Lightspeed Commerce Inc. (LSPD) Q2 2027 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. My name is Rochelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lightspeed Second Quarter 27 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star then the number 1 on your telephone keypad. To withdraw your question, press star then 1 again. Thank you. I would now like to turn the call over to Gus Papageorgiou, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Lightspeed's fiscal Q2 27 conference call. Joining me today are Dax Dasilva, Lightspeed's Founder and CEO Asha Bakshani, Lightspeed's CFO and Gabriel Benavides, Lightspeed's chief revenue officer. After prepared remarks from DAX and ASHA, 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 fiscal 27 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 2 can be found in our earnings press release which is available on our website on SEDAR plus and on the SEC's EDGAR system. Note that because we report in US dollars, all amounts discussed today are in US dollars unless otherwise indicated. With that, I will now turn the call over to Dax.

Good morning, everyone, and thank you for joining us. Lightspeed had a solid second quarter characterized by accelerating software growth expanding payments penetration, strong gross margins, improving profitability, and a customer base that continues to shift upmarket. In Q2, on an organic year over year basis, we delivered revenue of $324 million up 15% and at the higher end of our outlook. Software growth accelerated to 9%, and payments penetration was strong at 45% up from 40% a year ago on an organic basis. Gross profit of $143 million was up 11% and adjusted EBITDA of $23 million. Our focus markets of North American retail European hospitality continues to dominate our overall growth with total revenue up 17% and now accounting for 77% of our revenue. Thanks to our strong balance sheet healthy performance, and growing confidence in our strategy and operations, Year to date, we have repurchased $98 million of our own shares. Last year, we launched our refresh strategy. Sharpening our focus and concentrating our product and go to market resources on our 2 growth engines, retail in North America and hospitality in Europe. As always, I will organize my comments around our 3 stated priorities, from that refresh strategy which are 1, growing customer locations in our growth engines. 2, expanding subscription ARPU. And 3, improving adjusted EBITDA and free cash flow. I want to address the first 2 priorities. Growing locations and expanding subscription ARPU and revenue together. Last quarter, I stressed that high quality customer growth was 1 of our top priorities. Larger, more established customers drive higher software payments revenue. Stay with us longer, and are better positioned to benefit from Lightspeed's more advanced feature sets. In general, they provide higher lifetime value. As you know, we have been making a concentrated effort to move our customer base upmarket. And we are beginning to see the benefits of these initiatives in our results today. The increasing quality of the locations we are adding is driving our improved metrics. While deal quality improved noticeably, net location ads were softer than prior quarters. Over the past several months, we have meaningfully tightened our deal parameters as we move upmarket with our offering. Prioritizing merchants who will attach more of our software over their lifetime and stay with us longer. And not only are we seeing strong win rates with these customers, but we are doing it while discounting less. Often winning at a significant premium over our biggest competitors. The early proof points tell us this approach is working. Our results today show that within our growth engines, software revenue grew 14% year over year, up from 12% last quarter. Also within our growth engines, GTV grew 14%, year over year. Greatly exceeding location growth of 8%. Organic software ARPU grew 7% year over year. We had very strong software gross margins of 84%, improving from 82% last year. And we drastically improved hardware margins, from -74% last quarter to -59% this quarter. Lightspeed has long been a velocity business. The proven ability to attract and sign new customers rapidly. While this is changing, we have added a tighter focus on the up-market, especially within our core verticals where Lightspeed has built a unique right to win. We are taking a more disciplined approach to execution. Prioritizing strong deal economics, operating efficiency, and profitability. And we have reengineered and revitalized our go-to-market motions to enable our success. New deal criteria new leadership, and new ways of selling take time to fully embed across an organization. As we continue to focus on the volume and velocity of our business, we also expect the trend towards higher quality locations to continue. We are not signaling a structural slowdown in our velocity We are signaling a structural step up in the quality of our growth. Within our growth engines, new customer locations came on with 27% more software revenue on average than a year ago. Are clear signals that the merchants we are winning are higher quality and more deeply attached to our software. These dynamics are showcased in many terrific wins across the quarter. For retail, those included the Hockey Hall of Fame in Toronto, that recognized Lightspeed as the official retail point of sale technology partner. The International Spy Museum in Washington DC that sees over 700 thousand annual visitors. Spider surf with 3 locations in California, offering premium surf and snowboard equipment in the state. And the Great Canadian Dollar Store, with 73 locations signed. A fantastic multi location and high value customer for