Preview: ARPU Expansion Core To FQ3 Growth Our Conclusion
Lightspeed will report its third quarter on Thursday February 8, prior to the
market open. We expect FQ3 Y/Y organic revenue growth of 25.5%, which is
aligned with FactSet. Our forecast assumes this will largely be driven by
ARPU expansion from upselling existing merchants and a rising Payments
attach rate. We expect this will be partially offset by macro headwinds and
churn among merchants at the low end of the market.
To reconsider our Neutral rating, we would like to see a path to accelerating
subscription growth. When that materializes, we expect it to raise
Lightspeed’s overall growth, free cash flow and the valuation investors are
willing to ascribe to it.
We rate Lightspeed Neutral with a C$27 price target (prior C$24) based on
an EV/F2024 sales multiple of 3x (prior 2.5x) and an FX rate of 1.34 (prior
1.35). Lightspeed trades at 2.6x EV/F2024E sales vs. peers (avg. of 5.4x)
and the BVP Cloud Index (median at 5.7x).
Key Points
We expect third quarter revenue of ~$236.7MM (FactSet $236.4MM) and
EPS of $0.09 (FactSet $0.05). While we applaud Lightspeed’s operational
focus, its shift in strategy towards an upmarket mix will take time to complete.
The company has ~70k merchants on its platform (ex. Ecwid) that generate
less than $200k in annual GTV. This cohort is being de-emphasized, and
many are likely to churn off the platform as a result.
We expect revenue growth of 25% (F2024) and 23% (F2025) driven by rising
ARPU from customer upgrades and an expanding Payments attach rate (25%
of gross transaction volume last quarter). We forecast FCF as a percent of
revenue of -2.3% (F2024) and 7.5% (F2025). Our thesis is based on:
1. A TAM of 2.5MM complex SMBs, in retail and hospitality. While the
segment has low cloud adoption, Lightspeed is in transition, targeting
higher value customers. Lightspeed is focused on SMBs with revenue of
$200k+, with a preference for $500k+, which represents a greater ARPU
opportunity of $1,300 - $2,400. In FQ4/23, the company had ~168k
customer locations with ~100k at the target GTV (ex Ecwid). In FQ2/24,
ARPU was $425 (up 26% Y/Y). Transaction revenue growth was 36%
from higher Payments attach. Subscription revenue growth was 9% on a
muted transition.
2. Lightspeed’s platform has advantages for complex needs. It is a
good choice for larger merchants that require cloud POS & integrated
payments.
3. Rising growth and free cash flow. Factors to achieve this goal are: 1)
revenue growth from both subscription and transaction; 2) rising unified
payments adoption; and 3) lower customer acquisition and user costs