Funding Circle

Half Year Results 2024

5 September 2024

Transcript

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Disclaimer

This transcript is derived from a recording of the event. Every possible effort has been made to transcribe accurately. However, neither Funding Circle nor BRR Media Limited shall be liable for any inaccuracies, errors, or omissions.

Lisa Jacobs:

Good morning, and welcome to the Funding Circle Half Year 2024 Results presentation. I'm pleased with our performance in the first half. We're now a simpler, leaner, profitable business. We've seen strong growth in the first half and we remain on track to deliver against further growth and profitability. Today, I'll run through an overview of who we are, a summary of our H1 performance, and business updates before passing to Oliver for the financial review.

We're the UK's leading SME finance platform. To date in the UK, we have extended over £13.5 billion in credit to over 100,000 businesses. Our mission is to build a place where SMEs get the funding they need to win. When businesses like 15 grams coffee, featured on our front page, get finance, it has a big impact on the economy and communities through the UK. In 2023, lending through Funding Circle supported 95,000 jobs. We offer a quick and slick way to get finance to enable SMEs to borrow for the long term with our range of term loans, pay later with a line of credit to spread their bills and invoices, and spend using our newly launched Funding Circle cashback credit card. We offer our SMEs an amazing customer experience powered by data and technology, saving them time so they can get back to doing what they do best, running their business.

The market in which we operate is large and underserved. In the loan space, there are more than £80 billion in loans outstanding. In the payment space, there are over a trillion B2B SME payments made every year, of which £80 billion is on cards. Our customer experience continues to be strong, powered by our data and technology, and as we expand our product sets we're able to leverage the same quick and easy experience. 76% of businesses get an instant decision with applications taking six minutes, and that means our customer satisfaction levels are very high. Our MPS is 75. Our Trustpilot score is 4.6.

When it comes to assessing applications, our risk models are three times better at discriminating risk than the Credit Bureau Score. This level of risk discrimination enables us to say yes to more businesses and offer competitive rates whilst maintaining our strong loan returns. Our loan returns continue to deliver for our investors at 5 to 6% historically, with estimated net returns increasing in line with interest rates to about 10% in the last 12 months. Our consistent and resilient loan returns have attracted ongoing funding commitments in excess of £1.8 billion in our platform-funded loans business and a Citi facility of more than £150 million for our FlexiPay and card products.

The first half has been about reshaping the business to deliver an attractive business, simpler, leaner, and profitable with strong growth prospects. In March, we announced that we were in early stage talks for the sale of the US business in order to focus on nearer-term profitability and cash generation in the UK. The transaction closed on the 1st of July as we completed the sale to iBusiness funding for a gain on sale of 10 million pounds. I was pleased with both the speed and outcome of the deal. In addition, we restructured the business to deliver £15 million of annualised cost savings in 2025. As part of this, we removed about 120 roles in the UK business driven by focused actions on management layers, business prioritisation, and productivity, in part supported by GenAI tools. I was pleased with our execution against this and the benefits that we're starting to see flow through. We're now a simpler and leaner business.

Alongside these business changes, we have delivered well in the first half. Our total credit extended, the sum of our term loans and FlexiPay transactions was £918 million. This grew 25% half-on-half and over 60% year-on-year as we saw strong growth across products. Revenue growth continued the strong momentum we saw in 2023 with Group revenue growth of over 30% year-on-year and a profit of £0.5 million pre-exceptionals for the continuing business, achieving our profitability target a half early. Cash balances remain high at £164 million, roughly in line with the start of the year. We've improved our customer value proposition in both term loans and FlexiPay, delivering strong half-on-half momentum. In term loans, we've launched new products and product features. We also saw heightened market demand at the start of the first half. Combined, these contributed to a 17% origination growth from H2. In FlexiPay, our pay later line of credit products, we've crossed half a billion pounds in transactions with 57% growth since H2 '23 and have seen good traction with our linked pay later card, which is now responsible for about 10% of all FlexiPay transactions.

I remain excited about our future business. We've delivered well in the first half. Whilst the heightened demand we saw in the first quarter has normalised, we remain on track to deliver against our full year revenue guidance for both our loans and FlexiPay businesses. We've upgraded our full year profit guidance. On a group basis, we'll be profitable for the full year, not just the second half as previously guided. In the loans business, we have upgraded our PBT margin guidance to more than 12%, from 8 to 12%, and we remain on track to meet our medium-term 15 to 20% revenue growth per annum and profit guidance of more than 15% PBT margins. We have an attractive business with a strong growth outlook. We have seen a good share price reaction to the plan we set out and have been delivering against since March, but the board still believes that the share price undervalues the business. In March, I announced a £25 million share buyback. We are now £19 million through the programme and we expect it to conclude in Q4 this year. Today I'm announcing that following the conclusion of this £25 million share buyback program, we will launch a further program of up to £25 million, doubling our overall buyback programme.

