Lightspeed Commerce Inc

TSX:LSPD

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Chris, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Lightspeed First Quarter 2020 Earnings Conference Call. [Operator Instructions] Thank you. Chris Mammone, Investor Relations, you may begin your conference.

[Christopher J. Mammone]

Thank you, operator, and good morning, everyone. Welcome to Lightspeed's fiscal first quarter conference call. Joining me today are Dax Dasilva, Lightspeed's Founder and CEO; Brandon Nussey, Chief Financial Officer; and JP Chauvet, President of Lightspeed. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our earnings press release from yesterday as well as in our filings with Canadian securities regulatory authorities. Also, our commentary today will include adjusted financial measures which are non-IFRS measures. These should be considered as a supplement to, and not a substitute for, IFRS financial measures. Reconciliations between the 2 can be found in our earnings press release, which is available on our website. 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 Dax.

[Dax Dasilva, Founder, CEO & Corporate Director]

Thanks, Chris, and thank you, everyone, for joining us. We're pleased to announce another great quarter for Lightspeed, as we continue our journey of building a recognized market leader for SMB retailers and restauranteurs globally. This past quarter demonstrated solid execution on a number of our stated growth strategies to ensure Lightspeed remains the leading cloud-based solution in our segment. The result was accelerated top line growth during the first quarter. Total revenue grew by 38% and topped $24 million. Approximately 90% of this base consists of recurring Software and Payments revenue, which grew 40% during the first quarter. We continue to be extremely pleased with the overall pace of business expansion as we soundly execute on our mission of helping complex, small and medium-sized businesses thrive in a world with rapidly changing consumer expectations. Our core belief is that cities and communities are built on the success of the local SMBs. And our work as their key technology partner is more important than ever, particularly as today's consumer demands a delightful in-store or in-restaurant experience. We believe the complex SMB is seeking a recognized global market leader for the solutions we provide, and we're pleased with the progress we're making to be known as that go-to player. GTV growth of greater than 30% over the last 12 months to approximately $15.6 billion is an effective gauge of a healthy, growing customer base that is finding increased success through partnering with Lightspeed. As we look forward, we will continue to grow organically in 3 primary ways: attracting new merchants, entering new markets and expanding ARPU. First, continuing to attract new merchants within our existing core markets. Our market is vast and underserved by cloud technology solutions, and we will leverage our growing global brand to attract an increasing number of new merchants to the Lightspeed platform. During the first quarter, more than 2,000 net new retail and restaurant locations joined the Lightspeed ecosystem. We were particularly pleased with our progress in North America this quarter as we saw a considerable uptick in our new sales and top-of-funnel activity on the back of increased awareness of Lightspeed and our focused investments to drive those results. We are well positioned to continue growing our overall location count by greater than 20% per year, while simultaneously generating solid underlying unit economics. Our second organic growth avenue is to selectively enter new markets, leveraging our sales and marketing expertise in our core markets, we believe new countries and new end markets all represent a compelling opportunity for us. With just about 1/3 of our revenue coming from outside North America today, we see tremendous runway to continue to grow that overall contribution over time. Although we prefer to pursue new end market growth organically, we also won't hesitate to buy meaningful scale and market leadership in new geographies when it makes financial sense to do so. And that was certainly the case with our acquisition of iKentoo, which I'll discuss further in a moment. And the third way we grow organically is through ARPU expansion. We have amassed the industry's broadest set of functionality for our customers. We continue to see a significant percentage of new and existing customers paying for more than 1 Lightspeed product, and increasingly multiple modules being adopted initially by customers, which are encouraging signs. Lightspeed Analytics, Lightspeed Loyalty and Lightspeed Payments all continue to be notable success stories for us, affirming our strategy of being a one-stop shop for the core commerce needs for our customers. On Lightspeed Payments, specifically, our encouraging launch continues. This past quarter, close to 50% of new U.S. retail customers bought Payments alongside their Lightspeed software subscription. Meanwhile, hundreds more customers from our existing base made the decision to adopt Lightspeed Payments over their incumbent solution. Our early successes here serve as a welcome validation that this is the right strategy to deploy. To ensure we continue to see this new customer momentum continue, we announced numerous product innovations which I'll discuss later in my remarks. But first, I'd like to highlight some recent successes with our channel partner strategy as yet another lever we are utilizing to bolster our go-to-market approach. We work with many great channel partners to help