Thank you for standing by and welcome to the Lightspeed Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. [Operator Instructions] And finally I would like to advise all participants that this call is being recorded. Thank you.

I would now like to welcome Gus Papageorgiou, Head of Investor Relations to begin the conference. Gus, over to you..

Thank you, operator. And good morning, everyone. Welcome to Lightspeed’s fiscal Q2 2024 conference call. Joining me today are JP Chauvet, Lightspeed’s Chief Executive Officer, and Asha Bakshani, 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 second quarter 2024 results presentation available on our website, as well as in our filings with U.S.

and Canadian Securities Regulators. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures and ratios. These 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 SEDAR plus and on the SEC’s EDGAR system. And finally note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to JP..

industry leading analytics from Upserve; ingredients management from counter; advanced block chain technology from ICAN2; and best in class headless commerce from [Equid] (Ph). We simply could not have developed these features on our own in such a short period of time.

In part, thanks to these acquisitions, we have developed an organization with unparalleled depth of management and technical talent these game changing products. With industry leading products that have scale and global reach combined with our continuously improving financial performance, Lightspeed is in its strongest position ever.

This is helping us attract and win more high GV customers. Let me share a few examples of these who have joined Lightspeed in the last quarter. In hospitality, we are incredibly honored to add the iconic Joël Robuchon International as one of our newest customers.

With dozens of owned and operated locations across Europe, North America, the Middle East, and Asia, Joël Robuchon Group has been awarded more mission stars than any other restaurant group in the world with over 15 current Michelin stars.

They came to us looking for a global player that could manage their complex workflows under one integrated software and payments platform. We were also happy to add Gustoso Group in Germany with over 100 restaurants operating under six different brands. We started rollout of a number of their restaurants on Lightspeed restaurants.

In the U.S., after a very competitive sales process, we signed seven locations with Indiana State Park Inns for both Lightspeed Restaurant and Payments. And in Sydney, Australia, we were selected by Kensington Street operator of nine Asian inspired food vendors, two bars, two event spaces, and six full service restaurants.

Kensington Street is the exact type of complex SMB that can leverage the full power of our products to simplify and scale their operations. Kensington Street’s Management chose Lightspeed to deliver more data-driven decisions for their business. On the retail front, we had an incredible quarter.

Lightspeed retail is emerging as the leading cloud platform for complex multi-location, high GTV retailers the world over, notable wins this quarter included. GetBoards, the ski and snowboard retailer with three locations across California, wanted to upgrade from their legacy solution, and they have now adopted both Lightspeed Retail and Payments.

Blue Star Eyewear, the independent high-end eyewear retail who chose Lightspeed to power their businesses across its four locations in Australia. And finally, Les Jumelles in Antwerp Belgium with 250,000 Instagram followers. This woman’s apparel boutique chose lights beat to power their two locations.

In Golf, we added two big wins, after an extensive due diligence process, we were selected by GreatLIFE Golf to Power 14 of their 56 U.S. locations, and BlueStar Resort & Golf selected Lightspeed for all 15 of its Arizona courses.

Both organizations will be using Lightspeed restaurant and retail in addition to golf to manage their dining facilities, pro shop as well as Lightspeed payments. And finally, we were able to sign up several new brands to our supplier network, including Jordache, Ashley Lauren and Espri.

Moving on to Unified Payments, we made great progress this quarter, although too early to comment on the international rollout, I want to specifically call out our North American teams for their excellent execution this quarter. We onboarded a record number of payments customers, and September was our strongest month ever.

I shared earlier this year that we were prepared for potential bumps along the way as we launched Unified Payments. Our biggest concern was that we would see higher customer churn as we made payments mandatory. Fortunately, this risk has not materialized on the contrary, our churn levels remain very much in line with our historical ranges.

We were confident that our customers would much prefer Lightspeed’s Unified Commerce platform over their commoditized and dated payment solution, and we were right. Lightspeed’s commerce platform is at the core of our customer’s operation.

We act very much like an ERP system, managing inventory employees, customer loyalty payments, and accounting integrations, while also offering valuable data insights into their business. Changing your POS is far more complex and disruptive than changing payments provider.

It is only when you combine payments with software that you can create real value for your customers. I’m also very encouraged that our close rates for new customers remain very consistent and in many cases better than historical levels. New customers understand the benefits of buying a unified solution. Our new customer funnel remains strong.

Even as we become more rigorous on marketing spend. Our ARPU is the highest it is ever been, given the impact of flagship’s commanding higher ARPU Unified payments, as well as our focus on targeting higher GTV customers. This is the best case scenario for us. Close rates remaining consistent with historical levels while ARPU on new business is growing.

I think it is safe to say that Unified Payments has been a great success in North America, and we are now turning our attention to international markets. Market dynamics internationally are different than North America. European SMBs have a closer association with their regional banks.

