Funding Circle Holdings plc Full Year 2023 Results Embargoed until 7.00am, 7 March 2024 THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014 FULL YEAR PERFORMANCE IN LINE WITH EXPECTATIONS GO FORWARD FOCUS ON PROFITABLE UK BUSINESS £25M SHARE BUYBACK PROGRAMME ANNOUNCED Funding Circle Holdings plc (“Funding Circle”) today announces results for the twelve months ended 31 December 2023. Lisa Jacobs, Funding Circle CEO, says: “I’m pleased with our 2023 performance. We delivered a solid set of results in FY 2023, in line with our expectations, and made good progress against our multi-product strategy. In the UK, we have expanded our product range with the rollout of our Card product so customers can now borrow, pay and spend with Funding Circle. Our UK Loans business was profitable and our FlexiPay business grew strongly with transactions nearly quadrupling. We continue to deliver a superior experience for our customers. “Looking ahead, we will be focused on our UK business – comprising UK Loans and FlexiPay – to drive improved Group cash and profits and deliver greater shareholder value. Whilst the US business offers attractive long term growth, it also requires a significant amount of cash and capital to grow the SBA proposition and we don’t believe that this is the best course of action for the Group. We have received indications of interest for the US business and will update further in due course. “Our go forward UK business will be PBT profitable in H2 2024 and has an attractive growth and profitability profile over the medium term. We look forward to executing against our plan to help more SMEs get the funding they need to win and to capture growth in a large, underserved market. “We believe the share price materially undervalues the business and as such will be buying back up to £25m shares.” Executive Summary: We delivered a solid Group performance in line with expectations: Total income grew 7% to £162.2m (FY 2022: £151.0m); Group AEBITDA of negative £3.9m (FY 2022: £9.5m) with strong profit in UK Loans offset by continued investment into FlexiPay and the US business. Profitable UK Loans business with AEBITDA of £21.3m (FY 2022: £13.8m) and PBT of £6.5m (FY 2022: loss before tax of £1.8m). FlexiPay transactions almost quadrupled to £234m (FY 2022: £59m). Loan returns remain robust and attractive with continued institutional investor demand to fund loans; £1.1bn of forward flow agreements in the UK. We continue to execute against the three strategic pillars of our medium-term plan: Attract more businesses: strengthening existing distribution channels and expanding into new embedded and intermediated channels to enable more businesses to reach us. FlexiPay extends our product range so customers can now borrow, pay and spend with Funding Circle, driving increased relevance and attracting new customers. Launched second year of sports sponsorship with Premiership Rugby and secured Jamie George as our brand ambassador, driving increased brand metrics. Say yes to more businesses: serving more businesses through an expanded set of Funding Circle products and further integration with third party lenders. Marketplace (where we refer businesses we cannot support to other lenders) showing continued strong momentum, with over £100m UK lending through 2023. Continued innovation in core product with expanded product offering via the third iteration of the UK government Recovery Loan Scheme since August. #1 in new products: using our capabilities to enter new markets where we can develop market-leading products. FlexiPay transactions grew ~4x in 2023, with £297m FlexiPay transactions since launch. Completed FlexiPay card launch – now available to new and existing customers, with over 6,600 cards issued so far. Looking ahead, we are focused on a profitable UK business with attractive growth prospects, which we believe will deliver greater shareholder value: Received early indications of interest in the US business and will provide an update in due course. Go-forward UK business combines scalable and profitable UK Loans business with high-growth FlexiPay business. Over the next 3-4 years we expect net income growth of 15-20% CAGR with PBT margins of >15% Performance Highlights