our complex SMB customers manage all aspects of commerce in their business. Recent strategic partners brought into the Lightspeed ecosystem includes Faire, which has integrated its marketplace for buying wholesale products into the Lightspeed retail solution, and Affirm to offer points-of-sale financing options for shoppers at Lightspeed retail locations. In addition to these 3 primary organic growth vectors, we believe a targeted and opportunistic approach to M&A is also important to solidifying our leadership position globally. Our M&A strategy is to look for targets that will accelerate our product roadmap, increase our market penetration in a way that doesn't slow us down with complicated integration efforts and add significant value for our shareholders. Longer term, we believe the increased scale will drive significant opportunities for the business to upsell modules, unlock strategies using the immense amount of transaction level data our systems generate and monetize an increasing base of GTV. Last quarter, we announced the acquisition of Montréal-based Chronogolf, which brought us instant leadership in a vertical subsegment, adding hundreds of golf course operators, primarily in North America. The integration of Chronogolf, which has been a large software partner of ours over several years, is now completed and went very well as expected. More recently, we announced the acquisition of iKentoo, a rapidly growing cloud-based POS system, specializing in the hospitality segment in Europe with close to 4,000 customers. iKentoo was compelling to us for many reasons. Number one, it brings further platform breadth, capabilities and upselling opportunities in EMEA, in new countries such as Switzerland, France and South Africa. Number two, Ikentoo brings Lightspeed complementary technology and experience well suited for large and complex deployments needling Lightspeed to further accelerate the displacement of legacy POS providers globally. And number three, we're adding a talented team of passionate people with a similarly disruptive mindset to Lightspeed, which will help drive us forward to take even greater advantage of the structural tailwinds at play in this marketplace. Brandon will comment further about the financial details surrounding this acquisition during his prepared remarks. But first, I'll speak to how some customers operating in complex environments have benefited through integrating iKentoo's advanced solution. iKentoo recently replaced the legacy system for a 5-star hotel group to manage all of their food and beverage POS needs by deploying more than 100 devices across several properties. And this summer, iKentoo has been powering 2 large European music festivals, attended by more than 0.5 million people. In one instance, functioning as a centralized POS for managing more than 50 food vendors. And in the other case, used on more than 500 devices during 2 very high-volume weekends. Turning now to some of Lightspeed's most exciting recent developments on the new customer and product innovation front that further our position as the leading cloud-based end-to-end solutions platform in our space. Lightspeed continues to enjoy strong customer momentum from complex retailers and restauranteurs in North America and around the world, many of whom continue to select Lightspeed given our ability to manage their omnichannel business needs seamlessly. Customers such as Herschel Supply company, an affinity backpack brand with dozens of retail locations; U.K.-acclaimed Crosstown Doughnuts and luxury hotel operator, the Perle Oban Hotel in the Scottish Highlands, all selected Lightspeed in the quarter. Additionally, Kemper Sports, one of the largest golf course operators in the world, selected Lightspeed to replace their multiple legacy systems and power their golf courses, restaurants and retail pro shops for over 100 properties across North America. Kemper will be making the full transition to Lightspeed over the coming months. Turning to our product innovation efforts. One of the main reasons that customers and retail choose Lightspeed over other cloud-based solutions is our unmatched capabilities in helping a complex SMB manage their most important asset: their inventory. It follows that during the first quarter, we rolled out a multitude of enhanced data-driven, inventory management control features and next-generation reporting capabilities to all Lightspeed retail clients, further distancing Lightspeed from other solutions in the marketplace and giving our complex retail SMB more mastery over inventory tracking across all of their omnichannel workflows, including tighter management over presales, backorders and overselling. We have other major new product releases and enhancements coming within both the Lightspeed retail and Lightspeed restaurant platforms throughout the year. And I look forward to sharing with you more of the details around this rapid product velocity, which is an absolute hallmark trait of Lightspeed, in future earnings calls. And lastly, I'm thrilled to have our new Chief Product Officer, Jim Texier, join us in a few weeks to help us go even further. To sum up, it was another great quarter. I've never been more excited about the future for our business, and I'm really proud to see the hard work from the entire Lightspeed team translate into stellar results for our company and our customers. We have the momentum, the team, the vision and the technology to be the clear leader for complex SMBs globally. I'll now turn it over to Brandon to provide greater detail around the financials for the quarter as well as to provide our updated outlook for fiscal 2020. Brandon?

