A Growth Stock for the Next Decade: Lightspeed POS Inc


  • Lightspeed provides point of sale and e-commerce software to small and medium sized retail and restaurant businesses.
  • Thousands of businesses in over 100 countries are currently using their software
  • Lightspeed went public last year, raising $179 million dollars in capital
  • Still unprofitable, they are aggressively pursuing internal and external growth
  • This growth stock has plenty of room to grow in the coming years

1 – HISTORY OF A SUCCESS STORY

Lightspeed (TSE: LSPD) was founded in 2005 by Canadian entrepreneur Dax Dasilva. Inspired by Apple’s vision of blending art and technology, he made it Lightspeed’s mission to provide small and medium-sized enterprises (SMEs) with user-friendly software to help them manage their point of sale and develop e-commerce solutions.

In the first six years of its existence, Lightspeed posted incredible yearly growth of 1900%. In 2012, Lightspeed ranked 61st on Profit’s list of “Canada’s 200 fastest growing companies”, which prompted Accel Partners to invest $30 million in the young start-up.

By 2014, Lightspeed counted more than 21,000 customers who collectively processed $8.2 billion in annual run-rate transactions. This amazing growth generated further interest among investors and Lightspeed received $35 million in funding from iNovia Capital.

By 2015, 23,000 businesses in more than 30 countries were using its software and 1,000 new stores were signing up every month. In 2017, Lightspeed raised an additional $160 million in venture-capital funding. In 2018, Lightspeed made two huge coups when they named Patrick Pichette, former Google CFO, and Paul McFeeters, former Open Text CFO, to their board of directors.

The company finally went public in March 2019 on the Toronto Stock Exchange under the ticker LSPD. It raised $179 million, making it the largest Canadian IPO in nine years.

Today, Lightspeed has more than 1,000 employees in Montreal, Ottawa, Ghent, Amsterdam, London and New York. It has customers in 100 countries, but its principal client base is in the U.S.A, Canada, Australia and England.

Dax Dasilva, the founder of Lightspeed, is the charismatic and forward-thinking brain behind the company’s success

2 – POST-IPO GROWTH STRATEGIES

Since going public, Lightspeed is focusing on delivering internal and external growth to provide value for its shareholders.

A – Internal growth

Lightspeed’s organic growth strategy is threefold: Attracting new merchants, continuing global growth and expanding ARPU (“Average Revenue Per User”).

  • Attracting new merchants

Lightspeed targets SMEs which represents a vast global customer base.

  • Statista.com estimates that there are approximately 421 million SMEs (small and medium-sized enterprises) in the world.
  • A May 2018 Eurostat report claims that “In 2015, enterprises employing fewer than 250 persons represented 99% of all enterprises in the EU”.
  • A 2017 World Bank paper estimates that SMEs (Small and Medium Enterprises) comprise “over 90 of the private sector among developing countries and create more than 50% of jobs in their respective economies”.

This data lends credibility to Lightspeed’s claim that their potential customer base is a “large, underserved market”.

Their second approach is to help their customers drive growth in their point of sale. This is done by providing them with numerous tools to fine comb their inventory management, perform sophisticated sales analysis, develop e-commerce presence and increase customer loyalty: Lightspeed Retail, Lightspeed Analytics, Lightspeed E-Commerce and Lightspeed Loyalty are the four prongs deployed to help customers develop their business.

In sum, Lightspeed’s strategy is to help its customers grow and then grow along with them.

  • Global growth

Lightspeed’s global growth strategy is mainly focused on gaining market shares in developed regions, such as Europe, Australia and North America. However, they also have clients in South America, the Caribbean, Asia and Africa and will continue growing in those regions.

  • Expanding ARPU

ARPU is achieved when customers purchase multiple Lightspeed products.

Typically, a customer signs up for Lightspeed Retail, the basic inventory and sales management software. Once the customer is comfortable and satisfied with this tool, they become interested in the more advanced features that Lightspeed has to offer, most notably the advanced analytics.

From there, the logical step to pursue additional growth is to set up an online store, which is very easy via Lightspeed’s e-com. Then, the final steps are signing up for Lightspeed Loyalty program, to increase customer engagement, and Lightspeed Accounting, to simplify accounting via external APIs such as Quickbooks of Xero.

B – External growth

To increase its presence in different markets, Lightspeed has been pursuing an aggressive acquisitions strategy.

In just one year, Lightspeed completed the acquisition of the following software companies:

  • Chronogolf: Online platform for golf game reservation
  • Ikentoo: European leader in high performance omnichannel POS solutions and business management systems for the restaurant and hospitality industry,
  • Kounta: Australian leader in cloud-based POS solutions for small and medium sized hospitality providers
  • Gastrofix: Premier cloud-based hospitality POS solutions provider in Germany.

These acquisitions not only immediately increase Lightspeed’s customer base and revenues, they also solidify their footprint across Europe and Australia. This is good for long-term growth as it introduces the company to regions with strong SME presence and significant purchasing power.