Lightspeed. Which came to us through our growing partner channel. We were also pleased to add brands, including Evergy, Natori, and the well known sock apparel and footwear brand, Bombas, to New Order. Providing them with a modern collaborative wholesale experience while enhancing their product discoverability across thousands of light speed retailers. Our hospitality teams continue to excel in Europe. In the UK, we added the McManus pub company locations across The UK. And Nato, the creation of Michelin starred chef Phil Howard. Serving freshly made pasta across London. In Luxembourg, welcomed the hotel Le Place d'Arb, supporting the restaurants within their luxury hotel. In France, we signed Domaine de la Dame, with luxury chateaus and restaurants in Southern France and also the Indy Group, with bars and restaurants across Paris, Saint Tropez, Courcheval, and other locations across France. In golf, we signed Poppy Hills, 1 of the youngest courses at Pebble Beach, and the award winning Wailea Golf and Tennis Club in Maui. Signing these larger, more established, and sophisticated customers helped lift our organic software ARPU growth to an impressive 7% this quarter. Larger customers generally buy more software and generate more payments revenue. We also continue to deliver new innovations across our flagship platforms of Lightspeed Retail and Lightspeed Restaurant, which is key to long-term software ARPU growth. In retail, I am excited to share that we recently launched new agentic capabilities within Lightspeed AI that move beyond insights. to taking action on behalf of our retailers. Retailers can utilize Lightspeed AI to ask questions receive recommendations, and prepare tasks such as updating inventory tagging clearance items, or planning stock transfers, all within their existing workflows and with full visibility and approval before any action is taken. This is a meaningful step in our mission to take complex routine work off the plates of our retailers so they can focus on what matters most, their stores and customers. Later this quarter, we plan to launch phase 2 of our agentic offering in retail, 1 that will proactively understand all facets of a retailer's business and help them focus on what yields the highest returns. In addition, we introduced meta conversions API allowing merchants to connect their stores directly to meta so they can measure how digital advertising converts to in store purchases and better understand their return on ad spend. We released AI Doc Import, which automatically converts order confirmations packing slips, and invoices into purchase orders. Streamlining inventory receiving, and helping retailers get products onto the shop floor faster. Omni customer accounts, gives shoppers the ability to create an account view purchase history, and loyalty information online. Helping brick and mortar retailers strengthen customer relationships. And finally, we connected Lightspeed Retail directly with ShipStation so retailers can access shipping infrastructure without adding disconnected systems or manual workflows. Enabling merchants to ship out of stock items directly to customers. In hospitality, we launched new AI capabilities across the hospitality platform that enables hospitality merchants to turn AI generated charts into live dashboard tiles and self updating reports, helping operators to keep important business answers visible and current. We upgraded Lightspeed Reservations to support Reserve with Google. Allowing guests to discover availability and book directly from Google Search and Maps. Designed to help restaurants capture more demand and create a smoother path from search to reservation. We launched new customer display hardware. Featuring an 8-inch customer facing display and integrated payments. Designed to increase transaction speed, improve order accuracy at high volume restaurants. And we upgraded scan to pay. Allowing guests to scan a QR code on their receipt to view their bill split the payment, add a tip, and pay directly from their phone. Within Lightspeed calls, we launched OnDeck, allowing golfers to submit a request for preferred tee time or window. And then book when an opening becomes available. I am very proud of the pace of innovation across our product teams. Concentrating on our 2 growth engines has allowed us to deliver cutting edge solutions that help our customers run and grow their businesses. We have also added considerable talent to that team, ensuring that Lightspeed can capitalize on the opportunity of Agentic AI. Now turning to profitability. We have made tremendous strides towards improving profitability with free cash flow increasing from last quarter and which we expect will continue to improve in the back half of this year. In the first year of our transformation, we mapped out where we plan to compete and how we will win. With our renewed strategy in place, we are now able to recognize some of the benefits of that plan. Removing costs and improving our productivity. As part of this planned transformation, we recently executed several organizational changes, which simplify our operations. Improve our efficiency, and create further capacity to reinvest in the areas that matter most. Our software platform, go-to-market organization, and the customer experience. These actions are a continuation of the multiyear transformation we have been executing against over the last several quarters. We believe these are the right actions at the right time, and they position LightSpeed to deliver both stronger growth and stronger margins as we move through our transformation. The entire executive team and I are focused on improving our profitability and cash flow which we see as essential to creating long term shareholder value. With that, I will turn it over to Asha.

