$PPH released its interim results.

Their Summary

• Positive year on year growth in key metrics albeit at a lower rate than anticipated due to investment for future growth, the go-to-market strategy reset and broader macroeconomic factors presenting ongoing challenges.

• Operating revenue of US$103.0 million, up 10% on prior comparable period (pcp).

• Underlying EBITDAF of US$26.8 million, down 10% on pcp.

• Total Processing Volume increased to US$3.6 billion, up 2% on pcp.

• Increase in Customer numbers (+4% to 14,602 Customers compared to 30 September 2021).

• Strong operating cash flow resulting in net debt of US$35.1 million, down from US$47.2 million as at 31 March 2022.

• As updated on 28 October 2022, guidance for FY23 is Underlying EBITDAF of between US$54.0 million and US$58.0 million. Pushpay continues to forecast positive operating revenue growth but has lowered expectations to be between 4% and 8% for FY23.

• Medium-term growth outlook (>US$10 billion in Total Processing Volume and >20,000 Customers)

My Observations

For the first time in a while, we get to see a purely organic PCP.

Key message - growth is slowing, although they are holding to the story of seeing growth in FY24 from the current investments.

Progress in Catholic segment from 173 parishes up 153 to 326. (Total market is 17,000). Added only 4 new diocese where they are an approved vendor to 49 from 45 (Total market is 194).

New customer adds continue to slow: net addition is 94 to 14,602 (+0.6%).

Meanwhile, operating expense up 37%.

EBITDAFI/Revenue has fallen from 29% to 20% in PCP

NPAT US$8.8m down 54% from US$19.1m

OpCashFlow of US$16.9m down 47% from US$31.7m

Funny how these last 3 didn't make the summary.

Bottom line: PPH has matured and cost base has expanded as they try to drive growth, killing profit and cash flow growth.

I didn't even read on to the guidance and medium term outlook.

Perhaps the acquisition has saved ongoing holders from further pain down the track. A forward PE of 23 is not cheap for negative growth (that's the consensus E before updates)!

Disc:. Not held in RL and SM

PPH released their annual results today. In summary, growth was modest, organic growth on all metrics lacklustre and costs are rising (due to strategic remuneration reset and investment in headcount for future growth). Overall, results were broadly in-line with well-signalled guidance. Disappointingly, FY23 guidance is for lower EBITDAF indicating continued sluggish growth is expected with the full year impact of high headcount and wages eroding margins. If that was the full story, I would sell my remaining holding.

Here's the links to the release and the presentation:

https://cdn-api.markitdigital.com/apiman-gateway/CommSec/commsec-node-api/1.0/event/document/1410-02520355-3J74HUF5J26FV0G8Q7S261CNU1/pdf?access_token=0007rIit7tYr7BhJF81mQdguF0jO

https://cdn-api.markitdigital.com/apiman-gateway/CommSec/commsec-node-api/1.0/event/document/1410-02520359-5DCIK2D471IE7B73H6CBLU51NL/pdf?access_token=0007IP6992IGCY3dnYyX8cO2tLHU

However, a bright light is the progress in the Catholic segment. My remaining remarks will focus on that.

In little more than a year, PPH has 173 parishes as customers out of 17,000 (1%). More notable is that it is on the approved vendor list of 45 diocese. By my numbers that's about 25% of US dioceses. That is both impressive and important, as a lot of the supporting infrastructure for a parish is held at the diocese level, and a parish would be unlikely to adopt a system that was not supported at the diocese level. So the key to watch over the next year is what kind of feedback the parishes are giving. Diocese will love it, because they will love the data that ParishStaq provides. But adoption and value ultimately depends on uptake within the parishes. In 12 months we should be able to get some more granular insights on this, but it was too early to expect much at this stage given the long sales cycles and more conservative approach within this faith sub-segment.

Given this unfoliding opportunity, and the current undemanding SP mulitple and the fact that in the current environment this is a firm that delivers strong operating cash flows and strong organic free cash flow, I am not in a hurry to sell. PPH remains on my "under review" list, and no longer high conviction. So I will mull this over some more and am interested in views of the other Straw-people.

On CEO Molly, I felt the presentation was good. Less hyperbole and more transparency - perhaps an indication that she is growing into the role. A good balance of highlighting the opportunity over 5 years, while managing expectations over the near term. FY23 is soft - there is no hiding that. PPH says it is focused on profitable growth, but we are going to have to wait until FY24 to see it.

So, in conclusion, SP is probably close to fair value.

Disc: Held IRL and on SM. Recently reduced RL holding by 33% on the SP kick on rumours of takeover.

I found yesterday's Investor Day for PPH very informative. CEO Molly showcased several members of the management team. Most notably, it gave in-depth presentations of the strategy to serve the very large Catholic segment, including interviews with early adopting customers, which was something I'd been waiting to see. It was very illuminating to hear both a pastor and parish associate describe how PPH product adds value to their ministry work ("I don't finish the day with a pocket full of post-it notes"). (These will be great marketing videos for them!)

Slide 5 was at once exciting and scary - showing the scale/breadth of the ambition for PPH, while also raising for me the question about how resources will be allocated going forward and how PPH will strike the balance between revenue growth and margin expansion as the business inevitably becomes more complex. (I was reassured in the lengthy Q&A that the team are pretty focused)

https://pushpayinvestorday.gcs-web.com/register - recording is available here.

Living out one of their values of Excellence, I think the webcast was very professionally executed - seamlessly integrating live and pre-recorded elements. The Q&A session was also very good, with all members of the team appearing candid and relaxed. It covered a lot of ground running for c. 45 minutes.

