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Edited Transcript of PPH.NZ earnings conference call or presentation 5-Nov-19 10:00pm GMT

Interim 2020 Pushpay Holdings Ltd Earnings Call

AUCKLAND Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Pushpay Holdings Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce Patrick Gordon

Pushpay Holdings Limited - CEO & Executive Director

* Gabrielle Wilson

Pushpay Holdings Limited - Manager of IR

* Shane Sampson

Pushpay Holdings Limited - CFO

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Conference Call Participants

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* Ashwini Z. Chandra

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jules Cooper

Ord Minnett Limited, Research Division - Senior Research Analyst

* Matt Joass;Maven Funds Management;Chief Investment Officer

* Philip Campbell

UBS Investment Bank, Research Division - Analyst

* Stephen Ridgewell

Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Pushpay interim results investor briefing. (Operator Instructions) I would now like to hand the conference over to Gabrielle Wilson, Head of Investor Relations. Please go ahead.

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Gabrielle Wilson, Pushpay Holdings Limited - Manager of IR [2]

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Thank you, Ashley. Welcome to the Pushpay Holdings Limited interim results investor briefing for the 6 months ended 30 September 2019. Our interim report and interim results investor briefing presentation have been released to the NZX and ASX. Please visit our website, pushpay.com/investors/announcements, if you do not have a copy.

Before we begin, the information in this investor briefing is for general information purposes only and is not an offer or invitation for subscription, purchase or recommendation of securities in Pushpay. It should be taken into account in conjunction with and as subject to Pushpay's interim and annual reports, market releases and information published on Pushpay's website, pushpay.com. It includes forward-looking statements about Pushpay and the environment in which Pushpay operates, which are subject to uncertainties and contingencies outside of Pushpay's control.

Pushpay's actual results and performance may differ materially from these statements. It includes statements relating to past performance which should not be regarded as an indicator of future performance and may contain information from third parties believed to be reliable. However, no representations or warranties are made as to the accuracy or completeness of such information. All information in this investor briefing is current at the date of this investor briefing, unless stated otherwise. All currency amounts are in U.S. dollars unless stated otherwise.

Today you'll be hearing from our CEO, Bruce Gordon; and our CFO, Shane Sampson. Following Bruce's presentation, our CFO, Shane Sampson, and our President, Steve Basden, will also be available for questions.

During the presentation you will be in listen-only mode. Once the presentation has concluded, we will open the call to questions. We ask that questions come from analysts and investors only. Members of the press are able to organize interviews with Bruce following this briefing. Please get in touch with me, by e-mailing "investors@pushpay.com" and I will arrange this.

Thank you for your attention. I will now hand over to Pushpay's CEO, Bruce Gordon.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [3]

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Thank you, Gabby. Good morning and good afternoon, everyone, and thank you for joining us for Pushpay's investor briefing for the 6 months ended 30 September 2019. I'd like to welcome any new shareholders who have joined the call and take this opportunity to thank all shareholders for their continued support.

Now I'll turn your attention to the presentation slides that accompanied our interim report which was released to the market this morning. We are pleased to present a strong result for the 6 months ended 30 September 2019. Pushpay has delivered solid revenue growth, expanding operating margins, EBITDAF growth and operating cash flow improvements over the period.

Pushpay continues to focus on future-proofing the business by refining the strategies that will allow the company to realize its considerable potential over the long term while maintaining prudent financial discipline. As we continue our growth journey, our relentless focus on innovation, strategy and execution will lead to continued growth and success for the business.

Turning to our agenda, on Slide 3, today we will be covering Chief Executive update, a people and culture update, product update, finance update, outlook and questions.

Now on to Slide 5, looking at our key metrics for the 6 months ended 30 September 2019. I'll go into more detail on the main ones, but for now I would just highlight a couple. Pushpay increased its total revenue for the 6 months ended 30 September 2019 by USD 13.4 million when compared to the prior comparable period, from USD 44.0 million to USD 57.4 million, an increase of 30%. We increased our gross margin over the 6 months ended 30 September 2019 by 8 percentage points when compared to the prior comparable period, from 57% to 65%.

Pushpay increased EBITDAF for the 6 months ended 30 September 2019 by USD 12.7 million when compared to the prior comparable period, from a loss of USD 3.1 million to a gain of USD 9.6 million, an increase of 413%. Our NPAT improved by USD 10.9 million over the 6 months ended 30 September 2019 when compared to the prior comparable period, from a net loss of USD 4.4 million to a net profit of $6.5 million, an improvement of 247%.

We're excited today to report that our operating cash flow improved by USD 14.0 million over the 6 months ended 30 September 2019 when compared to the prior comparable period, from negative operating cash flow of USD 5.1 million to positive operating cash flow of USD 8.9 million, an increase of 274%. Our total processing volume increased by USD 676.3 million over the 6 months ended 30 September 2019 when compared to the prior comparable period, from USD 1.5 billion to USD 2.2 billion, an increase of 45%.

