Afternoon All
Promised to share some thoughts earlier. Took time to reflect, read, digest and repeat over several days.
My review of the PushPay FY2021 result (incl. Guidance provided for FY2022) has quite frankly resulted in more questions than answers. Maintaining conviction on PushPay as an investment has, IMO, always been easy, this supported by a 'faultless' trajectory build on each and every metric that really matters. FY 2021 was no exception and this together with the announcement on the planned expansion into the Catholic sector coupled with the continuance of the cross selling opportunities via the declared state on the product holding splits, natural to expect another stellar year in FY2022.
The 'soft' guidance provided for FY2022 signals a likely break in these trajectories and with that the risk profile shifts in the face of the unknown.
Some will remember, I wrote the script for the FY2021 results back in January, suggesting that the provision of EBITDA of the then latest guidance together with the narrative in the HY results, would allow us to contstruct a view on Revenue, Gross Margin and Opex. I raise this now, not in pursuit of any self-applaud, but to suggest that the underlying maths + narrative resulted in something which can IMO be considered credible. At the time, I opted for a beat on top-end of guidance by 1% ( Bullish me) . A 3% error. I provided for an increase of 5% on expenses. This came in flat at USD 65 m. Note : The results on Opex were reported by the Company as 9% up, but this came about only as a result of the Company re-stating the previous year's number/s. The assumption on GM % was spot-on at 68%, with the resultant fall-out appearing in the Revenue number. A 4.7% error.
Once again the Company have only provided guidance on EBITDA for FY 2022. I have opted to use the Guidance which excludes the preparation and associated costs with a launch into the Catholic sector. That just muddies the waters.
The mid point of EBITDA guidance for FY2022 (excl Catholic prep) is USD 68.5 m, a mere 16% up on that achieved in FY 2021 [ Revenue +40% ; GM % +3% ; Opex essentially flat ; EBITDA + 133%]. A serious disconnect when one considers :
* Cross Selling Opportunities : Theoretical opportunity to x-sell Churchstaq to 6474 Donor Mgt System customers and to x-sell Donor Mgt platform to 2172 Church Mgt customers. Sure, not everybody will sign up for the fully intergrated dual 'one stop shop' platform, but have we already reached that point of customer reluctance. ROI ??At the time of acquiring CCB, PushPay indicated the purchase would be earnings accretive in the first year (FY21) and fully accretive in FY22.
* Messaging via Narrative ...
" Strategic goal of being the preferred provider of mission critical software to the US Faith sector. PushPay continues to expect strong Revenue growth, as we continue to execute on our strategy to gain further market share...."
* Are we dealing with nothing more than PushPay being ultra- conservative with their 'first' guidance, given the uncertainty in early stage of a post Covid period where churches reopen etc. We know the Company pride themselves on delivery of Guidance, but if they have pegged this first 'conservative' number with the knowledge they have future opportunity to increase guidance, then quite frankly their track record on guidance delivery becomes watered down and even to the point of diminished value.
Let's get back to seeking out some pointers using the Maths to interpret what the mid-point of guidance could mean in terms of Revenue, Gross Profit & Opex.
A. Scenario where Gross Margin % maintained at 68% and Opex as a % of Revenue maintained at 36%.... [ Fall out depicted in Opex]
Revenue est. at USD 214 m ( equates to 18.2% YOY growth )
Third Party Costs at USD 68.5 m
Gross Profit at USD 145.5 m
Opex at USD 77 m
B. Scenario where Gross Margin % maintained at 68% and Opex contained at USD 70m (single digit increase vs FY21)...... [ Fall out depicted in Revenue]
Revenue est. at USD 203.6 m ( equates to 12.4 % YOY growth )
Third Party Costs at USD 65.2 m
Gross Profit at USD 138.5 m
Opex at USD 70 m
C. Scenario where Revenue is set at USD 214 m (as in A above) and Opex is contained at USD 70 m...... [ Fall out depicted in Gross Margin %]
Revenue est. USD 214 m ( so 18.2% YOY growth)
Third Party Costs at USD 75.5 m
Gross Profit at USD 138.5 m
Gross Margin % at 64.7%
Opex at USD 70 m
Some Questions
* Does the low EBITDA guidance provide for a known acquisition prospect which will cause a material extension in Operating expenses? I guess plausible if 'known' and Company provides for this in first Guidance for FY 22 so as to avoid having to reduce guidance once announced.
* Covid 19 induced a 'call for help' from Churches across the entire US faith sector. Large, Medium & Small churches were forced to embrace technology solutions as a means of survival. PushPay chose to expend their efforts almost exclusively ( customer count numbers tell the story) towards their existing customer base, including new customers via the CCB acquisition. I guess makes sense, particularly when you have just paid USD 86 m for an acquistion. Have PushPay competitors soaked up the market opportunity which is now materially impacting PushPay's runway for growth. Different selling to someone who has fragmented multi point legacy systems compared to someone who has now established technology efficient systems, albeit without the bells & whistles.
* Staying with Competitors, have Competitors ' closed the Gap' in terms of their offering/s. PushPay clearly positioned themselves as the Premium service. Has the value proposition been diminished ? Which competitors are financially stronger now and better able to accelerate their progress towards aspirational targets (even presenting as a threat to PushPay's customers)
On this point, PushPay insist on a contract whereas many Competitors have a 'cancel at any time' approach. PushPay were charging each customer USD 199 per month whereas a Company like Tithe-ly only charge USD 99 per month. For interest sake, if the price point is still at USD 199 per month, it would cost PushPay USD 13 m per year to align their fee with what appears to be an industry standard.
Is that what is being provided for ?
* The historic ratio of H2 Rev to H1 Rev of 22%. FY 2021 has just come it at 9.3%.
* Unearned Revenue was reported as 11.2 % of Total Rev. in FY 2020. FY 2021 came in at 7.8%.
* The proportion of Medium and Large Customers, as a percentage of Total customers, decreased to 56.3%, down from 58.9% a year earlier, this as a result of increased sales to small customers.
PushPay were willingly shedding small customers a year ago.
And finally, anybody recognise this ....
" In the long term , PushPay is targeting over 50% of the Medium & Large Church segments, an opportunity representing over USD 1 Bn in Annual Revenue"
Been in every Financial Report that I can remember. If you find it in any of the FY 2021 material, please let me know. Will this be similar to the reporting on Pushpay's success vs the Top 100 churches in the USA. Withdrawn and the last I heard the number was down to 52.
I said at the outset, more questions than answers. My read is that everything points to their competitive landscape changing. They have the scale and financial strength to counter this. Their messaging says they will grow via M&A as this is more time efficient than organic growth. The Company is debt free and reached a milestone of generating close to AUD 100m a year of free cash flow. Dont believe dividends feature in their plans , so this FCF will need to find a home. Based on track record, PushPay have excelled iro execution. For investors, the short / medium term risk has to be considered higher after assessing the FY22 guidance. For me, the entire FY 21 result is lost in terms of share price appreciation, which is disappointing.
I for one will await the AGM and will also be keeping an eye the Standard & Poor rebalancing of the ASX 200 on Friday 11 th of June. Not sure how many looked at the Register. Light on substantial holders ( was it 4 only), but populated with many new names. Christopher Fowler still a question.
As always, the above reflects my individual thinking and I welcome your comments and thoughts.
Rokewa
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