LSPD a new position

Hi all,
I wrote this up quite a while ago, but keep putting off on posting it so I could refine it. Please forgive the semi rough draft nature of this particular post. I have delayed long enough that LSPD has reported a new quarter, which I thought was a pretty solid quarter. I’ll post about it later.

Buckminer brought Lightspeed to the board a while ago . The post got me interested and the more I looked into the company the more interested I got until I took a position. I’ve been meaning to write up Lightspeed for a while now. I initially bought them around 52 and 54.

Quick Overview
Lightspeed is a Canadian omni-channel category spanning company that is a cloud based SaaS providing POS (point of sale) and merchant services. These services are typical saas modules that are bundled in various purchasing “tiers”. Things such as accounting, ecommerce, analytics, payments, loyalty programs, purchasing, inventory etc. This allows small and medium businesses retail, restaurants, hospitality, golf courses etc to have an omnichannel presence (physical and online). The reason I say category spanning is the company isn’t just a payments company, or a POS, or ecommerce, or business management, accounting. Their big selling point is they offer ALL those things and ALL those things are integrated.

Pricing is a flat rate billed either monthly or annually with tiered rates for additional modules that provide added functionality. For example retail pricing starts at 69 dollars a month for a basic retail POS and payment terminal, 30 additional dollars a month gets you eCommerce, add 20 dollars and you get accounting, 50 dollars online and physical loyalty programs, 60 dollars for analytics. The customer may have started at 69 dollars a month but as the store grows they could end up at 229 dollars a month plus a portion of all payments run through the system (2.6% + 10 cents for payments).

Industry and Consolidation
The POS, business management (my term), ecommerce, backend industry has TONs of vendors that individually fulfill different business or geographic niches. Basically, the industry is very very fragmented. Initially this turned me off on the company but then I realized Lightspeed is consolidating the industry which plays to the power of SaaS. Lightspeed is creating an all in one solution through acquisitions that either give them new customers or geographies. The acquisitions allow them to target niches as well as more general companies. So far they have completed 4 acquisitions and announced two others. The completed acquisitions have given them Germany, Australia, golf courses, Switzerland, South africa, and France. The golf courses gave them an entirely new industry, new set of customers, and tailored experience for that industry. Those customers are more valuable to lightspeed than they were to the acquired company because lightspeed is able to bring the customers onto their payment platform as well as provide the customers with additional functionality through more modules.

Other companies that the board has invested in overlap with lightspeed. Shopify is very strong in ecommerce, but minimal in merchant services. SQ is strong in POS and has started to add merchant services and business management. Lightspeed is unique for a number of reasons and has some interesting paths for growth that I think make it an interesting investment.

Here are some of my notes:

Growth Opportunities
Rebound in retail/hospitality
Increased payments penetration
Lightspeed capital (partnership with stripe)
More modules (recently added a COUPA style market purchasing module)
Acquisitions (expanding geographic reach, consolidating markets, expanding capabilities)
Replace legacy systems (80% of market is on legacy)

Direct in US/Canada/Australia/Europe. Indirect through the rest of the world.
Google is a new strategic partner

The company has had quite a bit of success despite COVID being especially tough on their target market.

Temporary measures for covid
payments @ no margin
ecommerce platform free
5% of companies paused their subscriptions during covid, now negligible

Payments penetration (q2 2021 is first reported penetration rates) this is important, keep these numbers in your head
10% US retail
4% canada
3% US hospitality
greater than >50% purchasedLightspeed Payments in conjunction with purchasing their Lightspeed software during the fourth quarter of Fiscal 2020 (consistent in q2 and Q1)

ARPU (ME: These numbers have been inconsistently reported) but are trending up.
Q2 145 per location fiscal 2020,
Q1 2020 ARPU 245 per customer 160 customer location
Q4 2020 ARPU 230 per customer, 145 customer location.
40% of customers paying for more than 1 module, up from 33%

Q1 2021 Chronogolf and ikentoo have been rebranded as lightspeed.
Complete the same for kounta in the summer.
Gastrofix by end of calendar year

Some financials

Covid began to have an effect for their q4 2020. Q1 2021 was the height of lockdowns and then q2 2021 the economy opened up and was much more normalized.