Moving on to a business update. Two and a half years ago, I laid out our multi-product vision to enable businesses to borrow, pay later, and spend through Funding Circle. Our focus in the meantime has been on leveraging our existing strengths in SME credit, data, distribution, and brand to expand our product set to meet these objectives. This enables us to attract more businesses and have deeper relationships with them. Our business has grown over the last few years as we've expanded our product set from our term loan proposition into payment finance, and we're seeing the benefits of this expansion. We've added over 10,000 active FlexiPay customer accounts, our customers engage with us through FlexiPay more than once a month versus taking a term loan out every three to five years, and we're seeing both crossover in terms of customer groups and the ability to reach new audiences with different products.

Our product set is made up of three families, borrow, pay later, and spend. Our term loans business is where we started. We've been offering businesses term loans for 14 years, but we've not stood still over that period. Our Funding Circle loans have been supplemented with government-guaranteed loans, enabling us to serve a larger portion of businesses and attract a different type of lender, and our marketplace loans where we leverage our distribution and finance expertise by referring businesses that we cannot support to other lenders. Our term loans are the solution for our businesses who are looking to invest to expand their businesses, whether that is a climbing center in Hayes, expanding their space to include a cafe and fitness studio, or an Edinburgh-based foundry expanding their production and art gallery space.

FlexiPay is a pay later product and a solution for our customers' biggest pain point, cash flow management. It's the solution for our businesses faced with quarterly VAT bills that they want to spread, for our businesses with frontloaded cash flow needs like caterers, florists, for our businesses dealing with long payment terms from their customers or for our businesses buying stock in bulk, whether seasonally or to extract volume discounts. Last year we launched a FlexiPay pay later card, giving customers another way to access their line of credit. It's been successful in driving FlexiPay volumes with about 10% of transactions coming from the card, with the remaining 90% coming from direct bank transfers to suppliers. Since the launch of our card, customer feedback has pointed us to the addition of a cashback credit card for everyday transactions. We launched this in Q3. With this product, we intend to capture a share of the over £80 billion in SME card transactions. We're excited about the potential of this product, and I'll share further updates as this product matures. For now, it provides another example of how we're expanding our product set to serve more customers' needs whilst leveraging our existing capabilities.

In each of these product families, we're expanding what we're doing and evolving our customer proposition to drive increased volume and growth. In our term loans business in the first half, we successfully launched new iterations to our loan offering, including launching the latest government loan guarantee programme. In marketplace, we continue to find ways to support businesses. We expanded the lenders that we work with, the product range we have, and the integrations that we have with them through marketplace, which now accounts for more than 10% of our term loan origination. Our intention is to say yes to as many businesses as possible through the combination of our products and our partners' products. In our FlexiPay business, we've continued to see strong growth. We've crossed through half a billion pounds of total transactions. Our pay later card is enabling businesses to expand the ways and places that they can pay later. We've continued to improve our product features such as by adding increased flexibility for our customers, allowing shorter and longer repayment terms, amongst other application and billing changes.

Diving into a bit more detail on FlexiPay, transaction growth continues at pace with transactions increasing over 150% year-on-year. Importantly, we continue to see ongoing engagement with our customers as they use the product at least once a month. Businesses have now FlexiPayed more than 140,000 times as they use their line of credit to spread the cost of bills, invoices or buy stock in bulk. Our unit economics continue to deliver in line with expectations as we target a 12 to 18 month payback. As we've shared before, our FlexiPay unit economics have a J curve. Marketing and Expected credit loss costs are frontloaded, with revenue coming subsequently as customers use the product on an ongoing basis. Our upfront acquisition costs benefit from our brand and existing customer base and have been trending down as we have honed our marketing messages and channels. Product losses have remained in line with expectations. On an ongoing basis, we continue to see very stable usage rates between cohorts, as you can see in the chart on the right. I've shown this chart a few times now, and the trend continues to be consistent. Aggregate FlexiPay transactions grow at a fast pace with over £225 million of transactions in the first half, but what excites me more is looking at the recurring transactions on a cohort basis, and this is shown in the different coloured bars. Once the customer tries FlexiPay, it becomes part of their regular cash flow management toolkit, and we see stable recurring transactions. We expect to see this trend continue.

Now, I'll pass over to Oliver to talk about the overall financial results in more detail.

Oliver White:

Thank you, Lisa. Good morning, everyone. The successful execution that Lisa has spoken about is grounded in, and reflective of a good set of financial results.

The go-forward UK business, comprising term loans and FlexiPay, was 0.5 million PBT positive in the first half. This is ahead of our guidance of achieving profitability in half two. To ground us all in our financial presentation, I would like to draw out a few key items. Firstly, to minimise any confusion, we'll be referring to our Net Income as Revenue. This continues to be defined as Total Income plus Fair Value Gains or Losses, and less Cost of Funds.