[Brandon Blair Nussey, Chief Financial Officer]

Thanks, Dax. Our strong first quarter results are a reflection of the solid progress we continue to make across all of the important areas of the business. Before I cover the numbers, just a quick word about how our financial model works for anyone that may be new to Lightspeed. Approximately 90% of our revenue is earned through recurring subscription and payment revenue streams. Our subscription revenue is priced on a per location, per month basis with rates that increase as customers adopt incremental functionality offered by Lightspeed. As customers open new locations or adopt new modules, our subscription revenue grows. We also generate recurring payments revenue, which is earned as a percentage of the underlying transaction value, to date, mainly from payment referral partners. But with the introduction recently of Lightspeed Payments, we now have the ability to earn a much larger portion of the transaction value, and this will become a growing portion of our revenue over time. Turning to some of the key metrics we use to track our progress. Total customer locations grew to greater than 51,000 as of June 30, 2019, up from approximately 42,000 a year ago, representing growth of 20%. It should be noted that Q1 is our seasonally slowest selling quarter of the year in terms of net merchant additions. That activity typically ramps throughout the year and ends with Q4 as our strongest selling quarter. As Dax mentioned, we are particularly encouraged by the early returns we saw in North America on the back of the growth-oriented investments we guided to last quarter, and which were primarily focused in this geography as well as the increased brand recognition we've seen since our IPO. We'll continue to track and monitor the conversion rates of this investment over the coming quarters, but we view this early progress as quite encouraging as we push to build a global leading cloud-based brand. As many will recall, ARPU expansion is an important metric for us as well and we saw that continue to grow by double digits versus the year-ago period. Total GTV processed by our customers during the first quarter was $4.6 billion, up more than 30% from a year ago. This is an important measure for us as we roll out Lightspeed Payments. And on Lightspeed Payments, we saw continued strong overall customer receptivity for this important long-term growth driver to our business. In the quarter, we saw continued progress in new customer adoption of payments, with close to 50% of new U.S. retail customers contracting Lightspeed Payments at the time of purchasing Lightspeed's core software. In addition, we saw hundreds of existing customers make the move from their incumbent solution to Lightspeed Payments. This is another quarter of very encouraging progress. But again, I will stress that we remain in the early days of launch and still have much work to do. Nevertheless, the early signs during this initial rollout year are good ones. Turning now to overall financial results for the first quarter. Revenue for the quarter was $24.1Million, up 38% from the same quarter a year ago and ahead of our previous guidance of $23.0 million to $23.5 million. Software and Payments revenue was $21.3 million or 89% of total revenue and up from $15.2 million in the same quarter a year ago. This represents growth of more than 40%. Gross profit from Software and Payments revenue was $15.5 million, up 33% from the prior year quarter. Hardware and other gross margin was 7%, reflecting the hardware subsidy we are providing to new Lightspeed Payment customers in this initial launch phase. Overall, gross margin was 65% of revenue. Adjusted EBITDA loss for the quarter was $5.1 million as compared to $2.9 million loss a year ago, and came in slightly better than our guidance. The increased loss from a year ago reflects the incremental costs and G&A of being a public company and the results of our purposeful investment in marketing in the quarter to drive greater brand awareness, primarily in North America. As mentioned, we are quite pleased with the initial results from this investment, but expect it will take several quarters before we can fully ascertain the overall effectiveness of this campaign. Net loss for the quarter was $9.1 million compared to $8.1 million loss a year ago. And cash used from operations was $6.3 million for the quarter, in line with our guidance when compared to $2.9 million a year ago. We ended the quarter with $191 million in cash on the balance sheet and no debt.As Dax mentioned, on July 2, we completed the acquisition of iKentoo, a leading cloud-based point-of-sale solution provider based in Switzerland. The purchase price for Ikentoo was approximately $18.5 million in cash on closing plus the issuance of just over 400,000 shares in Lightspeed to the key founders of the company. There are additional cash-based incentives payable over the next 2 years tied to continued employment of key team members. From a growth technology and go-to-market perspective, iKentoo closely resembles a Lightspeed model in many ways. iKentoo brings Lightspeed close to 4,000 more hospitality customers in the European region and deepens our presence in new countries that are important to our long-term growth plans. From a financial perspective, while the impact to the current year's revenue will be modest, we expect this acquisition to help us accelerate our growth in EMEA, given the large markets that they are helping us open up. We're very excited by the potential this new platform brings us from an overall talent and market expertise and successful track record of complicated high-end customer deployments as an important building block towards Lightspeed's objective to be the undisputed leader in serving the complex SMB market. I'll now conclude my prepared remarks by discussing our financial outlook. As a quick note on our currency, our guidance does not consider any potential impact with foreign exchange gains or losses as we do not try to estimate future movements in foreign currency rates. For the second quarter ending in September, we expect between $26.5 million and $27.0 million in total revenue, representing growth of between 42% and 45%. And for the full fiscal year ending March 2020, we now anticipate between $112.0 million and $115.0 million in total revenue. This represents annual growth between 45% and 48% compared to our fiscal 2019 revenue. Turning to adjusted EBITDA and cash flow. Our recent acquisition does bring an amount of incremental loss in the current year, which we expect will be eliminated on a run rate basis by the end of the year. Factoring this in for the full year, we expect operating cash flow to be a total use of approximately $9.5 million to $11 million and an adjusted EBITDA loss in the range of $18 million to $20 million. For our fiscal Q2, we expect operating cash flow to be a total use of approximately $5 million and an adjusted EBITDA loss in the range of $5.5 million to $6.0 million. And with that, we're now ready to take questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos with BMO Capital Market.

[Thanos Moschopoulos, VP & Analyst]

Now that you've been selling payments for a couple of quarters, have there been any key lessons learned? And I mean any sort of tweaks to the incentive structure, the pricing, the go-to-markets that you've had to make or is it all kind of rolling out as expected? You mentioned also more penetration into the existing base, which I think that's coming sooner than some of us had expected. Can you comment on what you're seeing there as far as adoption with existing customers and how that's being received?