I'm also pleased to report Pushpay's total lifetime value of the customer base increased to USD 3.1 billion, up from USD 2.2 billion, an increase of 45%, over the 6 months ended 30 September 2019 when compared to the prior comparable period.

Now to Slide 6, customer growth. We increased our customer base by 485 customers over the 12 months ended 30 September 2019, from 7,420 to 7,905, an increase of 7%. Pushpay's strategy is progressing well, with modest growth in the number of new customers and a continued increase in the proportion new medium and large customers. Over the 12 months to 30 September 2019, Pushpay's proportion of medium and large customers increased from 54% to 56%. Unit churn driven by smaller customers continues to decline.

As we execute on our sales strategy, the company's primary focus is on increasing revenue by attracting a larger number of medium and large customers while expanding ARPC and increasing retention. As at 30 September 2019, 98% of Pushpay's customers were located in North America, which covers the U.S. and Canada, with the remaining 2% located in Australasia, which covers New Zealand and Australia.

Looking now at Slide 8, ARPC increased by USD 212 per month over the 12 months to 30 September 2019, from USD 1,060 per month to USD 1,272 per month, an increase of 20%. There are a number of factors which have contributed to an increased ARPC, which include: increased subscription fees from new and existing customers; a larger proportion of medium and large new customers; further development of our product set, resulting in higher volume fees; increased adoption of digital giving in the U.S. faith sector; and increased giving to religion in the United States. Pushpay plans to continue to grow ARPC by increasing revenue derived from existing customers and by continuing to implement its sales strategy to attract more medium and large new customers.

I'll now turn to Slide 9. Looking at our track record of success, this is something we are really proud of. Pushpay has a strong track record of delivering on guidance. Since initially listing in August 2014, Pushpay is pleased to have met or exceeded all guidance provided to the market.

Looking now more closely at some of our key metrics. Pushpay increased its total revenue for the 6 months ended 30 September 2019 by USD 13.4 million when compared to the prior comparable period, from USD 44.0 million to $57.4 million, an increase of 30%. These results were obtained through the targeted implementation of our strategy, the growing team capabilities and expertise and responsible investment into product design and development. Pushpay reiterates operating revenue guidance for the year-ending 31 March 2020 of between USD 121.0 million and USD 124.0 million.

As signaled earlier in the year, Pushpay's new customer acquisition for the first half of the financial year was lighter than in the previous year. The company has a number of initiatives in place to continue to drive new customer acquisition throughout the remainder of the financial year. We expect to see continued revenue growth as the business executes on its strategy, achieves increased efficiency and gains further market share in the U.S. faith sector.

Pushpay's diligent approach to optimizing gross margin has driven pleasing results. Pushpay increased gross margin over the 6 months ended 30 September 2019 by 8 percentage points when compared to the prior comparable period, from 57% to 65%. Although gross margin is typically weaker over the second half of the financial year, we now expect gross margin to stabilize at around current levels over the remainder of the current financial year. The company reiterates gross margin guidance for the year-ending 31 March 2020 of over 63%.

Pushpay increased EBITDAF for the 6 months ended 30 September 2019 by USD 12.7 million when compared to the prior comparable period, from a loss of USD 3.1 million to a gain of USD 9.6 million, an increase of 413%. Pushpay increased EBITDAF guidance twice over the 6 months to 30 September 2019. On 19 June 2019, the company increased EBITDAF guidance, which was previously between USD 17.5 million and USD 19.5 million, to between USD 18.5 million and USD 20.5 million. And on 20 September 2019, Pushpay further increased EBITDAF guidance to between USD 23.0 million and USD 25.0 million. Pushpay today reiterates EBITDAF guidance for the year-ending 31 March 2020 of between USD 23.0 million and USD 25.0 million, with an expectation towards the upper end of guidance.

Now turning to Slide 10. I know Shane will delve into this further, but I'm really proud of these next few metrics. So I'll touch on them briefly. While Pushpay increased operating revenue over the 6 months ended 30 September 2019 by 31% when compared to the prior comparable period, total operating expenses declined by 2%. As a percentage of operating revenue, total operating expenses improved by 18 percentage points, from 72% to 54%. Pushpay expects significant operating leverage to accrue as operating revenue continues to increase while growth in total operating expenses remains low.

Pushpay adopted best-in-class software tools and scalable processes early in its development. Combined with strong financial discipline, these investments will allow significant operating leverage to be achieved as revenue grows.

NPAT improved by USD 10.9 million over the 6 months ended 30 September 2019 when compared to the prior comparable period, from a net loss of USD 4.4 million to a net profit of USD 6.5 million, an improvement of 247%.

Operating cash flow improved by USD 14.0 million over the 6 months ended 30 September 2019 when compared to the prior comparable period, from negative operating cash flow of USD 5.1 million to positive operating cash flow of USD 8.9 million, an increase of 274%. Pushpay's increasing positive cash flow provides flexibility as we assess potential strategic acquisitions that broaden Pushpay's current proposition and add significant value to the current business.