Fiscal Quarter       GMV(b)        Rev(m)     Rev Growth   GM         adjusted EBITDA
Q3 2020                6.2          32.6                    64%        -5.3
Q4 2020                6.1          36.3                    63%        -6.2
Q1 2021                5.7          36.1           50%      60%        -2.2
Q2 2021                8.5          45.5           63%      60%        -2.8
*guide                             47              44%

Cash 513 million, no debt (~250 million after paying for shopkeep and upserve)

Their TTM revenue is 150 million dollars. (240 million with recent acquisitions)

On the face of it these numbers aren’t all that amazing but then look at q2 2021 when lockdowns were relaxed. Revenue spiked 13% sequentially, GMV shot up to 8.5 billion dollars and this is happening at a time when their payments solution allows them to take part in that upside. Gross margins are likely to stay lower as the payments become a larger part of their revenue since payments isn’t as high of a margin as merchant services.

The other two things we haven’t discussed are the shopkeep and upserve acquisitions. Lightspeed
-upserve - 40 million TTM, 6 billion GMV. Acquired for 123 million in cash and 5.9 million stock for a total price of 430 million dollars.

-shopkeep 50 million TTM, 7 billion GMV. Acquired for 145 million in cash and 9.5 million shares. Total price 440 million

The combined entity has a 240 million TTM, 39 billion GMV. Lightspeed diluted themselves about 15% and used 268 million of cash to increase their revenue 50%. I’ll take that deal any day. These customers are also more valuable to lightspeed than they were to upserve or shopkeep because lightspeed can move them over to its payment system and take a portion of their GMV.

CC notes
“ Nearly 9 months after the outbreak of COVID-19, small and medium-sized businesses continue to face challenging conditions. In addition, we’ve experienced rapid changes in consumer behavior, necessitating a reinvention of commerce for the retail and hospitality industries``

“4 key themes: the continued innovation of our platform; the strengthening of our Board of Directors; our NYSE listing; and finally, our pending acquisition of Shop”

On innovation.
“The first is eCom for restaurants. Designed to allow Lightspeed restaurants to seamlessly transition their businesses online and integrate new revenue streams… an online presence and frictionless delivery and takeout experience have provided a crucial lifeline.
The second recent innovation is Order Ahead. A cost-efficient online ordering platform designed to facilitate takeout, Order Ahead integrates eCom for restaurants, creating a powerful digital hub that enables restaurants to provide a completely contactless customer experience. …Finally, we introduced Lightspeed Subscriptions, a new module that allows local North American retailers using Lightspeed Payments to collect recurring revenue through their POS. “

On the board of directors:
“This quarter, we further enhanced the strength of the Board with the addition of Merlene Saintil. Merlene has over 20 years of experience as a technology leader and business executive at organizations such as Intuit, Yahoo! and PayPal. …named one of Women Inc.'s Most Influential CorporateBoard Directors.”

On acquisitions:
“That growth strategy includes acquisitions, and I’m happy to say that our efforts to date have delivered strong success. All 4 of our recent acquisitions, Chronogolf, iKentoo, Kounta and Gastrofix, delivered their strongest quarters yet, demonstrating our ability to integrate and enhance the operations of our acquisition targets. I am also happy to report that the integration of these acquisitions into our flagship hospitality platform continues at a rapid pace, with the majority of the developed resources now directed towards the converged effort”

On shopkeep:
“let’s just step back and think about ShopKeep. This is our strategy, it’s part of what we announced, which is consolidation of the market. And I think we’ve proven that we can do some acquisitions and get some good returns. So here for ShopKeep, if you look at the company, they were one of our biggest competitors in the U.S. We have a very similar profile of customers, if you look at the industry.They also have a mix of restaurant customers and retail customers. So for us, this is very much in line with all the other types of acquisitions we’ve done….again, as many of the acquisitions that we look at in this space, they operated by referring customers, thepayments opportunities, over to several partners, one of which was First Data. And I think as we go forward, we’ll – we have Lightspeed Payments, of course. But the long-term strategy there remains unchanged with how we approach this market and how we see these 2things coming together naturally over time”

On restaurants during the pandemic and lightspeed’s innovation.
“I think this was a big quarter for innovation from Lightspeed’s [core] hospitality sector, especially with, as you mentioned, e-com for restaurants, which gives those businesses a digital hub, which brings together the reservations or social media, all the different pieces that they need as well as the order ahead capabilities to be tied in as well. And I think that – and delivery.So these are all tools that are coming up. They’re helping these restaurants adapt business models for this particular moment. And we’re seeing adoption really aid these businesses. And I think it will continue to help these businesses transform even post-COVID, and add new revenue streams”

On innovation driving new business.
“ the majority of the market is on legacy systems. And in the context ofCOVID, legacy systems are really not – I mean they’re underserving the market. So there’s a big transition there of people who want to move into the new world so that they can adapt and they can thrive, hopefully, in this environment”