Financial Summary: Loans Originations growth of 2% to £1.5bn (2022: £1.4bn) reflects prudent approach to lending. Commercial lending saw strong growth. LuM reduced to £3.3bn (2022: £3.7bn), reflecting the repayment of government loans. FlexiPay saw continued momentum with transactions almost quadrupling to £234m (2022: £59m) and end of month balances up to £56m (2022: £18m). Operating income grew to £154.8m (2022: £133.7m) following origination yield increases, income from FlexiPay and improved interest on corporate cash. Net investment income was £7.4m (2022: £17.3m) and, as expected, continues to reduce as investments amortise down or have been sold. Fair value gains of £8.7m (2022: £4.8m) from the strong credit performance of on balance sheet loans. AEBITDA of negative £3.9m (2022: positive £9.5m) reflects planned investment in both the US Loans business and FlexiPay. The UK Loans business was AEBITDA positive at £21.3m (2022: £13.8m) and profitable at a PBT level at £6.5m (2022: loss before tax of £1.8m). Loss before tax was £33.2m (2022: loss before tax of £12.9m) reflecting the above planned investments. Net assets remain robust at £246.8m (2022: £284.0m), with the reduction down to investment in the US Loans business and FlexiPay. Group cash is £221.4m (2022: £177.7m), of which £169.6m (2022: £165.6m) is unrestricted[3]. 1 To improve clarity and to better reflect our evolving business, we made certain changes to the presentation of our financial results within our Half Year 2023 results which are reflected in our Full Year 2023 results. All interest earned is now shown within Total Income (and consequently AEBITDA), where previously interest earned on cash was presented below operating profit. With no meaningful other items between operating profit and profit before tax we no longer present an operating profit line item. Comparative financial information has been re-presented with further detail provided in Note 2. 2 For definitions of non-GAAP measures refer to Note 2. 3 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 generally payable to third parties. Outlook: We set out the following guidance for 2024:
FY 2024
UK Loans
FlexiPay
Total income
>10% growth
3x growth
PBT
Margins of 8-12% (20-25% AEBITDA margins)
Continued investment, with losses at a similar level to FY23
The UK businesses (UK Loans and FlexiPay) will be PBT positive from H2 2024 Board changes Eric Daniels will not be standing for re-election as a Director at the Company’s AGM on 15 May 2024. Share buyback Funding Circle announces that it intends to commence a discretionary programme to purchase ordinary shares of £0.001 each in its share capital, up to maximum consideration of £25 million, because the share price materially undervalues the business. Funding Circle intends to conduct the programme in accordance with and under the terms of and capacity available under the general authority granted by its shareholders at its Annual General Meeting held on 11 May 2023, subject to available distributable reserves. Funding Circle will announce further details of the programme separately. Analyst presentation: Management will host an analyst and shareholder presentation and conference call at 9:30am UK time (GMT), on Thursday 7 March 2024, 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 when prompted by the operator. An on-demand replay and transcript will also be available on the Funding Circle website following the presentation. Contacts: Funding Circle Investor Relations Tony Nicol ir@fundingcircle.com Joint corporate brokers Investec: Bruce Garrow / Kamalini Hull (+44 20 7597 4000) Deutsche Numis: Stephen Westgate / Jamie Loughborough (+44 20 7260 1000) Funding Circle Media Relations Angeli Everitt (+44 20 3830 1325) press@fundingcircle.com Headland Consultancy Mike Smith / Stephen Malthouse (+44 20 3805 4822) About Funding Circle: Funding Circle (LSE: FCH) is the UK’s leading SME lending platform. Its mission is to build the place where small businesses get the funding they need to win. Funding Circle enables small businesses to access funding – offering an unrivalled customer experience powered by data and technology. For institutional investors, Funding Circle provides access to an alternative asset class in an underserved market, with robust and attractive returns. Globally, Funding Circle has extended more than £16bn in credit to c.150,000 businesses. 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 Funding Circle is the UK’s leading SME lending platform. We operate in a large, attractive and growing market, with over £80bn of outstanding debt in the UK SME market and £1.3trn of B2B SME payments each year. What sets us apart is an unrivalled customer experience powered by data and technology. This advantage is clear in our credit assessment process, with our models 3x better at discriminating risk than traditional bureau scores. It also delivers superior results for our customers. 