Lightspeed Commerce Inc (LSPD) 2024 Q3 法說會逐字稿

Good morning. My name is Krista, and I'll be your conference operator today.

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 speakers' remarks, we will have a question and answer session. If you would like to ask a question, 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 Papageorgiou, 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 JP Chauvet, Lightspeed's Chief Executive Officer, and Ashok Bob Shanks, 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 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 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 CEDAR plus and on the SEC's EDGAR system. And finally, note, because we report in US dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated.

So with that, I will now turn the call over to JP.

Thank you, Gus, and welcome, everyone, by speed continued 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 million 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 stretch of 2024, I feel very confident that we will meet all our key objectives for the year.

As a reminder, these objectives were one. We think the benefits of one might lead to 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 for achieving adjusted EBITDA breakeven or better for the full fiscal year.

As fiscal 2024 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 2025 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 GTD. 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, the significant accomplishments, two years of effort and a lot of hard work. I want to thank everyone at Lightspeed for their dedication and commit. Of course, there is still work to do.

But going forward, Lightspeed 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 this space with a massive opportunity and many of our target customers continue to use dated legacy system.

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 what might be 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 while expanding and innovating our product offerings continues to be a priority for light.

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's 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 from both retailers and restauranteurs, allowing us to offer best-in-class features such as analytics and grid management and e-commerce within the timeframe that would not have been possible if we have 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 GTE. 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 Café in the UK, which is known to have trained some of the greatest threats in the world. In Germany, we signed the iconic table in downtime, Humber and tourism in Berlin, all of whom chose Lightspeed restaurants. Also Attica or regular in the World's 50 Best restaurants Live has selected Lightspeed to operate their fine dine restaurant in Melbourne.

On the retail front, we added a number of locations for Lilly, including the Canadian Atlantic apparel designer that switch to Lightspeed from one of our cloud-based competitors. In the US we signed fit my feet a six location footwear retailer that was switching from their on-premise legacy POS system. In the UK, we signed two locations from a high end bike brand in RL family owned and operated since 1952 scenario has one simple objective to make the world's best bikes in the quarter.

Lightspeed was proud to be the retail POS for Twitch call. The annual conference for the widely popular live through video gaming platform, which with over 60,000 attendees hosted in Las Vegas and finding signed up several new brands through our supplier network, including casual lifestyle brand, Tommy Bahama, Canadian footwear, brand passion and the casual men's apparel company on target list of high value brands that our supplier network continues to expand.

We remain focused on building an integrated supply chain that links high value brands to retailers and consumers. We continue to invest in our supplier network and remain highly confident that will 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 for our fiscal year end and that our Unified Payments initiative has proven to be a success. We continued to see ongoing progress in North America and rolled out our efforts in Europe and A-Pac in Q3.

As expected, converting customers to payments in Europe and A-Pac 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 in a bag and face less competition in those markets. Getting these customers onto payments improves our unit economics.

So this time 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 costs, the majority of the time.

These advantages are just as applicable to our customers in a year and a bag, and they are to customers in North America. As we head into fiscal 20 24our account management teams in North America will gradually go back to selling software acquisitions payments, but we expect to continue to make progress on expanding payments throughout fiscal 2025. So while we expect to end 2024 with TPV as a proportion of GTV. at between 30% to 35%. We foresee this number continuing to grow throughout fiscal 2025.

On the product side, we continue to deliver innovative features that help our customers manage and scale their businesses. We have several exciting new product launches this quarter. In the US, we launched instant payouts, allowing retailers to access funds immediately no matter to date or time, although still in the early stages. This offering saw very strong initial reception.

We launched Lightspeed Capital into France, the Netherlands and Belgium this quarter and Germany shortly after the quarter, expanding our global footprint for these high-margin offerings 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 service can instantly process orders and accept payments on a nice phone, reducing wait times, increasing table turnover and improving customer satisfaction.

And we also launched tap to pay on a phone in both the UK and the Netherlands, allowing customers in those regions to accept payments right on their items. We introduced Lightspeed retail and new order integration into the flagship retail offering, lowering our retailer customers to order directly from thousands of brands through the new order of a 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 2024 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 so we are focused on adjusted EBITDA profitability and our TPV. continues to grow.

Some of the incremental profits will be channeled towards expanding our open our feet on the street sales motion. We expect that the unit economics and 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 here 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 Ashley to take us through the quarterly results and provide outlook.

Thanks to 18. Lightspan 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 are pleased with the progress on our key performance indicators in the quarter. Revenue and gross profit growth remained strong. Our pool hit record highs this quarter with 28% growth year-over-year. Gpv grew 69%, thanks in large part to our Unified Payments 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 higher GTV customers. Although we are seeing positive initial traction.

