A retailer doesn’t need another dashboard telling it that winter coats aren’t selling in one store while another location has run out. It needs the stock moved before customers leave and markdown season arrives. Software that handles those decisions can earn a place in the budget. For investors, that’s a more interesting opportunity than another company promising to sprinkle artificial intelligence (AI) over the checkout counter.
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Better deals, fewer distractions
Lightspeed Commerce (TSX: LSPD) sells software and payment services to retailers and restaurants. Its strategy increasingly concentrates on North American retail and European hospitality, where management believes its products have the strongest competitive position.
That focus means choosing which customers to pursue and how much discounting to accept. In an interview with Motley Fool Canada following its latest results, founder and CEO Dax Dasilva described the change directly.
“We just have to concentrate on the quality of deals in order to hit those bigger financial metrics,” he said.
For shareholders, the attraction is customers buying more valuable software and staying longer. Adding locations at thin margins can make a sales announcement look impressive without leaving much behind. I’d rather own a business getting better at charging for what makes its product worth buying.
The software earns its keep
Software revenue within Lightspeed’s targeted growth businesses rose 14% in its fiscal second quarter. Its overall subscription gross margin reached 84%. That means approximately $84 of every $100 in subscription revenue remained after the direct costs of providing it, before expenses such as sales, development, and administration.
That’s why selling additional software deserves attention alongside processing more payments. Both can grow the business, but they don’t contribute equally towards covering overhead and producing cash.
“Software growth is really, really important for us to drive that free cash flow number,” Dasilva said.
He pointed to Great Canadian Dollar Store as an example of the customer Lightspeed wants. Through its NetSuite partnership, Lightspeed can handle complex inventory and store-level operations while the partner supports broader financial management. It’s a practical explanation of why a larger retailer might pay for specialized software rather than settle for a basic till.
AI with a shopping list
The next opportunity is reducing the work merchants still do manually. Dasilva described tools that can prepare purchase orders, inventory transfers, and markdowns, with merchants approving actions.
“We launched agents that can take action for you,” he said.
He said proactive recommendations were next for user testing. That could move the product from answering questions to identifying work worth doing. A retailer saving hours on inventory administration has a concrete reason to value the software. Lightspeed still has to turn that benefit into paid adoption.
The cash still needs work
The latest results also showed US$7.5 million of cash used in operating activities. Management attributed the year-over-year decline primarily to expanding merchant cash advances. Financing customers can deepen relationships, but it also ties up money. Software growth needs to translate into stronger cash generation across the business.
Competition and merchant spending remain risks too. I’d consider Lightspeed a smaller growth holding within a Canadian stock portfolio, with the purchase justified by future earnings rather than memories of its old share-price high.
Bottom line
I’d consider a small, staged purchase for a patient Tax-Free Savings Account (TFSA) investor with sufficient room and a diversified account. Dasilva’s strategy gives the recovery a concrete direction: better customers buying software that does more work. If that produces stronger cash after the cost of winning and serving those customers, Lightspeed could earn a larger place in my portfolio.