I'll now turn to Slide 11. Total processing volume increased by USD 676.3 million over the 6 months ended 30 September 2019 when compared to the prior comparable period, from USD 1.5 billion to USD 2.2 billion, an increase of 45%. We expect continued growth in total processing volume, driven by a larger proportion of new medium and large customers; further development of our product set, resulting in higher (inaudible) usage; increased adoption of digital giving in the U.S. faith sector; and increased giving to religion in the U.S. Pushpay reiterates its total processing volume guidance for the year-ending 31 March 2020 of between USD 4.8 billion and USD 5.0 billion.

Moving now to Slide 13 for an update on our people at Pushpay. As we continue to execute on our strategy, attracting and retaining exceptional talent is critical to our success. Our customer-centric culture of continuous improvement focuses on achieving higher job satisfaction, increased productivity, improved employee retention as well as increased customer satisfaction.

On the 8th of May, the company announced a number of changes to its leadership team. Chris Heaslip resigned from his position as CEO effective 31st of May. Chris remains a nonexecutive director of the company.

Following Chris' resignation, Pushpay's board appointed me as CEO and Executive Director, effective 1st of June. I was previously the Chairman of the Board. Graham Shaw, previously Independent Director, assumed the role of Chairman of the Board, effective 8th of May. Christopher Huljich was replaced by Peter Huljich, who was previously an alternate director to Christopher as a nonexecutive director, effective 8th of May. Subsequently, Christopher was appointed as an alternate director to Peter. Daniel Steinman resigned as a director of Pushpay, effective 26 August 2019. On behalf of the Board and all of the management, I'd like to thank Dan for his invaluable contribution to the Board and for his continued support as a shareholder.

Pushpay was pleased to welcome Justine Smyth to the Board of directors as an independent director, effective 26 August 2019. Justine also joined as chair of Pushpay's Audit and Risk Management Committee and as a member of the Nominations and Remuneration Committee. Justine brings strong business experience from her background in listed company governance, financial performance, mergers and acquisition and taxation of large enterprises. Justine is currently the chair of Spark New Zealand, a director of Auckland International Airport and the chair of the Breast Cancer Foundation New Zealand. The Board is also actively searching for additional directors and is considering suitably qualified candidates with diverse backgrounds and experience.

I'll now move to Slide 14 to highlight our recent product updates. Pushpay continues to invest in its leading solutions, which simplify engagement, payments and administration, enabling our customers to increase participation and build stronger relationships with their communities. Our product design and development team employs an agile approach where our solutions evolve through collaborative effort, including ongoing customer feedback. We are really excited about the innovation that we continue to bring to the Pushpay suite of engagement and giving solutions.

Some of our more recent additions to the Pushpay solution from our spring product launch in May were detailed on Slide 16. They include Non-cash and Organisational Giving, Thank you by Fund, Content Cards, Impact Cards, Rich Push Notifications and Related Content.

Pushpay's August summer product release is detailed on Slide 17. This included a number of enhancements to existing features, focused on making giving information easier to access for donors. Pushpay now allows donors to access their own giving statements within our donor portal. Donors can also view their progress towards pledges and giving campaigns. We also released a new live polling feature called Attitude Polls, which allows customers to measure the sentiment of a group of people via a live poll within the app.

I'd like to share a little more information about several of our recent releases, Non-cash and Organisational Giving, Impact Cards, Rich Push Notifications and Related Content. I personally had some great feedback about these features from the customers I talk to. They love that Pushpay is so focused on building great-looking, quality, reliable software.

In May 2019, Pushpay launched Non-cash and Organisational Giving, which supports customers with recording all forms of giving. It is a common practice of business owners to make financial contributions through their own personal accounts and also through their businesses. Many large customers also receive noncash gifts, including stocks, vehicles and property. Customers are required to issue tax statements to businesses and include noncash gifts on tax statements. Supporting noncash and organizational giving is key to centralizing giving on the Pushpay platform and helps customers to streamline their gift recording and reconciliation process.

We released Impact Cards in May 2019 as part of our spring product launch. Impact Cards enable customers to showcase stories of people and their communities that have been transformed as a result of the generosity of their donors. For example, customers can use it to surface the results of recent ministry efforts or key statistics relating to a fundraising campaign that donors have recently given to.

This feature connects donors to specific initiatives they support, while also driving increased participation and engagement within customers' communities. Customers using Impact Cards see an average 18% increase in giving in the months they use Impact Cards.

We introduced a number of features in our May 2019 product launch which help drive user adoption, engagement and time spent on the app, including Rich Push Notifications and Related Content. Rich Push Notifications allow customers to effectively capture users' attention by including photos and video content in the push notification itself. Rich Push Notifications are showing a 350% increase in open rates compared to basic push notifications.

Once in the app, the Related Content feature makes it easy for users to find content by suggesting new pieces of new content that may be the next in a series, playlists or even events that may be of interest. Customers can now encourage app users to engage more deeply with their content, message and mission. Pushpay has seen a 55% decrease in app sessions under 40 seconds for customers using Related Content.