With respect to this initiative, we are focused on accelerating the shift in fiscal 2025 through initiatives such as investment and outbound. 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. First margin on subscription revenue was 77%, consistent with last quarter, thanks to a dedicated effort to consolidate cloud vendors and improve 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 continued to focus on Unified Payments with teams from North America, EMEA and A-Pac. We're 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. And we expect that by mid fiscal 2025, the majority of our account managers will return to their traditional rules 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 increased 69% year-over-year to $6.6 billion as a greater portion of our GTV went through our Lightspeed Payments clients. 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 onto 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, Lightspeed 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 the organization, including the efficiencies we identified and implemented through actions like our reorganization that was completed in our fourth fiscal quarter of last year. Total adjusted 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 TAM. 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. Ttv growth was more modest this year, owing to a challenging macro environment. And given management's attention was focused on unified pay in fiscal 2025. However, increasing our hygiene TV 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 continued to grow our sophisticated higher GTV customer base customer locations with GTV. exceeding $1.5 million 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 RPU in the quarter came in at $447, up 28% year-over-year. Unified Payments is helping increase overall arc as we mandate payments for all eligible new and existing customers and we're seeing healthy growth in software RPU as well.

Churn rate 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 are prepared for churn to increase as we rolled out unified payment, yet it is encouraging to see that the majority of our customers recognize the benefit of an integrated software payment solution and the value of the Lightspeed commerce platform.

In terms of our balance sheet. We 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 center. 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 our Unified Payments as progress, 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 as our employees continue to execute. It demonstrates how effectively this organization can achieve its goals once we set our mind to it.

Now onto 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 TCV perspective, given transaction-based revenue is over 60% of total revenue and highly dependent on GTV growth, we remain conservative on our GTV growth assumption given a still subdued macro, and we have not seen any signs of improvement in the 1st 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 million and 905 million with breakeven or better adjusted EBITDA. With that I will pass the call back to JP.

Thanks, Asher. 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 from one. Our TAM is very large number in the millions and we maintain only a few hundred thousand customer locations. Two, our products are industry-leading, especially for the more complex IGT customers three. Our global reach for complex retailers and restauranteurs is unmatched and for 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 2025, our GTV growth and increasing the number of IGT 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 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. And you've mentioned several times that you have in prior quarters that the international market needs a lot more education has been slower to adopt.

Tom, I guess, Dave, two questions there. One is, Tom, does the pace of payment adoption in the international market in any way, shape or form active, the gating kind of mechanism to slow your software growth. Are we willing to sell software first and then come back and get payments later. So that's kind of the first question I had.Yes.

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 of new customers. So new customers buying our software on that front, we bundle both. So you could not buy software without payments.

And on that front, we're seeing close rates that are strong adoption that strong. So there is some 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 have planned for a slower adoption because it just simply puts more conservative market. So but again, I just want point out one data point here that's very interesting is, you know, planned slower growth, but still at Lightspeed, it's up about 250% year-over-year when you look at the 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 bifurcate those two pieces to it. The second just quick follow up question is on the idea around expanding outbound sales to go after higher GTV locations and it sounded like 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 2025, but is there some is there the 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 has actually expanded and then it reaccelerates materially in the back half? Or should we be expecting a more kind of a positive cadence throughout next year?

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. We found because we have field reps today and found that the unit economics on a field, the field reps customer that they sign are much better because they're much more efficient in going after our ideal customer profile.

And so while we do expect that the investment will precede revenue growth, we're very confident that we're still going to be adjusted EBITDA generating adjusted EBITDA profitability next year. And we do expect to pivot a little bit more towards growth and 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.

Andrew Bauch, Wells Fargo Securities.

Sorry about that. Thanks for taking the question. I just wanted to dig into the GTV trends in the quarter and what you've seen thus far off 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 on I think you said that the trends haven't improved into the into this quarter. Does that mean that there's further deterioration that you've seen, but any additional color there would be would be helpful?

Yes, absolutely. Thanks for the question, Andrew. So GPV 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, you know, 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 A-Pac, 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 larger declines when it comes to our US hospitality portfolio. I don't think that's a Lightspeed specific stat. But at Lightspeed, we did see in US hospitality declines year-over-year. And so when we when all told we put that together and we look towards 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 you.

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

Yes, in our Retail North America, sorry, our hospitality North American portfolio remain, you know, very much impacted by the weather in January, but

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

Yes, absolutely. The on the under 200k annual GTV. customer cohorts represent about 5% of the overall company GTV. and that, you know, it hovers between 5% and it goes down to 4% but it's always in that range. And so again, from a customer location standpoint, it's a larger percent for sure, about 30%.

But overall on only 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.

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

Thank you.

