Unified Payments strategy. Reiterating commentary from F2Q24, LSPD management expects 30%–35% payments penetration by year-end, noting that the North American launch has gone very well with churn and the time to transact (integration) performing better than expected. In North America, payments penetration is in the low-30s% and management expects to see continued uplift in penetration from customers coming up for renewals (~30% of customers renew annually), as well as non-solicits. The EU is the next stage with the launch starting back in September, which also appears promising as churn levels have been normal. Specific to continental Europe, management called out (as they did in F2Q24) that a key consideration is that banks have generally managed payment processing for merchants, which requires more “hand holding” to move existing customers over to Lightspeed Payments, while pointing out that new customers in the region have little push back to making the switch. Walking through the strategic thinking of migrating North American customers to payments in F2Q24, management pointed out that NA tilts more towards retail customers, for which LSPD migrated those customers before the holiday season, when the window to migrate would be closed. On the other hand, in Europe, the customer mix tilts more towards hospitality, which has their busy season over the summer months (F2Q24), and having just ended, opened the right time to shift European customers to Payments. Looking forward, management believes it could achieve 40%– 45% penetration in FY25 and then >50% the year after.
ARPU & margin uplift. A key metric we highlighted from F2Q24 is sustained growth of Software ARPU, growing HSD in the quarter, even while Lightspeed’s account management team had pivoted to aid in migrating customers to Payments. Management called out two key factors that drive the trajectory of ARPU growth 1) the increased adoption of its flagship platforms, which naturally carry more software modules (with more to be added) vs legacy platforms; and 2) its customer mix shifting towards larger customers, which adopt more software to manage more complex operations, and churning off smaller, low ARPU customers (<$200K GTV customers account for ~90% of churn). We believe that these two trends will continue to play out both from AM teams pivoting back to focusing on software sales, as AM teams typically bring in 40%–50% of MRR, so with them pivoting back to software could accelerate software ARPU to 10%–15%; and as Payment’s penetration enables a key softwarecomponent: Insights, which provides merchants with deep analytics to optimize operations. Management noted that Insights has received highly positive feedback from customers and is a key competitive differentiator. Additionally, we note that Lightspeed has nine legacy products, which its cheapest, compared to the new flagship products, represents a ~30% ARPU lift, and furthermore, as the company winds those down, there will be an associated improvement to margins as duplicative costs are reduced. For margins, one of the biggest considerations is Capital, which carries a ~90% gross margin, and has yet to be fully unleashed as management noted that it does not want to stress its balance sheet, and instead is exploring externalization partners.
Macro commentary. Management expanded on its relatively cautious view of the macro environment, calling out that it faces tough comps in retail in certain verticals, such as bikes and home improvement, and as retail had ~flat SSS in F1H24, with management expecting a slight y/y decline. Hospitality is expected to be seasonally lower in FQ324 and even lower in F4Q24. However, there are no changes in internal indicators that are driving the company’s conservatism. Additionally, management reassured that in the event of a macro slowdown, it still intends on achieving on its adj. EBITDA or better target for FY24.