Importantly, it was stated that PPH is not seeing any reversal of the transition to online due to COVID-19, albeit being careful not to make any disclosures being in the blackout period leading up to half year results. (This was reiterated 5-10 times across various questions.)

When asked about international expansion, Molly said that for now they remain focused on the USA because they continue to see a large remaining opportunity there. (She did note that they are already present in Aus/NZ/Canada, and that they asked about international expansion a lot). My sense is that we will see a strong focus on the US Catholic segment and then broadening beyond worhship into other verticals (e.g. not for profit). To another question, Molly stated that they still see a lot of cross-sell opportunity ahead, and implied we'd see more of this in the metrics at the haly year.

When questioned about the small church segment, Molly said that they had been positively surprised to see some small churches signing up for ChurchStaq at near to list price due to the attraction of the integrated solution.

They were asked why guidance hasn't been narrowed as we progress through the half. (Something Molly's predecessor was adept at doing.) Recall that the guidance is quite wide, given uncertainty about customer behaviour through COVID and re-opening. My expectation is that H1 is therefore tracking within guidance.

There are a reference to the war for tech  talent being very real - something we have also heard from 3DP and EVS recently.

There was a great question of Molly about whether PPH will continue to grow operating leverage or whether focus will shift to revenue growth. Molly pointed out that it is because of the strong operating leverage that PPH has been able to acquire CCB and Resi, but that going forward it would be more of a balance. M&A remains on the aegnda.

While I didn't gain many insights that directly drive my valuation, I came away with a better understanding of the strategy, the product and the leadership. All impression positive, supporting my thesis.

I have only covered some of the key points here. The recording is a must watch for all shareholders.

[Disc: Held in SM and IRL. I am a long term holder since 2017 (thanks Matt Joass!) I will take any future SP weakness as opportunities to increase my exposure.]

Resi Acquisition - report and reflections on the Investor Call

Today’s announcement was for me a surprise, as I suspect for many. I attended the call interested to understand the strategic rationale. I’ll not repeat any of the information in the ASX release, summarised well by The Strawman himself, but rather try to share some insights I took way from the presentation and the Q&A.

This is a significant move widening the digital offering to churches, as well as positioning for other verticals in the future. My sense is that PPH have gained confidence from the cross-selling experience across CCB and Pushpay legacy, where we have seen strong ongoing revenue growth even with few new customers added. The strategy appears to be to both acquire capabilities and customers to create new scope for cross-selling.

CEO Molly Matthews made reference to the importance of the acquisition to support the previosuly announced strategic push into the Catholic sector. She indicated that several Catholic Churches are already Resi customers, and that dealing with a one stop shop for digital solutions would be an advantage.

With 3374 total Resi customer and 11,000 PPH, we don’t know yet what the overlap looks like. This came up in Q&A and it is clear that Resi and PPH segment the market quite differently. Further clarity on this will be something to look out for at the next report.

The acquisition price (8.8x F21 revenue), the high cash component, and the absence of an earnout structure featured in the Q&A. Molly answered by making clear that key management of Resi are locked in for two years via the share component. However, more importantly, she indicated that she felt there was strong alignment on values – in building a leading tech platform for the faith-based sector. Without using the word “risk” she plainly stated that knowledge transfer into Pushpay will be a focus over the next two years (my words, not hers). In disucssing the deal structure Molly made clear that the Resi owners had run a competitive process. I recall her saying that the PPH offer had been chosen despite not being the highest cash component based on the preference of the owners for alignment on vision and values with PPH.

There was some Q&A about the rapid growth of Resi in 2021, and what the expectations for future growth will be. (This was a big question in my mind. With COVID lockdowns, churches the world over have implemented live-streaming solutions to allow the faith community to continue to attend services.) I don’t think this issue was addressed as fully as I would have liked. There was reference to many churches using basic solutions, like FB Live and Zoom, and wanting to create a better experience. There was also reference to mega-churches having events at multiple locations that are live streamed – a core solution of Resi. While all that is interesting, I think we have to be really clear that the 2020 to 2021 growth is an direct consequence of COVID, potentially one of those oft talked about cases of 5 – 10 years growth being compressed into a year. You just have to look at 2018 and 2019 numbers to see that. That said, Resi have acquired 2,500 customers in a year and that is an asset to PPH.

We didn’t get much visibility of Resi’s finances or economics. What we know is that it has achieved US$17m revenue and US$12.9m and that growth has been “bootstrapped”, i.e., funded out of operating cash flow. It is expected to have a minimal effect on FY22 EBITDAFI, beyond some minor exceptional items noted.

[As a side note: There is some simple analysis we can do on the acquisition in term of CAC and ARPU etc. but I didn't do this ahead of this report]

In conclusion, I tentatively buy into the strategic rationale of providing church customers with a “one stop shop” digital solution provider. The combination of PPH and Resi is a unique integrated offering. While it is a large acquisition for PPH, the business is now throwing off strong cashflow, so the debt will be worked through in a year or two and is not excessive.

Molly made clear that other M&A is in prospect, in that the time is right to build a compelling platform as well as customers to cross-sell to. As soon as PPH has got control of the business it would be great to get a strategy update, where we get greater insights into the customer base, the cross-sell opportunities and future plans, including when other verticals will be contemplated.

I hope other Members who attended the call will correct me if they had other or different take-aways.

As a footnote: brand integration has started quickly, with Resi already describing itself as “A Pushpay Company” on its website.

[Disc. Held in RW and SM. I remain a long term hold, as I like the strategic ambition that Molly appears to be developing, in continuity from Chris.]