However, the value proposition of Unified Payments is the same, no matter where our customers are located. There is absolutely no reason for our customers to isolate their payments offering from their software. An embedded solution allows them to reduce the time and effort needed to reconcile two disparate systems.

It delivers far greater data insights into their business, and more often than not comes at minimal to no additional costs. Although we have more to do, I’m very encouraged by what we saw this quarter. Our new business is thriving. Our teams are onboarding a record number of customers to payments and churn remains in line with historical levels.

Our focus now will be to keep the momentum going through the rest of the year as we expand this effort internationally. On the product side, we continue to deliver innovative features that help our customers scale their businesses.

In hospitality, we created smart items, an AI tool that creates menu descriptions and even generates images for online ordering. Compelling descriptions and images can increase revenue for restaurants, but many of our customers lack the time and expertise to properly develop these.

We believe smart items can help them solve this problem and make our restaurant customers more successful. It will also translate menu items into other languages such as French or Spanish. It is also worth repeating that our advanced insights module is now fully available for our hospitality customers globally.

We solve for regional regulatory and privacy requirements, which our global scale and footprint are uniquely positioned to address.

Advanced Insights has proven very popular with our North American customers, and because it requires payments in order to collect data, we believe it will be a driver of both higher ARPU and higher payments adoption for hospitality customers in EMEA and APAC.

Delivering an advanced solution like Insights to a global audience requires a broad range of expertise that we do not believe any other organization can match. In retail, the company delivered new omnichannel capabilities for multi-location merchants that accommodate complex workflows around inventory management for physical and digital customers.

For New Order by Lightspeed, we enabled vertical assortments, which allows brands with their own retail locations to merchandise, assort and visualize their own products. Lastly, in terms of profitability, again, we are committed to being adjusted EBITDA breakeven or better in fiscal 2024.

This quarter, we came in with a positive adjusted EBITDA ahead of our outlook, which places us in an excellent position to meet our goal of breakeven or better for the fiscal year. I believe we will continue to drive operating leverage in our business.

We are expanding financial services such as payments and capital, and we are seeing our strongest ever unit economics with new customers. As we continue to monetize more GTV, we expect to better align ourselves to the rule of 40 metrics focusing on balancing both sustained growth and profitability, and we are at the right path to get us there.

I will now turn the call over to Asha to take us through the quarterly results and provide outlook..

Thanks, JP. Lightspeed had an excellent quarter with revenue and adjusted EBITDA coming in well ahead of our previously established outlook and our unified payments efforts continuing to gain traction.

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 upcoming fiscal quarter and full-year. Overall, I was very happy with our progress this quarter. We achieved positive adjusted EBITDA for the first time since becoming a public company.

In addition, we are seeing many of our key performance indicators move in the right direction. Revenue and gross profit growth accelerated from the previous quarter. ARPU hit record highs this quarter with 26% growth year-over-year. GPV grew 59% thanks in large part, to our unified payments efforts.

Churn was lower than anticipated and remained within historical ranges. And again, I’m happy to report that total cash burn in the quarter was under $10 million, excluding cash used to fund our merchant cash advance business. We continue to grow our high GTV customer base, although not at the rates we would like to see.

We believe there is room for improvement here and this will be a continued area of focus for us. In the quarter, revenue came in at $230.3 million, an increase of 25% year-over-year, and more than 8% ahead of our previously established outlook. Subscription and transaction based revenues grew by 24% year-over-year.

Subscription revenue increased 9% year-over-year to $81 million. Gross margins on subscription revenue remain consistent with last quarter at 75%, and when removing the impact of share-based compensation expense, gross margin on subscription revenue was 77% consistent with last quarter, and at its highest in over two-years.

Thanks to a dedicated effort to consolidate cloud vendors and improved overall efficiencies. I want to reiterate that in the quarter, 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 half of our added software MRR in any given quarter, and so it was encouraging to see that subscription revenue grew 9% year-over-year despite their temporary reallocation of duties. Once our unified payments efforts are complete, we expect software revenue growth to accelerate.

Transaction based revenue grew 36% to $137.7 million. In the quarter, we saw gross payments volumes increased 59% year-over-year to $5.9 billion, as a greater portion of our GTV went through our Lightspeed payments platform. We also saw good growth in the capital business in the quarter with revenue up over 120% year-over-year.

Referral fees continue to decline in the quarter as customers move on to Lightspeed payments. Gross margins for transaction-based revenue came in at 28% up from the previous quarter, but down year-over-year, given declining referral fees.

Total adjusted gross margin, which excludes the impact of share-based compensation and related costs came in at 43% flat to the previous quarter and down year-over-year. Although the increased transaction-based revenue is putting pressure on gross margins, this is being partially offset by growing capital revenue.