[Jean-Paul Chauvet]

Yes. Good morning, Thanos. It's JP speaking. So I'll take this one and then if Brandon wants to jump in, or Dax. So I think the payments is going according to plan. We're -- I mean, as we know, we have a pretty large base that is nonintegrated. Also the market expectations, more and more, is to change their payment solution when they're buying at a point-of-sale. So for now we see no changes. We are excited about what we're seeing. I think the adoption with the existing base has been a bit stronger because we're realizing our customers are not happy with their current solution providers. And so we're starting to push and we're being prudent about it. But little by little we are trying to put in place strategies as the product matures to go and do 2 things: have stronger attach rates on our new customers and penetrate the existing base of nonintegrated customers.

[Thanos Moschopoulos, VP & Analyst]

And in terms of the GMV profile, you're seeing of customers adopting payments, is that very consistent with your overall averages? Or is that skewing any different?

[Jean-Paul Chauvet]

No, it's absolutely in line with the averages. And we see penetration on larger customers, medium-sized customers and smaller customers.

[Thanos Moschopoulos, VP & Analyst]

Okay. And can you update us on the timing of the launch of payments into the restaurant market into Europe?

[Dax Dasilva, Founder, CEO & Corporate Director]

Yes. I mean, our goal is to have payments available to our entire North American merchant base by the end of fiscal '20. We'd like to have beta for restaurants in the next 90 days. Europe is also a goal for the end of the fiscal year.

[Thanos Moschopoulos, VP & Analyst]

Great. In terms of the verticals, can you provide some color in terms of relative growth rate between retail versus restaurant?

[Jean-Paul Chauvet]

Yes. I mean, we don't disclose the growth rate. But I mean, we're seeing high-growth in the 2 verticals. Restaurants is the smallest in terms of number of users, but it's the fastest growing, but retail continues to grow very fast.

[Thanos Moschopoulos, VP & Analyst]

Great. And then one last one from me. In terms of IKentoo, you've mentioned that they have an ability to handle large complex deployments. And so to clarify, how large is their average customer in terms of location count? Is that on average similar to Lightspeed? And how large of a deployment can they do as far as location count?

[Jean-Paul Chauvet]

Yes. So as we said in our strategy, we really are focused on the more complex restauranteurs and retailers. So when we look at an acquisition, it has to be in the sweet spot of Lightspeed, so it's -- we're not interested in the smaller coffee shops or low SKU count. So in that sense, iKentoo is at least what Lightspeed is, in a sense that it services complex restaurants with complex routing. But what it does slightly better than Lightspeed is, when you think about volume of transactions, and we gave the example of some of the big, big events happening in Europe, it can process extremely high volumes of transactions per second. So I think for us, this means that it can help us go slightly up market, and it can help us really pursue this replacement of all of the legacy systems, and it gives us a broader aspect. The last piece about iKentoo is that there's a lot of technology that's complementary to ours, and so it's also going to help us with all of our products in terms of understanding how to scale the back-office and provide more capabilities basically for more complex institutions.

[Operator]

Your next question comes from the line of Richard Tse with National Bank.

[Richard Tse, MD & Technology Analyst]

With respect to iKentoo, I guess given that you are looking at acquisitions, I'm curious, are they going to be running on their own platform going forward? Or is there a path that there is an integration on your platform? And it sounds like you'll take pieces of what they're good at and incorporate into your platform, am I kind of on base there?

[Dax Dasilva, Founder, CEO & Corporate Director]

Yes. iKentoo is its own platform, but there's existing Lightspeed technology that we'd like to bring to their base and to their geographies and vice versa. I think that there's a lot of technology that we're acquiring here in iKentoo that's going to be very valuable with the current Lightspeed products. So, over time, I think you're going to see some convergence of technologies, and that's part of the reason the – technologies themselves as well as the teams and the expertise that we're gaining here.

[Richard Tse, MD & Technology Analyst]

Okay. And then I guess over the next year, I was wondering if you can maybe elaborate a little bit in terms of your priority areas when it comes to operating investments.

[Brandon Blair Nussey, Chief Financial Officer]

Yes. Hey, Thanos -- Richard, sorry, it's Brandon. I think what we're doing right now seems to be working pretty well and we're pretty pleased with the progress. So continuing to drive net new location adds organically, we're finding kind of the Lightspeed brand and the top-of-funnel progress is working the way we had hoped. So I think you'll continue to see us do more there. Obviously, lots to do. In terms of market, we're in the early innings here of a really big market opportunity. So expect to continue to see that R&D line being an important one for us. And of course, we've got to make sure that this payments thing continues to be a success and we penetrate as much of our GTV as we can, as soon as we can. So those are all things we have underway. We're pretty happy with our progress, and I think you'll see those continue for us.

[Richard Tse, MD & Technology Analyst]

Okay. And then you mentioned on your call, the funnel seemed fairly robust. Could you give us some perspective on what that funnel coverage may be today versus what it was last year?

