The US faith sector is estimated to take in about $US130 billion ($187 billion) in donations each year.
In the US, as in Australia and many countries, churches primarily generate their funds for operations from the donations of their members.
While you may envisage a plate being passed around the congregation and people depositing a few coins as it goes by, that is largely an image of the past.
Many church attendees believe in the principle of tithing, which means giving 10% of your income.
So a family earning $100,000 a year may well give $200 a week to their church.
They are probably not using cash. Credit cards, direct bank transfers and increasingly online methods, including mobile apps, are becoming the norm.
Pushpay (ASX: PPH) is a company that has not only capitalised on, but to some extent driven, this trend.
It was founded in 2011 by two Kiwis, Chris Heaslip and Eliot Crowther, who were sitting in church one day feeling awkward that they wanted to donate but didn’t have any cash.
They thought that making a donation should be as easy as downloading a song on your phone so they set about building a mobile giving app.
In the year to March 2019 that app processed $US4.2 billion in gifts. The business was listed on the NZE and the ASX in 2016 but now derives 98% of its revenue from the US.
Church is big business in the US. There are over 300,000 churches with an average of over 500 attendees each.
That includes over 1300 mega churches, defined as churches with weekly attendance of over 2000 people.
As they say, “everything is bigger and better in Texas”, and this is true of churches. The largest church in the US is Lakewood in Houston, with over 50,000 people.
Lakewood recently signed on as a Pushpay customer, which is consistent with Pushpay’s strategy of targeting medium to large churches. Indeed, 55 of the 100 largest US churches have adopted Pushpay.
Pushpay generates revenue from subscription fees and transaction fees.
Bigger churches pay bigger subscription fees and are also more likely to generate higher volumes of transaction fees.
Thus, while the number of customers only grew 5% for the year ended March 31, 2019, average revenue per customer grew 35%, resulting in operating revenue growing 42% to $US96 million.
Pushpay has now reached an inflection point.
To date it has been a fast-growing tech start-up and as such was spending more money than it was making. But that has now changed with the business achieving profitability and positive cash flow.
There have also been a number of board and management changes, with Heaslip stepping down from the role of CEO and becoming a non-executive director. He also sold $NZ45 million ($32 million) of his shares last week, but retains a stake exceeding $NZ60 million.
Now that the business has reached this more mature phase it is possible to value it using conventional techniques.
Of course, it is still based on assumptions about the future, but unlike some tech businesses where there is so much unknown that the assumptions are really guesses, the key variables for Pushpay are reasonably predictable.
Its expenses primarily consist of transaction processing fees, sales and marketing, and software development.
Revenue is harder to predict but there are some key indicators. First, customers tend to have high retention rates. Also once customers are established the revenue derived from them tends to grow as more church attendees adopt the platform for their giving.
Macro factors that will impact revenue include the number of people attending churches, the number of people giving and the magnitude of those gifts and the adoption of digital giving.
All of those factors have been trending upwards in the US recently.
The use of paper cheques has persisted for a lot longer in the US than in Australia, but now it is gradually being replaced by digital forms of giving, particularly among the younger generations.
All of these factors point to strong revenue growth for Pushpay, but countering that is the competitive environment. There are many other providers offering similar services, but most of them are vastly smaller.
Also there are the major payment platforms such as Paypal and credit card providers.
Pushpay is noted to be more expensive than many of the competitors. It has been able to overcome this by demonstrating to churches that their overall level of giving receipts will likely increase due to the app’s ease of use as well as the other supporting engagement tools that it provides.
It also is well regarded for the quality of its sales and customer service teams. But higher fees are always a point of vulnerability that competitors may attack.
Pushpay currently processes about 3%-4% of the total US church giving transactions. It is probably safe to assume it has a strong revenue growth runway ahead. The key questions is how strong? This will be the primary factor in determining how much you should be prepared to pay for the shares.
My analysis concludes that you would have to apply very bullish assumptions to justify a purchase for a price that was much above $3.
It is a high-quality business with no debt and should start to generate significant cash from now on. If it can be acquired for the right price it may be worthy of your faith.