Adjusted gross profit dollars came in at $97.8 million, an increase of 17% year-over-year. Adjusted EBITDA in the quarter came in positive at $0.2 million. This is much improved from an adjusted EBITDA loss of $8.5 million in the same quarter last year.

This improvement is the result of our continued focus on prudent spend across our 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, research and development, sales and marketing, and general and administrative expenses were relatively flat to last quarter and up 6% from a year-ago. Our one Lightspeed efforts are increasing sales productivity. As sales growth is greatly outpacing any increase in sales and marketing costs.

We had an adjusted income of $6.4 million versus an adjusted loss of $7.5 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 $5.9 million from a year-ago.

We continue to actively manage our share-based compensation and related costs, which were $23.3 million, down from $34.9 million a year-ago, and approximately 10% of revenue down from 19% in the same quarter last year, and roughly in line with our prior quarter. GTV in the quarter came in at $23.5 billion, up 5% year-over-year.

Hospitality growth was stronger than retail. We saw strong growth in Europe, which is dominated by hospitality customers and GTV in North America and APAC remained relatively flat. This quarter, we also continue to grow our sophisticated higher GTV customer base.

Customer locations with GTV exceeding 500,000 a year grew by 8% in the quarter, whereas those with GTV under 200,000 declined. Again, in this quarter, the fastest growing cohort was locations with annual GTV exceeding $1 million. This customer cohort grew 9% year-over-year.

As we focus on more complex higher GTV merchants, we expect the under 200,000 annual GTV cohort 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 mute our net location growth.

However, the overall health of our customer base as a whole will continue to improve. Currently, Unified Payments is dominating our attention and resources, but growing our high GTV location count is very important to us and remains a core focus for Lightspeed. Total ARPU in the quarter came in at $425 up 26% year-over-year.

Although, Unified Payments is helping increase overall ARPU as we mandate payments for all eligible new and existing customers, we are also seeing healthy growth in software ARPU as well.

Churn rates in the quarter remain consistent with last quarter and within our historical range, despite challenging macroeconomic conditions and the launch of Unified Payments. Also, the vast majority of our overall customer churn is in the cohort of customers processing under 200,000 in annual GTV.

Again, we were expecting turn to increase as we rolled out unified payments, but it is encouraging to see that the majority of our customers recognize the benefit of an integrated software and payment solution and the value of the Lightspeed commerce platform.

In terms of our balance sheet, Lightspeed closed the quarter with just over $761.5 million in cash and cash equivalent down from approximately $780.3 million in the previous quarter. The biggest uses of cash was the increase in merchant cash advances of 10.1 million during the quarter.

Again, if we exclude the growing capital business, overall, cash burn in the quarter was under $10 million. Turning now to our unified payments efforts. As you heard from JP, we were very happy with the progress we made this quarter. We saw a record number of customers become transactional and our onboarding teams really executed well.

Our efforts in North America thus far have been very successful and we saw less turn than we expected. We will continue to encourage the remaining existing customers with software only to add payments. Our attention will now turn to international markets. We expect markets such as the UK and Australia will act much like North America.

However, continental Europe may be more challenging as customers there are generally more conservative. In Europe, we expect the recent launch of our insights module will help encourage customers to adopt payments as that module requires payments to provide meaningful insights.

We are also armed with strong customer testimonials that are helping convince our European customers that switching to Lightspeed Payments will simplify their operations, save them time, and deliver better data insights into their business.

Now to our outlook, this quarter illustrated that our strategy of pursuing high GTV customers mandating payments advancing our capital business and making profitability a priority, is working. Given transaction-based revenue is over 50% of our total revenues and highly dependent on GTV growth we are being conservative on our GTV growth assumption.

We remain cautious on the macro environment given central banks continue to suggest potential future rate hikes. Also, we believe that there are increasing signs that consumers plan to be more frugal this upcoming holiday season.

For the third quarter of fiscal 2024, we expect revenues between $232 million to $237 million and an adjusted EBITDA of approximately $2 million. For the full-year of fiscal 2024 we are increasing our outlook to total revenues of between $890 million and $905 million with breakeven or better adjusted EBITDA.

Despite the macroeconomic backdrop, we expect both revenue and adjusted EBITDA performance in the second half of the year to be better than the first half. With that, I will pass the call back to JP..

Thanks Asha. Before we take your questions, I want to welcome Menno Vette back to our Board of Directors. Menno has over 20-years of experience as the head of global media and telecommunications company, including the last two-years at Verizon and is a proven leader in the industry. I’m very excited to have her back on our Board.

We are now halfway through our fiscal year. I’m encouraged to see that we are delivering on our key goals, particularly in the area of profitability, where in the quarter I believe we made tremendous progress. As we look beyond this year, I continue to see incredible potential for Lightspeed.

We will continue to build a category leader for sophisticated SMBs the world over with our acquisitions fully integrated, our industry leading products, improving financial performance and strong balance sheet we are in a position of strength.