[Dax Dasilva, Founder, CEO & Corporate Director]

Yes. I mean without getting into the specifics, Q1 for us is a seasonally slow quarter. Us being new as a public company here, some of these things are new for the markets, I suppose, in how we communicate. Q1 is a seasonally slow quarter, and for us to see the lead flow we saw in Q1 and the new location adds we saw in Q1, all pretty encouraging for us. So without getting into the precise growth rates of what's happening on the funnel side, Richard, really happy with the underlying unit economics and the early returns we're seeing from those investments. And yes, we think we're set up well for the back half of the year, and hopefully, you see that in our guidance, and in some of the messages you heard from us today.

[Operator]

Your next question comes from the line of Josh Beck with KeyBanc.

[Josh J. Beck, Senior Research Analyst]

First one, Dax, it'll be for you. I know you mentioned that you viewed innovation velocity as a hallmark of a company. So I mean as you look out the next couple of years, are there certain areas, without disclosing the roadmap, whether it's front end, back end, enhancement to existing features that you are particularly focused on in terms of innovation?

[Dax Dasilva, Founder, CEO & Corporate Director]

Yes. I think that there's -- we view Lightspeed platforms as one-stop shops for complex SMBs. So we're -- the recent rollout of features for inventory management in retail represents a strengthening of the core and further distancing ourselves from other cloud-based vendors. This is -- inventory is a huge competitive advantage for our retail product. But as you've seen from all of our module -- our success around modules, there's additional capabilities that customers are looking for from Lightspeed as this one-stop shop. And we've seen amazing adoption of those modules, analytics, loyalty, payments, accounting, Integrations and there's more opportunities. There's areas around employee management, around scheduling. So I think you'll see the core being strengthened. Things like omni-channel are becoming more and more a part of the core. E-commerce has been a big module, but it's also becoming a core part of retail. So you'll see the core strengthen, and you'll see new capabilities building out for both retail platforms and the restaurant platforms.

[Josh J. Beck, Senior Research Analyst]

Okay, very helpful. Wanted to follow up on the payment strategy. Obviously, you've had a nice uptick in terms of adoption of new customers, whichI'm guessing is mostly driven by execution. As you look forward and look out, are there opportunities to bring in other partners potentially? And is that something that could maybe even boost that rate further? Maybe just help us kind of run through how you're thinking about that?

[Brandon Blair Nussey, Chief Financial Officer]

Josh, it's Brandon. Yes, absolutely, we've always -- having multiple processing partners is important for us as we look to make this available across our global client base, so lots of activity and progress happening there. We do see opportunities to continue to grow attach rates. It is early days, so don't want to get too far ahead of ourselves. But we're only a few months into this. We're pretty happy with the progress. And we're still learning and finding the right messages and the right way to position and sell and upsell customers. So we see some opportunities. There are some things we need to do on our side. There are some things that additional partners will provide to us. But so far so good.

[Josh J. Beck, Senior Research Analyst]

Okay. Great. And last one from me. When I look at the revenue guidance, it seems like there's a pretty nice acceleration in revenue growth as we go into fiscal Q2. So maybe just help us think through what some of those drivers are? If M&A is important? That would be helpful.

[Brandon Blair Nussey, Chief Financial Officer]

Yes. The guidance does not reflect any future M&A. So this is kind of the outlook of what we have kind of inside of Lightspeed right now. And I think -- just echo some of the earlier messages, we're just seeing good momentum in adding new customers into the business. We're seeing good momentum with payments. And even with the acquisitions we've done, Chronogolf, Dax gave a good example of a big customer win that happened post-acquisition there, where we like to think we were helpful in making that happen. So yes, I think, it just reflects good strong strength in the core and some of the initiatives we've had under the way.

[Operator]

Your next question comes from the line of Todd Coupland with CIBC.

[Todd Adair Coupland]

I wanted to ask about the new customers you spoke about on the call. Again, the profile seems to be quite a number of locations across different industries. Can you talk about what they're actually buying in terms of modules? Do you have to do any customization for these large organizations? And how long does it take to roll the platform out across their businesses?

[Jean-Paul Chauvet]

Okay. Yes, I think I'll take this one. It's JP. So I mean, very simply put, the customers are in line with what we're looking for. And here, when you think about it, it's typical customers. So for us, the most important thing is complex retailers that means -- and complex restauranteurs. That means that these are institutions that have -- if you're in the restaurant space, pretty complex routing rules. If you're in the retail space, that means you have a lot of inventory. Now it's true that a lot of them here have multiple locations and I think that the strength of Lightspeed is, as you go from one location to just 2 locations, regardless if it's restaurant or retail, that's where you start seeing the strength of all of our products. And that's where we start distancing ourselves from all the other cloud-based systems. So a couple of points: first of all, we do not do any customizations in a sense that the code base, regardless of the customer, is always the same. And then what we do is we have implementation. So we have implementation partners. We have implementation teams. But really, what we're deploying is the same thing everywhere. Just to answer maybe the first part of your question, we -- what we see is, customers normally start with a bundle. And then what happens is, over time, they buy more from us. So if you look at the typical customers that bought from us, would have bought omnichannel, going back to what Dax was mentioning. And then what we see with time is: customers, once they have implemented the core, which is a POS and sometimes the e-commerce platform, then what they end up doing is they look at the new modules. So they look at analytics, which will help them call better decisions because they have a much better insight on their business, and then maybe they might move into other platform. But it really depends on the businesses. But generally speaking, the customers we mentioned are very much in line with the target base we're going after, which are complex retailers and restauranteurs with one or more locations but really the core of it is, they need to have complex needs. If you take the case of Kemper, that's slightly higher than what we normally do. But we do have customers with more than 100 locations that are current existing customers. So here, I don't think nothing is outside of the norm. The last point is around implementation. Because this is cloud-based, regardless if you have 1 store or 50 stores, once you've programmed the setup for 1 store, then deploying new locations is very simple. All you have to do is just have a browser or an iPad connected to the web, and we just deploy more stores as we go. So the real challenges are mainly around training and training of the employees more than anything to do with the code base.

