Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Lightspeed Commerce Inc. (NYSE: LSPD / TSX: LSPD)
NOTE TO EDITORS: The Following is An Investment Opinion Issued by Spruce Point Capital Management
Provides Evidence To Show A Pattern Of Lightspeed’s Material Inflation Of Key Metrics, Including Customer Counts, Gross Transaction Volume And Total Addressable Market
Questions Lightspeed’s Ever-Changing Definition Of Average Revenue Per User, Which The Company Claims Is Growing Despite A Former Employee Telling Us That “Average Revenue Per User As A Whole Has Dropped Significantly”
Reveals Evidence That Lightspeed’s Costly $2.5 Billion Acquisition Spree Has Been Plagued By Growth Issues And May Be Used As Means To Paper Over The Company’s Declining Double-Digit Organic Growth Challenges And Shrinking Total Addressable Market
Believes Lightspeed’s Heavily-Promoted Payments Business Has Experienced Rapid Margin Decay And Discloses Comments From A Former Payments Employee Who Revealed That The Company’s Gross Transaction Volume Metric Is “Smoke And Mirrors” And “Not Verified Payments”
Asserts That Lightspeed Will Lose Out To Existing Competitors Like Shopify And New Competitors Like Amazon Due To Its Lagging Ecommerce And Omnichannel Capabilities
Sees 60% To 80% Long-Term Downside Risk To Lightspeed’s Share Price And Urges Investors To Visit www.SprucePointCap.com And Follow @SprucePointCap On Twitter For The Latest On $LSPD
September 29, 2021 09:15 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “Putting the Brakes on Lightspeed” that outlines why we believe shares of Lightspeed Commerce Inc. (NYSE: LSPD / TSX: LSPD) ("Lightspeed" or the "Company"), face up to 60% to 80% long-term downside risk, or $22.50–$45.00 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
Spruce Point Report Overview
Lightspeed is a Montreal-based software provider that offers various solutions in the highly-competitive point-of-sale (“POS”) payments space. Despite being in business for 16 years, evidence shows that Lightspeed has never been profitable, failed to be transparent about competitive pressures, and we believe does not disclose enough information for investors to ascertain its true organic growth.
Spruce Point finds evidence of poor, inconsistent, and continually changing disclosures which leads us to believe that Lightspeed has engaged in a pattern of materially inflating the size, quality, and growth prospects of its business. We expect that Lightspeed’s astronomical 23x 2022E sales multiple will quickly contract and that it will lose business to existing competitors such as Shopify and new competitors in the space like Amazon due to its lagging ecommerce and omnichannel capabilities.
Spruce Point believes it is imperative that Lightspeed form a Special Committee – with advisors independent of management and the Board – to review the conclusions of our report. Key findings that Spruce Point believes management should be held accountable for include:
- Evidence shows that Lightspeed massively inflated its business pre-IPO, overstating its customer count by 85% and gross transaction volume (“GTV”) by 10% – a payment volume metric that a former employee described as “smoke and mirrors.” Spruce Point’s research shows that Lightspeed’s business was stalling pre-IPO and that as early as 2014, GTV overstatement was identified and revisions were made to reduce GTV by ~$1.5 billion. We question why Lightspeed reported “50,000+” customers up through November 2018, and then ceased customer count disclosures to investors when coming public in March 2019? In our view, the Company might have shifted the narrative from customers to locations in an attempt to conceal a materially inflated customer count or an undisclosed material adverse event involving customer loss.
- Evidence of declining organic growth and business deterioration through Lightspeed’s IPO, despite management’s claims that Average Revenue Per User (“ARPU”) is increasing. Lightspeed’s income statement disclosures make it difficult to determine organic revenue growth, but our research shows that hardware margins have recently turned negative and deferred revenue quality has deteriorated. Hardware sales, formerly a profit center where Lightspeed received upfront payments from customers for long-term software contracts, is now a cost center for Lightspeed while competition gives hardware away for free. An interview with a former employee that spent five years at the Company revealed that “ARPU as a whole dropped significantly.” We question why has Lightspeed revised its ARPU definition three times and never disclosed a decline in ARPU despite acquiring businesses with lower ARPUs? Also curiously, Lightspeed initially told investors that operating cash flow was the best way to measure its growth, but quickly suspended its cash flow guidance the following quarter and failed to promptly call out the change to investors.
- Recent acquisition spree has come at escalating costs with no clear path to profitability, while management pursues aggressive revenue reporting practices. By backing out Q3 2021 acquisition contributions to deferred revenue and receivables, we find evidence of double-digit organic decline. This contrasts with Lightspeed’s claims of 42% organic software and payments revenue growth in its core business. At its IPO, Lightspeed’s prospectus promoted a Total Addressable Market (“TAM”) of $113 billion to grow to $542 billion. Yet, after $2.5 billion spent on acquisitions since its IPO, and claims of increasing its ARPU, its recent prospectus showed a current TAM of just $16 billion (85% less). Lightspeed also appears to have loosened its revenue recognition disclosure post-IPO to allow for earlier recognition. There is evidence of a revenue restatement post-IPO (along with COGS revisions), without explanation. Revenues barely went down during peak COVID-19 shutdowns, while other peers in the retail and hospitality POS businesses saw revenues decline by 20% and DSOs worsen.
- Weak governance standards and worrisome auditor oversight by PwC under a concerning CFO, who was tied to a prior technology roll-up scandal. In light of multiple financial anomalies in Lightspeed’s reporting, Spruce Point questions why the Company hired CFO Brandon Nussey – an executive with financial scandal and turnaround experience – to lead it through an IPO into the public markets. Mr. Nussey failed to make clear on his biography that he held a senior operating role at Descartes Systems Group (a troubled software roll-up company) before becoming CFO when it restated financial results and took asset impairment charges. We also find it troublesome that the Board ties the CEO’s compensation to “target payment customers” despite never disclosing this key metric to investors. We also question why immediately after its IPO and a period of substantial acquisitive growth, Lightspeed added a clawback provision, and switched its PwC audit partner from an expert in technology to one that specializes in entertainment, media & communications?
- Lightspeed commands a premium multiple of 23x and 47x 2022E sales and gross profit despite its substandard financial reporting quality, and inability to generate positive EBITDA margins or cash flow 16 years after it was founded. The Company is positioned by its stock promoters as a best-of-breed commerce technology solutions provider. However, we believe the promoters have taken Lightspeed’s story at face value without conducting a rigorous forensic review of its financial claims, accounting policies, and acquisition history. It appears that the majority of price targets (the average target is $120.70/share) are based on financials currently inflated by a rapid sequence of acquisitions that Lightspeed has yet to fully digest and prove it can extract value from. Promoters give it full credit for seamless integration of each business despite our findings that most of the recent acquisitions have been plagued by growth issues and were very expensive. As one former employee told us, “They are very good at PR, and saying we’re going to acquire this, this, this, but I don’t know if there will be a breaking point where all these acquisitions are not going to play well together. It looks great on paper but when you go into practice, how is this going to operate beyond just numbers on a PR deck?” Once investors come to grips with reality and reassess the quality of its business, Spruce Point expects Lightspeed’s share price to decline by 60%-80%.
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