And we will use this position to grow our business, expand our solution set, help our customers, and create value for our shareholders. With that, I will turn it over to the operator to take your questions..

[Operator Instructions] And your first question comes from the line of Andrew Jeffrey from Truist Securities. Your line is open..

Thanks. Good morning. I appreciate taking the question. JP, I want to understand a little bit maybe how you are looking at the unified payments efforts as you move beyond the US and particularly and Asha too, I guess your comments on Europe.

Should we be thinking about perhaps attach rates slowing a little bit and software becoming more of the revenue and gross profit growth driver as we exit fiscal 2024? I’m not asking you to guide, I’m just thinking directionally, you know, do you declare victory in North America this year and refocus the team on software? How does that all sort of balance out?.

Yes, good morning. So just, simply put, just to state where we are when you look at North America, I think we have enough months and quarters behind us to think that this is going to be a really successful. When we look at Europe, we are early on, and Australian and, and New Zealand the same thing.

But for now, the early signs is that churn remains low, and we have no reason to believe that it is not going to go well. And I mean, we are bringing the same value to customers. So I think for me, I’m just going to go back to this year, this year is all around unified payments.

We want to ensure that the majority of our customers, who are existing customers, attached Lightspeed payments. And we want to also ensure that all new customers attach Lightspeed payments at almost a hundred percent. And so, it is going to be the focus.

Once we have unified payments under our belt, of course we are going to go back to selling more financial services, capital being one that has a really good gross margin. And of course, we want to continue selling more software. And with that in mind, we have a number of initiatives that are underway. The first one is analytics.

We have launched analytics across Europe, which is a big module there. And we are also now launching our insights modules on the retail side, which we think it has some great success.

So just answering your question directionally, is we are going to focus on unified payments this year, and as we get into the end of the year, we will refocus all of our teams back on upselling software and growing ARPU..

And then just in terms of adding flagship customers, these more complex, higher GTV customers, a little bit of a downtick in the growth rates in those this quarter.

Is that macro or is there something else going on? And can you re-accelerate the growth in those larger customers?.

Yes, so I will take this one too. Let’s start with how competitive these products are and here, what we are excited about is that these products are the most competitive they have ever been. If you look at our retail North American market, that is a huge demand.

And I would say that the gap between us and our closest competitors is broadened and ARPU on new customers is up. And I would say payback is the lowest it is ever been. So we are really in a good position for competitiveness. Same thing with hospitality.

When you look at Europe, this is our largest market, and we are extremely confident that K accommodates the more complex, and I think, just look at the wins this quarter and it gives you a good idea. So for me, it is not around is this the macro or are the products competitive or not? It has to do with the year of two halves.

The first half of the year for us, we were very clear is going to be around unified payments and focusing all of our teams on unified payments. And then the second half of the year, as we get into the end of this fiscal year, we will refocus everybody back on software.

And maybe the last point just to answer your question very precisely is, as unified payments becomes a success, that will generate more free cash flow. And we are going to take a portion of that and re-inject it into go to market.

So we can have strategies where we have people with foot on the ground everywhere accelerating our growth with the higher GMV merchants..

Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Your line is open..

JP, maybe on that last point, how should you think about operating leverage? As I mean, you profitable this quarter and as your profitability ramps, how do you intend to strike the balance between reinvesting the business versus ramping up the margins.

Might you look to cap margins at a certain level and then drive it into customer acquisition given the strong feedback you are seeing or will we see it kind of an ongoing ramp in margins as you are profitable?.

Yes. So I will start an Asha, maybe if you want to jump in on the second half here, but for me it is around rule of 40, and we have been very clear. We want to get closer to the rule of 40. And I think, so that is the first answer here, is we will be getting closer to rule of 40 as we exit the year.

And then for me, the second view is it is a huge market. It is up for grabs. Our products are extremely competitive. We know that from the feedback from our customers that we have the best platforms on the market. So now the question for us becomes how do we balance out profitability versus this market that is up for grabs.

And I’m a strong believer we need to generate in the rule of 40 some adjusted EBITDA positivity. But I think we should favor owning this market and going back into a higher growth..

That is helpful.

And then, just remind us of the seasonal dynamics for this quarter and how that might influence the payments ramp just because given the Christmas season, could you have a dynamic where retailers are maybe more reluctant to change their payments provider this quarter? Might there be a lag in switching on merchants who have committed to designing for payments?.

Hey, Daniel, so I will take that one. You are right in the third quarter, which is our biggest quarter for retail, given the holiday spend. We do expect merchants are not going to be switching over their payments provider. And that is why the North American launch is largely behind us. Inhospitality, it is actually the opposite.

We have the summer months, which is our highest seasonal quarter in hospitality. And that is why the hospitality launch, which is primarily Europe, happened at the end of the second quarter. And so, we will start seeing those merchants switching in the third quarter. So again, keep in mind, Q2 strongest quarter for hospitality.

