Funding Circle Plc: Full Year Results

Funding Circle Holdings plc

Full Year 2022 Results

Embargoed until 7.00am, 02 March 2023

THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014

Funding Circle Holdings plc (“Funding Circle”) today announces results for the year ended 31 December 2022.

Lisa Jacobs, CEO at Funding Circle, says:

“We’ve made good progress against our medium-term strategy, expanding our reach in distribution and depth in products. We introduced lending as a service in the US, and expanded our product set through the launch of super prime loans in the US and near prime loans in the UK. We have continued to see strong engagement with FlexiPay — so our customers can now not only borrow, but pay and spend with Funding Circle for the first time.

"I’m really pleased with how the business reacted to the evolution of the economic environment and transitioned back to commercial lending, with government schemes phasing out in 2022. Overall we delivered a solid financial performance. We were prudent in our lending in 2022, and will continue to be whilst conditions remain challenging — as expected in the UK in 2023, where we have pushed out our 2025 income targets by a year. We're confident in the US and are excited about new FlexiPay growth over the medium term. Having built strong foundations to deliver against the plan, we expect to double Group income over the next three years."

Executive Summary:

• Following a period of significant market uncertainty, Funding Circle has proven resilient through change, delivering a solid financial performance in FY 22 as government loan schemes were phased out.
• Loan returns remained robust and attractive with upgraded returns for several cohorts.
• Continued institutional investor demand to fund loans with new forward flow agreements in the UK and US.
• In 2022, lending through Funding Circle contributed £6.9bn to UK GDP, supported 106,000 jobs and contributed tax revenues of £1.4bn to the UK economy.[1]
• Customer satisfaction remained strong with Group NPS at 77 and a UK Trustpilot score of 4.6. In the UK it takes only six minutes to complete an online application with an instant decision for 70% of applications.
• Good early progress made against the three strategic pillars of our medium-term plan:
  • Attract more businesses: two Lending as a Service (“LaaS”) partnerships in the US;
  • Say yes to more businesses: expanded customer segments to super prime in the US and near prime in the UK;
  • #1 in new products: tripled FlexiPay transactions from H1 to H2; launched FlexiPay card in beta.
• Our balance sheet remains a strategic asset, with net assets of £284m, including cash of £178m.
• We have introduced guidance for 2023 and medium-term guidance is updated.
  • UK Loans reflects the challenging economic environment in 2023 pushing back 2025 targets by one year.
  • US Loans guidance for 2023 shows strong momentum and medium-term guidance is unchanged.
  • The significant progress we’ve made on FlexiPay means we have outlined our expectations for the first time, including a step up in investment in 2023.
• Now including FlexiPay, we target a doubling of Group total income by 2025.

Financial Performance:

1 Funding Circle research in partnership with Oxford Economics.

2 Net investment income comprises investment income less investment expense.

3 Adjusted EBITDA (“AEBITDA”) is an alternative performance measure and represents operating profit/(loss) before depreciation and amortisation, share based payment charges, associated social security costs, foreign exchange gains / (losses), and exceptional items. A reconciliation between AEBITDA and operating profit/(loss) is shown in the Business Review.

Financial Summary:

• Originations of £1.5bn (2021: £2.3bn) down 35% year-on-year but in line with expectations following the peak of the government-guaranteed loan schemes in H1 21.
• Both H1 and H2 22 originations up on H2 21, but reduced in H2 22 from H1 22 following credit tightening in response to the more challenging UK economic environment.
• Loans under management of £3.7bn (31 December 2021: £4.5bn) down 16% following anticipated early repayments of CBILS loans in UK and PPP loan forgiveness in US.
• Operating income was £131.4m (2021: £165.5m) down 21% against the high levels of income from government-guaranteed loan schemes in 2021. 2021 also included £2.1m of deferred PPP revenue.
• Investment income was £17.3m (2021: £41.4m) down by 58%, as expected, as investments have either been sold or amortised down.
• Fair value gain of £4.8m (2021: £28.6m gain) reflects continued positive revaluations for improved underlying credit performance.
• AEBITDA of £6.8m (2021: £91.8m) and operating loss of £14.7m (2021: profit of £64.2m) reflect the reduction in net income following the closure of the government-guaranteed loan schemes.
• Net assets remain healthy at £284.0m (31 December 2021: £288.0m), including cash balance of £177.7m (31 December 2021: £224.0m), of which £165.7m (31 December 2021: £199.4m) was unrestricted[4].

Operating and Strategic Summary:

• We are delivering against our medium-term plan which brings significant growth opportunities in a large addressable market:
  • In March 2022, we announced our medium-term plan to transform Funding Circle into a multi-product platform, serving a direct and embedded audience.
  • We are focused on enabling SMEs to borrow, pay and spend.
  • A year into this plan, we are delivering against our strategic pillars:
    • Attract more businesses: strengthening existing distribution channels and expanding into new embedded and intermediated channels to enable more businesses to reach us
      • Launched two Lending as a Service pilot partnerships, with Pitney Bowes and DreamSpring in the US.
      • Developed our distribution partnerships in UK and US.
      • Launched our first sports sponsorship with Premiership Rugby to drive brand awareness and consideration.
    • Say yes to more businesses: serving more businesses through an expanded set of personalised Funding Circle products and further integration with third party lenders
      • Expanded US Loans proposition to serve super prime businesses.
      • Expanded UK Loans proposition to include near prime lending.
      • Increased Marketplace originations with lending up 24% y-o-y.
    • #1 in new products: using our capabilities to enter new markets where we can develop market-leading products
      • SME B2B payments represents a new major market opportunity.
      • FlexiPay rolled out to additional customer segments during 2022, with strong growth trajectory and high customer engagement: >3x growth in cumulative transaction value H1 22 to H2 22; ~£60m total transactions in FY 22 (£3.5m FY 21); > 2,000 active accounts at end FY 22 (c.250 FY 21); >20,000 transactions to date; 1.4 transactions per month per active customer.
      • FlexiPay card launched in beta at the end of 2022.