Secondly, we are reporting the US business as a discontinued operation, given its successful sale, effective July the first. The loss of 10.1 million shown here reflects a H1 trading performance. The financial impact of the sale will be reflected in the full year results. The finance section of the press release includes a pro forma presentation. Finally, the results in this slide and in the following slides are presented before exceptional costs. £2.6 million of exceptional costs that are incurred in the half to support the actions taken to simplify and streamline the UK business. These exceptional costs primarily reflect redundancy in associated payments. I will now walk through these results in more detail.

Starting with the go-forward Group, revenue grows to £79.1 million, up 12%, half-on-half. H1 of '24 compared to H2 of '23, and is up 32% year-on-year. H1 '24 compared to H1 '23. Strong growth was seen in both term loans in FlexiPay. Adjusted EBITDA almost doubles half on half to £11 million, and the group is PBT positive of a profit of £0.5 million. As mentioned, this is before exceptionals. Term loans continue to be profitable, investment in FlexiPay scaling continues. I am pleased that the group has reached this important milestone of profitability earlier than originally anticipated. Net assets and cash remain robust, Funding Circle has a net asset value of £229 million, and unrestricted cash of £164 million, to which I'll come back to later.

The term loans business is a market leading platform from SME lending, has scale and is profitable and cash generative. Originations grew 17%, half-on-half, and 47% year-on-year.

Product innovation and launches, including the strength of the Marketplace offering, enabled continued growth in changing market conditions. As a reminder, we saw a significant step-up at originations in H2 of 2023 due to the actions we took in growth from product expansion. This included the successful reintroduction of our participation in the recovery loan scheme, alongside some post COVID market normalisation. H1 of 2024 has maintained the same momentum, with demand in the first quarter of 2024 being particularly strong. Loans under management or LuM stabilised as government guaranteed COVID scheme loans amortised down and were offset by new originations.

Revenue increased to £71.6 million, up 7%, half-on-half, and up 25% year-on-year. Transaction fee income growth matched originations, and servicing fee income tracked LuM with yields broadly constant half-on-half. Term loans continues to be consistently profitable, demonstrating sustained margin improvement with continued operational leverage being seen. Profit growth is exceeding revenue growth with adjusted EBITDA up 46% at £18.3 million, half-on-half. PBT was up 80% at £9.2 million. PBT margins increased to over 12%.

Now, to FlexiPay. FlexiPay top-line growth continues. FlexiPay transactions have increased to £226 million, 1.6 times that of H2 of '23 and 2.5 times that of H1 of '23. End of month balances follow a similar pattern, growing to £81 million. This performance is driven by the customer growth we've seen in the past 12 months, with our borrower base increasing from 7,000 to 18,000. As Lisa has shown, we have seen continued repeat usage from previous cohorts and this has allowed us to scale in line with our customer growth.

This momentum has resulted in its significant revenue growth with revenue of £7.5 million. This is over double that of H2 '23 and almost four times the level and a H1 of '23. This is driven by the increased customer usage mentioned, along with the flow through of pricing actions taken in 2023 when we increased the fee from 3.5% to around 4.9% in response to the rising base rate environment. AEBITDA was £7.3 million negative and PBT was £8.7 million negative, as we continue to invest in and scale FlexiPay. We've invested in technology and the FlexiPay team. Additionally, and as discussed, Marketing spend and the Expected credit loss provision, front-run income. Profitability for FlexiPay comes from predictable repeat revenue, alongside its attractive unit economics.

Operating expenses continue to be actively and tightly managed according to the strategic needs of each segment. Cost management is and will continue to be a major area of our focus.

In May, we announced actions to simplify and streamline our UK business. A further example of this would be the decision taken to consolidate in one rather than the two floors in our London office. The loans business is the most established segment and demonstrates operational leverage as we grow. Loans in half one demonstrated continued cost efficiency, with costs growing 1%, whilst revenue increased by 7%, half-on-half. PBT margins reached over 12%. We continue to scale FlexiPay. FlexiPay is demonstrating a strong growth trajectory, and as discussed, we are investing behind the product with some costs front-running revenue. Revenue was up 127% and cost was up 49%, half-on-half. Overall group costs grew £5.7 million versus half two of 2023. Salaries were held flat, with other costs up £1.6 million, which were primarily higher share-based payment remuneration reflecting the higher share price. An additional £2.8 million was invested in Marketing, and FlexiPay Expected Credit loss provision grew £1.3 million in line with the growth of the product. Included in the half, was some limited benefit from early execution of some of the restructuring actions.

