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'We're doubling down on payments:' Lightspeed Commerce shifts its business model

Lightspeed Commerce Inc. is a payments software provider.

Lightspeed Commerce (LSPD.TO)(LSPD) is in the midst of a push to get new and existing customers to use its own payment software, a shift that analysts say could cause some short-term pain for the company.

The Montreal-based software company previously allowed customers to integrate its point-of-sale technology with any payment terminal brand. As of May 1, the company began requiring new customers to sign up for its payment platform alongside its point-of-sale technology. Those who choose not to use Lightspeed's payment terminals will have to pay a transaction fee.

The change is now being gradually rolled out to Lightspeed's existing 340,000 customers, starting with retail customers in North America, followed by hospitality clients and then to customers around the world. The company is hoping to have a majority of its customers using its payments platform in the first half of the year.

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"Now we're going to hone in and do whatever it takes to bring customers onto payments," Lightspeed chief executive Jean Paul Chauvet said in an interview with Yahoo Finance Canada.

"We're doubling down on payments."

That doubling down is expected to impact adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter of the 2024 fiscal year, with the company forecasting a loss of approximately $10 million. As part of the plan, Lightspeed said it will offer businesses free payment terminals in making the switch, contract buyouts to cover early termination fees, competitive processing rates and free on-site installation.

"We've reached a point where if we want to provide our customers the best possible experience to scale their businesses, it is important for us to think about payments and [the point-of-sale] platform as one unified product," Chauvet said on a conference call with analysts on Thursday.

I'm extremely confident that this is not going to be an impediment to growth.Lightspeed CEO JP Chauvet

When asked by an analyst whether there was a "Plan B" for the company if it faces resistance from customers to make the shift to its payments platform, Chauvet said the company "has very strong confidence that people are not going to replace the core platform that runs everything in their business."

Morgan Stanley analyst Josh Baer wrote in a note to clients on Thursday that the upcoming fiscal year will be “messy” for Lightspeed, “turning out to be a transition year with churn... extra costs and significant mix shifts.”

“Taken all together and given the uncertainties of the current macro environment and Lightspeed’s increased exposure to retail and restaurant [gross transaction volume], we see shares largely range-bound until we get some insight into the degree of location churn associated with the push to payments, the trajectory of payments attach and signs of more meaningful margin expansion,” Baer wrote. Still, he noted that the payments strategy could be a positive for the company in the medium term.

“This shift also sets the stage for pulling forward higher levels of transaction revenue and gross profit, likely a clearer positive in [fiscal 2025] and beyond,” he wrote.

The strategy shift, alongside a weaker than expected forward guidance, weighed on the company's stock on Thursday. Lightspeed closed the trading day on Thursday down nearly 13 per cent after it released its fourth quarter results.

ATB Capital Markets analyst Martin Toner said while "investors are concerned about churn," Lightspeed will have "a strong business model when fully integrated."

"We believe Lightspeed has a durable growth strategy and that it will be highly profitable over time with additional scale," Toner wrote in a note to clients.

Lightspeed has been focused on acquiring larger merchants in its pursuit of profitability, and less interested in single-owner operated businesses. The company said that it expects churn among its customers with a lower gross transaction volume (GTV) to increase in the short-term as it focuses on the shift to payments.

"I'm extremely confident that this is not going to be an impediment to growth and to attracting the right customers," Chauvet said.

"We do not believe that churn will be high as we launch unified payments to our existing customers on the cohorts that matter. We believe that the high [gross merchandise value] merchants will actually love what we're doing."

Chauvet said that while 44 per cent of its customers process less than $200,000 of gross merchandise value (GMV) per year, those businesses represent 5 per cent of the company's total transaction volume.

"It's not a very valuable cohort to us," he said.

Shares of Lightspeed closed the trading day on Thursday on the Toronto Stock Exchange at $17.50, a decline of 13 per cent compared to Wednesday's close.

Chauvet's comments came the same day Lightspeed a loss of US$74.5 million in its fourth quarter compared with a loss of $114.5 million in the same quarter a year earlier as its revenue rose 26 per cent. Revenue in the final quarter of the company's 2023 financial year totalled US$184.2 million, up from US$146.6 million last year.

With files from the Canadian Press

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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