Our marketing and people teams have been creating something unique, which I'm really excited to share. Looking at Slide 18, in May we launched our on-demand learning environment, Pushpay University. Pushpay University is an exclusive website for customers to learn from leading experts in leadership, communication and technology, while also deepening their Pushpay product knowledge. Some of the course instructors include Cheryl Bachelder, former CEO of Popeyes; Erwin McManus, best-selling author, Mosaic Church in Los Angeles, California; Nona Jones, Facebook faith-based partnerships leader; Patrick Lencioni, best-selling author, founder and president of The Table Group; and Scott Harrison, founder and CEO of charity: water.

Following the launch of Pushpay University, over 1,000 users have created student accounts. Thus far, these students have enrolled in over 800 courses and have spent over 475 hours in the digital classroom, which has over 27 exclusive video courses. New courses are added to Pushpay University every month, offering students new opportunities to learn and grow, while further establishing Pushpay as a thought leader in the U.S. faith sector.

Turning to Slide 19, over the past 6 months we've also made significant enhancements to our home page website, pushpay.com, to better reflect Pushpay's solutions and commitment to serving customers in the faith sector. The new home page welcomes visitors with new imagery, easy-to-navigate product descriptions and access to Pushpay's Customer Success representatives.

Following the launch in July 2019, visitors to Pushpay's enhanced home page are spending, on average, 4% more time on the page. In addition, new testimonials page houses our customer stories, which further demonstrate the impact that is enabled by Pushpay's solutions.

Moving to Slide 20, I'm really excited to share some insight into one of our newest employee-led initiatives, Pushpay Cares, which launched in August. The Pushpay Cares program enables staff to give back to the wider community in meaningful ways through a variety of events arranged in partnership with key customers and philanthropic organizations.

The company's first Pushpay Cares event was held in Seattle, Washington. Pushpay employees partnered with our customer, Churchome, to deliver materials, food and services to many of Seattle's transient and homeless residents. This event was followed by clothing drives, a community event partnering with one of Pushpay's newest customers to serve the people of Snoqualmie Valley, Washington, and a beach cleanup project in Auckland, New Zealand.

With Pushpay Cares we have taken an additional step to support individuals in need and make a difference in our local communities, an opportunity which is both humbling and rewarding for our teams.

With that, I'll now hand over to Shane Sampson, our CFO, for a financial update. Thanks, Shane.

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Shane Sampson, Pushpay Holdings Limited - CFO [4]

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Thanks, Bruce. Good morning and good afternoon, everyone, and thanks for joining our call today.

Turning to Slide 22, we are pleased to have achieved revenue growth of 30% relative to the prior comparable period, to $57.4 million. Expenses, including third-party costs, grew at a much lower rate of only 2%, to $48.9 million. As a result, we achieved a profit before tax of $8.5 million, an improvement of $12.6 million, or 306%, on the prior comparable period.

Comprehensive profit was $3.7 million, an improvement of $9.5 million, or 164%, on the prior comparable period. Comprehensive profit was lower than net profit after tax as a result of a foreign currency translation adjustment of $2.8 million, which was the result of a lower New Zealand dollar against the U.S. dollar, reducing the value in the presentation currency of our New Zealand dollar-denominated assets; in particular, the deferred tax benefit which relates to brought-forward tax losses and deferred research and development expenditure in New Zealand.

The next slide shows more detail on the key components of the net profit. Gross profit increased by 49%, to $36.5 million, reflecting the growth in operating revenue and the impact of the gross margin improvement program. Operating expenses declined by 2%, to $30.2 million, reflecting the efficiencies achieved.

Looking at Slide 34 (sic) [24], we have shown EBITDAF as a percentage of operating revenue at each half. We achieved positive EBITDAF of $9.6 million, an improvement of $12.7 million, or 413%, on the prior comparable period. Key drivers were the solid revenue growth, significantly improved gross margins and slightly lower operating expenses.

The previous trend of improvement has continued, with EBITDAF of 17% as a percentage of operating revenue. We expect this ratio to continue to improve, with cost centers purposely held around current levels, while revenue continues to grow.

Turning to Slide 25, subscription revenue grew by 22%, to $15.3 million, and processing revenue grew even more strongly, up 35% to $40.8 million, reflecting the higher average revenue per customer and the higher average number of customers. The higher average revenue per customer is driven both by the increasing mix of large and medium customers relative to the prior comparable period and the continued growth in the volume processed by existing customers. Over all, operating revenue grew by 31%, to $56 million.

Third-party direct costs, however, increased by only 7%, to $19.6 million, as the increased processing volume was partially offset by the improved processing cost base. Processing costs as a percentage of processing revenue reduced from 55% in the prior comparable period to 43% as a result of our margin improvement program. The significant reduction in processing costs as a percentage of processing revenue achieved in the second half of the prior financial year drove an improvement in the gross margin percentage, with 57% in the prior comparable period, to 65%. The gross profit improved by 49% to $36.5 million as a result of the increased operating revenue and higher gross margin percentage.