So we expect to see those merchants switching in the third quarter. AndQ3 is the strongest quarter for retail. And so the majority of the North American launches behind us which is primarily retail..

Your next question comes from the line of Matt Coad from Autonomous Research. Your line is open..

Just wanted to touch on the macro. You guys historically have taken more of a conservative approach, I would say, to kind of like your assumptions around same-store sales growth for your merchants.

So I was just hoping that you could opine on like what is embedded in your guidance and then more broadly what you are seeing in terms of the consumer strength, in terms of discretionary versus non-discretionary spend..

Yes, sure. I will start Matt.

So from a GTV perspective, and what we are including in the guide, although we did see strong growth this quarter, and particularly in hospitality, what we are thinking as we enter the very strong retail spend season is that we really don’t believe the end consumer has felt the full impact of rising interest rates inflation.

We are hearing about student loan repayments as well. So we are keeping our expectations on GTV modest for the rest of the year, including the upcoming busy retail season.

So when we - and when we think about verticals across our different verticals, what we are seeing is we are actually seeing in many of our retail verticals, same store sales declining, things like bikes, home improvements, sporting goods and even golf year-over-year, the GTV is declining in many of these verticals.

And so we are being cautious as we walk into the very strong holiday season, we are being cautious on what that year over year GTV growth is going to look like. On hospitality as I mentioned just now earlier, Q2 is our seasonally strongest quarter. That is when, you know, folks dine out in the summer months.

And so we expect to see Q3 to be down from Q2 from a hospitality perspective. So all told, you know, given those factors as well as what we are seeing happen in the macro, we are being prudent on the guide..

That makes a ton of sense, Asha. Thank you. And then I may have missed it and apologies if I did, but previously you have talked to the payment penetration ratio exiting this fiscal year at I believe 30 to 35% range.

Do you have an update there?.

Yes, yes, that is correct. We have said, you know, in the past quarter that we expect to exit the year at 30 to 35%. You have seen us move the needle by about 300 basis points in Q1, a little more than that in Q2. And we do expect by the end of the year we will be in the 30 to 35% range..

Your next question comes from the line of Andrew Bosch from Wells Fargo. Your line is open..

Hey guys, thanks for taking the question. And nice job on the payments processing strategy. Just you mentioned, made some comments around once the payments, monetization efforts are complete, then the software side of the business would accelerate.

I guess could you put a little finer point on what you mean by the completion of that? I know it sounds like the back half of the year you are going to start to pivot towards software, but just a little bit more color there would be helpful..

Yes, I’m just going to try and reiterate what I said earlier on. So of course, as payments becomes a success, we are doubling the ARPU per customer, just give or take and on a net basis. So that frees a lot of money for us to be able to re-inject.

And if you look at today we are in a way throttling the engine because we don’t have enough basically, money to allocate to growth when we look at our overall balance sheet. So the idea here is to say, I’m now going to use, you know, let’s call it three quarters of this year to get as many customers as possible onto payments.

And then as the regions are fully done on the payments job, that means I can now redirect my salespeople into going after new customers and more salespeople instead of having them, you know, focus on unified payments.

And at the same time, I can allocate enough cash for marketing and, you know, and outbound strategies so that I can accelerate growth of customers. Today if I had way more free cash flow to give to my marketing engine and my sales engine, I could intake way more customers than I’m taking today. So that is really the strategy.

It is very simple, but it is we believe we are really going to be in a very strong spot and especially with North America, we are going to start with North America because that is the first industry we went after with payments.

And that means as we get into the second half of the year, we will be allocating more and more salespeople to going to get new customers, mainly in North America..

On the timeline, Andrew, the only thing I would add to what JP was saying is that, you know, this year is the initial launch of Unified Payments. So even though the migration of our back book onto payments continues into next year, we should start seeing the improvement in software in next year as well..

Yes, I mean, it is a multi-year strategy. Just a follow up on, in the 4Q, it looks like you guys are embedding some, some softer assumptions for just an EBITDA. And I assume that is macro, largely macro driven.

But are there anything else in the comps or other things we should be considering as far as investments in the back half of the year that would be kind of leading to that implied guide being a little bit lighter?.

I’m going to refer back to what we talked about a little bit earlier on the rule of 40. As we have mentioned, there is a huge TAM that is out there, and we want to make sure that we are taking as much of that tam as possible for sure. Profitability put some parameters in place as to how quickly we can grow.

And so we are being cautious or prudent I would say, on the EBITDA guide so that we have the flexibility to reinvest in sales and marketing to get more of the tam if that is what maximizes our rule of 40 metrics. Because that is really what we are anchoring ourselves around..

Your next question comes from the line of Martin Toner from ATB Capital Markets. Your line is open..

