Description

Pushpay is the global leader in church management and church giving software. The story has a “funny” feel to it particularly as it relates to the history of management turnover (and recent appointment of Matthews as CEP), but at 20x EBITDA with ~80-90% FCF conversion (multiples in summary page are EBITDA), the asset seems priced for minimal growth. Despite a slowdown in church acquisition in 2020, we feel the stock presents an interesting risk/reward in a world where recurring revenue multiples are extremely high, and a turn in customer adds this year could reignite interest in the stock (the company has also indicated to us it is is aware of the valuation differences in a potential US listing)

On top of providing the digital platform for recurring giving (i.e. set up direct recurring gifts from your bank accounts via the PPH app, or donate through texting/web pages), Pushpay acquired Community Church Builder in December 2019 for $87.5m. CCB is a church management system (ChMS) that provides software for churches to connect and communicate with the community, record member service history, track giving, as well as other administrative tasks (i.e. a CRM for churchgoers: you can see the “participation scores” of church members -> individual involvement i.e. attending, serving, groups, giving history, etc. and make action plans accordingly. Donor management allows church leaders to screen for the members that may deserve “outreach and pastoral care”).  Pushpay generates ~70% of its revenues through volume transactions (1-3% take rate depending on ACH, debit, credit) and 30% through monthly subscription revenues (i.e. $299/mo).

As of mid-2020, Pushpay has consolidated CCB and Pushpay into a single all-encompassing software stack (named ChurchStaq) for a best-in-suite for small and medium sized churches. We think this makes it a compelling “one throat to choke” proposition from a single trusted vendor (company indicated many medium churches wanted an all in one offering). However, the rollout coincided with COVID-19 shutting down and delaying major investments by medium and large churches. The company has stated that recent cross-selling has exceeded internal expectations.

I don’t think it’s unreasonable to assume EBITDA grows in double digits while company throws off a 4-5% FCF yield. (with incremental margins being in the 80-90% range, you can model in just 50% incremental going forward and still get close to 20% EBITDA growth). There’s an element of wait-and-see to it, but the TLDR is: “only publicly traded leader in ChMS, providing a best-in-suite product (which in itself consists of best-in-breed giving) for an industry that has historically lagged in digital transformation efforts and is increasingly required to do so. The cross sell opportunity is just presenting itself as the company restructured in 2020 with a more compelling go to market. At ~20x 2021E EBITDA with 80-90% EBITDA conversion to cash flow, we think the valuation provides a skewed risk/reward to the name in today's markets"

Investment Highlights:

Strong recurring revenue model with net ARR >100% and ~97.5% annual retention rate

Churches have gone through an irreversible shift with digital giving going from 35-40% to 60% due to COVID for PPH's customers. PPH’s data shows very little likely to revert after COVID dissipates; churches are adapting as well with certain large churches adding “digital only” sermon to capture non-local demographics (churches becoming less localized means an engaging app can capture larger audiences)

Strong operating leverage (would like them to dial up R&D spending). Revenue grew 33% YoY, while EBITDAF increased 1,506% (1,677% ex CCB). Operating expenses went from 65% of revenues to 52% in 2020 (and excluding the CCB transaction, would have gone from 65% to 47%). ex CCB; EBITDAF increased $26.2 million on revenue increase of $27.2 million.

Generates strong OCF, as OCF as % of EBITDAF is well over 90% (company is largely on track to pay down its entire debt from the CCB acquisition by FY21 year end); Capex <.4 million for each of the last couple years (de minimis)

CCB acquisition potential narrative inflection? Prior to CCB, Pushpay didn’t really have a strong “data presence/data gravity” (while annoying to have to change donor systems, it is doable if you are willing to risk the recurring givers attrition for a lower take rate); with the cross sell and ingestion of ChMS; I think the data gravity and value add of the software will compel customers to likely stick with Pushpay over the LT (similar to a restaurant software/payments model)

Nothing granular on Churchstaq offering but we know ARPC is higher (will be hard to tease out churchstaq vs church size mix going forward)

Long Term Market Growth. Pushpay is processing around ~5% volume of the Protestant market today. The company is targeting 50% penetration of medium and large church segments in the US, which it predicts to come out to $1 billion in potential revenues.

PPH has around ~11,000 churches. In the US, there are 340,000 churches (17,000 large, and ~100,000 medium. PPH does not target the 200,000 small churches). Church penetration can be slow because even though Pushpay is in constant contact with ~300,000 churches, it’s often up to the church when they are looking to upgrade their software stack (throwing more marketing dollars to work won’t necessarily hasten the timeline with the elders at a church)

Churches that accept tithing online increase overall donations by 32%[1]. Pushpay says 8/10 of the CCB churches they acquired saw >10% increase in giving after adding Pushpay (easily eclipsing the slightly higher volume take rates)

Risks

Church attendance is secularly declining. Over the last 10 years, % of American adults professing as Christian has gone from 77% to 65%; while “religiously unaffiliated” has gone from 17% to 26% -> younger people are much less likely to be religious. Protestant churches (which is where Pushpay operates) went from 51% to 43% while Catholics went from 23% to 20%. Most Americans now attend church a few times a year vs. monthly; and the decline is broad-based:

https://www.pewforum.org/2019/10/17/in-u-s-decline-of-christianity-continues-at-rapid-pace/ (35,000 participants)

https://apnews.com/article/f15241378057486ea437cad490a2ed67

The decline appears linear and I would underwrite the case that % of US population that is Christian falls 1% a year (however, growth of US population of 1% a year helps offset that); The % of population of Christians will decline but the absolute number might be expected to stay flat or marginally negative (similar conclusion from Pew). In addition, a lot of the “religiously unaffiliated” are not atheists or agnostics, but simply people who profess no particular religious allegiance (potentially up for play?)