[Todd Adair Coupland]

And in terms of competition, particularly, for these multi-location wins, is it typical point SMB cloud solutions that you're competing with? Or are you actually seeing companies like Demandware show up and compete for this business?

[Dax Dasilva, Founder, CEO & Corporate Director]

So first of all, we -- I mean, we deploy in many different countries, many different geographies and -- I mean the market is so big that every geography has its own set of local competitors, exactly like iKentoo would have been a competitor in Switzerland a year ago. But primarily, the market is a replacement of legacy platforms. So here, if you look at Kemper, which is a very good example, this was really legacy property management with legacy POS for the retail store and probably a MICROS or the Lightsols in the restaurants. So these are really the competitors. So I think the choice for established businesses is really, do I continue with the legacy? Do I renew my maintenance? Or do I select Lightspeed? And here, I think the real advantage of Lightspeed is, when you think about the breadth and the depth of what we offer, there's not many cloud vendors that have what we have. Now when you think about new businesses, the majority of the new businesses nowadays want to go with a cloud-based platform. And here, really, when you think about it, the complexity of the business is going to drive the decision. And here, we'd be really a good fit for the more complex retailers.

[Todd Adair Coupland]

That's helpful. And then I just had one financial question, if I could. Last quarter, you called out 2 quarters of heightened marketing spend to accelerate payments' attach rate. Just wondering if you could update your views on that whether or not you would expect to continue beyond this quarter in terms of continuing encouraging signs? Or will you reevaluate heightened spend levels once you close Q2?

[Brandon Blair Nussey, Chief Financial Officer]

Well, I think our guidance reflects our current intentions, Todd, for both the quarter and the year. As we said earlier, pretty happy so far with what we see. Not all of this spend is meant to be an immediate ROI and will benefit quarters beyond the initial outlay. So yes, there is -- as you can tell on the guidance for Q2, there is expected ongoing investment through that quarter. But we do expect that to produce overall returns throughout the year such that the guidance we've given for the annual will be how we see the year going.

[Operator]

Your next question comes from the line of Tien-Tsin Huang with JPMorgan.

[Tien-Tsin Huang]

Just building on that last question, with the success -- with the early success of the growth initiatives, does it change your thinking at all in terms of customer acquisition costs or how you want to invest there or even the pricing of your base products or the pricing of payments?

[Dax Dasilva, Founder, CEO & Corporate Director]

Not on pricing. So what is going on, of course, is we're seeing the average revenue per customer increase as we get more and more success and confidence with payments and can more accurately predict that as modules like loyalty continue to roll out, we're seeing that average revenue per customer grow. And I think, as you know, we run the business on that underlying unit economics. So as that ARPU grows, it does allow us to increase the cost we would otherwise spend to acquire a customer, and that's where some of that incremental investment had gone. So yes, all told, I would see -- we purposely are allowing ourselves to pump up the pack a little bit, but purely because we're seeing ARPU expansion.

[Tien-Tsin Huang]

Yes. No, that makes sense. So the nice acceleration you're showing throughout the year, that's implied in the outlook. I heard the momentum comment, but I'm curious, did you give us how much is coming from the acquired revenue? And is there a way to rank some of the other factors that's changing the outlook, perhaps earlier eligibility, more merchants on payments or, as you mentioned, ARPU units? Just maybe if you can rank it for us, that would be great.

[Brandon Blair Nussey, Chief Financial Officer]

Well, I think it's a balance of both. So certainly, 9 months of iKentoo is contributing to the overall outlook. But a good chunk of that guidance increase is to strengthen in our organic business and what we're seeing in net new locations and adoption of payments. Of course, we're going to continue to remain conservative in how we forecast and how we outlook, especially in these early quarters here, but it is a balance of both.

[Operator]

Your next question comes from the line of Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

So from the MD&A, it looks like the free payments hardware has been a popular promotion. Do you provide these to all potential customers? Or are there some analytics you do, for example, on a customer's GTV to determine if they qualify?