Wanted to ask a little bit about growth of large merchant locations, it is strong but has decelerate a little bit.

Can you talk a little bit to the extent to which up is a distraction and you expect that growth rate to re-accelerate going forward?.

Yes, so look, it is a year or two halves. So we were expecting less growth in the first half versus the second half. And just going back to what we just discussed, as I get more money to invest and I can free my resources, I’m going to accelerate that.

I think the other piece for me that is very important is that it is not a question of numbers and that --I mean, you look at the profile of the customers we brought in this quarter, they are absolutely outstanding. And Gustoso Group with a hundred locations Joël Robuchon. So I think those are the most important for us.

And so what we are seeing simply put is we are seeing ARPU of new customers go up. We are seeing ARPU, which is revenue per user of all the flagships, be much stronger than the old products, and we are seeing higher attach rates. So even though, the growth has been 9%, we are very happy with the profile and the ARPU that these customers bring in..

Follow-up is on cash flow. The cash flow burn, I think this quarter was about the same as last quarter.

Can you talk a little bit about what those dynamics will look like for the balance of the year and what items are sort of holding you guys back from like reducing that burn even further?.

No, I will take that one. So from a cash flow perspective, overall cash burn was a little under $10 million for the quarter, similar to last quarter. As we look forward, there are a couple of things that that will improve that, but also certain things such as our merchant cash advance business growing, that that does improve that.

Overall, they are working capital items such as the fact that about 70% of our customers pay us monthly. Yet our contracts with our vendors are typically paid annually upfront. So those working capital dynamics does drag the overall cash flow down and cause it causes it to be more, more negative than our adjusted EBITDA, for example.

As we move into next year, our view is that we will be incentivizing our sales team to bring in more annual deals paid up front and that should alter the working capital dynamics on that front and then the other, the only last thing to keep in mind is we do intend to continue to grow our merchant cash advance business, which is a large use of our working capital.

But outside of that business growing and outside of the cash use to fund that business, we expect in a few quarters that cash from ops will align more closely with adjusted EBITDA as we start to align our incentive plans accordingly..

Next question comes from the line of Dan Perlin from RBC. Your line is open..

I wanted to just kind of delve in a little bit on ARPU here. It was great to see up 26%. Obviously, payment penetration is a key component of that, but by our math it also looks like your software ARPU, I think was up mid to high single digits. So I guess one is that math kind of plus or minus, correct.

And then if it is directly, can you just talk about some of the incremental drivers, especially given all the commentary around the sales team being just so focused on unified payments and not so much on software. I suspect it is mix as part of it, but any color there would be would be great..

Yes, so I will start and Asha, if you want to jump in, just simply put, let’s start with the new products. They drive higher ARPU for software. So given that now the new products are more than 30% of our total store count, and that we have been doing really well there, that just has a big driver on ARPU. So that is the first comment.

The second comment is we are developing a lot of software modules that basically need payments to be unlocked. So as an example, our analytics engine for hospitality needs payments for this to become a module. So as we compound people onto payments, we are driving more software. So yes, I think on all fronts we are feeling good about this.

And we think we are really in a position of strength, because of those new platforms that are really attracting the right profile of customers that are giving us more on software..

The only thing I would add, I just wanted to confirm that your math on the software ARPU uplifted is right. It is very high single digits..

Excellent. That is great. The other thing I just wanted to kind of touch on in terms of subscription gross margins being steady, I guess a really a question.

I know you talked about vendor arrangements and improved efficiencies, but it also seems to suggest that the pricing environment around that software is pretty stable and you are not having to give up kind of as much pricing as I think some had thought in order to kind of drive maybe some of that Unified Payments.

So can you just talk to that point a little bit as well? Thanks so much..

Yes, absolutely. So, the subscription revenue growth we had said to expect modest growth, we are doing better than that expectation. And you are right, that is coming from the fact that we have had to discount the software less than we anticipated, but also the fact that churn has been lower than we had anticipated.

Churn has been very much in line with historical levels, and we had accepted an uptick in churn from the Unified Payments efforts and we are not really seeing that. So all told our subscription growth is better than anticipated..

Your next question comes from the line of Josh Baer from Morgan Stanley. Your line is open..

Just wanted to focus on the go-to-market and sort of overall strategy. I guess. Just to start, Asha, you mentioned that growth in like the key larger GTV customer cohort was not quite where you want it to be.

Is that a reallocation of resources to Unified Payments or is there something else that sort of causing that situation versus your aspirations?.

Well, let’s just start with the macro. Okay. A lot of the industries where we operate have still not recovered from, you know, the post pandemic kind of scenario.

So here, if you look at just GMV per merchant for bikes or for outdoors and sports and homeware, and these are categories where we have a lot of customers and they are still, you know, in decline year over year. So I think that is the, going back to Asha’s comment. On the new customer front we are getting a lot of intake in those industries.