I think this implies it is more important than ever for churches to have an attractive digital platform that builds communities. Millenials and gen Z expect an omnichannel presence to anything physical, and a church without an engaging app will likely lose market share as the digital transformation of religion reduces the power of local market capture. Pretty soon, I think it is just as likely for any church leader to ask: “what is our digital strategy” as any G2K company. i.e. "According to Grey Matter Research, 17 million Americans who don’t regularly attend church visited a church website. While most are searching for church hours or programs, 26% are streaming video and another 26% are streaming audio"

Giving (tied to attendance) is also falling as a result “Of the $428 billion Americans gave to charity in 2018, by far the biggest slice of the charitable giving pie—$125 billion or 29 percent—went to religion…Giving to religion declined in 2018 after six years of slow growth and one year of flat growth. Further, giving to religious organizations has been declining as a share of total giving since 1984, when it reached 57 percent. The 2018 record is the first time that giving to religion has fallen below 30 percent of overall giving.” (people are instead giving to international affairs, human services, health and environmental associations)[2]. Even with religion declining as % of population 1% a year, giving as largely stayed flat or somewhat positive. It isn’t great but it’s not a deterrent to growth as Pushpay has only ~4-5% of the total market

Lack of success in expansion outside of Protestant ChMS. Have heard from previous employees that Pushpay isn’t going to be able to address the Catholic market unless it makes an acquisition (like PARISHSoft or something). Company is beginning to take steps to market to that market but so far there has been no major KPIs to report

Culture? This one is a little harder to distill. Some employees we talk to seem fine with the company but no one was overwhelmingly enthusiastic. Indeed there has been a lot of management change at the top over the past few years and it seems like a lot of positions are taken over (like COO) from the CCB team; could be some mishmash of culture (and previous insiders selling down stock seems to be hitting the news all the time). The recent CEO (Molly Matthews) has been with the company for four years, is a church goer and chief customer officer. She is a big customer advocate and is involved in product engineering as she is constantly grossing feedback from customers. We aren’t sure whether there was any drama in the background in appointing the new CEO (vs. CCB people, etc.) - the company explained that they wanted to lay the foundation for the CEO to be in the US.

Competition There’s quite a few competitors out there (tithe.ly, subsplash, ministrybrands etc.) Tithe.ly has been making news with tons of new church adds during 2020. At this point, most of Tithe.ly’s customers are in the small church space with <250 customers that Pushpay actively decided to de-emphasize in 2017/18. There is very little overlap in customers except at the very low end. While the appearance of apps may not be particularly different (i.e. you can compare subsplash vs. pushpay church apps), PPH has more robust back end that competitors lack (donor analytics, donor development dashboard, at risk callouts). The company is confident given its revenue profile/market share and investment in R&D, it can constantly punch out new features to further differentiate its software stack

Unlike software where small SaaS companies become the giants of tomorrow such that “land, expand, and grow” within small companies is important (i.e. AWS IaaS/PaaS with startups), churches tend not to grow or shrink that much. A local church more or less stays around the same size over 5, 10, 15 years largely dependent on population growth. It is really rare for a small church to grow into a mega-church, and typically if that happens the old software stack (if there even is one…) is completely overturned multiple times as the church scales to 1k, 5k, 10k, 50k attendees. Hence, while a Datadog might be developer-first and attrite away the market from a New Relic or Splunk by going bottoms up, I don’t think that same risk applies in church software (a software solution that targets sub 250 attendees can keep it simple and probably would not find it valuable to invest significant R&D into donor management / automation / outreach. This is a different conversation with 20,000 attendees). The needs of a large church are quite different from small churches (which focus primarily on low cost) and I think a bifurcation of the market is likely to persist

Our estimate is that small churches have maybe ~100-110k TPV/year; while a medium/large sized church is $1.8-2m

2020:

Revenues (FY2020) of $128 million, resulting in gross margins of 66%, EBITDAF of $25.1 million and OCF of $23.5 million. The “balance sheet value” of LTV of the customer base estimated at $4.5bn (up 46% YoY; this is calculated using a 2.5% annual churn rate)

Customer Profile: Pushpay has around ~11,000 customers (up 7% organically, or up 42% YoY due to CCB acquisition); with average revenue per customer of $1,317 per month. 8,180 customers use the traditional giving software (Pushpay), while 2,716 use CCB (which include 1,442 mutual customers). This implies a penetration rate of only 13% mutual-use, which sets the business up for significant cross-sell opportunities.

End Consumer: Pushpay collected $5 billion in TPV in 2020 (up 39% YoY). This was done over 26 million transactions, which results in $195/average transaction value. 26 million transactions / 12 = ~2.2 million transactions a month/11,000 = ~200 transactions per giving church. Taking out CCB, this implies 271 transactions per month per church. Think there is decent tx volume capture within existing churches from here

2021 1H:

For 1H’21, TPV increased 48% from $2.2 billion to $3.2 billion (accelerated)

Revenues increased 53% YoY from $56m to $85.6m

Gross margin improved another 300bps from 65% to 68%; operating expenses fell another 12% from 50% to 38% of revenues

Resulting EBITDAF increased from $9.6m to $26.7m (177% increase), or $17 million on a $20 million increase in revenues (~85% incremental)

Operating cash flow up 203% from $8.9m to $27m

10,896 customers – roughly the same as March year end (bleh)

MRR added however, has increased stronger than last year

ARPC unchanged YoY due to acquisition of CCB ($1,272)

Guided EBITDAF for the full year $54-$58 million; raised to $56-60 million as of recent update with new CEO appointment

Catalyst

Guidance on progress/return of customer adds on next call; announcement of Catholic church progress/win; capital allocation clarity