've mentioned before that the total addressable market is approximately 46 million retailers and restaurateurs globally. Our focus is specifically on the more established ones who generate higher gross merchandise value, which brings our direct addressable total addressable market to about 6 million. This indicates significant growth potential. Importantly, once we acquire a customer, they tend to remain with us long-term and are less likely to churn due to lower business failure rates. A large portion of the market is still using legacy systems. Looking around the streets in various cities, you'll see that most businesses have not upgraded from these systems. This situation presents an opportunity for us, especially as the restaurant and retail sectors pivot back to technology in the aftermath of COVID. They are also considering the importance of an omni-channel approach. We excel in providing workflows that integrate both online and offline solutions. In our industry segment, very few competitors have the capabilities we offer. Moreover, I believe that our latest product releases are now more competitive than ever and align well with current market demands.

Okay. So no change in your TAM or no modification based on this very kind of focused customer profile, it sounds like.

No, no, absolutely. We know our strategy. We know the segments we want to own, and we're doubling down on that and attracting the right profile of customers.

Okay. And then also just sort of a corollary. One of the things that I think Lightspeed has talked about in the past is the ability to accelerate growth of acquired businesses. And it sounds like because of the nature of some of the customers in the companies you've acquired in the last year, year-and-a-half, maybe the churn is higher in those businesses than it might have been in past acquisitions. Can you just talk about maybe on a same-store sales metric or something for those merchants that you keep from acquired business? Just some sense of how those ShopKeep, etcetera, businesses are doing after you bought them and have integrated them.

We have gross and net adds, and we're focusing on net adds. The reality of our business is that while we have core customers, acquisitions bring along many customers that aren't valuable to us. For example, Gastrofix in Germany had some good customers, but also included small retailers that didn't fit our model. Similarly, with Vend, most customers aligned with our needs, but there were still segments that we weren't interested in. This leads to higher churn in those groups, which is beneficial for us as we concentrate on more valuable customer segments like grocery stores. We anticipate seeing increased churn in less relevant segments and will instead focus on nurturing our strong customers. Overall, our churn levels are aligned with expectations. However, churn is significantly lower among the customers that matter most to us, while it's much higher among segments that we don't prioritize.

Yeah. One thing I wanted to ask about was the pace of penetration in Payments. It seems like sequentially, it was one of the bigger jumps that we've seen. So anything to read back into that maybe with respect to the impact of the flagship platforms or other? Just curious if there's any callout there.

We have discussed some efforts we are managing, particularly focusing on the top end of the funnel to ensure effective attachment of our flagship products in retail and hospitality, which are demonstrating strong attach rates. This is reflected in our landed ARPU, new store ARPU, and overall aggregate ARPU. Additionally, we see significant opportunities within our current customer base. We have launched several initiatives aimed at enhancing our conversion rates, speeding up the process, and ensuring that they become transactional quickly. We made good progress this quarter, and while there is still much to accomplish, I am quite pleased with the early results from these initiatives.

Maybe, Brandon, it's worth mentioning that we recently launched Payments in Europe and Australia. There is often a lag between when sales start to pick up and when we effectively manage the entire customer flow. What you're observing is a result of our global efforts in selling, onboarding, processing, and delivering Payments at an appropriate pace. Therefore, we are very encouraged by the progress we’re making in this area.

That makes a lot of sense. I also wanted to follow up on the organic growth, which I believe was 38%. That's right in line with your longer-term model. In the quarter, there was around 11% location growth, which would suggest slightly better than mid-20s growth on the ARPU side. Is this the correct way for us to think about it? While I don't expect guidance, I'm curious about how we should frame this moving forward.

Hey Josh. Yeah, totally, that is the right way to look at it. We've committed to 35% to 40% organic growth in the year. And given the Payments initiatives that both Brandon and JP talked about that we've launched, and we see continued success so far, we are confident in that annual 35% to 40% guidance. And that 38% is right in the middle of that. One thing that we should be wary of or we want to remind the public of is we had a very strong Q1 last year. We had an exceptional quarter last year with a strong uptick for the verticals where Lightspeed is strong. And despite that, we were able to grow 38% year-over-year on an organic basis. So that's definitely the right way to look at it.

Just wanted to touch upon the B2B network and some of the early feedback that you're hearing from clients. And thinking about this in the full context of the year, can we consider any contributions from that in the full year guide or when does that you guys anticipate to kind of start gaining more traction?