Andrew Jeffrey, Truist Securities, Inc.

Hi, good morning. Appreciate you taking the questions I just want to tried to dimensionalize long term or just reconfirm maybe the Unified Payments aspirations of JP. and Azure. Do you think that that GTV. 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 geo mix look like? Maybe you could help us by talking about where PV. attaches in North America versus Europe today? And where do you think that could go?

So absolutely. We as we always said, our next step and our ambition is to get to 50%. As we said this year, we'll get to 30% from 30% to 35%, and we're fairly fairly confident we're going to get that number. And what we said is the following year we'd go between 40% and 45%. So we are very much on track for that. And we believe that there is no, there's nothing stopping us. And 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 almost 100, you know, 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 they are now we are actually working hard at Lightspeed to actually unleash all the verticals that we couldn't unleash and don't like high risk. And so we're really working hard now at expanding the TAM in the US so we can continue having very strong penetration.

Okay.

That's helpful. Thank you. And then I appreciate the emphasis on on revenue growth, especially given your size and the TAM and also the outbound sales efforts. But and again, I recognize you're not guiding 2025, but as we think out over the next several quarters, could we expect kind of a hockey stick at some point in software revenue growth because pre the subscription revenue is pre your Unified Payments efforts, you are 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 pointing in the right direction?

Yes. So again, just on 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 have traditionally or up-selling 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 software on sorry, 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 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 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.

Right.

Appreciate that. Thank you.

Thanos Moschopoulos, BMO Capital Markets.

Hey, 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 differences there?

Yes. 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 I'm going to keep the customers. So we are going to sequence it to ensure that we lose a few customers as possible.

And I think maybe just going back to one of the comments, Ashish said that where we're seeing a more emotional decision is in this low GMV buckets, and those are the ones that, you know, could potentially churn, but not really important to us given it's only 5% of our RGRGBRGMV. 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 have critical mass and for which it's proving to be a strong differentiator. I mean, so clearly I would assume application for bikes and for high-end apparel, but are some of the verticals are ramping up in that regard?

Yes, we are. And so you're right, apparel and bikes, you know, the strong ones we are going out to supporting our outdoors. And but I think for me, again, it's some just if you look at the number of customers on retail, the largest segment for Lightspeed in retail is apparel. So we're actually working really hard to make that experience even better for all the customers and apparel. As you know, we hired John Shapiro who came from Wayfair, was now really focused on driving a better experience for our customers. So and then as you know, we historically had bikes, but now we're expanding.

And next one is outdoors and sports.

Joshua Baer, Morgan Stanley.

Great.

Thank you and congrats on hitting a high 20s payments attach setting up for 30 35 next quarter.

Question is on subscription.

There were the prior three quarters we saw really nice sequential subscription growth and this quarter was pretty much flat versus slightly down. I'm just wondering if there's any commentary for or around that a change in trajectory this quarter?

John, thanks for your question. The subscription revenue 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 A-Pac were in the third quarter at the peak of those units. The Unified Payments launched relaunched Europe and A-Pac 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 2025. And we're absolutely expecting subscription revenue to accelerate.

Okay, got it.

So even in like North America retail, where it had payments, the Unified Payments strategy, I guess for a while, they're still focused on Unified Payments versus and like do you have the number at this point in time?

Yes, absolutely. Because Unified Payments launched in North America in May, but we launched in May and 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, 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 software subscription does that cohort records?

You know that things change. That's not something that we have disclosed dumb. But you know, 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 5% of the GTV., although that's not representative of the overall revenue, it is representative of the potential of this this cohort of customers.

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

Great.

That's helpful.

Thanks.

Dominic Bahl from Redburn.

Well, hello, guys. Had I showed you of JP, um, on software of two. So obviously the higher the better makes your merchants a lot more sticky work 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. Yes, maybe I'll start. I mean, of course, that the larger merchants have a much stronger RPU. They buy more modules and really when you look at it as a lot of greenfield, there's a ton of room for growth inside of our customer base. I don't know if you want to comment on this or yes,

we know we have been growing software, and that's really the delta software attach new modules that we've been building.

But to answer your question, very simply, there is really there's a large opportunity for software deals going forward, buybacks from Cornelius gate, when we said that, that is the reality. But assuming that you can pay us 400 plots in just software, our pool.

And as we continue to innovate and we'll have more software modules, there's lots of opportunity for growth.

Just what I think about flagships, in particular on RPU up lift in fleet and be up as high as 30% when we're migrating customers from legacy Intuit flagship entered a lot of our uplift opportunity for us just from migrate back into the budget. And then on top of that is all the other software modules that we continue to evolve.

That's great. That's really good.

Thank you.