[Dax Dasilva, Founder, CEO & Corporate Director]

No. It's going to everyone right now, Dan. Just think it's important for us to do that in this initial launch phase. We get -- we, more than anything, just need to establish credibility, momentum and get these customers on-boarded. So it's a piece of friction that to us makes just a ton of sense to remove in order to make that happen.

[Daniel Chan, Research Analyst]

Okay. That makes sense. And also, it seems like a part of the sales and marketing increase was from reseller commissions, and in the prepared remarks it sounds like this is something that you guys are looking more into. So how do you think about your channel as you scale and accelerate growth? And do you have a preferred mix of direct versus indirect sales?

[Jean-Paul Chauvet]

Yes, I think you're -- It's JP. Good morning. Here the most important is the balance. When you think about markets and you think about penetration of the software, and you think about how I'm going to support the customers and you think about how I'm going to configure the platform, we really look at a balance between selling directly and also channel. So here, yes, the growth comes from pretty much all vectors, and we're expecting it to continue. What we're seeing is that some of the more, let's say, the more tech-savvy customers can do everything themselves. But then when we think about that there's a lot of kind of more old school customers. And there we need a lot of channel to help us deploy, implement and support. But we certainly believe in channel. We believe in partnerships. And we think that channel, which are implementation partners, is one of the piece, but the other piece is also alliances. So as an example, we just signed an alliance with a company called Faire that has a marketplace. So we're really looking at our core customers, and we're trying to figure out what is the ecosystem that is going to make them successful. So here, we announced the partnership with Faire which really is a marketplace for our customers to go and buy their own inventories. We announced a partnership with Affirm, and what they do is, they do financing of transactions on the spot for consumers. And so we're really looking at the whole ecosystem, and we have a really strong focus on partners because it's really part of our success. And we can't just imagine going direct without having the support of the ecosystem.

[Daniel Chan, Research Analyst]

Okay. And just a follow-on, on that. How do the margins or maybe customer acquisition costs compare for a direct versus indirect sale? And how are they structured? Is it kind of like a onetime commission that you pay to these partners or do they get renewals as well?

[Jean-Paul Chauvet]

So it's -- again, there's no magic bullet, it really depends on the type of partnership. But generally speaking, what you look at are a couple of things: the first one is the cost of acquisition, so who drives the customer. And obviously, if the partner drives the customer and we have nothing to do to acquire the customer, that's a chunk that's removed from our -- from what we need to do and from our profits. Then the second piece we look at is implementation. So if a partner does the implementation, we do not need to do it. So that's another chunk of the commission we would give. And then the third piece we look at is ongoing support. So some partners, as an example, in regions where we don't have a strong presence like South Africa, are going to actually do everything from selling to onboarding customers and supporting them. So obviously, they take more margin than a customer that just does the identification or a customer that just does the implementation.

[Operator]

Your next question comes from the line of Paul Steep with Scotia Capital.

[Paul Steep, Analyst]

How should we think about iKentoo into maybe fiscal 2021, building into North America and more aggressively going after that base to build up the larger complex deals on -- and customers in this region?

[Jean-Paul Chauvet]

It's -- maybe I'll start and then maybe Dax can jump in. So for me, again, as we move forward, we're going to see synergies between the platforms, and we -- our aim is to actually merge everything into one Lightspeed front end. So we don't typically look at it as though we're going to have multiple solutions in multiple countries. We're going to have a go-to-market platform that's going to be working everywhere. And for the customer, I mean, it's going to be one process and one seamless implementation. Now the -- so when you think about iKentoo, I think the net result of iKentoo is we're going to see probably more functionality that is going to help us with the current Lightspeed platform in North America and vice versa. You will see more functionality coming from Lightspeed that's going to start surfacing in the iKentoo customers. So again, this logic of cross-pollination is very strong. And finally, for us, when we look at iKentoo, we look at payments, as we deploy payments into Europe, which is a big uptick. And then we look at all of the modules because iKentoo is just a point-of-sale, but we have loyalty, we have a number of platforms that we can bundle onto iKentoo, which will be very synergetic on both angles.

[Dax Dasilva, Founder, CEO & Corporate Director]

I think longer term, as well, we view the value lying in the transaction level data and all the strategies there. And so iKentoo brings us a lot of scale and a lot of new data in all these new regions. So alongside monetizing a growing base of GTV that they bring to us, that transaction level data is also going to be valuable for our long-term strategies.

[Paul Steep, Analyst]

Great. Last one from me. On payment adoption, have you set up sort of a team to go after your existing base and added additional resources to try to further ramp up the adoption and the switchover of the existing clients that we might have thought about may be more into a 2021 time frame?

