Why LightSpeed revenue growth is accelerating

LightSpeed was in my radar mid 2020 when it was trading at $25 USD. I bought and sold a small position in a short duration. At the time, it didn’t interest me because the growth rate from the past few years was not impressive. It’s 35% YoY 2019 from 2018. It’s really not that great.

I primarily look at revenue growth rate history as a base to start looking into a company. With this criteria, I’ll miss some companies that starts slow but accelerates later.

Fast forward 1 year, the growth rate is accelerating! There are two reasons. The 1st one is obviously aggressive acquisitions. This is good. But what else?

I dug into the numbers and I found patterns very similar to Shopify and BILL .com !

It added Payment service in 2019 and its revenue from transaction fee has been increasing at a rapid rate, much faster than the SaaS growth!

Here’s some notes I took:

Lightspeed Payments:
-Launched in 4Q’2019 to US Retail customers
-Better user experience for customers; More attractive economics for Lightspeed
-Majority of early adopters successfully processing live transactions by March 31
- > 40% attach rate for new eligible customers Pricing model: ~2.6% gross non-cash transaction volume; ~65bps net of direct processing costs
-Once 50% payments penetration is attained, Adjusted EBITDA as a percentage of revenue of ~20% is achievable.
-Portion of GTV monetized via payments: 10%, Q1-2022

Revenue is accelerating:


Year   Total Revenue(m)  YoY
2020	$120.60	         56%
2019	$77.50		 36%
2018	$57.10		 34%

Lightspeed only started disclosing transaction fee revenue so I only have a couple quarter of data. Transaction fee revenue is growing at a much faster speed than SaaS! As a result, the transaction fee becomes a bigger and bigger portion of total revenue just like Shopify and BILL . COM !

Transaction fee becomes more important:


Quarter	        Transaction fee/Total revenue
Q1-2022	            48.75%
2021		      37%
2020		    23.00%

Transaction fee is growing faster than SaaS:


Quarter	      Subscription fee (m) YoY	    Transaction fee (m)	YoY
Q1-2022	                $49.90	115%	          $56.50	453%
2021	               $119.00	51%	          $83.00	195%

A motley fool writer named Victoria Matsepudra wrote an article titled: Why Lightspeed (TSX:LSPD) Is Not a “Mini” Shopify (TSX:SHOP) and said Light Speed is more comparatable to Square. I disagree. Square did the opposite of Shopify,Bill .com and Light Speed. Square’s transaction fee revenue as a percentage of total revenue is declining and downed from 55% last year to 19%. It’s YoY growth rate is merely 27%. Where in both shopify and LightSpeed, they started with SaaS and then expand into fast growing transactional market with huge TAM.

I think it’s a mini Shopify with a retail/restaurant/golf focus.
I am very comfortable holding a large position in Light Speed despite the recent runup in stock price.
I just noticed I have 25% exposure to payment processors. If I count the transaction fee revenue from BILL and Shopify, I have 35% allocdation to payment processing. It has a large TAM and money changes hand every day. It’s almost SaaS. It’s sticky as mentioned in BILL’s earning call. BILL transaction fee did not go down at all during COVID and went up 106% YoY in the COVID quarter Mar, 2020! I guess B2B payment is sticky as the core engine of the econonomy is essential.

Currently Long Light Speed 14.6%

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Sorry, forgot to include 2021 revenue:
2021 total revenue $222.00 grew 84% YOY, up from 56% YoY in 2020.

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Thanks for posting this because it’s something I’m trying to get my head around. As I posted before, when I asked Lightspeed Salesperson how they compare with SQ (another holding of mine) he said, “the main difference is custom support! Lightspeed POS offers free, 24/7 phone and chat support to all of our clients. We’re also a lot more focused on the POS side of things, whereas Square focuses heavily on payment processing.” It is my understanding that they integrate Stripe to process payments and don’t have a native solution nor have they purchased one. And I’m not locating specific information surrounding this. What’s the arrangement and how are they getting transaction fees if they’re not actually processing the payments themself?