Yeah. So I'll maybe address this one. So as we said, when we did our forecast this year and for next year, by the way, we are not expecting a lot of revenues from the B2B network. The B2C network for us is an investment where what we're expecting to see is, again, a much more competitive platform, if you will. And what we're expecting is that over time, we're going to start building revenue. So here, just being very clear on the launch, what we did for now is we've integrated new order into the Lightspeed platform. And now for the luxury brands that are on new order, we enable anybody to do an integrated order from the storefront, which is pretty game-changing. We enabled the stores also now to have automated descriptions, videos and pictures of the items they order instead of doing it manually. And then on the flip side of that, what we're doing now is we're enabling the brands to access sell-through on a consolidated basis for small businesses. So what we're enabling them to do basically is to sell through an SMB network and have the same level of feedback as they were selling directly to consumers. So that's the first step for us, and this is really now, for now, focused on the key brands within new order. And we decided to take that approach so that we can learn and we can iterate and we can create value. And what we're seeing so far is that there is a ton of value for the store owner because for them, it just saves them time and it makes the automated view and the real value for the brand is the sell-through. Now for us, this is a step one. But then as we go forward in this year, and you'll hear more about other verticals, we want to deploy verticals that are strong to Lightspeed, not just luxury brands, but we want to try and deploy outdoors and sports and do some service repairs. So we are right now building the plans now that we have the plumbing that's done. We have the first few customers that are using it, and we have the feedback. We're now going to start building a plan on what verticals we tackle when, and you can hear more from us in the next quarters where we'll be progressing there. But again, being very clear, we are not expecting anything. This is an investment zone for us and with a horizon of probably 24 months before we start seeing some material revenues. But we think it's game-changing because if we do this right, we are going to solve a really big problem for our customers.

Yeah, absolutely, and it can definitely be a solution that drives more stickiness in the platform. I know it's a really small piece of the business right now, but the $9.4 million in cash advances, up 49% quarter-over-quarter. Where do you guys see that going over the next year as your base may need additional working capital to kind of keep things afloat in uncertain times?

Yes. That's an important part of the portfolio for us. We've had great success there. We get wonderful feedback from our merchants. It helps make the whole platform more sticky. We've seen solid evidence of that. So far, our loss ratios have been very, very low, reflecting the more established customer base that we've launched this into. So we're going to keep growing this. We expect it to continue to grow at a very healthy clip, but still, of course, be mindful of running this business, this part of the business quite prudently.

With respect to Payments over the next, call it, 12 to 24 months, do you expect it to continue increasing at the same pace or actually accelerate given the number of initiatives you have underway now?

The things that we can control, Richard, we expect to accelerate. The macro economy and what that means for baseline volumes inside our customer base, that's tough to predict. You heard from Asha that we're taking a pretty cautious view of how that looks through the rest of the year. But on the things that we can control in terms of the number of new customers that we onboard, the amount of our existing base that we convert, we're confident that we'll see that continue to accelerate.

Yes, I'll take that one. We have a strategy focused on one product for retail and one for hospitality. Most of our products have been launched, and now we're addressing our largest market, which is the U.S. We are rolling out our retail platform in the U.S. and have introduced a few verticals that are performing exceptionally well. We are experiencing improved close rates, higher average revenue per user, and better payment attachments. This success is due to the effective integration of our core software and payment solutions in the new platforms. I believe we are now more competitive than ever with our products, and the gap between us and our competitors has widened. We are seeing improved close rates for our new product launches.

Okay. And just a last quick one here. You're still talking about breakeven EBITDA next year. Where is most of that sort of operating leverage going to come from when it comes to the OpEx line?

Thanks, Richard. Most of that operating leverage really comes from the integration of our different acquisitions that we've made over the past few years. As you've heard from us, we're being very rigorous and disciplined in our spend. But at the same time, we have so much opportunity as we integrate all the different companies that we bought over the last two years. Integration leverage comes from not only teams and integrating our people, but also from contracts. When you think about things like AWS and Google Cloud Infrastructure contracts where all of these companies had their own separate contracts, as we consolidate those and we get volume, we get more volume, and we get much better rates. And so as we continue those integration efforts, we're starting to see more and more of that operating leverage.

I would like to ask for more details on the full year guidance. The Q1 revenue exceeded your expectations, so I am curious about your outlook for the remainder of the year to maintain that level despite the strong Q1 result.

