Renewed faith? Analysts’ verdict on Pushpay’s result

Forsyth Barr, Craigs Investment Partners and Jarden analysts have all tweaked their ratings, or 12-month target price, after Pushpay’s full-year result – and several numbers that took the market by surprise.

Analysts were sharply split ahead of the full-year report – particularly over how well it would handle two big challenges: dealing with new, lower-cost competition and breaking into the Catholic market.

Forsyth Barr’s Jamie Foulkes had the biggest crisis of faith ahead of Pushpay’s full-year earnings. The one-time bull (Foulkes initiated coverage in July last year with an “outperform”) downgraded the stock to underperform in April, saying the company had blown its chance to capitalise on its market dominance during the pandemic – in part because of new competition from Tithe.ly, which offers digital giving for around a third the price.

In April, Foulkes said Tithe.ly had added 12,000 customers in the first half of 2021 to Pushpay’s 309.

Foulkes was also dubious of Pushpay’s plan to push beyond the Protestant segment (where most of its sales have been made so far) and into the Catholic market – noting that a lot of Catholic giving was managed through private school donations.

In the event, Pushpay reported a doubled net profit yesterday, and forecast a sizeable jump in operating earnings for 2022 as cross-selling new church management software and an app suite to existing customers more than made up for slower growth in new customers.

In a new research note issued this morning, Foulkes upgraded Pushpay to neutral – though also trimmed his 12-month target price from $1.81 to $1.74.

Foulkes cited better-than-expected customer numbers in the second-half of FY2021 and noted “an encouraging start from new CEO Molly Matthews who brings a relationship-based approach to customers”. The ForBarr man doesn’t draw a direct contrast, but Matthews is a notably warmer communicator than the smart-but-mumbling Kiwis who preceded her.

Foulkes’ faith is not completely replenished, however. He said the new customers were an “inferior” mix to previous years – that is, they were at the lower-end of the scale as Pushpay seeks to target mid-to-large congregations.

And he remained skeptical of Pushpay’s effort to woo the Catholic segment, “given older demographics, inertia towards technology, the challenge of declining attendance, lower historical giving trends and a more formal service structure reducing the chance to solicit donations”.

Craigs Investment Partners’ Stephen Ridgewell saw positives across the board.

“It was a good result with an improving outlook,” he told the Herald.

Pushpay reported operating earnings that more than doubled to $58.9m for the 12 months to March 31, 2021, and forecast operating earnings between US$64m and US$69m for FY2022.

“Billable product growth accelerated in the second half of FY2021, with management bullish on further improvement going into FY2022, and this seems to have surprised the market to the upside.”

Shares were up 6.8 per cent to $1.72 in early trading after the result was released before easing back to finish at $1.64 for a 2 per cent gain and a market cap of $1.81 billion.

Pushpay more than doubled its market cap to $2.3b during 2020, but the share price has eased back during 2021 on the general pull-back in tech stocks, cornerstone investor the Huljich family selling a major stake, and concerns about slowing customer growth.

“Cash generation was exceptional, and the company has now moved into a net cash position, which puts Pushpay in a good position to fully debt-fund strategic acquisitions,” Ridgewell said.

On a conference call yesterday, Matthews said strong cashflow had allowed Pushpay to fully repay the debt it took on when it bought Church Builder for US$87.5m in late 2018. Operating cashflow increased 145 per cent to US$57.6m in FY2021.

Although there was only a 2 per cent gain in total customers, there was more upselling to existing customers, and customer gains accelerated in the second half.

“Customer growth surprised to the upside. The company seems to be seeing some green shoots of growth from its new ChurchStaq,” Ridgewell said.

ChurchStaq, launched in September last year, combines elements of Pushpay’s Community Church Builder software and donor management and mobile payment products, wrapping them into a series of user-friendly apps, with dashboards to monitor progess in encouraging participation, and levels of giving.

