MoMo Productions Investment Outlook Lightspeed Commerce (NYSE:LSPD) recently reported its FQ1 2025 financial results, beating revenue and consensus earnings estimates. I previously wrote about LSPD in February 2024 with a Sell outlook due to declining international growth prospects and continued high operating losses. Since then, Lightspeed’s founder has returned to running the firm and results have improved in terms of reduced operating losses. I’m Neutral on LSPD on the promise of an increased focus on more predictable subscription revenue and lower operating costs. Lightspeed’s Market And Approach LSPD provides a range of POS software and hardware products to customers of all sizes in North America and Europe. More recently, the company has increased its focus on larger merchants, which it pursues through its direct sales and marketing efforts. It also sells its products and services to small and medium businesses through resellers. LSPD generates most of its revenue from transactions (65.4%), subscriptions (31.3%) and other sources (3.3%), as shown in the pie chart breakdown here: Seeking Alpha Data Per a 2022 market research report by Grand View Research, the global point-of-sale [POS] terminal market was approximately $104 billion in 2023 and is forecasted to exceed $181 billion by the end of 2030. This growth, if reached, would represent a CAGR in excess of 8% from 2023 to 2030, a moderately strong rate of growth. Below is a chart that illustrates the U.S. point-of-sale terminal market’s expected growth trajectory through 2030, by product type: Grand View Research Also, the worldwide point-of-sale software market was approximately $21 billion in 2023 and is forecasted to reach nearly $75 billion by 2032. This growth rate for software (versus terminal) is projected to be much higher – at around 15% from 2024 to 2032, according to a Market.us research report. The software point-of-sale market is expected to generate higher growth due to increasing demand for cloud-based delivery systems, full-service transaction processing and a trend toward digitalization through various industry sectors. Major traditional vendors are: NCR Oracle (Micros) Verifone Ingenico Younger cloud-based system providers include: Shopify Block Toast Clover These newer cloud-based system vendors provide enhanced mobile capabilities, multichannel integration, a variety of easy-to-use self-service functions and, more recently, AI-enabled services including recommendations, inventory management and predictive analytics. Recent Financial Trends Total revenue by quarter (columns) has risen due to increasing payments adoption. Operating income by quarter (red line) has remained negative but improved in recent quarters because of cost controls, contract renegotiations, footprint consolidation and greater scrutiny of corporate overhead costs. Seeking Alpha Data Gross profit margin by quarter (green line) has trended lower due to declining referral fees. Selling and G&A expenses as a percentage of total revenue by quarter (orange line) have fallen due to continued cost controls, including workforce reductions. R&D expenses as a function of revenue (purple line) have also fallen as the company reduces R&D in an effort to get to operating breakeven. Seeking Alpha Data Earnings per share (Diluted) have remained negative but have made some progress toward breakeven in recent quarters. Seeking Alpha Data (All data in the above charts is GAAP.) For balance sheet results, LSPD ended the quarter with $673.9 million in cash and equivalents and no debt. Over the trailing twelve months, free cash used was $93.1 million and capital expenditures were $7.3 million. The company paid a significant $68.4 million in stock-based compensation in the last four quarters. The net dollar reduction in stock outstanding for the most recent quarter was valued at $37.6 million, a strongly favorable result for shareholders, at least as far as this metric is concerned. Although the benchmark ETF is not exactly comparable, in the past 12 months, LSPD’s stock price has fallen by 19.2% vs. that of the iShares Expanded Technology-Software ETF’s (IGV) gain of about 22%, as the chart indicates below. TradingView Below is a handy major financial and operating metrics table showing trailing and forward metrics. Metric Amount EV/Sales (“FWD”) 1.1 EV/EBITDA (“FWD”) 26.7 Price/Sales (“TTM”) 2.0 Revenue Growth (“YoY”) 26.2% Net Income Margin -15.6% EBITDA Margin -9.5% Market Capitalization $1,880,000,000 Enterprise Value $1,240,000,000 Operating Cash Flow -$85,810,000 Earnings Per Share (Fully Diluted) -$0.98 FY 2025 FWD EPS Estimate $0.40 Rev. Growth Estimate (“FWD”) 21.6% Free Cash Flow/Share (“TTM”) -$0.68 Seeking Alpha Quant Score Strong Buy – 4.51 Click to enlarge (Source: Seeking Alpha) Although LSPD gets most of its revenue from transaction sources and isn’t strictly a SaaS company per se, its Rule of 40 performance, which simply shows revenue growth and operating margin, has improved over the two periods shown in the table below, primarily from improving negative operating margin. Rule of 40 Performance (Unadjusted) FQ3 2024 FQ1 2024 Revenue Growth % 24.6% 26.2% Operating Margin -19.7% -10.4% Total 4.9% 15.8% Click to enlarge (Source: Seeking Alpha) Why I’m Neutral On Lightspeed With the return of company founder Dax Dasilva to the CEO’s chair, Lightspeed is increasing its focus on outbound sales efforts, improving ideal customer retention rates and stabilizing churn rates. LSPD is also continuing to reduce operating costs wherever possible. While laudable, this cost-cutting approach has become common for software enabled technology companies that are consistently generating operating losses and have been punished by the market in a higher cost-of-capital environment for those losses. The problem for these firms is that the cost cuts, called ‘managing for profitability’, usually results in reduced revenue growth rates going forward. LSPD appears to be no different, with trailing twelve-month revenue growth of 26.2% turning to a fiscal 2025 expected forward growth rate of only 21.6%, or 4.6% lower. The most recent management conference call with analysts is illustrated with the following graphic, which shows the frequency of various keywords used in the call. Seeking Alpha Data This graphic indicates that the company’s retail and restaurant customers are seeing challenges in same store sales as consumers pull back. Also, smaller clients are producing declining gross transaction value [GTV] metrics, producing downward pressure in this important segment. However, LSPD has made progress in shifting its focus toward shifting its customer base toward higher GTV locations and, as a result, ARPU (Average Revenue Per User) has increased by 31% for non-equity customers. So, there are various cross-currents with Lightspeed’s current performance and outlook. I’m in favor of founder-led companies and am heartened to see Dasilva back in direct command. But, U.S. retail sales growth has been low recently, as the chart shows here: TradingEconomics With so much of the company’s revenue tied to transaction activity, reduced activity has an outsized impact on the firm’s revenue trajectory. Perhaps this is why we’re starting to see Dasilva begin to place greater emphasis on increasing the company’s subscription software results. Subscriptions are more predictable and stable as a revenue stream and can soften the negative impact of a dropoff in transaction activity on the company’s revenue path. It appears management is seeking to pass some pricing increases through to customers of certain subscriptions. With improved operating results, an increased focus on subscription revenue in the coming quarters and the founder back in charge, I’m now Neutral on LSPD for the near term.
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