Thank you, Dan. We are being cautious regarding the current macro environment. As Brandon mentioned, there are aspects we can control, such as the number of customers we migrate to our Payments platform and the speed at which we facilitate customer transactions. We are confident in our ability to manage these elements. Our recent initiatives are showing positive results. However, factors like retail spending, hospitality spending, and the effects of inflation on consumer behavior are beyond our control. Therefore, we want to ensure our guidance reflects a cautious approach that we are comfortable meeting.

I appreciate the insights you provided about consumer spending and your cautious outlook. Can you share any information regarding merchants' willingness to adopt or invest in new technologies given the current macroeconomic uncertainty? Additionally, any updates on key performance indicators like inbounds or conversion rates would be helpful.

I believe the situation is straightforward. As we potentially face a recession, hiring may become limited. Vendors are looking for platforms that can maximize efficiency. This is precisely what Lightspeed offers – the ability to do more with less. Currently, we are experiencing strong demand for platforms like ours. Additionally, vendors are favoring the idea of consolidating their tools. For example, a vendor may use multiple services for e-commerce, payments, and loyalty. During a recession, they typically seek to combine these services with one vendor at a lower cost. We are actively providing bundled solutions and discounts based on these bundles. While we remain cautious, there are many opportunities and a significant demand for platforms like ours.

Can you speak to the headwind you're seeing from FX? You obviously had significant European exposure. So have you been implementing any pricing adjustments in some of the geographies to offset FX or is it more the fact you've got other levers like Payments ramp and module add-on sort of offsetting that?

Hey Thanos, thanks for the question. So FX for us, at the end of the day, a strengthening USD is great for Lightspeed just from the fact that the majority of our revenues are USD, whereas the majority of our operating expenditures are in currencies outside the USD such as the Canadian dollar and euro. So overall strengthening USD is helpful for Lightspeed. Of course, to your point, there is an impact on the revenue line, but we need to keep in mind that the majority of our revenues are still U.S. dollar-denominated. And so given that fact, the strengthening USD against other currencies caused a 1% to 2% impact on our revenue overall. So really not a huge deal for us at this time.

Great. And then for JP, you talked before about your push into the U.S. hospitality market on the back of the new hospitality platform and building out an in-person sales presence. So maybe just update us in terms of where you are in building out the local sales teams and whether the macro backdrop has influenced your plans and timing in terms of those investments at this point or not?

Yeah. So as we mentioned last time, we were trying with salespeople with foot on the ground. And so we started that initiative, a couple of handfuls of salespeople. And I'm happy to report that the actual LTV over CAC is better with the outbound for the profile of customers we're going after. So we have decided to double down on that. So we are now going to move the needle and double the size of the LTV and continue pushing on that front. So we're adjusting the model. For now, we're happy with what we see, and we're seeing better unit economics on our own outbound when we do performance marketing.

Just wanted to ask on the One Lightspeed, the brand transitions expected to be complete at the end of this year. Are all those transitions going to the flagship platforms or also other legacy versions of Lightspeed?

I believe this relates to what Asha mentioned about cost savings. We are consolidating everything under one flagship product and transitioning everyone to the Lightspeed brand. As we roll out the flagship products globally and prepare the brand, the next transition will be the Upserve brand in the U.S. now that the K-Series is launched for our hospitality sector. In the upcoming quarters, we will phase out Upserve entirely and operate solely under the Lightspeed brand. All sales personnel will focus exclusively on selling the new Lightspeed platform. The final step in our journey will involve transitioning to Australia and New Zealand, which we've already started for retail, and will do the same for hospitality. In short, moving to one Lightspeed means having a single product for hospitality and another for retail.

And then outside of the brand transition, just like thinking about the total customer base, what percent of your total base is on the One product, the flagship versions today? And where can that go by the end of the year?

Yeah. So I think we were very clear on the steps. Step one for us was to get all go-to-market for new customers on one platform. And then from that moment, we will then focus our account management teams on building conversion utilities and getting the base onto the new platform. And here, I think there's enough new functionality and enough new features that we're going to see a natural progression of those customers moving over. We haven't shared any data for now on this, but this is going to be, I mean, top of our mind as soon as we have the One brand everywhere in the world.

We've seen quite a few tech layoffs and share price reductions impacting stock-based compensation. I'm just wondering how you guys are thinking about that macro headwind and how it's impacting your hiring plans, if you have any, if you can share them and any issues around compensation with the share prices down?