And just one more quick one. Is there any difference you see in so far approved between your retail merchants and your hospitality motions?

We are doing today because we have several products in our portfolio of others quite different depending on pumping modules other than that the offer.

But when we think about our flagship product yard Club Med is quite significant, retail and hospitality too.

Thanks guys.

Tien-Tsin Huang, JPMorgan.

Thanks for the time.

The question here. Just want to ask on the gross margin outlook. I should maybe get some help on the outlook there, given some of the puts and takes of 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 and locations?

Hello, Jason, thanks for the question. Yes, absolutely.

We'd expect and you've heard this from us before that overall gross margin 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, as you know, on the negative side, there's the declining residuals that come in at 100% margin. But on the flip side, what we what we have is increasing international payments penetration. And even though international take rates are lower than North American, the gross margins are higher there, about 36%. And that's what we're seeing, you know, in the gross margins from A. Pac 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, as you know, and 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 just pretty stabilized. So the declining residuals will be offset 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 GDP growth and high GDP unit growth, can you maybe be a little more specific on the what type of locations, whether it be geography or the other vertical? I'm just curious on that.

So what we said on and on, you know, from a high GTV growth perspective, or customer perspective, our ideal customer at Lightspeed, our retailers and restauranteurs that process $0.5 million 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 and 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 lighting in fiscal 2025, as you heard from JP., is to double down on growing software revenue through increase at our IGTV. merchant base through software attach. And the best way to do that is through heavy investments in our outbound, which is which is our absolute focus for next year, it's a no geographic bias is going after the larger retailer restaurant.

Understood.

And so interesting, absolutely.

Richard Tse, National Bank Financia.

As I think 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 cap kind of changed on a year-over-year basis.

And so the LTV to cap is not a stat that we have disclosed publicly in this past year. However, you know what you have heard from us. And then the reality is that with the increase in payments penetration, our unit economics, as you know, 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 cap 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 you know, that is 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 solutions.

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

Yes.

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, you know, 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, 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's 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 of 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 some 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 they're 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 that's really my commentary on this.

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

Thanks to the big question.

I know we've hit on this a little bit earlier and in some of the questions around that expanding of the direct sales force. But you started doing this, I believe, in the fall of 2021. I was just hoping you could give an update on the number of salespeople that you have today in the US. And then in terms of the expanded efforts this year, a rough number on how many that might RAMP-2? And then I have a brief follow-up.

Yes.

So look, and maybe just going back in time, we really are only did that primarily in the US until now and really around hospitality and where we had a competitor that had a lot of foot on the ground. So we have to ensure that within the categories that work for us and the GMV that we had people on with feet on the ground, that is being said at the time it wasn't a significant number.

And even today you're talking about maybe 30 people. But now we have enough kind of and enough and have enough time under our belt to know that these are really very good for Lightspeed 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 merchants.

So I think there also when we look at food on the ground, we are going to heavily invest in retail in the US where you will start seeing people with feet on the ground pretty much in every big metropolitan area in the US. And then the other piece for us is outside of the US for hospitality. If you go across Europe now we're starting to have a lot of concentration and it's very frequent to go into restaurants where you see Lightspeed. And I think there we now want to double down in Canada in Australia and New Zealand and in Europe, double down in 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, to more of a strategy that Clover has taken sort of a multipronged 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 result in terms of that, that coverage that you were talking about nationwide.

And 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 partner. So it's always been something we 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. And 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 and workflows.

And so 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 can have with banks and real estate agents. So and I think to answer your question, very clearly, we believe that the blend of both is the most important is having people with foot on the ground to go and really we convinced the more traditional customer base that we are the right platform in parallel to having a lot of referral customers or referral partners that are bringing us deals.

Excellent.

Thank you, JP.

Raimo Lenschow, Barclays.

Great, thank you.

This is Jeremy on for Raimo. I just wanted to ask in terms of verticals that are eligible for Lightspeed Payments is there's still more work to be done there and if so, but could you talk to what percent of overall GTV would be in some of these verticals can doctors at the moment?

Thank you.

Yes. So I think first of all, you need to when you look at GDV, there is a portion of cash. So let's start there. So just the portion of cash brings you 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 and or where industries where we don't yet have a presence or even countries where we don't yet have payments for Lightspeed. 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, give you compensate for 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 we are hoping to make some announcements in the in the foreseeable future on that. And then I think it's all around expanding.

So as an example, I'll just give you have in Singapore. We have a lot of Michelin Star and fine-dining restaurants that are on Lightspeed yet today, we don't 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, we're only selling software. So that's why when you 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 Lightspeed 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 Papageorgiou for closing remarks.

Thanks, Anders, and thanks, everybody, for joining us today, and we look forward to seeing you on our next conference call after our 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 correct.