Continuing to Slide 26, the margin improvement program's impact can be seen in the increase in the blended gross margin, to 65%. We expect processing costs as a percentage of processing revenue to be around the same level in the second half, which combined with the seasonally higher processing volumes will reduce the blended gross margin fractionally from the first half.

Looking at operating expenses, on Slide 27, operating expenses declined by 2%, to $30.2 million. Reductions were achieved across all functions, other than Customer Success, as we continue to drive efficiency initiatives in the business. In Customer Success, we continue to invest in the customer experience while achieving efficiencies in our processes.

Moving to Slide 28. If we look at the graph of operating expenses, the solid operating revenue growth and slightly lower operating costs, resulting operating expenses as a percentage of operating revenue improving to 54%, from 72% in the prior comparable period.

Looking at Slide 29, the business generated strong operating cash flows of $8.9 million, up 274% on the prior comparable period, reflecting the solid revenue growth and modest increase in expenses, including third-party direct costs.

With building cash on the balance sheet, we have put and priced $13 million in short-term investments, which are showing in the financing cash outflows and has resulted in cash and cash equivalents declining slightly.

The new line in the cash flow relates to the accounting impacts of IFRS 16 which requires us to treat a portion of our [repayments] as a financing cash outflow, as it reduces the notional lease liability.

Slide 30 sets out the operating cash flows of the business by half year. Our continued investment in product development and customer acquisition has been more than offset by the growth in revenue from those investments have generated, resulting in steadily improving operating cash flows. Strong operating cash flows position us well for any future investments.

Turning to Slide 31, comparing the 30 September 2019 balance sheet to the 31 March 2019 balance sheet. The 2 key points to note are that combining cash and cash equivalents with short-term investments we've seen an improvement of $9 million, in line with the operating cash flows, and the change in treatment of leases under IFRS 16 has resulted in an increase in liabilities on the balance sheet, of $3.6 million, and a similar increase in assets on the balance sheet for the right-of-use assets.

With that, I will now hand you back to Bruce, who will discuss the outlook,

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [5]

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Thanks, Shane. Pushpay expects further solid revenue growth as we continue to execute on our strategy to gain further market share in the medium term and believes this is the best way to maximize shareholder value. From a strong financial position, we will continue to balance expanding operating margin with opportunities to increase revenue growth. We are particularly focused on ensuring efficiency remains high, while maintaining cost discipline throughout the business.

As we continue to execute on our strategy, we are also actively evaluating potential strategic acquisitions that broaden Pushpay's current proposition and add significant value to the current business.

Turning to Slide 33, Pushpay reiterates its guidance for the year-ending 31 March 2020: operating revenue of between $121 million and USD 124 million; gross margin of over 63%; EBITDAF of between $23.0 million and USD 25.0 million, with expectation towards the upper end of guidance; total processing volume of between $4.8 billion and USD 5.0 billion. In the long term, Pushpay is targeting over 50% of the medium and large church segments, an opportunity representing over USD 1 billion in revenue.

Our success would not be possible without the expert direction from my fellow directors, successful execution from management and the hard work of my dedicated colleagues.

Thank you for your attention and your support. And with that, I'll now hand over to the Operator to open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Stephen Ridgewell with Craigs Investment Partners.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [2]

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Congratulations on the really strong operating leverage that was delivered. I've just got a few questions. First of all, on the front book we can see that new customer growth was up, although I presume it was driven by lower churn and, like, smaller customers year-over-year. And if we look at the medium and large church segment, new customer growth was down [to about 39%], net growth. Are you able to clarify at a high level whether that slower growth in the mid/high segment is due to slower acquisition or any kind of change in churn rates at that segment?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [3]

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Bruce, here. So we indicated at the annual meeting that the first few months of the year had seen lower than previous year for the new acquisition, and we put some color on that at the time that we were seeing some of the larger churches just take a little longer in the software decision buying cycle. And I think that's bearing out through the year. So we're not losing those opportunities to others; it's a case of sort of essentially being able to close them when they're ready to make that buying decision. Generally, our churn is holding very stable across each of the segmentation of large, medium, small.

So Shane, did you want to add anything?

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Shane Sampson, Pushpay Holdings Limited - CFO [4]

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It's that -- so you had -- Churn has been just fractionally better. So I'd say sort of consistent with the ranges we've previously given, but probably fractionally better on the previous period, say, in large and medium. And small church, we have seen a bit of an improvement. I think we've indicated on the last few calls we've seen that percentage of churn falling.

We did also have some more small church acquisition in the period. It had very little incremental cost for us and we just saw that as a tactical opportunity from a competitive point of view, given our large database of churches, to pick up some more small churches. And from what we can see so far, the ones we're picking up are fairly healthy.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [5]

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That's helpful. The thrust of the question is there has been some commentary or speculation that churn had picked up in some segments. And so that was the rationale for the question, but I do appreciate the clarity. So just to call it out, Shane, you're still looking at kind of much better than 90% retention rate amongst installed customers in that medium and large segment?

