Earlier this month, Lightspeed, the Montreal-based point-of-sale (POS) technology company, marked the one-year anniversary of its initial public offering amid a significant stock-market slump. The firm watched its share price on the Toronto Stock Exchange fall nearly two-thirds across the first half of March, as equities everywhere plummeted in the face of the COVID-19 pandemic and a global oil glut.

Lightspeed’s customers are primarily independent retailers and restaurants with physical locations. “That’s what’s getting hit the hardest right now—all these small businesses are being forced to close,” said Gus Papageorgiou, head of research at PI Financial. But he and other analysts say Lightspeed is likely to weather the outbreak thanks to its business model, good timing and strong balance sheet.

At the end of last year, the company’s technology was being used in more than 66,000 customer locations, which conducted US$16.2 billion in transactions using its cloud-based POS platform over the last nine months of the year. During that period, Lightspeed posted revenues of US$84.4 million, up 50 per cent from the same period in 2018. It forecast revenues of US$120 million for its full fiscal year, which ends March 31. 

Governments’ social-distancing policies in response to the COVID-19 outbreak have forced brick-and-mortar small businesses in many countries to close their doors, while consumers are feeling anxious and watching their spending. 

“I think [Lightspeed’s] growth probably grinds down to zero in the short term,” said Papageorgiou. “There’s probably going to be a higher-than-normal level of bankruptcies amongst small businesses.” But new stores and restaurants will open to fill the gap once the economy recovers. 

Merchants traditionally sign year-long contracts with the company that are settled upfront, according to Papageorgiou. “Even if I have a store or a restaurant and I have to close it down for a month, I’ve already paid Lightspeed,” he said. “So they’re not going to lose any revenue.” 

While consumers may not be able to walk into many Lightspeed-using establishments at the moment, some merchants are still in business, said Thanos Moschopoulos, managing director of equity research for technology at BMO Capital Markets. Restaurants could be using their terminals to process delivery or takeout orders, while stores adopt Lightspeed’s e-commerce software.

The company declined to comment for this story, citing restrictions on doing so during the last four weeks of the quarter. But it’s moved to support merchants affected by the outbreak, offering free access for three months to its restaurant-delivery, e-commerce and loyalty-program tools. It’s also compiled a resource guide of government support, partner discounts and advice.  

In January 2019, Lightspeed launched its own payment-processing service, which it called a “significant growth opportunity” in its IPO prospectus. But “it’s still very early days,” said Suthan Sukumar, principal for technology research at Eight Capital. Lightspeed Payments started with just U.S. retailers, and only expanded to U.S. restaurants and Canadian stores in the last quarter.     

The slow rollout may prove to be a blessing, because only a small portion of Lightspeed’s revenues are tied to merchants’ transaction volume. Lightspeed is likely to be less affected than Square, which similarly serves small- and medium-sized businesses, but has a different business model. “Square is moreso a payments company; Lightspeed is more of a software-subscription company,” said Sukumar, noting that the U.S. firm lowered its revenue forecast last week because retail and restaurant activity has dropped amid the outbreak. 

Papageorgiou estimates Lightspeed gets seven per cent of revenue from such transaction fees, compared to about 65 per cent for Square. He also said businesses borrowing from Square’s lending service are more likely than usual to default, and the firm will find it harder to sell those loans to investors, further hurting revenue. While Lightspeed is exploring a credit service, as CFO Brandon Nussey said on a February earnings call, it hasn’t launched one yet. 

The company also picked the right moment to raise capital, collecting $175.1 million in a late February shares issue that Sukumar called “very good timing.” Major pre-IPO investors Caisse de dépôt et placement du Québec, Investissement Québec and Inovia Capital also sold a combined $112.7 million of stock in the deal. “Given what I would expect their cash burn to be, they should have plenty of balance-sheet capacity to weather this downturn,” said Moschopoulos, who estimates the company has about US$200 million in cash.

Lightspeed has made a string of acquisitions over the last year. In January, it bought Gastrofix, a German startup serving the European hospitality market, for a record US$101 million (US$61 million of that in cash). Lightspeed buys companies to “expand into new regions and new business verticals,” CEO Dax Dasilva told The Logic in October 2019, adding that the company has “a very robust pipeline.” 

The acquisitions have indeed helped diversify the company’s mix of merchants and markets, with 45 per cent of locations in the hospitality sector and half overseas. “A year ago, our business was heavily weighted to retail in North America,” Dasilva said on a February earnings call. 

The analysts disagreed on whether the company will make more deals soon. Papageorgiou said Lightspeed will “slam on the brakes on acquisitions in the short term.” But the downturn could create opportunities. “There’s some good businesses out there [with] good assets, but [that] are not prepared to weather a few weeks or months of the type of destruction that we’re seeing,” said Moschopoulos.

All three analysts expect small- and medium-sized firms will continue to adopt cloud-based systems, skipping over or replacing more expensive hardware from legacy payments technology companies. Demand for Lightspeed’s technology isn’t going away, even if some of its current customers do. “A point-of-sale platform is the cornerstone of a merchant’s business,” said Sukumar.

With files from Zane Schwartz