The COVID-19 pandemic has forced many independent retailers and restaurants to close their doors, but point-of-sale technology (POS) firm Lightspeed’s merchant base is proving resilient in the face of the outbreak. On Thursday, the Montreal-based company reported US$36.3 million in revenue for the first three months of 2020, a 70 per cent increase from the same period last year and ahead of its projections for its fiscal fourth quarter. While merchants saw sales drop in March, business rebounded in April.

Lightspeed stock was up more than 30 per cent in early-afternoon trading on the Toronto Stock Exchange on the news. Here’s what you need to know:

The (small) big numbers: Lightspeed closed April with customers using its technology in 75,600 locations, down about 1,000 from its fiscal year ended March. Less than five per cent of current clients are on “pause plans,” paying much-reduced rates because they’re closed for the pandemic, CFO Brandon Nussey said on the company’s earnings call.   

Why it matters: Gross transaction volume (GTV), which measures the value that Lightspeed merchants process through its POS systems, hit US$6.1 billion in the first three months of 2020, a 74 per cent year-over-year increase. That’s despite a 35 per cent drop in March GTV for retail clients—who make up about 55 per cent of the customer base—before rebounding over 50 per cent month over month in April. Unlike competitor Square, which also serves many small businesses, Lightspeed doesn’t make much money from transaction fees yet. The Canadian firm brought in 87.6 per cent of its revenues last quarter from software subscriptions and payments, with the latter contributing only nominally. Since it isn’t taking a big cut of higher transaction volume, Lightspeed’s continued growth depends on keeping the number of stores, restaurants and golf courses using its technology high and the share of merchants on pause plans low, as it has so far.

The pandemic effect: About three-quarters of Lightspeed merchants are still “actively trading … despite dealing with widespread government-mandated shutdowns,” CEO Dax Dasilva said on the call. Many retail clients are selling online instead, with e-commerce volumes up 400 per cent in April compared to February. While apparel, gift and electronics stores saw drops of as much as 70 per cent in March, “verticals like bike, home and garden and hobby performed decently,” Nussey said. Lightspeed’s hospitality clients are also adjusting, albeit slower. “Our restaurant customers are continuing to face challenges overall, but signs of recovery are beginning to show,” said Nussey, noting that home-delivery volumes rose fivefold in April in Australia, which is ahead of Europe and North America on the pandemic curve. The company’s international reach also helps. “Our customer concentration is in countries that may be a little further ahead and opening up their economies,” he said. Lightspeed merchants can try its e-commerce and delivery features free for three months, but most sign up to year-long contracts and pay the difference, president JP Chauvet said.  

A note of caution: The company said it won’t be providing financial guidance for its 2021 fiscal year, citing “heightened uncertainty in the global economy” due to COVID-19. Its report on Thursday warned that since many pandemic measures were implemented in March, “we expect to see more significant impacts in subsequent quarters.” That could include increased refunds and chargebacks; the company increased its provision for bad debt by US$1.2 million as a result of the pandemic.    

The trend line: Like their peers at e-commerce giant Shopify earlier this month, Lightspeed’s executives said COVID-19 has sped up merchants’ shift online and adoption of new technology. “There’s a lot of opportunity now to gain market share in new regions. We’re more in an offensive mode,” said Chauvet, predicting that “the disruption of the legacy systems is going to accelerate in the coming years.” The market of small- and medium-sized businesses looking for “POS innovation is large with a low cloud adoption rate,” wrote Todd Coupland, managing director of technology research at CIBC Capital Markets, in an April note. 

The analysts’ take: “While the outlook is undoubtedly challenged under the current
backdrop, Lightspeed has been able to sustain the business at a level that’s better than most originally thought (including us),” wrote Richard Tse, managing director at National Bank Financial Markets, in a research note, although he warned that the “next few quarters have the potential to be volatile” as the firm tries to add new customers and some businesses fail. Suthan Sukumar, principal of technology at Eight Capital, pointed to Lightspeed’s new customer growth, retail volume increases and restaurant-delivery growth as positive signs. “With early signs of stability and recovery and with merchants clearly adjusting their operating models to remain in business, we think [Lightspeed] is well positioned to bounce back to growth,” he wrote in a research note, predicting that the transition to cloud-based POS systems and use of digital payments “only accelerates on the back of the pandemic.”

The best of the rest: The company’s international reach continues to grow, with markets outside its four core—the U.S., the Netherlands, Canada and Belgium—making up 16.39 per cent of revenue in the 2020 fiscal year, up from 10.82 per cent. In May 2019, The Logic reported Lightspeed was aggressively hiring sales and marketing staff in Europe and Australia. It has also bought regional competitors to support its growth, including the January acquisition of Gastrofix, which has large customer bases in Germany, Austria and Norway, and a July 2019 deal for Swiss firm iKentoo. “This is a market that’s in a land grab globally,” Tse told The Logic in an interview. Lightspeed has “done the right thing to get a beachhead in the regions that they want to operate, often through acquisitions,” he said.

What’s next: Lightspeed sees opportunity in the fragmented POS space. The firm signs and sets customers up virtually, which is both cheaper and less susceptible to physical-distancing restrictions than competitors’ “expensive feet-on-the-street sales and installation model,” Chauvet said on the call. It also has US$210 million in cash, and a taste for acquisitions—it’s done four major deals since its March 2019 IPO. “We have the balance sheet and the business fundamentals to capitalize on a permanently altered commerce economy, and to take advantage of strategic opportunities that we expect to emerge,” Chauvet said. Lightspeed approaches acquisitions strategically and is unlikely to act in the next few quarters, according to Tse. “They’re not just going to pick off a client base,” he said.