I mean, if you look at bikes, I think we are the defacto leader. Anybody opening a bike store is going to buy bike from Lightspeed or, and if you look at all the progress we have done in golf, we are, you know, gaining a lot of courses and that means those industries are doing well..

Okay. I guess, I’m wondering like, it sounds like it is clear that the, some of the resources on selling more software back into the base, like those are shifted toward attaching payments.

I guess I’m just wondering the structure of the salesforce, if the reps that are, were responsible for going after new accounts, if like their focus is also on unified payments, like has the land of new customers been, you know, reallocated toward the payment strategy also?.

Again, just going back to it, it is a question of dollars. So of course we have allocated a lot of dollars in our Go-to market overall to upselling payments versus going off to new customers. And I think goes back to the dynamics I described earlier on, is as we get customers on payments, we will allocate more money onto go to market.

And I think for me, maybe when I, when I look at go to market, just talking about the dynamics, we have a strong belief that in North America for retail, there is a really good play to be had where we have people with foot on the ground in every city.

So another way of saying it is we want to take kind of the hospitality approach that some of our competitors have been having and apply this to retail where there is nobody else than Lightspeed in the more sophisticated.

So I think there is a real opportunity there and that is really what is going to happen as unified payments is behind us and we are getting more, I mean, we are doubling our net take rate from customers. We are going to take a lot of that money and we are going to actually hire people with foot on the ground for retail in North America.

The other dynamics that is going to happen is for rest of the world, call it outside of the U.S. On the hospitality side, we want to take the exact same approach as we get more and more of our customers onto payments and we free a lot of money. We want to have a lot of salespeople with foot on the ground in hospitality outside of the U.S.

So in Canada, across Europe and APAC because those markets are up for grabs and there are no competitors in those markets. And I think that is a real opportunity for us. So I think you will see that, on a dollar basis, we are going to allocate more and more money to our finding new logo kind of teams.

And we will also over time as we don’t need as many people upselling payments, we will reallocate some of those into going off to new customers..

Your next question comes from the line of Raimo Lenschow from Barclays. Your line is open..

Great. Thank you. This is [Jeremy] (Ph) on for Raimo. I just wanted to ask on the payments capture rate, so looks like this quarter came in around 2.3% only slightly lower than Q1.

And can you just touch on like the different factors that are impacting that number and the direction going forward in terms of when you think it could sort of bottom out? Thank you..

Hey Jeremy. Thanks for the question. Yes, for sure. I think we should look at it from a gross margin perspective. From a capture rate perspective, there is a bit of noise because. In North America, the gross take rates are between 2% and 2.5%, depending on the industry. And the net take rates are in the 50 to 65 basis points.

In international markets, the gross take rates actually between 1% and 1.5% depending on the country. And the net take rates are between 35 and 45 bps. And so what we should focus on is really the gross margins. The gross margins - this quarter, the gross margins on transaction based revenue was 28%, which was slightly up from Q1.

And that increase is what we should sort of expect slowly over time.

You have heard from us that melting referral fees or residual partner fees will put downward pressure on transaction based gross margins, which is true, but the increase in our capital revenue, which comes in at 95% gross margins in addition to the fact that when we go after international markets on payments, the gross margins are in the 30% to 35% range.

So all told the increase in international markets and the increase in capital revenue should more than offset any decline from the referral fees from here on..

Your next question comes from the line of Tien-Tsin Huang from JP Morgan. Your line is open..

Just JP I want to ask you about some of the new releases, because we have been studying a lot of the restaurant tools that have been coming out. Looks like you are the smart items, the magic menu quadrant, I think it is solving a lot of the challenges around the menu items.

How homegrown and how quick was that to develop? I’m just curious if that is giving us a clue on, on, in your focus areas within the verticalized retail restaurant areas that you are going after?.

So just simply put, I’m just going to try and make it, we have brand new products that have very, very limited technical debt and that are in code bases that are easy to evolve. Just start there. So here, what you are seeing now is accelerated roadmaps.

You are seeing accelerated delivery of features because that the code is new and when you are developing a new technology, I mean, the order of magnitude of speed is completely crazy versus what we had with our previous products that were 10, 12, 13-years old in the world of technology, 13-years is a lot.

And there is a real gap between the ability to execute with new platforms versus old. So that is my first point. And I think that is why I keep saying we are in a position of strength is we now have products that are the leading products on the market that are brand new, which means we are going to accelerate roadmaps.

When you look at what we delivered this quarter, the value we are bringing to our customers has nothing to do with features for smaller merchants. It is for well established merchants.

And so here, when you look at what we are doing with AI and we are making smart descriptions and we are just basically looking at the flows of our customers and we are saying, how can I help our customers do more with less? How can I remove all kind of manual tasks? And that is what resulted in us now automating descriptions of menu items.