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Shane Sampson, Pushpay Holdings Limited - CFO [6]

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Absolutely. I think we've generally indicated in the range of 5% to 6%, from a customer number point of view 5% to 6% in large church and 10% to 12% in medium. So blended, it's definitely under 10%.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [7]

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And just in terms of the initiatives to, if you like, drive improved new medium and large church customer acquisition, Bruce, are we seeing any green shoots there? Or is it just too early to talk to things like changing the structure of the Summit conference to a little bit more regional road shows and the like? Are you seeing any results in the current quarter from those changes? Or do you need a bit more time?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [8]

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I think green shoots is a good way to put it. We're certainly seeing consistency in terms of front book net add. And the focus has been on, I guess, a repurposing of spends primarily and a focus on the effectiveness of that spend. So some of those things do take time.

And you mentioned Summit. It's a good example, where historically that has been largely a brand build exercise. Very successful in establishing Pushpay as a thought leader in the faith sector, but not so effective as a new business closing tool. So our pivot is to do more intimate and smaller thought leaders events, and they roll through the year. They're performing well, but essentially they happen as the calendar rolls out. So I think it's fair to say I'm happy with the effectiveness of our pivot in some of this area, but as you know it's still quite early. It's only 4 months into my tenure.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [9]

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I appreciate that. And just on the cost equation, with indirect cost down 2% year-over-year, obviously again at the Investor Day you talked through in quite some detail with some greater efficiencies that the business had been getting since you took over the reins. Broad brush, if we sort of look at $32 million as the number for first half indirect costs, what kind of step-down, given we're already 5 or 6 weeks into the second half, what kind of step-down would you be expecting in indirect costs at this juncture?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [10]

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For the balance of the year I think we're looking that the cost base will reflect pretty much in line with this first half, I think is a good way to look at it, Stephen.

Again Shane, did you want to add anything?

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Shane Sampson, Pushpay Holdings Limited - CFO [11]

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Yes. I think we're making sure we have still got some capacity to invest if we need to. We think, however, we can fund most of the initiatives through reducing existing expenditure, given the success we've had so far in driving efficiency initiatives. But we just want to keep that ability up our sleeve to invest more if we get the opportunity. So we're expecting similar to the first half, as Bruce said.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [12]

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Great. And maybe just one last one from me, on competition. There's been a -- I think you did call out some competitors, [at least today]. But just interested in your views on Blackboard's recent announcement that it was adding a kind of payments app to its ERP. And clearly, they have aspirations in the church segment. Are you seeing anything from (inaudible) in terms of an attempt to cross over into the, across the church space? And I guess how do you defend against that? Or are there any particular steps that Pushpay can take to defend against that move?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [13]

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Well, we're not seeing them in market, first of all. If you look behind their releases, they've stated on a couple of occasions that they're primarily focused on the Catholic market. We tend to be predominantly in the Protestant space today. And I think it's a positive with them coming into the market and with our aspirations to segment more of our customer database, including accelerating growth within the Catholic market. So my personal view is having 2 strong brands educating what is a reasonably conservative marketplace is a positive. It helps legitimize and educate that church software solutions are available.

In terms of competitors specifically in the mobile giving and engagement space, when we look across the landscape we're very respectful of competition and obviously keep an eye on what's happening. But I think we're very confident around the head start we have. The moat that is built around our solutions today and the fact that we continue to invest and innovate across giving and engagement helps us to keep at the forefront of solutions for the market. So we're not unduly concerned, but we are always mindful.

We're not at face value losing business to any entrants. If anything, it's a conversation we've had several times over the years, and that is churches move at the speed at which they make decisions. And so the status quo staying with what they're doing, be it a spreadsheet, be it a basic ChMS, that's more our challenge today, is education to modern technology.

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Operator [14]

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Your next question comes from Ash Chandra with Goldman Sachs.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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Just a couple of quick questions, if I could. When I look at the processing volume that you've indicated you've done in the first half of $2.2 billion and then sort of tie that in to your reiterated $4.8 billion to $5 billion for the full year, it implies a seasonal skew that would be reasonably conservative. I think in the past your kind of first half/second half processing volumes have been 40/60. This guidance would otherwise imply 45/55. Is there any reason why the seasonality is going to be less pronounced first half/second half this year than what we've seen in the past? Because your first half, $2.2 billion, really should sort of gross up closer to a $5.5 billion number for full year.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [16]

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Shane, are you happy to take that?

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Shane Sampson, Pushpay Holdings Limited - CFO [17]

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Ash, just sort of doing a very quick look at it from my point of view we're probably seeing it as I think kind of high 50s last year in terms of that weighting and kind of lower 50s this year. So not quite as extreme as you indicated there, but definitely seeing seasonal impact. However, also historically there's been, if you like, the proportion of new churches coming on board ramping impacts that, as well. So we are seeing that as being slightly (inaudible), plus more mature cohorts. But over all, we're seeing that as being relatively, a couple of percentage point movement order of magnitude, rather than 10% in terms of the weight of the 2 halves.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Okay. Terrific. That actually helps clarify that. And then -- I've got a few, but I'll just add one more before I get back in the queue. On your gross profit margin comments, you did 65% in the first half, which is obviously very strong, and you articulated that you expect that to stabilize. But the actual commentary is maintained as greater than 63%. So I just sort of wanted to understand how to reconcile that. Like, why shouldn't it be 65% if you're effectively saying you expect it to remain the same?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [19]

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Thanks, Ash. Shane, are you good with that?