Yeah. So I'll address this one also and Brandon and Asha, if you want to jump in. Look, for me, it's very simple. We are not a pure e-commerce or a pure digital company. The strength of like the 90% of our GMV is physical retailers and restaurateurs, and this return to the physical world is creating a lot of demand for us. We have a forecast that we are committed to hitting 35% to 40% growth this year. We are being cautious, and the way we forecast it is a very cautious way. So we are confident we're going to hit our numbers. And for us to hit those numbers, it means that we need to continue hiring, we need to continue investing. We need to continue bringing people who can deliver to customers and deliver an incredible experience to our customers. So we're not in that mindset for now. We are more in the mindset of, hey, let's really focus on getting payments, getting more customers, ensuring that customers have a higher ARPU and delivering on the numbers we gave to the market.

That's great. And then as a follow-up, you performed really well in Europe in the quarter, citing hospitality and people traveling. As we think through the summer and these macro headwinds that you're talking about, some concerns on Europe, is there anything for us to think about for that region into the fall?

I believe Lightspeed is well balanced, operating in retail, hospitality, and golf across all continents. Even during COVID, when one area struggled, another thrived. For example, while golf was down, hospitality performed well. Currently, we're experiencing substantial demand in Europe for platforms like Lightspeed, particularly strong GMV in hospitality. The growth rates and overall demand are encouraging. Additionally, we've launched our X-Series product, our retail solution in the UK and parts of Europe, and there's significant interest in this new platform, which we view as more competitive than our previous offering.

I just want to circle back real quick on the guidance and the FX impact. Asha, I completely appreciate that most of the gross revenues are more North America based. I think when we go down to gross profit or net revenue, it still holds, but maybe to a lesser extent. Just with that context, could you maybe just give some context on what was the FX impact in the original guidance for revenue for the year? And what is the FX impact in the guidance today? So just so we can get a sense of how much incremental FX impact that you're working in and still able to maintain the revenue guide.

Hey Tim, thanks for the question. Just like I mentioned earlier, on a net revenue basis, you're right, the mechanics are slightly different. But overall, at the end of the day, the majority of our Payments revenue is still coming by way of North America. So even though we are diversified, the majority of the net revenue is still U.S. dollar-denominated. And so given that when we look to our guide and we have factored in FX, it's really in a very small percent range 1%, 2%, 3% range, not more than that.

And then my brief follow-up is I just want to confirm, I think the math suggests this is a yes. But if we were to back out the roughly, I think you said 1,000 to 2,000 of incremental churn from some of the legacy, non-core, smaller, lower ARPU type of locations that for the core business, let's call it ex-Gastrofix, ex-ShopKeep that the location adds are roughly trending in sort of the mid-teens, maybe even slightly higher. Is that a fair characterization?

Yeah.

One brief one for me. Just has there been any change in the approach to integrated payment partners, the partners that you negotiated rev share agreements? As I try to foot Lightspeed Payments, GPV to typical take rates, it seems like there's a pivot happening there, but maybe you could help me out with any other dynamics playing out in the non-Lightspeed transaction revenue?

No, nothing new there. Our core partners remain the same, and all of the additional business essentially flows through to those core partners. We still have the legacy referral line from before we launched Lightspeed Payments, and that revenue line continues to decline, which we expect to persist. So, what you might be noticing is that while our overall Payments and our overall GTV are growing, there is this declining line within our overall transaction-based revenue, and that could be what you're observing.

I think our primary focus is currently on the U.S. hospitality sector. We're pursuing this strategy because our competitors are active in the same space. However, when it comes to retail, we're quite satisfied with our existing model, which we find to be very predictable. We have a comprehensive understanding of the economics involved, and we closely monitor the close rates. Internally, I often liken our approach to making a soup; we know the ingredients. If we decide to scale up, it's a straightforward process of increasing our marketing efforts to attract more customers. Nevertheless, we are committed to achieving EBITDA breakeven or profitability next year. Since our payback period is over 12 months, overextending ourselves in acquiring new customers could lead to losses in the first year. Therefore, we aim for a balanced strategy to attract the right customer profile without altering our go-to-market approach. Interestingly, our observations during COVID indicate that during economic downturns, our customers tend to seek out multiple products. As a result, we're focused on bundled pricing and striving to integrate Payments for every new customer. We’re adopting a strategy similar to former telecom operators, where purchasing multiple packages from Lightspeed offers customers a bundled discount. We believe this approach will be effective, especially considering the potential for an upcoming recession.

Thank you for your participation. This conference has concluded. You may now disconnect.