On omnichannel.
“mean, going back to what we had talked about last time, we still see the same ambition where we’ve been talking about omnichannel for 5 years. And now everybody is coming to us. And they want it, they want it now. So we’re still seeing that same trend of people needing to adopt digital platforms and to serve their customers in different means. And I think that’s not going to slowdown…s ambition we have of being 1 global brand is really helping us when you think about the intake of new customers”

On how much of growth is new merchant creation vs competitive takeaways.
“the blend hasn’t changed. And I think that the surprise we had is that there are still new businesses being created in the space. And don’t forget, Lightspeed is – we’re global. So we have businesses around the globe. And some countries are – don’t – are not seeing the impact of COVID, like Australia. And other countries like the U.S. are staying open, while Europe is maybe having more difficulty. So I think there, we’ve seen at a macro level the same thing as usual, where it’s a healthy blend of people graduating off kind of less powerful cloud-based platforms.Then the second big bucket is really net new businesses we’re opening and need a system. And obviously, we’re probably one of the chosen few.And then the third category we still see are people moving off legacy systems. And again, just trying to imagine somebody on the legacy system in the context of COVID, they need to change to be able to adapt. So I think it’s a kind of blend we’ve always seen”

On B2B aspirations.
“But regarding products for B2B, we’ve been ramping our tools for suppliers, and we’re going to be talking about it more in the coming quarters.”
My note lightspeed just announced a supplier market. You can read about it here.… and here,… . Looks like a huge deal.

On why they have such an advantage over legacy systems.
“Then if you go one layer underneath, it’s not the same technology, it’s not the same developers, it’s not the same code base. So for them,this would mean a rewrite. And it’s interesting because Lightspeed, we had a product that was on-premise. And the lifting is extremely heavy. So what we had to do was redevelop completely a platform next to it. And this will take at least 3, 4, 5 years to get to the level of functionality needed within those businesses. This is – these are big solutions to develop.So we’re not too worried about that. And actually, if you look at the evolution of technology throughout time, it’s very rare that a company manages to reinvent themselves.And then I think the last piece, sorry, is the business elements. These platforms are sold with upfront payments. They’re not cloud. Soeven their cost structures are not adapted for this new world.”

On increasing hiring and development:
“we were increasing our development capabilities, because if the market adoption [has accepted] accelerating, we need to accelerate our road maps to be in line with this. And we’ve done tremendous progress if you look at the products we’ve been launching in the last few months. And here, you can expect this to continue. We need to be sure that the product market fit is perfect for Lightspeed. And because the market is just accelerating, we need to accelerate the roadmap”

On payments attachment rate (adoption)
“so just to be very clear, we have more than a 50% attach rate on the regions where we’ve launched Lightspeed Payments. And I think now, for us, what we’re just --what we just need to do is we need to continue deploying into all the countries where we operate”
my note this is a huge opportunity for 40 billion GMV that they can take over 2% of as revenue. They say they have over 50% attach rate in areas they have launched, so if 50% of 40 billion is 20 billion then that is ~400 million of revenue up for grabs. Compared to their current run rate of 240 million.

LSPD is approximately an 8 billion dollar company. TTM revenue will be around 240 million for an EV/S of 33. I’m hesitant to predict what their forward revenue could be and how quickly they can roll out payments. I think their GMV could dramatically increase if we get a rebound in small and medium business , that in combination with increasing payments penetration as well as new customers with people having confidence to start new businesses as the pandemic recedes could lead to pretty astronomical growth.

I don’t know when the macro environment gets better for lightspeed. I can see arguments for Q4 2020 (lightspeeds q3 2021) being a rough one due to shut downs, but then again it doesn’t take much increase in payment penetration to dramatically affect their revenue. However, I do know that improving conditions will happen. Lightspeed is positioned really well with their new payments system, their merchant services and their new large acquisitions. They have shown they are a nimble organization during the pandemic by rapidly rolling out new products and marking key large acquisitions at advantageous prices. Certainly big acquisitions have risk but I think they will do good things going forward. I have a position that I’m looking to build as I get more comfortable with the company.



Ethan thank you very much for the great write-up.
I passed LSPD for the first time because it looks to me their business greatly overlaps with Square and Square’s payment and service to small and medium sized businesses has already established itself into an ecosystem. I’m wondering if LSPD can challenge SQ in US market since SQ’s service is so good. How do you think about their competitive advantage over SQ? Thanks!