Thanks, Dax. And good morning, everyone. Our second quarter results demonstrate solid progress across several key metrics. I would like to highlight 3 important trends from the quarter. First, the underlying drivers of profitability remain strong. Software gross margin continued to improve, reaching 84% on an organic basis. Up from 82% in the same quarter last year. Transaction based gross margin was 32% flat year over year organically. We also made significant progress in hardware gross margin which improved to a gross margin of negative 59% from negative 74% last quarter. Second, underlying cash flow was positive. Excluding cash used, to grow our high margin, merchant cash advance business and cash used for buybacks, overall cash flow was $10.9 million Adjusted free cash flow was $4 million for the quarter, up CAD8.5 million from last quarter and before the cost reduction actions we took after quarter end. Third, and perhaps most importantly, our growth engines continue to perform very well. In North American retail and European hospitality, year over year results were total revenue growth of 17%, software revenue growth of 14%, payments penetration of 50%, GTV growth of 14%, and location growth of 8%. New customer locations came on with 27 more software revenue on average than a year ago. Our growth engines now represent 77% of our revenue, up from 67% a year ago. Our goal to continue shifting our revenue mix towards these high growth markets. I will now discuss the quarter in more detail. Followed by our outlook for fiscal Q3 and fiscal 27. Unless I know otherwise, year over year comparisons use organic figures that normalize for the impact of the observed divestments. Total revenue grew 15% to $323.8 million at the high end of our outlook for growth of 12% to 16%. Growth was driven by an increase in customer locations, higher software ARPU, and increased year over year payments penetration. Software revenue for the quarter was $97.8 million, up 9% year over year and up 14% in our growth engine. Software ARPU increased 7% year over year, up from 6% last quarter. Software growth accelerated versus last quarter driven by successfully landing higher quality, and high-GTV customers who adopt more software, as well as from a continued focus on upselling across our installed base. Transaction based revenue for the quarter was $213.9 million, up 17% year over year. GPV grew 19% year over year. GPV as a percentage of GTV came in at 45% up from 40% in the same quarter last year on an organic basis. Our high margin capital revenue had another great quarter. Growing 42% year over year. Customers who use Lightspeed Capital exhibit significantly lower churn and generate higher lifetime value. Growing this high margin offering remains a key priority for the business. Overall, GTV grew by 8%. To $25.8 billion. We saw positive same store sales across both retail and hospitality. Within our growth engines, GTV grew 14%. Total monthly ARPU reached approximately $688. Up 12% year over year. Driven by both higher software and payments monetization. In our efficiency market, revenue grew in the very high single digits. Supported by strong payments adoption. Payments penetration in these markets was 31% for the quarter. It increased year over year but remains well below the level for the overall business giving us meaningful room to grow payments revenue. Turning to profitability and operating leverage. I will continue to use organic figures for year over year comparisons. Normalizing for the impact of the observed divestment. Total gross profit grew 11% year over year, reflecting strong top line growth and gross margin performance across subscription and transaction based revenue. Total gross margin was 44% compared to 46% a year ago on an organic basis. The decline was partly due to mix, Transaction based revenue increased to 66% of revenue, from 65% in the same quarter last year on an organic basis. Hardware gross margin also declined slightly year over year although it improved sequentially to a gross margin of negative 59% from negative 74% last quarter. Given the actions we have put in place, we expect hardware margins to continue to improve significantly in the second half of this fiscal year. Software gross margin was 84%. Up from 82% a year ago on an organic basis. This improvement was driven largely by high-GTV customers who adopting more software and by AI resolving 80% of our support tickets. Reducing our cost of support and service delivery. Gross margin for transaction based revenue was 32%, flat year over year on an organic basis. This reflects increased payments penetration in international markets, where margins are higher than in North America. As well as growth in Lightspeed Capital, which was offset in part by declining referral fees. As we convert customers to Lightspeed Payments, we increase overall