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Shane Sampson, Pushpay Holdings Limited - CFO [20]

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Ash, I guess one thing we decided was we're definitely sitting above 63%. However, we didn't feel it was necessary to update it, given it was a "more than." I think, as I just noted in my part, we're seeing the processing margin stabilize. However, you will still see a slightly lower second half just with the volume of [pricing] that comes through. So if you like, the more pricing comes with some cost of sales, the bigger the pricing number. It has a slight impact on the blended gross margin. So we'll certainly still be above 63% seen in the second half, as well, but it will be fractionally lower than the 65%.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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Okay. Okay. Actually, can I be cheeky and just ask one more before I jump off? With respect to the front book growth, last year when you gave the cohort analysis it showed that the front book revenues added in Fiscal '19 were sort of in the order of just over USD 9 million in new revenues. At the halfway mark of this year, just to give us some context for the slower growth that you're experiencing, are you in a position to be able to articulate kind of what run rate you might be at relative to last year's $9 million?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [22]

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We are not providing that at this time. I think with December in mind, as well. Shane, what are your thoughts?

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Shane Sampson, Pushpay Holdings Limited - CFO [23]

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I think we're keen to avoid getting into having to kind of forecast it at each line item in the cohort tables. So at the moment we're just focusing on the guidance we have given and not guiding to that level of detail.

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Operator [24]

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Your next question comes from Phil Campbell with UBS.

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Philip Campbell, UBS Investment Bank, Research Division - Analyst [25]

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Just a couple of questions from me, again just kind of following on from the kind of guidance statement. I'm just wondering whether that revenue growth of about 31% in the first half, the kind of guidance obviously is implying a bit of a slowdown in the second half. Again is that just kind of being a little bit conservative around December? Or is there anything else kind of going on in that second half that we're not aware of?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [26]

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Shane, you good with that?

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Shane Sampson, Pushpay Holdings Limited - CFO [27]

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Yes. Obviously, as we grow and the base becomes bigger, the percentage just declines a little bit. And that combined with the large front book means that rate of growth will be a little bit lower. So based on our guidance we're a bit under 30% in the year as a whole. It's a little bit lower in the second half.

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Philip Campbell, UBS Investment Bank, Research Division - Analyst [28]

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Great. And Bruce, just wondering if you had, in terms of people whether you had made any announcements sort of with regard to the new marketing person in Seattle.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [29]

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No. I have a highly experienced Pushpay leader in role at the moment. He has a very deep faith market understanding, and he's helping to reshape marketing. We're having a very deliberate focus on reconnecting more tightly with our target market. And so he's doing a nice job in there. And just as we progress through the year I'll just consider our needs as we go forward as we reshape the marketing function and continue to drive the effectiveness that we are.

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Operator [30]

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Your next question comes from Jules Cooper with Ord Minnett.

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [31]

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Just 2 questions from me. I guess, Bruce, with 6 months under your belt and I guess just following on from that sort of guidance questioning earlier, but we've seen the FY21 consensus numbers move lower since April, and I guess I think they're sitting at around [$140 million] compared to Bloomberg, which would imply a pretty slow growth into the next year. Now I just wondered whether you, knowing the visibility you've got in the business, remain comfortable with that expectation that analysts are setting out there, on average, or whether you see that as being conservative, either upwards or downwards. There's one follow-on, too.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [32]

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Jules, as you know, we don't provide guidance out past this financial year. So we've reiterated guidance on this year. And I think it's a process or function of extrapolating what we've made available.

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [33]

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Right. Okay. Well if we just then look at the guidance you have maintained that appears to be very long term, the target to achieve over 50% share of the medium and large church segments, and you actually quote a revenue number of close to $1 billion, if that FY21 revenue growth is, let's say it's close to the mark, it looks like it would take you 15 years to achieve $1 billion at a 15% revenue growth. Now when you make that comment, I wonder if you could maybe just talk around some of the assumptions why that's still seen as relevant. It's been there for a number of years and also if you can maybe give us a sense for the time line. Because it certainly feels like 15 years would be a long time. So we'd have to be seeing some sort of acceleration to achieve that on any shorter horizon. I just find it hard to reconcile that $1 billion with what we're sort of seeing being forecast and the performance of the business.

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Shane Sampson, Pushpay Holdings Limited - CFO [34]

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Should I (inaudible)?

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [35]

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Well, Shane, I was just going to say we're providing that, it's an aspirational target for the long term. We've got some good tailwinds around transition of offline to online giving, processing. Acquisitions, clearly, will play a role as we expand our product offering to the market.

So Shane, did you want to add something specific?