BTW; Not sure we’ve reported this but Toast, another promising unicorn fintech company, is going public, I think this week. “About 48,000 restaurant locations used Toast’s software to process more than $38 billion of gross payment volume during the last 12 months, a prospectus said. Customers include Flour Bakery & Cafe, Trapper’s Sushi Co., and Harpoon Brewery.”

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FallingWallenda,

If others are interested in Toast (TOST), which is on my TDAmeritrade account calendar as going public on Wednesday, Brian Feroldi and Dylan Lewis discussed the company’s S-1 this past Friday on the Industry Focus podcast. It’s here: https://www.fool.com/podcasts/industry-focus/2021-09-17-tech….

Their summary is basically: low margins in a low-margin industry, but the leader in an industry that definitely needs help. Company founders are still involved–not CEO but with 99% of voting power. Tons of competition, since they get companies in the door through payment processing, but sticky as they have a full suite of services. SaaS revenue is a small portion right now, but could grow. They considered it a watch.

The podcast mentions a company Brian and Dylan both own in the restaurant space called Olo (OLO). Olo is focused on online ordering (which is where the Olo name comes from). That went public back in March, and has much higher margins. The breakdown by Brian and Dylan of that S-1 is here: https://www.fool.com/investing/2021/03/09/what-investors-nee….

Olo blew past expectations in both of their quarters as a public company, and I have a 2% position. I’m not sure if I’ll keep it; I’ve already sold it once at a small profit to get into something else. But I bought it back less than a week ago (after the lockup expired) and it’s up again almost 5%. So at the very least it seems to be a good place to grow some money while watching what happens in the restaurant space. That industry is desperate for disruption across the board.

Here’s the transcript from Olo’s last earnings call: https://www.fool.com/premium/coverage/earnings/call-transcri….

Founder-CEO Noah Glass made me pay attention on that call with lines like this one: “our new ambition to reach digital entirety as the restaurant industry transforms to digital, touching, adding value to, and deriving revenue from every restaurant transaction.”

And again in the Q&A: “This all factors into what we have described as our new ambition of getting to digital entirety where Olo has the ability to touch every transaction, add value to every transaction, and derive revenue from every transaction.”

While Brian and Dylan seemed to see Toast and Olo in two different parts of the industry, it seems to me that while they may be starting in two different segments–payment processing for Toast and online ordering for Olo–they seem to both have the ambition to expand the digital experience for restaurants to include all of it.

My guess is that they become competitors over time or one acquires the other to keep the likes of Square, Stripe, and the various delivery services (Door Dash, GrubHub, etc.) on the restaurant sidelines.

JR

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First, I want to correct my typo from the first post above: I own Light Speed not Shopify so I meant to say” If I count the transaction fee revenue from BILL and lightspeed(Not Shopify), I have 35% allocation to payment processing”

Re: FallingWallenda

Unfortunately, Square moved heavily into bitcoin which is speculative IMO. Bitcoin revenue reached 70% of total revenue in Q1 2021. That’s scary. Their transaction fee became less relevant as I pointed out above.

Stripe provides white label payment service to many businesses. (Example: Thinkific, an online course creator which is on my watchlist) Stripe just provides the API connection. Most businesses don’t want to build in-house payment processing capability from scratch because it’s too expensive. It’s a low return on investment if the only user is themself.

As someone may ask the question: what’s the moat for LightSpeed payment?
It’s the whole Ecosystem. Subscription to transaction is a land and expand strategy. If customers are using Lightspeed POS, it’s more convenient and effective for them to use Lightspeed payment as well. Stripe has no reason to stop the service to Light Speed as there are alternatives to stripe. Why do they want to lose the revenue?

There will always be competitions. If the market is large enough and businesses are competitive, they can co-exist. However, there will be leaders. If there’s a threat, the results will show up on the reports.There will be plenty of time to get out of stock. We just need to watch the company’s financial numbers.

I don’t have time to worry or check out every single competitors because it’s time consuming. But I’ll answer this one just as an example.

Toast is a pure play restaurant POS where Lightspeed is more general purpose: retail, restaurant, golf POS.
Toast earns all of its revenue in the United States while lightspeed has customers across 100 countries.
Lightspeed has 150,000 Customer Locations.
Toast has 48,000 Customer Locations. It’s 30% of the total locations of Light Speed.
Lightspeed has the first to market advantage.