net gross profit dollars. Transaction based gross profit grew 15% year over year. For operating expenses, adjusted EBITDA adjusted free cash flow and share based compensation, year over year comparisons are on an as reported basis. Adjusted research and development sales and marketing and general and administrative expenses grew 5% year over year. Largely due to investments in go to market. As Dax mentioned, we continue to take actions to improve operating efficiency and align our cost structure with our strategic priorities. Following the quarter, we eliminated approximately 250 roles across the organization. These actions reflect changes to our go-to-market operating model. Organizational simplification, and a broader effort to align resources with our highest priority initiatives. We are also leveraging the use of AI and automation across the business. Which will continue to drive further productivity and operating leverage over time. Adjusted EBITDA was $22.7 million, up from $21.3 million in Q2 last year. This reflects continued execution of our strategic shift on our focus on AI and automation to improve operating efficiency. The divestment of Upserve means our fixed cost are now absorbed over a lower revenue base. We expect this impact to be offset by revenue growth and continuous cost reduction efforts. Adjusted EBITDA was 16% of gross profit. Our net loss was $4.2 million or -$0.03 per share, compared to a net loss of $32.7 million or -$0.24 per share a year ago. The improvement reflects higher gross profit and the fact that we have now fully amortized our acquisition related intangibles. Adjusted free cash flow was $4 million for the quarter. Including a $4.3 million working capital movement related to higher inventory levels, which reduced the risk of stock shortages and the expedited freight cost that weighed on hardware margins last quarter. This investment in inventory contributed to the sequential improvement in hardware gross margin. That improvement together with better deal quality, more favorable working capital movement, and the actions we took after quarter end to remove costs from the business, position us to deliver significant growth in adjusted free cash flow this fiscal year compared with last year's $18.2 million Our overall cash position declined from the previous quarter largely due to a $26 million increase in merchant cash advances out outstanding and $11.2 million spent on buybacks. Last year, we were able to grow the capital business by reducing the payback to approximately 7 months. With payback periods remaining at this level, and default remaining in the low single digit range, we are dedicating more capital to growing this highly profitable business. We remain confident that our focus on growing quality locations and revenue finding significant operating efficiencies keeps us on track to meet our free cash flow target of $95 million for fiscal 28. We continue to actively manage share based compensation and related payroll tax. These totaled $14.7 million for the quarter, compared with $17.4 million in the prior year quarter. And declined as a percentage of revenue year over year. With respect to capital allocation and our balance sheet, our balance sheet remains very healthy. We ended Q2 with approximately $343 million in cash, down from $372 million at the end of Q1. The decline was almost entirely driven by discretionary actions to return capital to shareholders and to grow Lightspeed Capital. We spent $11.2 million on buybacks during the quarter. Overall, our issued and outstanding share count is down 5% year over year. We will continue to be opportunistic with our remaining share buyback authorization. Beyond potential share buybacks, our largest use of cash will be the continued growth of our merchant cash advance program. There were $143 million in MCAs outstanding at quarter end, we intend to continue expanding the successful high margin program over time. Overall, our balance sheet remains strong. And positions us well to continue executing against our strategic priorities. Now on to outlook. Our fiscal 27 outlook remains unchanged and consistent with the company's 3 year targets for gross profit, adjusted EBITDA, and adjusted free cash flow presented in our Q4 earnings release in May 2027. For fiscal 2020, we expect total revenue of $1.225 billion to $1.265 billion representing organic growth of 12% to 15%. Total gross profit of $565 million to $585 million, representing organic growth of 12% to 16%. Adjusted EBITDA of $75 million to $95 million For Q3 of fiscal 27, we expect total revenue of $310 million to $320 million. Representing organic growth of 11% to 15%. Total gross profit of $141 million to $146 million, representing organic growth of 11% to 15%. And adjusted EBITDA of $25 million to $30 million. With that, we will now take your questions.