Let's now turn to our term loan performance and the returns provided to our platform investors. The overall book has remained very stable with circa five to 6% average annualised returns over base rate, despite the changeable macroeconomic environment. Our credit risk management is proven, our borrowers are resilient and the loan quality is good. It should be noted that we haven't relaxed the credit tightening introduced in the second half of 2022. The returns demonstrate the robustness through the cycle of the asset class that Funding Circle has developed and other capabilities built to originate, underwrite, and manage these loans. We have maintained a forecast of loan returns in each annual cohort with the exception of the 2022 cohort. We have seen some continued ongoing economic deterioration impacting this cohort, and accordingly, we have forecasted a further reduction in the expected returns of 50 basis points to 5.1%.

As you will recall, the economy began 2022 with some anticipated COVID recovery, but was impacted by stresses including the energy price shock and the mini budget. This impact is isolated to the 2022 cohort. 2023 and 2024 illustrates how we've responded to the changing base rate environment and have been able to reprice into a steepening yield curve to maintain returns. A reduction in returns in '24 has been seen as the yield curve, has started to reduce and investor return expectations are moderated and we have passed this onto borrowers in the form of lower pricing. The robustness through the cycle of the returns is evidenced in the ongoing support of our institutional investors. Going into H2, we have £1.8 billion of forward flow commitments with seven investors supporting term loans. With FlexiPay, we've successfully renewed or senior facility with Citibank, and this facility now includes the cash back credit card.

Our balance sheet remains robust. Net assets are £229 million. The decrease in net assets of £18 million is driven by the trading profits and losses of each business unit, including the £10.2 million H1 drag of the US, which obviously will not recur. Additionally, the buyback, although EPS enhancing reduces net assets given these shares are purchased and subsequently canceled.

Unrestricted cash is slightly decreased by £5 million since December '23 to £164 million. Term loans continues to be cash generative and covers FlexiPay cash burn, noting that FlexiPay cash outflow is less than its reported losses, given the expected credit loss provision is non-cash. The US' operating outflows are offset by the monetisation of legacy on balance sheet loans. £8.2 million of the share buyback programme announced in March had been executed by June 30th. As of today, we've bought back over £19 million pounds of shares. The balance sheet is before the impact of the US sale, effective July the first, and the impact of this would be to increase both net assets and cash by around £8 million. Since June, we have received £8 million of net proceeds from the US exit and expect outflows of £17 million to complete the share buyback announced in March, and up to £25 million for the intended further buyback.

Additionally, we maintain a management buffer that as of June was £40 million. As our capital allocation framework shows, we are fully funded to deliver on our growth strategy, supporting FlexiPay to profitability and funding FlexiPay lines of credit. We are stewards of our cash and capital, where we evaluate how best to invest our deployable capital. We have strong returns in our existing business and we'll seek attractive returns on future opportunities. We'll invest in further growth opportunities as these become apparent and we'll invest where it makes the platform stronger. We'll periodically reassess the need for capital throughout the business and consider further distributions to shareholders as appropriate. This can be seen in the further £25 million share buyback that Lisa has announced our intention to commence.

I'm very satisfied with funding circle's financial performance in the first half of this year. We have delivered what we set out to do.

We've achieved a good set of results including delivering a profitable go-forward Group. Turning to our expectations for the full year. Term loans revenue growth remains at greater than 10% year-on-year. We expect to beat our margin guidance ahead of our previous expectations of 8 to 12%. I expect margins will continue or slightly improve on the H1 levels during H2. FlexiPay guidance remains unchanged. FlexiPay revenue growth will be three times out of the prior year, and FlexiPay losses will be similar to that of the prior year. Building on the H1 performance, the Group will be PBT profitable for the full year. I would now like to hand back to Lisa.

Lisa Jacobs:

Thanks, Oliver. As we've announced this will be Oliver's last set of results for Funding Circle. So I'd like to take the opportunity to thank Oliver for all that he has done for the business over the last four years. I'm delighted that Tony Nicol, our current finance and IR director, will be stepping into the CFO role from the start of the new year. He is well known to many of you and will be joining me on the roadshow.

In summary, we've delivered well in the first half. We have simplified and streamlined the business. We have delivered strong growth alongside profitability. We're continuing to improve and expand our product range and proposition for our borrowers, leveraging our existing capabilities in SME credit, distribution, and our technology.

We are in a strong position from which to continue on our growth trajectory.

Looking ahead, I'm excited about where we are. We operate in a large and underserved market with a strong and defensible data and technology advantage. This enables us to offer our customers a superior customer experience as we've continued to deliver strong and sustainable returns to our loan investors. Over the last few years, we have significantly increased our product portfolio, enabling us to serve more customers and more of our customers' needs as SMEs borrow, pay later, and spend with us. This provides us with multiple growth pathways.

As we continue to execute against this plan, we are building an attractive business with strong top-line growth with a 15 to 20% revenue CAGR alongside improved PBT margins, hitting more than 15% over the medium term.

Thank you. We will now take questions.