4 Unrestricted cash refers to total cash less cash that is restricted in use. The restricted cash is cash that is not available for general use by the company as it is held within investment vehicles and is payable to third parties.

Outlook:

We have introduced guidance for FY 23, updated our medium-term guidance for FY 25 and included FlexiPay guidance for the first time, as shown below.

Analyst presentation:

Management will host an analyst and shareholder presentation and conference call at 9:30am UK time (GMT), on Thursday 2 March 2023, including an opportunity to ask questions.

To watch and listen to the webcast, with the opportunity to submit written questions, please use this link to register and gain access to the event.

For conference call access, with the opportunity to ask live questions, please dial +44 33 0551 0200 or +1 786 697 3501. Quote Funding Circle Full Year Results if prompted.

An on-demand replay and transcript will also be available on the Funding Circle website following the presentation.

Investor relations and media relations:

Funding Circle Investor Relations

Morten Singleton (+44 7736 297 929)

ir@fundingcircle.com

Funding Circle Media Relations

Abigail Whittaker (+44 7989 876 136)

press@fundingcircle.com

Headland Consultancy

Mike Smith / Stephen Malthouse (+44 20 3805 4822)

About Funding Circle:

Funding Circle (LSE: FCH) is a lending platform for SME borrowers. Established in the UK in 2010, and now the leading lending platform to SMEs, the Group also has a material and growing presence in the US. Globally, Funding Circle has extended more than £15bn in credit to c.135,000 businesses.

For SME borrowers, Funding Circle provides an unrivalled customer experience, delivered through its technology and data, coupled with a human touch. Its solutions continue to help customers access the funding they need to succeed.

For institutional investors, Funding Circle provides access to an alternative asset class in an underserved market, and delivers robust and attractive returns.

5 Previous UK FY 25 guidance of total income £220m and AEBITDA margins of 30-35%.

Forward looking statements and other important information:

This document contains forward looking statements, which are statements that are not historical facts and that reflect Funding Circle’s beliefs and expectations with respect to future events and financial and operational performance. These forward looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the control of Funding Circle and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements.  Nothing contained within this document is or should be relied upon as a warranty, promise or representation, express or implied, as to the future performance of Funding Circle or its business. Any historical information contained in this statistical information is not indicative of future performance.

The information contained in this document is provided as of the dates shown.  Nothing in this document should be construed as legal, tax, investment, financial, or accounting advice, or solicitation for or an offer to invest in Funding Circle.

Business Review

At Funding Circle we deliver an unrivalled customer experience powered by data and technology, coupled with a human touch. We have now helped more than 135,000 SMEs to access more than £15 billion. Over the past 12 years, we’ve revolutionised SME lending and built the capability for SMEs in the UK to receive an instant lending decision. This is a first in SME term lending.

We have an attractive and proven business model:

• Loan returns remain robust and attractive. This reflects the quality of Funding Circle underwriting with three times better risk discrimination than bureau scores.
• Our proven model has been demonstrated through the cycle as seen by the strength of our loan returns.
• We continue to take a prudent approach to originations and adjusted borrower pricing to reflect the rising base rate environment.
• We continue to see institutional investor demand to fund loans with new forward flow agreements in the UK and US.

Our world-class technology continues to deliver a superior customer experience:

• We are reinventing SME lending through technology and data, coupled with a human touch.
• Our world-class tech platform delivers significant customer benefits and creates a deep moat around our business. As we continue to grow, we feed the Funding Circle flywheel:
  • Attract more borrowers: Funding Circle is revolutionising SME lending and delivering a superior customer experience resulting in strong satisfaction scores and high repeat rates.
  • Accumulate more data: As we attract more customers to our platform we augment our data lake – which has more than 2 billion data points on 29 million SMEs across the UK and US.
  • Develop better machine learning models: Our data enables us to build accurate and predictive risk models. In the UK, our 8th generation models are three times better at risk discrimination than traditional bureau scores, optimising access whilst delivering strong loan returns.
  • Say yes to more businesses: Our decision engine generates personalised customer journeys, pricing and propositions which help to increase conversion.
  • Greater operating leverage: Automation delivers lower processing costs and scalability. As we grow we deliver increased margins from leveraging the platform.
  • New products: The strength of our customers, our technology and our platform enables us to offer new products and capabilities to meet more customer needs. These generate deeper relationships with our existing customers and help attract new customers.

Overview of the year ended 31 December 2022

Against a backdrop of an increasingly challenging UK economic environment, our overall performance in 2022 was in line with our expectations. It followed a very strong prior year when our markets were distorted by the continued availability of various government-guaranteed loan schemes in both the UK and US which brought forward and exaggerated demand for loans by SMEs in H1 21. This led to a drop in demand for loans when these government schemes concluded, with a gradual recovery in demand evident through H2 21 and H1 22. In mid-2022, through our proactive monitoring, we noticed increasing signs of stress in the market and we therefore adjusted and tightened our credit criteria accordingly. This tightening is noticeable in the UK originations profile below.