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star then the number 1 on your telephone keypad. To raise your hand and join the queue. Please limit yourself to 1 question and 1 only. Your first question comes from the line of Daniel Perlin with Morgan Stanley. Please go ahead.

Hi. Good morning. Thank you. I wanted to ask about your tightened deal parameters. So I guess maybe could you just give us some examples of what those in deal parameters are and then how we should be thinking about the outlook for engine location growth from here relative to your 10% to 15% target?

Yeah. Great question. This is Gabriel Benavides. Happy to take at least the first part of this question. Yes, great to focus on Titan deal parameters and there is a few comments here as we shift our focus more upmarket. Winning and selling with discipline means tightening up deal parameters so that as we move to segments where we are very hard to beat and segments for whom we are purpose built, we rely more on selling on value and customer outcomes. Than on price per feature, for example. And tightening up the deal parameters as well as in concurrently with selling on value allows us to do a few things at the same time. We capture the highest deal quality, the best deal economics, for, Lightspeed, and we position our customers who are best positioned to capture value from Lightspeed. We best position them to find success in the immediate, medium, and long term future. Think there is some important context to add to that, and then I can pivot to the second part of the question. We really think the opportunity for light speed is to be a consistent, high margin growth company and growth story. And there is market share that directly supports those ambitions, and there is market share that more directly supports a lower margin volume and velocity play. And as you can tell, we are tightly focused on moving into and being very difficult to beat in the first part. You know, area of market share. Upmarket, really well developed customers, a high propensity to stay with us in the long term and grow with us. In our outbound motions, we saw terrific growth, between NoAm and EMEA, nearly 30% growth revenue growth we saw in Q2 year over year. In our inbound motions, which have always been our highest velocity, highest volume motion, we also are being much more purposeful about where we spend our time being very purposeful in the market share we are targeting. that is always been, as I said, the highest volume part of our motion. So that is where we saw some balancing on the number of closed ones, the number of locations coming in. However, if you think about that great statistic from this quarter, 27% more software revenue per close won Our inbound motion directly supported that as well. Going forward, we are not gonna lose this velocity that is in our DNA. We are gonna continue to double down on focusing on right market share, the right customers with the right deals, and we will continue to pull that velocity and volume that is in our DNA into our results and course as we go forward.

Got it. Helpful. Thank you. And then I guess, just on the efficiency markets, the high single digit growth there, I think that is kind of meaningfully better than the flattish to slightly positive, I think, target was. So just curious if there is anything specific driving that. Any specific verticals or markets Thank you.

Yeah. Thanks for the question. I will take that part. In our efficiency markets, and you have heard this from us before, the way we expand, you know, or grow revenue and margins is really from upselling process. there is very limited new business happening in those markets, and so the expansion really comes from upsell and cross sell primarily Lightspeed payments and capital. And so that is what you are seeing on the revenue line and the expansion in the gross profit growth as well. it is really coming from the financial service uplift that we are that we are having in the efficiency markets. Again, Lightspeed Payments and Lightspeed Capital.

Your next question comes from the line of Matthew Bullock with Bank of America. Please ask your question.

Hi. Good morning. This is Timothy Chiodo on for Matthew. Could you just following up on kind of the Titan deal parameters, could you just talk about like why now to start like tightening those, given the acceleration that we had been seeing in core location growth. And then just as a follow-up, please get an update on kind of the partner strategy motion and how that plays into kind of this higher quality customer focus? Thank you.

Hi. This is Dax here. Thanks for the question. So I think that these are really important metrics to drive. The growth metrics that you are seeing in the growth portfolio, they are important metrics for Lightspeed to meet our financial ambitions of our 3 year transformation. With 8% location growth, we drove 14% software growth in our growth portfolio, and 14% GTV growth. that is the software growth is meaningfully better than previous quarters where we had you know, a higher location count. We drove a lot more from these quality locations. We also drove better gross margins, software gross margins, and hardware margins, meaningfully better. that is a. that is because we did tighten deal parameters, guardrails around discounting, and did value based selling as Gabe was talking about. We also drove higher software ARPU And as Gabe mentioned, new customer locations came in with 27% more software revenue. So we are bringing in better deals for Lightspeed. You. that is how we get to our 3 year financial goals.

Yeah. On the partnerships, I think we will pass it to Gabe here. Yeah. Really glad to hear that part of the question as well. As we talked about last quarter, our partner strategy, our partner ecosystem and channel strategy is a critical part of the same growth story: high-margin, consistent growth company and consistent growth story. Just like last quarter, we continue to develop the strategy, but we do see some really significant wins of a different sort coming through. As Dax mentioned in the prepared remarks, 1 of our best, wins of the quarter came to us through, or in, collaboration with our partner channel, 1 of the kind of marquee wins of the quarter, and we expect to see the same thing developing as we go forward. 1 of the things you will continue to see is an impact on our, you know, back book growth and the monetization, the healthy monetization of our customer base increasingly in collaboration with our great partner channel as well.

Your next question comes from the line of Andrew Harte with BTIG. Please ask your question.

Hi. Thanos for taking my question. On the cost savings with the organizational changes, would love to just kinda hear if there is anything you would share on what the expected savings are if that should. If those savings could show up in 2027 or if we are thinking about more as a fiscal year 2028 number. And just kind of the balance between reinvestment and allowing it to flow to the bottom line with the emphasis on cash flow.