Also, SMEs in these regions are under intense pressure from online retailers such as Amazon and are in dire need of sophisticated but easy-to-use software that Lightspeed offers.


3 – FINANCIAL OVERVIEW: THE ROAD TO PROFITABILITY

So far, despite their tremendous growth, Lightspeed remains unprofitable.

However, there is room for optimism.

  • A growing customer base
Lightspeed’s customer base is rapidly expanding

Lightspeed’s customer base is growing on average 18% over the last three years and this trend is expected to continue in the coming years. The company projects +50% growth in new customers next year, with an estimated 74,000 total customer locations by the third quarter of 2020.

  • Strong revenue growth
Lightspeed’s revenues are increasing on average 34% per year

Lightspeed’s total revenues are increasing on average 35% per year, and the company believes this will continue given they expect a continuing increase in its customer base.

  • Gross Profit and EBITDA
The main issue going forward is profitability

While the gross profit is also increasing, the main cause for concern is the negative adjusted EBITDA and the expectation that EBITDA will remain negative in 2020.

EBITDA measures the company’s financial performance. It’s an important metric because it shows earnings before accounting and financial deductions such as amortization and taxes.

The company also posted a net loss of $183 million dollars due to a non‑cash charge of $191.2 million, offset by an associated $30.8 million deferred tax benefit, each related to the preferred shares which converted into common shares prior to the IPO.

  • Financial statement takeaway
LSPD Income Statement

Like many growth stocks, the company’s balance sheet is a tale of contrasts: on the one hand, the company is increasing its customer base and revenues, but on the other EBITDA and net income are negative and will remain so for the next few years.

However, the steady growth of the company should pay off at some point in the near future.


4 – THE CHALLENGES FACING LIGHTSPEED

Despite achieving spectacular internal and external growth, Lightspeed is facing numerous challenges – profitability is by no means guaranteed.

  A – The Dangers of Fast Growth and Diversification

Lightspeed is gradually structuring a complete package: inventory and sales management, payment solution, analytics, customer loyalty programs, accounting, ecommerce…the all-in-one offer allows a company to manage all facets of their business through one provider.

However, the risk is that Lightspeed will bite off more than it can chew. By trying to perform all tasks, the danger is not being able to perform all of them well.

Will Lightspeed be able to deliver? How much investment will be needed to recruit the necessary workforce to develop and update the software? So far, customers appear satisfied with the products but maintaining this level of excellence will require continuing investment, which will delay profitability.

B – Technical Issues

As more clients sign up, servers will be loaded and be subject to frequent crashes – this is already occurring from time to time. Customers are willing to put up with technical issues so long as they know that the provider is doing all it can to fix and prevent them.

Bugs and system glitches are inherent to any software development and Lightspeed’s strength is their reactivity and transparency. They have a dedicated technical error page where customers are notified in real time of system bugs and fixes. This transparency is reassuring for clients who can see how serious Lightspeed is about providing the absolute best service.

The only question is will Lightspeed sacrifice this efficiency in their search for profitability? If Dasilva’s admiration for Apple’s dedication to providing quality products is any indication, they will not.

C – The structural problems facing SMEs

SME’s represent most of the global economic activity and employment, but this fact is not set in stone. The emergence of behemoths such as Amazon, Alibaba and similar online retailers and wholesalers is redefining the way business is conducted.

Will Lightspeed help these small structures compete with the big boys or will SMEs’ progressive extinction drag Lightspeed down with them?

                D – Competition

Obviously, Lightspeed is not the only inventory/sales/ecommerce software provider to SMEs.

Its main competitor is Shopify, the e-commerce behemoth. However, despite Shopify having a definite advantage in the ecommerce domain, Lightspeed’s retail-first approach may be an advantage.

Indeed, both Lightspeed and Shopify are targeting the same market but from opposite angles:

  • Shopify starts out as an e-commerce platform and is now trying to attract its customers to its brick and mortar POS software, whereas
  • Lightspeed starts out by providing software for brick and mortar management with an e-commerce option integrated into it.

From my point of view, Lightspeed’s approach appears more sensible as it is easier to sell an e-commerce solution to a company who is already using your inventory/sales management software, with the e-commerce being a natural extension of the retail business, whereas it may be harder for Shopify to convince its e-commerce clients to adopts its retail POS management software if they already have one they are satisfied with.

However, Shopify’s clear advantage over Lightspeed is its recognized brand name and financial might. Will Dasilva’s entrepreneurial savvy outsmart the Goliath? Will Shopify or another tech giant make him an offer he can’t refuse? Only time will tell.


CONCLUSION: IS LIGHTSPEED A GOOD INVESTMENT?

Lightspeed’s story is very encouraging and provides much room optimism. However, the company will face tough challenges in the coming years. The path to profitability is still far away but the current strategy does provides a clear roadmap as to how this will be achieved.

I am fairly confident that Dax Dasilva and his team are competent, driven, and capable of delivering results.


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Disclaimer: At writing, author owns LSPD shares. However, this is not a sponsored article not financial advice. Always conduct your own research before investing.

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