For Six Months Ended June 30, 2021, Toast grew total revenue 104% YoY vs lightspeed 220% YoY during last quarter ending June 30.
Toast’s payment service revenue grew 120% YOY and it’s already 82% of total revenue! Less room to grow than Lightspeed. Vs lightspeed grew payment revenue 453% YOY and it’s only 50% of total revenue and has only 10% penetration!. I don’t know if Toast has built in house payment processing. That’s not my concern.

Conclusion: Lightspeed is growing much faster than Toast and has global operation, covers more industries where Toast is just US only focusing on Restaurant POS. I don’t see it as a threat to lightspeed. I believe the market is big enough for multiple players but there will be leaders. This is true for most industries. And Lightspeed is one of the market leaders.

Toast S-1: “With an estimated 22 million restaurant locations globally with greater than $2.6 trillion in revenue,18 we estimate that our global TAM is at least twice as large as the domestic opportunity, given there is nearly four times as much global spend and even more opportunity in terms of location count.”

All the info is available on the S-1 form and the company websites.
We should try to do our own homework instead of relying on others. IMHO.

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Re:CloudL
Unfortunately, Square moved heavily into bitcoin which is speculative IMO. Bitcoin revenue reached 70% of total revenue in Q1 2021. That’s scary. Their transaction fee became less relevant as I pointed out above.

For SQ, in my opinion, you should always ignore the bitcoin number. Even though BTC's revenue contributed to most of its revenue, it accounted for less than 5% gross profit.

The parts that contributed mostly to gross profits are transaction-based and subscription and service, total contribute 97% total gross profit and they accelerated at 16% and 22% SEQUENTIALLY in the last 2 quarters. I don't know why these numbers are not discussed anywhere.

For LSPD, its organic growth increased this quarter to 28% sequentially (65.4M this quarter - 51.2M last quarter), but it has a much higher market cap/Gross Profit compared to SQ. It has not been profitable yet while Square already has had positive earnings for a while.
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Re: kakawa93

How Square recognizes bitcoin revenue makes sense. .

Imagine a car dealer buys a car for $10000 then resell for $11000, the gross profit is $1000 and the revenue is $11000. The cost of revenue is $10000.

Likewise, Square buys $100 bitcoin, then sells to users at $102 and recognizes $102 revenue and $100 cost. This is capital intensive and costs lots of money to make 2% gross margin.
This model is different from the flow through model of transactional fee revenue where the money comes from the end user. Proccess just collects a fee.

On top of this, Square is holding $281 million worth of bitcoin as of June 30. TTM net income is $573 million. We know how much bitcoin price fluctuates. The volatility of bitcoin will affect net income substantially. “Square said it also recognized a bitcoin impairment loss of $45 million on its bitcoin investment in Q2”

The market doesn’t exclude the low margin revenue. It looks at the total revenue as a whole.

But just as you wish, I removed the bitcoin revenue and added back the bitcoin NET revenue as top lin revenue to total revenue and did some calculations.That still didn’t change my statement: Square is moving rapidly into bitcoin and the transactional revenue continues to decline as a percentage of total revenue.

Transaction revenue:
Growth from past 3 years: 30% annualized growth.
As the percentage of total revenue declined steadily from 82% of total in 2018 to 61% in 2021.

Subscription revenue:
Growth from past 3 years: 82% annualized growth.
As the percentage of total revenue increased from 15% of total in 2018 to 34% in 2021.

Bitcoin NET revenue:
Growth from past 3 years: 285% annualized growth!
As the percentage of total revenue increased rapidly from 0.04% of total in 2018 to 2.72% in 2021.

At this rate, transaction revenue will become less and less significant. The subscription revenue is doing fine. In a few years, bitcoin revenue will make up a large percentage of revenue.
I don’t why Square’s transaction fee revenue is not growing as fast as Shopify, BILL,Light Speed.(all three are closed to 100% per year growth in transactional revenue)

Percentage as( total revenue bitcoin NET):


 Type	                                  march--2018	June--2021
Transaction/(Revenue +  bitcoin net)	82.40%	           61.04%
Subscription/(Revenue +  bitcoin net)	15.29%	          34.07%
Bitcoin net /(Revenue +  bitcoin net)	0.04%	           2.72%

Growth rate:


Type of revenue    13 Quarters growth rate
Transaction	     30% annualized
Subscription	     82% annualized
Bitcoin NET	     285% annualized!!!