Thanks for the question, Andrew. I will take that 1. So we are continuing to actively manage our cost structure as part of normal ops. We need to consistently remain disciplined on all the costs across the org, and, of course, headcount is 1 component of that. Consistent with that approach, we removed 10% of headcount within product and tech. That was within the quarter. And then after the quarter end, we removed approximately 250 roles across the orgs. This included open vacancies as well. 1 thing I wanna call out though is, you know, as a part of our 3 year transformation, we had planned for cost reductions across the org. So this was all contemplated in our guide. In our. In order to reach, you know, the ambitions that you have seen from us in fiscal 28 for both EBITDA and free cash flow, cost efficiencies have always been a key component of that transformation. With respect to bottom line, some of that the cost efficiencies that, you know, that we have taken out in Q2 and, subsequent to quarter end, some of that will definitely fall to the bottom line. And some of it will be reinvested in the growth portfolio. You have seen some great metrics from us on growth portfolio, software growth, and GTV growth. You know, margin expansion. And so we are making very targeted investments in that portfolio. But overall, you will see EBITDA margins expand. You will see that in the back half of this year. You see that in our guide that we have given for Q3. And as we enter fiscal 28, the efficiencies that we have taken out to continue to benefit the bottom line as well.

Thanks. And then maybe just a follow-up on some of the location questions. If we could just get any color on what you saw in the second quarter, like, it seems like quarter over quarter, it was not necessarily like, would just love to hear how we should be thinking about growth quarter over quarter. I appreciate year over year was good. And then just, like, bigger picture as you think about location growth going forward, I think there was a stat that you said 27%, our new customers are coming on with 27% more software revenue than a year ago. So should we potentially be thinking about a shift in kind of ARPU versus location growth as we think about our models just given that stat of maybe there is less customers coming in, but they are coming at a much more profitable level.

Yeah. Listen. I think. Great question. I think that is a great way to look at it. We talked about this a little bit last quarter. I would encourage everyone to look at the quality of our growth and the durability of that growth. And the great news is you are seeing evidence that we are it is already starting, right? So as we move up market, higher quality deals, deal economics become very important, but that is exactly how to look at it. Look at the quality and durability of our software growth versus, just a pure kind of number or volume of locations. View, and it becomes increasingly important again as we really work to compete and be very hard to defeat in these core segments within the market share that talking about. that is a that is a key part of the story. But, again, as these new ways of selling, going to market, new ways of building territories, continue to grow and be embedded within our business, we only expect all these things to continue, to improve as we go forward.

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

Hi. Thanks. Just on the payments penetration, it looked like there is some improvement there. I was a little bit surprised by that. I am curious if there is been any change in approach or incentives to drive payments attached.

Hey, Tien-Tsin. Thanks for the question. Yeah. We are really happy with the payment penetration and the progress we are seeing there. Our growth markets went from 46% a year ago to 50%, in the quarter. And overall, as a company, we are at 45%. When we think about what is driving that, you know, we are we are always working on increasing that penetration in the back book. We are going after the back book aggressively, as you know. And we have taken care of a lot of the reasons that has been. Had been causing friction for merchants to adopt through product enhancements in particular. So really happy with what we are seeing there. And then in addition to that, every eligible new customer is taking payments. So, you know, over time, as we are getting these bigger GTV customers, and we are igniting them onto payments, that is improving the penetration as well.

Your next question comes from the line of Todd Adair Coupland. With CIBC. Please go ahead.

Yeah. Good morning, everyone. I wanted to talk about locations as well. So just a point of clarification. So the net new 800 is that a clean comp to the 2,000 you added last quarter? So just clear that up.

It. it is a clean comp to the roughly 2,000 we added in Q2 of last year, if that is what you mean. And yes, it is a clean comparison. And I would encourage you to kind of to look at that for just a moment with me. So significantly different number of net location adds if you compare Q2 of last year versus Q2 of this year for all the reasons, that we have discussed. All the reasons that, again, we think this focus right now really directly supports the terrific opportunity in front of us and how to seize it. But even with that significantly different number, know, compared to Q2 of last year to this 1, we drove significant growth in revenue. The quality of our growth means that it really just requires fewer locations to drive really significant and meaningful and resilient growth, which is what you are seeing if you compare that quarter versus this quarter. And, really, 1 more comment. If you think about last year, what you saw was an organization really optimizing and refining their ability to win new customers at pace. That is not going away. We are maintaining that. As we seize the opportunity in front of us to really go upmarket and drive this durable growth we have been talking about.

And what is your view how the. This updated focus what is your view how the sales team in Europe is performing? Are they performing at capacity? Is there still improvements to make? Just give us your thoughts on that and the path to where you hope to get to.