80% of UK applicants receive an instant decision, we have a strong NPS of 79 and see strong repeat usage, especially with FlexiPay. We made good, solid progress in 2023 despite a challenging macroeconomic environment. Alongside progressing the launch of new products and delivering against our strategic pillars, our priority has been to serve our small business customers responsibly and deliver robust loan returns in a high inflation environment. At a Group level, we delivered financial results in line with expectations with total income of £162.2m, up 7%, and AEBITDA loss of £3.9m, reflecting a strong step-up in profitability from our UK Loans business and investment in FlexiPay and in US Loans. We closed the year with a very healthy unrestricted cash balance of £169.6m, up from £165.6m, as legacy investments paid down, offsetting the operating cash outflow in the US and FlexiPay. During the year, we saw good momentum in our two UK businesses - UK Loans and FlexiPay. Our more mature UK Loans business is profitable and margins improved half-on-half. In 2023, UK Loans delivered AEBITDA profit of £21.3m and PBT of £6.5m, up from £13.8m and a loss of £1.8m in 2022, respectively. Our newer FlexiPay business, which helps small businesses manage their cashflows, delivered strong growth in 2023, building on a successful full launch of the product in 2022. Transactions near quadrupled to £234m, compared to £59m in 2022, as we saw FlexiPay quickly become an essential and ongoing part of customers cashflow management toolkit. We more than trebled the number of active accounts to c.6,500 at the end of 2023 and we have been encouraged by the increasingly predictable repeat behaviour among users. We also continued to innovate and expand our product set in 2023. In the second half we launched our integrated FlexiPay card. Whilst this remains at an early stage, with its launch, customers can now borrow, pay and spend with Funding Circle. In the US, we made steady progress. We saw good growth in the first half of 2023, which moderated as the year progressed. Total income for US Loans was £32.5m in 2023, from £29.1m in 2022, and the business recorded an AEBITDA loss of £10.6m, increasing from a loss of £3.1m in 2022. During the year, the team were successful in receiving the tentative award of an SBA 7(a) licence. We have now reached a point where future growth in the US will require significant cash and capital to grow the SBA proposition. Against this, we have determined that a focus on our profitable UK business will deliver greater shareholder value with improved profitability and cash generation. We have received early indications of interest in the US business and will provide a further update in due course. In the last two years, we’ve transitioned our UK business from a single product line to one that today enables SMEs to not only borrow over the long term, but also pay and spend. We are realising our multiproduct vision, thereby expanding our addressable market, increasing the level of engagement with our customers and strengthening the platform from which we can continue to grow. We expect our go forward business will be profitable in the second half of 2024. Over the next 3-4 years, we expect a net income growth CAGR in the range of 15-20% with profit margins improving to greater than 15%. Within that, our UK Loans business will grow between 10-15% with margins improving year on year. We expect FlexiPay to reach AEBITDA profitability in 2025. Given the strength of our business today and the future growth and profitability profile, we believe that our current share price materially undervalues the business. As such we are announcing a share buyback of up to £25m. We’re excited about the future of the UK business. Our strategy is focused on expanded distribution, increased conversion and an expanded product set, which is underpinned by a robust balance sheet and strong cash position. We are well-placed to deliver on our growth prospects and help more SMEs get the funding they need to win. Overview of the year ended 31 December 2023 The performance in 2023 was in line with our expectations, with total income growth in each business unit compared to 2022 and controlled investment in US Loans and FlexiPay. The UK Loans business originations were in line with 2022, with growth in commercial lending despite a slower economic recovery than initially expected. UK Loans showed AEBITDA growth to £21.3m (2022: £13.8m) and profit before tax of £6.5m (2022: loss before tax of £1.8m). The US Loans business showed originations and LuM growth on 2022 with originations at £396m (2022: £327m) and LuM at £420m (2022: £375m). Our line of credit product, FlexiPay, has demonstrated significant growth to date and we are investing to support the momentum we see in this product. Its transaction levels continue to grow (more than quadrupled in 2023 compared to 2022) following continuing strong customer engagement and the launch of FlexiPay card in September 2023. Segmental highlights (unaudited)
