Tyro Payments Ltd (ASX: TYR) announced on 7 January 2021 it had started to experience connectivity issues for approximately 15% of its active terminal fleet. Since the announcement, the Tyro share price has slumped 20% lower to a 9-month low.
Goldman Sachs released a report on Wednesday that believes the temporary terminal connectivity issues could weigh on Tyro’s medium-term growth prospects.
Terminal connectivity issues
Tyro has disclosed that its first half total transaction volume (TTV) was $12.118 billion, which was 3.7% ahead of Goldman’s forecasts. However, this was offset by the connectivity issues that have indicated to reduce Tyro’s TTV by around 5% to what would otherwise be expected for that period, said Goldman.
The connectivity issues are reported to impact 19% of its merchants, or 6,300 merchants. A further 11% or ~3,650 have been impacted but have multiple terminals on site, allowing for the working terminals to still be used. Around 70% of merchants are not affected by this issue at all.
The company advised it has a team of 250 personnel working to replace the affected terminals and indicated that a “majority” of merchants should be back online by the end of this week and balance in the course of next week.
Goldman observes that the direct impact on Tyro’s lost merchant fees should be “relatively immaterial”. However, the impact on potential lost revenues for its merchants “could be material” and estimates a loss of “$57.5 million to 230 million”, assuming merchants are not able to find an alternative basis to process sales.
Tyro has said that once connectivity is restored, it will be in a position to consider compensation for customers and other options.
Alongside this, Goldman is also concerned about the possibility that merchants may churn to alternative service providers regardless of compensation received. The broker cited that on social media, several merchants indicated they bought a Square terminal as a workaround.
Furthermore, the report fears that future market share gains may slow as a result of reputational damage and delayed/lost opportunity for future partnerships such as its partnership with Bendigo and Adelaide Bank Ltd (ASX: BEN).
Lower Tyro share price target
Goldman lowered its 12 month Tyro share price target from $3.65 to $3.15 with a neutral rating. This represents a 11% upside to Tyro’s close on Wednesday. Its lower price target was driven by anticipated lower new customer growth rate assumptions.