Yeah. I think there are 2 things that are true here. Once, I am very pleased with the progress and the performance across Europe where there are significant market dynamics and it is a very competitive environment. And I am very pleased with the progress of improvements and the progress at which we are we are winning. And as I mentioned earlier, if you look at the outbound motions, the newest motions into our business, if you combine the 2, it is roughly 30% growth in the outbound motions year over year. At the same time, when you think about focusing on the young market opportunity in front of us, focusing on the segments, the fortress verticals for which we are purpose built, it is clear skies. We have a tremendous opportunity, and so I am really pleased with the pace of performance and improvement. there is a lot way to go just because of the size of the opportunity in front of us.

Your next question comes from the line of Sagar K. Re with BMO. Please ask your question.

Hi there. Good morning. This is Sagar K. Re on behalf of Suthan. My first question is on the Titan deal parameters again. So if I understand correctly, these parameters are obviously for, you know, new that you are winning. But as some of your legacy customers, you know, their contracts come up for renewal, will you be typing deal parameters for these? I mean, to what extent will the deal parameters be tightened you know, at the risk of higher churn from these customers? Then I have a follow-up.

Yeah. Another great question. For the most part, the Titan deal parameters, think about those they are the most relevant when we are welcoming new customers into the Lightspeed family, new that will stay longer, grow with us, buy more, have more success, etcetera. So that is where that is most meaningful. Absolutely. And, the reason behind that is we really believe we clearly differentiate from a product standpoint and now from a go to market motion standpoint, and it is. The tightened deal parameters help us focus on the right customers, the right way of winning, and where we are gonna spend our time. As far as the existing customer base, we continue to focus on a couple things. 1, driving meaningful customer value. that is that is our critical focus even more than tightened deal parameters. 1 thing to think about, however, over time, what we are doing is remaking the composition of our customer base as we welcome larger customers with great deals and great deal economics. Over time, we remake and over. It takes a while. We remake the complexion of that, back book or that customer base. Which only helps us as we continue to bring more, you know, customer contraction churn under our control, and as we, you know, work to deliver measurable customer value consistently across the back book.

Perfect. that is helpful. And then for my second question, it has to do with the hardware gross margin. So it is good to see the margin improvement this quarter. You mentioned that, you know, you have secured even invested a bit in inventory for hardware as well. But given the, you know, the memory crunch and the hardware the component crunch that is going on, how do you think you have secured the capacity just for 2027-2028? Any visibility on know, the. How far along the hardware gross margins can be controlled Just any visibility on that would be helpful. Thank you.

Hey, Sagar. Thanks for the question. You are right. We did we did implement several initiatives such as better demand work forecasting. You could see that in the working capital investments we made early in the quarter. And that has yielded results with the improved margins that you saw from us. With respect to securing inventory, we have commitments that we that we make with our inventory providers that, you know, that bring us well into fiscal 28. And so we feel good about the pace of hardware margin improvement, We make commitments, you know, on the hardware that we procure from Apple, on payment terminals from our PSP, and those commitments have, you know, the pricing secured well into fiscal 28. And so we do expect that the measures. All of these measures we have implemented including the deal parameters around hardware discounting, the securing the inventory we just talked about, that hardware margins will continue to improve in the back half of this year and into fiscal 28 as well.

Okay. Your next question comes from the line of Daniel Perlin with RBC Capital Markets.

Hey. Good morning. I just wanted to also ask on the new parameters. So with this shift, how do you think about your competitive advantages in the context of product and go to market, which I know both have changed quite a bit in recent years and quarters? To win here versus where you were focused before? And as you make this move, you know, given that you have already kinda made a lot of changes in the go to market, should we think about this as of another change that will need time to sort of ramp until we get full productivity from here? Thanks.

Yeah. Great question. I think 1 point of illustration, this might be obvious. When we talk about the tightened deal parameters, we are absolutely maintaining the flexibility to be competitive and win where it matters. So these are not as rigid as you might you might imagine. But we are so differentiated in these core segments. Again, these core verticals for whom we are purpose built, for where we are hard to beat, is important to tighten up. Tighten up a little bit and make sure we are focusing the value of our software platform and the value it delivers to these customers who, very specifically, they tend to on a differentiated experience. that is who we are built for. So to your. That little more context. But to your question, yeah, I think you will continue to see that as our sales teams who have embraced these changes, and actually some of the results we are seeing are much more rapid than I have seen, in years past, As our sales team continues to embrace these changes, you simply get you know, faster, better, more resilient. You understand your moments. Really quickly to, you know, offer some flexibility and where you need to because you are just so clearly differentiated, you can hold your value. So we expect all these things to continue to, mature and get, more galvanized in our business as we go forward.