And then the second one you talked about, which is our quadrant is I’m now helping merchants identify returning visitors and actually what are returning visitors ordering versus when they order for the first time, which is extremely important for profitability.

You didn’t talk about this, but we also released on the retail side advanced workflows for omnichannel where now - and that is not valuable for a mom and pop. It is valuable if I have multiple locations and now, I can define how my pickup in store or all my omnichannel workflows will work across locations.

And again, not very valuable for the small merchants, very valuable for the merchants that are on live speed.

So we are really just focused now on delivering value and focusing on where do our customers spend too much time? Where are the workflows inefficient, and how can we deliver? And I think for me, just saying it at one last time, we are going to accelerate roadmaps, because we have a code base that is brand new and it is so much easier than I would argue our competitors are what we used to have in the past..

Got it. Yes. So product velocity is definitely accelerating. Okay, great. Thank you.

Just one quick clarification on the North America side, given what you have learned so far, the targeted customers that did not become transactional, that are choosing to absorb the higher fee, any surprise there or does it change your thinking around maybe pricing philosophy in general? Thank you. That is all I had..

Yes, look, I think, I mean, the bet we made was we don’t think people are going to change their core operating system, because we are giving them free terminals and accommodating their rates and we are saving them hours every day. So that was the bet going into this.

And we had modelled slightly more churn because we were like maybe people are not going to like to be forced into this. And actually, what we are seeing is the churn levels are within historical ranges, which is in incredible news for us when you look at the North American market.

And the other thing we are seeing is that customers are paying those who don’t want to move or in agreement to pay the transaction fees. And I think for me, what we are hearing from the customers is not, I don’t want to move.

It is like, we are not ready to move now, can you please work within our timeframes? And so, we have, cohorts of customers who are giving us the50 basis points transaction fee, and that are telling us, okay, let’s work on a schedule, because now is not the right time.

Asha gave you an example of holiday seasons, restaurants didn’t want to move in the summer when they have all their terraces office open, sorry. And I don’t think, hospital - I don’t think the retail customers are going to want to move around Christmas when that is when they make most of their revenue.

So I think we are, we are taking all of these into account, but net, net the bet we had made when we started this initiative has proven out a 100% in North America for now..

Operator, we will take one last question..

And your next question comes from the line of [Patrick Ennis] (Ph) from UBS. Your line is open..

Wanted to ask about the migration to the flagship restaurant retail products.

I know you touched on this a bit in the prepared remarks around some of the more robust features that are being folded in, but could you provide specifics around some of the advantage to sticking with Lightspeed as it relates to data transfer implications and maybe moving to a different provider and what some of the puts and takes there are, and then just had a quick follow up on pricing environment?.

Yes, maybe I will just talk about the philosophy here. We call it an upgrade internally. So, and I think it means a lot, because it says we are going to find a path to least resistance to migrate our customers or to upgrade our customers to the new platforms.

And so here, just going back to your question, we are now investing time and investing software resources and development resources to convert. And we are starting actually on some of the cohorts of customers. And so, you can expect that over time we are going to upgrade our customers to the new platforms. We will be cautious around these upgrades.

We will go cohort by cohort and we will ensure that there is a lot of software to make it as seamless as possible. And I think for me, when I think about seamless, we don’t want our customers to lose history. We don’t want our customers to lose customer information. We, and of course we want to port the inventory.

So we are building tools and over time we are going to bring our customers onto the new platforms. And maybe the last philosophy of the last belief internally is those products are so much better than the old ones that we believe our customers going to follow us in their migration..

Appreciate it. Thanks for all the color there.

And could you, I know you talked briefly about some of the puts and takes between North America and international gross take rates, but could you comment on the pricing environment generally and how we should be thinking about Lightspeed payments growth take rates considering maybe some of the accommodations or concessions you are giving to some of the migrations and mix shift to larger customers as well as this international growth?.

Yes, so I will just start by saying that I think it was 93% of the cases we are lower than, you know, what they are currently paying. So I think here you can expect that we maintain the rates that we have in the two geographies. I think for me, we are trying to get away from a commoditized rate to providing software value.

And I’m just going to go back to there is a ton of value of using Lightspeed payments integrated with Lightspeed software. And you know, the resounding feedback we are getting from our customers is that they are saving hours every day. They are running a more efficient business. And they once they are on the other side, they love it.

So I think for us, we are going to use this, the technology that we have and the capabilities with the software to maintain as much as possible the rates and not go into this commoditized war of rates..

That concludes today’s Q&A session. I would like to hand the call back over to Gus for closing remarks..

Okay. Thanks everyone for joining us today. We will be around if there are any follow-up questions. We will speak to everyone in about three months. Have a great day everyone..

This concludes today’s conference call. Enjoy the rest of your day. You may now disconnect..