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Shane Sampson, Pushpay Holdings Limited - CFO [36]

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Well, actually, it was similar to what you (inaudible), but particularly emphasizing that we have been clear that we do see some extension of our capabilities through mergers and acquisitions as being part of what will help really drive acceleration, particularly in the medium church space.

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [37]

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Okay. And any sort of time frame you would sort of call "long term?"

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [38]

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Not specifically. I think it's a well-accepted term, that it's not in the next 2 years and it's...

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [39]

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Not in the next 15.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [40]

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But not in the next 15.

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Operator [41]

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(Operator Instructions) Your next question comes from Matt Joass, with Maven Funds Management.

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Matt Joass;Maven Funds Management;Chief Investment Officer, [42]

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Just keen to double click into the small customer number this quarter. It looks like it was actually an addition of around 90 churches, which is the first addition since mid-2017. So just keen to understand that a bit more. Is that the change in strategy? Or what's going on?

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Shane Sampson, Pushpay Holdings Limited - CFO [43]

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Matt, just as I indicated before, it's a combination of we have seen churn go lower, but we did also capture some more small churches in this period. So we don't tend to invest (inaudible) marketing money, but we were looking at we have got a very extensive database of churches in the U.S. And so I think we took the opportunity to drive some promotions out to that database. So minimal incremental cost. It's still priced above where those competitors in that small church space sit. So we just thought it was a good way to take potentially some of the more higher-quality small churches out of the market so they weren't available for those small competitors, and incrementally for us a positive.

So the combination of dropping churn and higher gross new small churches is the driver of that net increase in small church, which as you noted at this time since during 2017. I think that that's good.

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Matt Joass;Maven Funds Management;Chief Investment Officer, [44]

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Right. And do you see that being kind of something you could continue to do? Or is it largely a one-off from that kind of book that you had?

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Shane Sampson, Pushpay Holdings Limited - CFO [45]

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We're obviously, as I said, we're not looking to spend a lot of money. So we're predominantly just leveraging our marketing database and internal polling. So I guess time will tell whether that dries up. But at the moment we're still seeing that as being a worthwhile initiative to continue. If you like, it's not our strategic focus, but it's driving incremental earnings for us and obviously from a competitive point of view takes a little bit of the cash flows out of those businesses, I guess, in the small church space.

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Matt Joass;Maven Funds Management;Chief Investment Officer, [46]

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Got you. Two more quick ones for me. Just the tax rate. I just very quickly looked. It might be around 23%, something like that. Just curious how you see that, going forward, given the accumulated losses. Are you able to use those to offset kind of (inaudible), now that you're tipping into profitability? How do you think about the tax rate over the next couple of years?

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Shane Sampson, Pushpay Holdings Limited - CFO [47]

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So the tax rate, so just under 24% in the period, and that includes accounting for -- we had profits in New Zealand, easing into the deferred tax benefit that we booked last year. So if you like, the cash rate is a lot lower.

We probably will be a little bit higher than the 24%. There's a little bit of finessing in terms of with the way the transfer pricing regime works, what portion of the earnings is in New Zealand versus the U.S. And as the portion in New Zealand goes up, it might go from slightly under 24% to slightly above 24%. But we think that's a reasonably indicative kind of a range from a P&L point of view. From a cash point of view, the tax in the period was quite a bit lower, easily the New Zealand side being covered by those losses.

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Matt Joass;Maven Funds Management;Chief Investment Officer, [48]

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I see. And last one for me, just around the Months to Recover CAC increase from 15.3 to 21. So I think it was the first time I had seen it broken out to a number, just being less than 18 before. But just curious to understand that a bit more and how you see that tracking.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [49]

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You're on a roll, Shane.

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Shane Sampson, Pushpay Holdings Limited - CFO [50]

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So as we mentioned, we've obviously had lower front book growth, and that's really the key driver of the ratio changing. So the ratio is effectively driven by the costs to sales marketing and our implementation costs in the period compared to the value of customers acquired. So while we added a lot of more small churches, if you like, the customer value of those is small.

So over all, the value of customers added (inaudible) reduced sales and marketing costs by 2% over the prior comparable period, even with an increase in the spend we've got on our account management team that deals with existing customers. So if you like, the CAC increase is about that lower front book cohort, rather than about a cost increase.

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Operator [51]

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(Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Gordon for closing remarks.

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Bruce Patrick Gordon, Pushpay Holdings Limited - CEO & Executive Director [52]

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Fantastic. Thank you. Thank you, Ashley.

So once again I just want to thank all of the investors for your ongoing support. And this information will be available in due course. Gabby, do you want to give us a quick update on the recording?

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Gabrielle Wilson, Pushpay Holdings Limited - Manager of IR [53]

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Thanks, Bruce. If there are any additional questions or for press, please contact me by email at "investors@pushpay.com." And the playback of today's investor briefing will be available within the next 24 hours, for 30 days. The playback can be accessed by dialing 0800.122.135 in New Zealand. And for all other international locations, please dial +64.9.950.7088. The playback PIN number is 10001428.

We'd like to thank you again for your time, and have a great day.