Pushpay doubles profit but faces new lower-cost competitor, Catholic challenge

New Pushpay chief executive Molly Matthews - the Kiwi-American company's first US-raised CEO. Photo / File

Pushpay has nearly doubled its full-year profit, and operating earnings and revenue ahead of guidance - but also warned of slower customer growth ahead, even as it forecasts higher operating earnings for 2022.

Shares were up 6.8 per cent to $1.72 (for a $1.9b market cap) in early trading as the stock recouped some of its recent losses.

The result comes as analysts are sharply split over the company's ability to handle two major challenges: new competition from cut-price digital giving startup Tithe.ly, and the challenges of expanding beyond its Protestant base into the multi-billion Catholic market.

The NZX-listed, Seattle-based maker of digital giving and church management software said net profit increased by US$15.2 million over the year ended March 31, 2021, from US$16.0m to US$31.2m, an increase of 95 per cent.

Ebitdaf was US$58.9m, from the year-ago $25.2m - and new CEO Molly Matthews said Pushpay is forecasting operating earnings between US$64m and US$69m.

Matthews noted on a conference call that Pushpay has met or exceeded guidance every year since 2014, but she the caveat that "uncertainty around Covid and the broader US economic situation remain."

Total revenue increased by US$51.3m from US$129.8m to US$181.1m, an increase of 39 per cent.

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 up-selling existing customers as they more took 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".

The company adds: "We anticipate digital adoption within our customer base continues to grow, albeit at a slower rate than before the Covid-19 driven acceleration."

On the conference call, CFO Shane Sampson said it was still too early to say if the jump 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.

Pushpay finished FY2021 with 405 staff, a 12 per cent reduction on its 2020 complement of 459.

Matthews did not directly address emerging, lower-cost competitor Tithe.ly, but did emphasise the integration of its 2018 acquisition of Community Church Builder, which gives Pushpay a broader ranger of features than managing digital giving. "Churches wanted an all-in-one solution" as they grappled with Covid and organised virtual congregations."

She elaborated to the Herald shortly after, "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."

The CEO added that strong cashflow had allowed Pushpay to fully repay the debt it took on when it bought Church Builder for US$87.5m. Operating cashflow increased 145 per cent to US$57.6m in FY2021.

Gross margin increased from 65 per cent to 68 per cent as staff numbers and marketing spend fell.

A new flock?

Matthews also reiterated Pushpay's plan to expand from its traditional customer base of US Protestant churches to the Catholic sector, adding new details.

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. A trial was underway 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."

Analysts were divided on the meaning of new competition for Pushpay on the eve of today's earnings report.

Pushpay more than doubled its market cap to $2.3b during 2020, but the share price has eased back during 2021.

There has been a general pull-back for tech stocks recently, but with its customer growth slowing, Pushpay has also faced questions about new low-cost competitor Tithe.ly.

Forsyth Barr's Jamie Foulkes sees Tithe.ly as a clear and present danger, and recently downgraded Pushpay to underperform.

But in a May 5 note, Craigs Investment Partners' Stephen Ridgewell said investors should keep the faith. The Craigs analyst sees the Tithe.ly threat as over-egged - although he maintained a neutral position on valuation.

In the faith sector, like so many others, the pandemic accelerated digitisation. With no plate to pass during a real-life service, congregations who had reconvened on Zoom adopted Pushpay.

In his April 9 research note, Foulkes - a former Pushpay bull - seemed to have lost his faith in the company. The analyst, who downgraded the company to underperform, said it had blown its chance to capitalise on its market dominance during the pandemic.

"Instead, our recent research suggests that over the past 12 months Pushpay has lost significant ground to its competition, with Tithe.ly growing its churches by 12,000 [in the first half of FY2021] while Pushpay grew by 309."

Foulkes said the premium-price Pushpay was losing out to lower-cost opposition (Tithe.ly is one third of the price), reducing its market share in large congregations from 58 per cent to 52 per cent over the year to March.

But citing rival statistics, Craigs' Ridgewell said while Tithe.ly is Pushpay's "highest-profile and fast-growing competition, it has not increased market share in large churches – indicating its growth is skewed to smaller churches not targeted by Pushpay".

Catholic opportunity?

Pushpay, which has made nearly all of its revenue so far from Protestant churches in the US, has recently said it sees Catholic congregations as an area for growth.

However, 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). And Foulkes notes the situation is further complicated by the fact that a lot of Catholic giving is funnelled through Catholic schools.

But here, again, Ridgewell takes the opposite stance.

"Pushpay appears well-positioned to take share against weak competition in the space," he says.

However, Ridgewell also acknowledges 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$7.0b.

On the schools question, Matthews told the Herald today, "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."

Pushpay shares have recently been on a slide against the background of the analyst debate over the Huljich family selling the remainder of their cornerstone stake, the company announcing its third CEO in 24 months as the Seattle-based Matthews took the reins in an internal promotion, and a general tech sell-off.

In mid-afternoon trading yesterday, shares were down 4.71 per cent to $1.61 for a market cap of $1.79b.

But Pushpay is still forecasting aggressive growth, and emphasising that it has moved well beyond its digital tithing roots with software that can manage communications and every facet of running a congregation.

Pushpay also announced today that former chairman and recent acting CEO Bruce Gordon would retire from the company's board at its annual meeting next month.