[Jean-Paul Chauvet]

Yes. Very good question. So I'd like -- we have 2 teams. We have teams that are handling net new, so we call these lands. And then we have a team of account managers who are in charge of making our customers successful and seeing if there's any module that can make them more successful, and we call these the expand teams. So when you think about payments, obviously, the marching order is, first, we need to land new customers, and we want to be very cautious as we move forward because we want to -- we just launched the product. So we want to be sure it's really a good market fit. Now as we see this is working well, we're gradually going into the expand teams. And yes, we will see, as we move into this year, the end of this year and into next year, we'll see more adoption from the current base. And the last piece maybe is when you think about the base you need to look at about all geographies, all products, and that's also the last piece of our strategy is, as we move into this year, we'll be deploying Lightspeed Payments to more products, more regions, and we will naturally start with the land. And then once everything works perfectly well, we'll then move into expand. And that's why we're starting to see now some adoption from our existing base.

[Operator]

Your next question comes from the line of Steven Li with Raymond James.

[Steven Li, Senior Vice President]

On your ARPU, in the near term for the next few quarters, the level of double-digit ARPU expansion, is that sustainable? Or can it be a little bit more lumpy?

[Brandon Blair Nussey, Chief Financial Officer]

No, we think that's sustainable for sure. But with everything that we've seen by way of module uptake and so on and payments as well, we see that as sustainable. We're -- just to reemphasize, it's early days for both of these new modules, let alone analytics and some of the things that have been in market a little longer. So there's lots of whitespace still in our customer base, and we see lots of good opportunities still there to see that ARPU increase.

[Steven Li, Senior Vice President]

Okay. That's great. And Brandon, on payments, I think before you mentioned, there is a lag between signing merchants and actual processing starting. There's the free hardware, is that changing that at all or still the same?

[Brandon Blair Nussey, Chief Financial Officer]

No, I'm glad you brought that up, Steven, because that's absolutely right. We're seeing good momentum on the customer acquisition side. And the time to transaction is still a learning process for us and how we accelerate that across the different types of customers. And that new business has one time to transaction versus us replacing an incumbent solution is sometimes a little more quick. So it doesn't have much to do with the hardware, and the hardware is just simply something we ship and it's quick to enabling and get up and running that way. It's just customer-specific, and we're -- our teams are all working to try and figure out how we can do our part to reduce that time to transaction across the board.

[Steven Li, Senior Vice President]

All right. That's great. And last one for me. The merchant additions are 2,000. What's the rough split, retail and restaurant?

[Brandon Blair Nussey, Chief Financial Officer]

Yes, we're not splitting that out. We're just -- we're seeing good -- JP talked a little bit. The restaurant continues to grow. It's the quickest grower off a smaller base. But we are seeing good momentum across both product platforms, and we'll leave it at that.

[Operator]

Your last question comes from the line of Andrew Jeffrey with SunTrust.

[Andrew William Jeffrey, Director]

I wonder, given the competitive environment and the legacy providers from which it appears Lightspeed is taking share, whether there's maybe an upper bound on the customer that makes sense for Lightspeed or if you're expanding that over time? If there's some way to quantify either by GTV, or subjectively, by complexity where you kind of say, all right, this is a good target for us given our unit economic targets versus this is not a good target and whether you can expand up market more effectively over time?

[Jean-Paul Chauvet]

Yes. So I think I'll just take it, and maybe if Brandon and Dax want to contribute, that's fine. But I think for me we -- well, first of all, let's start with the markets. There's 47 million SMBs globally. So there's whitespace everywhere you look. And then when you think about the markets, the vast majority of these are on legacy systems. So there's bound to be segmentation in the market. There's bound to be players with the smaller vendors. There's bound to be players with the medium size. So first of all, let's clear a few things. We are not looking at enterprise, that is not the segment. So when we look at a business, if you have more than the – let's say, 100 or a couple of hundred locations, we will not be interested. And actually, when I talk about the 47 million, those are not included in there. Now within that 47 million, as we always said, we really need to look at the complexity of the business. So when you think about complexity, you think about retail stores that have a lot of SKUs, and we've mentioned over time the number of verticals from pets to furnitures to electronics, so these are all stores that have very high inventory count. And for us, those make sense even if they have 1 location. But obviously, as you go from 1 to 10 to 20 to 50, those are very, very well-suited for us.And I think that's really what separates us from the rest of the market is we have a lot of functionality in the platform that really is rich and that can work with that segment, where most other cloud-based systems don't offer the depth of that functionality. And that's why we're continuing now when we think about analytics, I mean, this is a full blown BI for very complex retailers.The restaurants is the same thing. Small, medium, large coffees, obviously, we can make it happen, but that's not the sweet spot of Lightspeed. Our sweet spot are fine dine restaurants that have multiple printers, multiple rules, or restaurants that maybe are chains that have -- maybe some can be fast casual, some can be even quick serve, but that have some complexity, and here again that makes a lot of sense.Finally, let's talk about Chronogolf and hotels. And obviously, those are the bigger segments of our customers. But here, to our knowledge, we're one of the only few vendors that can really offer all the capabilities, a very complex resort or hotel or operation that has a mix of actually quick serve, fine dine, coffee shops, but need to have a centralized view of the P&L and need to have integration with the hotel management platforms, I think that also is a very unique segment where we are very strong.

[Operator]

That concludes today's conference call. You may now disconnect.