Lightspeed Commerce Beats Estimates But Europe Pressures Loom Large (NYSE:LSPD)

A Quick Take On Lightspeed Commerce

Lightspeed Commerce (NYSE:LSPD) reported its FQ1 2023 financial results on Aug. 4, 2022, beating expected revenue estimates and matching EPS estimates.

The company provides a platform for omnichannel commerce for businesses worldwide.

Given the worsening macroeconomic environment and the company’s exposure to the European market, I’m cautious on LSPD at this point, so my outlook is a Hold for the near term.

Lightspeed Commerce Overview

Montreal, Canada,-based Lightspeed was founded in 2005 to develop a commerce platform of various functions for small and medium companies worldwide.

The firm is headed by Jean-Paul Chauvet, who previously held senior roles at Atex Group and Nstein Technologies.

The company’s primary offerings include:

• Point of Sale

• Menu management

• Employee management

• Inventory management

• Analytics

• Payment processing

• Related hardware

The firm acquires customers primarily in the retail, restaurant and golf course industries directly as well as through reseller partners.

Lightspeed Commerce’s Market and Competition

According to a 2018 market research report by Grand View Research, the global restaurant management software market is forecast to reach nearly $7 billion by 2025.

This represents a forecast CAGR of 14.6% from 2019 to 2025.

The main drivers for this expected growth are a growing awareness by restaurant operators of the benefits of increased efficiencies from software systems.

Also, the COVID-19 pandemic will bring forward significant demand for integrated restaurant management systems in order to streamline processes while providing restaurant services in a more omni-channel approach to customers.

Major competitive or other industry participants include:

• Block

• TouchBistro

• Clover Network

• Toast

• Oracle/Micros

• NCR

• PAR Technology

• Heartland Payment Systems

• Shift4 Payments

• Fiserv

• FreedomPay

• Olo

• Others

Lightspeed Commerce’s Recent Financial Performance

• Total revenue by quarter has grown impressively in recent quarters:

• Gross profit by quarter has also followed the same trajectory as total revenue:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended lower:

• Operating losses by quarter have worsened sharply:

• Earnings per share (Diluted) have followed a similar trajectory as operating losses:

(All data in above charts is GAAP)

In the past 12 months, LSPD’s stock price has fallen 77.9% vs. the U.S. S&P 500 index’ drop of around 11.8%, as the chart below indicates:

Valuation And Other Metrics For Lightspeed Commerce

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	3.06
Revenue Growth Rate	101.2%
Net Income Margin	-56.1%
GAAP EBITDA %	-37.4%
Market Capitalization	$2,670,000,000
Enterprise Value	$1,860,000,000
Operating Cash Flow	-$106,020,000
Earnings Per Share (Fully Diluted)	-$2.32

Click to enlarge

(Source – Seeking Alpha)

As a reference, a relevant partial public comparable would be Toast (TOST); shown below is a comparison of their primary valuation metrics:

Metric	Toast	Lightspeed Commerce	Variance
Enterprise Value / Sales	3.42	3.06	-10.5%
Revenue Growth Rate	86.2%	101.2%	17.4%
Net Income Margin	-15.0%	-56.1%	275.0%
Operating Cash Flow	-$117,000,000	-$106,020,000	-9.4%

Click to enlarge

(Source – Seeking Alpha)

A full comparison of the two companies’ performance metrics may be viewed here.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

LSPD’s most recent GAAP Rule of 40 calculation was 63.8% as of FQ1 2023, so the firm has performed well in this regard, per the table below:

Rule of 40 – GAAP	Calculation
Recent Rev. Growth %	101.2%
GAAP EBITDA %	-37.4%
Total	63.8%

Click to enlarge

(Source – Seeking Alpha)

Commentary On Lightspeed Commerce

In its last earnings call (Source – Seeking Alpha), covering FQ1 2023’s results, management highlighted the company’s growth in hospitality in the EMEA region due to a rebound in travel post-pandemic.

Management is focused on ‘adding higher GTV locations of complex SMBs’ as they tend to produce ‘higher ARPU, lower churn and superior lifetime value.’

The firm believes that its software is recession resilient as companies turn to integrated solutions to ‘do more with less’ in the current environment featuring supply chain challenges, labor shortages and inflation pressures.’

As to its financial results, total revenue rose 50% year-over-year to a level above the high end of its previous guidance.

Notably, management did not disclose the company’s net dollar retention rate, which provides investors with visibility into product/market fit and sales & marketing efficiency. It did say the churn is in line with its historical results.

LSPD’s Rule of 40 results have been impressive due to its high revenue growth rate.

Gross margin dropped from 50% to 45% year-over-year due to change in revenue mix toward its Payment Solutions product which has a lower gross margin profile.

Operating losses and negative earnings continue to trend negatively.

For the balance sheet, the firm finished the quarter with $914.8 million in cash and no debt.

Over the trailing twelve months, free cash used was $118.5 million and stock-based compensation was $135.1 million.

Looking ahead, management reiterated its previous outlook for revenue at $750 million at the midpoint of the range and adjusted EBITDA loss of around $38 million. Adjusted EBITDA figures typically do not include stock-based compensation which can lower the results sharply, especially in LSPD’s case.

Regarding valuation, the market is valuing LSPD at an EV/Sales multiple of around 3.1x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.9x at September 30, 2022, as the chart shows here:

So, by comparison, LSPD is currently valued by the market at a significant discount to the broader SaaS Capital Index, at least as of September 30, 2022.

The primary risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, especially in Europe, which will likely slow sales cycles and reduce its revenue growth trajectory.

Given the worsening macroeconomic environment and the company’s exposure to the European market, I’m cautious on LSPD at this point, so my outlook is a Hold for the near term.