Yeah. I just wanna add, you know, kudos to Gabe and the and the go to market team for making these changes so rapidly in Q2. It started earlier than that. But this is, this has driven much better growth metrics for Lightspeed. I also wanna salute the product team that we have shown over many quarters rapid rollout of AI, AI-built, AI-powered features AI powered features, the latest being the agentic rollout that we are we are currently in the midst of. Phase 1 was AI answering questions. Phase 2, which we are in now, is those questions now being able to turn into actions. We are seeing 20% to 30% increases month by month, in usage among. Amongst our user base. Rapidly being adopted, and we are currently, about to roll out customer test of phase 3, which is proactive AI agents that can actually do some of the very you know, manually oriented tasks that, especially in retail, occupy so much of the business owner's time. So these AI features are really relevant to our user base. And this is this is gonna drive ARPU uplift So amazing work by both the go to market teams and the product teams. that is why we are able to, you know, do this meaningful tightening on deal parameters because we are delivering a ton of software value.

Got it. Super helpful. Thank you. And just separately on new order, I am just curious, you know, what your thoughts are on sort of the outlook for monetizing it. I know it is kind of been a really helpful, I guess, lead generation tool for you guys, but curious kinda your sense for, monetizing this asset as well as well, monetizing this asset, but also monetizing it via, payments. Thanks.

Yeah. I will take at least the first part of that. Well, I will start kind of back to front. There has been great success as we have rolled out payments capability to the new order base of customers, and we expect that to continue Speaking of things we expect to continue, new orders still is a really rich and a rich source of, you know, opportunities for our outbound team that is been that is been a terrific, you know, bit of a part of our flywheel so far. We think there is a lot of opportunity to continue to go to market in a differentiated way, partly based on new order. You will hear us talk a lot about the platform of wholesale built right in, which really resonates. And interestingly, that value prop resonates increasingly as we go upmarket. So this is 1 of the areas where you see kind of all roads lead us to differentiated specialty restaurant tours and retailers in the SMB and mid market segment where our platform differentiation and offerings like new order resonate and differentiate even more.

Once again, if you would like to ask a question, press 1 now on your telephone keypad. Your next question comes from Suthan Sukumar with Stifel. Please go ahead.

Hey. Good morning, guys. This is Suthan speaking on behalf of Suthan. My first question, I wanted to just double click on software. So, on the organic end, core market subscription growth improvement, I am curious how much of that reflects pricing versus module attach and larger customers or better retention.

Yeah. it is interesting. It reflects really most of everything that you mentioned. As regards price, not a real change in pricing except for the deal parameters. That we have tightened up, where it makes sense, and, again, where the. Where we are the most differentiated and competitive. The biggest difference really is it is. Sometimes it sounds too simple to be true that really the biggest difference is focusing on our fortress verticals, our ICP where we have the most differentiated, offering, the most clear differentiation, and the most valued offer. that is the biggest difference. Again, I will point you to the very clear metric, which is as we welcome on new customers on a per deal or per close 1 basis, They are joining us with 27% more software compared to the same period a year ago that really is tied to a tightened focus on the right type of market share that directly supports our high margin consistent growth opportunity.

Thank you. That was helpful. For my second question, I guess, to follow-up on that, could you quantify subscription growth and churn outside of the core markets. When should this business stabilize, and can consolidated growth accelerate without assuming a noncore recovery?

Yeah. Thanks for the question, Suthan. In our non core market, we have very limited new business activity. But what I will say is, you know, a big part of our noncore markets today really are our flagship products. In the international portfolio. So we think about our flagship retail or flagship hospitality in Australia, for example, and the rest of APAC, that is a part of our noncore markets. And so we. As Dax talked about, we continue to innovate on these products. And so even though we are not going to market you know, in any significant way in the efficiency portfolio, the innovation that we are driving on these flagships will continue to impact software revenue growth even though we are not spending a ton on new business there. So we actually feel pretty good about the non core markets. I mean, you saw total revenue growing in the high single digits, We were really, you know, really happy with the progress there despite, you know, the optimization of that portfolio in the very limited spend that we have there.

Thank you. There are no further questions on the line at this time. I will now turn the call back over to Gus Papageorgiou for the closing remarks.

Thank you, operator. Thanks, everyone, for joining us today. We will be around if anyone has any follow-up questions and we look forward to speaking to everyone on our next quarterly conference call. Have a great day, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for You may now disconnect.