“Management were also bullish on progress to date in the Catholic space, and confident of signing on more dioceses during the year following successful early results from the trial they have been running [with the Archdiocese] in Chicago,” Ridgewell said.

Ridgewell thinks a lot of the good news is already built into Pushpay’s share price, however. Post earnings, he kept his rating at neutral, and only nudged up his 12-month target price slightly, by 1 per cent, to $1.93.

Jarden analysts Wassim Kisirwani and Wilson Wong kept their rating at buy in a new research note issued this morning, but trimmed their 12-month target from $2.30 to $2.10.

The pair noted that profit margin was up and operating expenditure down (an investor presentation yesterday said Pushpay spent less on marketing during FY2021, and that Pushpay finished FY2021 with 405 staff, a 12 per cent reduction on its 2020 complement of 459).

But they also saw costs increasing in the medium term as Pushpay invested in its push into the Catholic market.

Regardless, Kisirwani and Wilson Wong, see operating earnings continuing to grow, hitting $78m in FY2023.

Cross-selling

Pushpay, which has been targeting larger churches, said it finished the period with 11,099 customers, only 2 per cent ahead of the 10,896 it reported for the 12 months to March 21, 2020. The revenue growth was fuelled by cross-selling existing customers as theytook on its Church Builder, Donor Management and ChurchStac products.

An outlook statement said Pushpay expects to grow in line with US GDP growth, which it notes is forecast to grow strongly, at 5 to 7 per cent, with growth concentrated in the second half of 2021 “as vaccinations allow the US to reopen”.

It added, “We anticipate digital adoption within our customer base continues to grow, albeit at a slower rate than before the Covid-19 driven acceleration.”

On a conference call, CFO Shane Sampson said it was still too early to say if the jump in use of digital tools would stick post-pandemic. Many congregations in Pushpay’s core US market were still under restrictions that limited attendance to 25 or 50 per cent. But he said the early data was encouraging.

Matthews did not directly address emerging, lower-cost competitor Tithe.ly, but she told the Herald, “While we have seen increased demand from smaller customers, we continue to see customers being attracted to our product due to the richness of our solution and all-in-one offering, which differentiates us with other players.”

A new flock?

Matthews also added new details on Pushpay’s Catholic push.

The CEO said Pushpay would spend US$6m to $8m over the next year in product development and marketing as it targets “68 million parish-connected Catholics and 16,703 parishes” in the US.

Matthews said Pushpay’s long-term goal was to acquire more than 25 per cent market share in the Catholic segment by parish by 2026. A trial was under way with the Chicago Archdiocese.

The CEO said Pushpay was investigating how it could “become a thought leader in the Catholic segment, just as we have already in the non-denominational space.”

Her company’s 40-odd open positions include, among a bevy of Salesforce roles, “Account Executive, Catholic Market.”

Incumbent in place

Unlike when it began in the Protestant segment, Pushpay faces an incumbent in that market: the Nasdaq-listed Blackbaud (albeit one tainted by a ransomware scandal in 2020. Blackbaud, which also caters to schools and non-profits, says its shares soared to US$78.99 during the pandemic, for a market cap of US$3.32b. The stock was recently trading at US$67.48.)

Ridgewell does not share Foulkes’ concerns about barriers to entry.

But he does concede that Catholic congregations, with total giving of around US$5.1 billion last year, are a “noticeably smaller target addressable market” than Protestant churches on around US$7b.

Matthews did not buy Foulkes’ argument that Catholic giving too intertwined with donations via schools to be an easily accessible market.

The Pushpay CEO told the Herald: “From what we have seen in the market, donations received by the Catholic church are largely separate to those received by private Catholic schools, even though the church and the school may be connected under the same organisation.”

Before joining Pushpay in 2017, Mathews ran her own change management consultancy.

The University of Oregon sociology grad has also had a long involvement with YoungLife, a Christian youth group that organises counselling, camping and other activities, and emphasises that it’s open to both Protestant and Catholic members.

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