I shouldn’t need to explain again that higher growth rates justifies a higher valuation.
Let’s look at the growth rate in terms of gross profit:


Year	 Square Gross profit	YoY		Year	LSPD Gross profit	YoY
						
2020	2,733,409	44.65%		2021	221,728	83.80%
2019	1,889,685	44.95%		2020	120,637	55.76%
2018	1,303,700	55.33%		2019	77,451	35.69%
2017	839,306			2018	57,079	

Light Speed is growing at light speed!(Pun intended)

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@CloudL: Thanks for your analysis. I fully agree that Lightspeed is growing very fast, no doubt.

My point is Square has been accelerating in the last two quarters. Its YoY% was very close to LSPD organic growth.

The gross profit of SQ
Q2-2021: 1141.1M - 91.2% YoY
Q1-2021: 963.5M - 78.9% YoY
Q4-2020: 803.7M - 52.5% YoY
Q3-2020: 794.5M - 58.9% YoY
Q2-2020: 596.8M - 28.1% YoY (COVID)
Q1-2020: 538.5M - 35.7% YoY

Also, as you pointed out, the BTC contribution, even though increasing, still only accounts for less than 3% of gross profit. Even if it rises to 5%, I still won't worry much.

For LSPD, other than its high valuation, my other concern is its dilution rate. In 1 year, the total outstanding shares increased by 41.54%, from 92.97M shares to 131.59M shares. That's a huge number.

I would love to hear your thoughts.
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I never worried about share dilution as long as revenue growth rate is high and gross profit margin remains relatively the same. Most acquisitions are accretive.
I will worry if the revenue is not growing and the company keeps issue new shares.

The GP/share growth won’t match the revenue growth exactly because there’s some small inefficiency. I don’t worry about it since the growth rate is fast and accelerating. I don’t see it slowing for at least few years mainly because the payment penetration is only 10% and it’s made up of only 50% of total revenue. It has lots of room to grow.


QTR	         Shares	   Revenue	QoQ Change(%)     GP        GP/share	QoQ Change(%)
2021-06-30	130,882	   115,920	40.69%	        57,573	    $0.44	    30.98%
2021-03-31	123,865	   82,395	43.02%	        43,957	    $0.34	    32.09%
2020-12-31	109,564	   57,611	26.64%	        33,277	    $0.25	    20.99%
2020-09-30	94,994	   45,493	25.57%	        27,505	    $0.21	    27.26%
2020-06-30	92,464	   36,229		        21,614	    $0.17	

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Reposting for format:

Re:CloudL
Unfortunately, Square moved heavily into bitcoin which is speculative IMO. Bitcoin revenue reached 70% of total revenue in Q1 2021. That’s scary. Their transaction fee became less relevant as I pointed out above.

For SQ, in my opinion, you should always ignore the bitcoin number. Even though BTC’s revenue contributed to most of its revenue, it accounted for less than 5% gross profit. The parts that contributed mostly to gross profits are transaction-based and subscription and service, total contribute 97% total gross profit and they accelerated at 16% and 22% SEQUENTIALLY in the last 2 quarters. I don’t know why these numbers are not discussed anywhere.
For LSPD, its organic growth increased this quarter to 28% sequentially (65.4M this quarter - 51.2M last quarter), but it has a much higher market cap/Gross Profit compared to SQ. It has not been profitable yet while Square already has had positive earnings for a while.

and because lucky Antlers!

-n8 (long LSPD)

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Thanks for the write up, I have been on the sidelines waiting for a chance to get in but this amazing company has yet to provide a chance. Might as well get skin in the game. I also agree, that LightSpeed compares more to SHOP versus SQ. Also, it’s rapid transactions see/revenue growth is more comparable to SHOP in my opinion.

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