Funding Circle Plc: Full Year Results
Funding Circle Plc (FCH)
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."
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.
Operating and Strategic Summary:
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.
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.
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)
Funding Circle Media Relations
Abigail Whittaker (+44 7989 876 136)
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.
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:
Our world-class technology continues to deliver a superior customer experience:
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.
6 Other represents the previously presented Developing Markets segment. As this business has been closed and is in wind-down it has been renamed Other for segmental purposes.
7 Given the size, FlexiPay loans of £4m were not presented in 2021.
In the UK, the government-guaranteed Recovery Loan Scheme (“RLS”) was introduced in April 2021 and operated until May 2022. We continued to offer our commercial loans alongside the RLS, transitioning to operate solely our commercial lending from June 2022 onwards. We now also offer our commercial loans to near prime businesses. In the prior year, we offered government-guaranteed CBILS loans until the processing of those loans finished in June 2021. CBILS had particularly high levels of demand, due to the favourable terms for borrowers, driving peak originations in H1 21.
In the US, we have continued to offer our commercial loan product, expanding our offering to also serve super prime businesses. In the first half of 2021, we operated the Paycheck Protection Program (“PPP”) government-guaranteed loan scheme through the Small Business Administration (“SBA”) which closed in May 2021.
During 2022, we have continued to grow originations via our Marketplace which connects borrowers with other lenders in the market, providing further products beyond what Funding Circle currently offers, such as larger loans, asset finance and invoice finance, and we see this growing further in the coming year.
Our new line of credit product offering, FlexiPay, has been launched in the market and continues to gain traction. FlexiPay card is now in beta testing and we will continue to expand this during 2023. We remain very excited about the huge market opportunity for FlexiPay to support SMEs with their shorter-term financial needs.
Characteristics of government loan schemes
The loans under each of the government schemes have different characteristics, and therefore the income that Funding Circle earns on them is different:
Loans under management declined during the year by 16% to £3,743m. This was principally driven by:
Funding Circle uses its balance sheet where it makes the business stronger. This has been through securitisation programmes and private funds in 2019/20, co-investing as required by the government-guaranteed loan schemes, short-term funding as we onboard new investors, and in funding the early stages of FlexiPay. At 31 December 2022, Funding Circle’s equity invested in the above Loans under Management was c.2.5% at £97m (31 December 2021: c.1.5% at £70m). This is described in further in “Balance sheet and investments” below.
During the year we continued to originate loans under RLS until the scheme ended in June 2022 as well as providing commercial loans throughout the year. As expected, we experienced slower initial demand when the RLS scheme ended, consistent with CBILS ending, as both schemes brought forward the appetite for SMEs to take out loans.
Demand has largely returned, although general credit quality has weakened and accordingly our conversion levels are lower than they were before the pandemic. With the increasing economic uncertainty in the UK, we tightened our credit criteria in July 2022 and introduced interest rate increases on our loans (which are all fixed rate) to align with increasing base rates.
Throughout 2022 there remained strong appetite from institutional investors to invest in both the RLS and commercial loans. Four forward flow agreements were signed totalling £2.4bn and an additional material forward flow agreement was signed in January 2023.
As previously reported, investment from retail investors was closed at the start of the pandemic as they were not allowed to participate in the government loan schemes. We closed the retail platform to new investment altogether in March 2022 and retail investors now represent only 2% of the overall LuM.
The UK delivered total income of £117.0m (2021: £159.4m) with operating income of £107.2m (2021: £137.7m) and net investment income of £9.8m (2021: £21.7m).
The reduction in operating income was largely driven by lower volumes of originations, partially offset by higher servicing fees (reflecting higher LuM experienced during the peak of CBILS lending in early 2021).
The reduction in net investment income resulted from a reduction in the SME loans held on balance sheet. This was driven by the exit of the UK warehouse in November 2021, loans continuing to be paid down, and the wind down and subsequent sale in 2022 of the majority of loans held in the UK securitisation vehicle.
The UK generated operating AEBITDA of £4.3m, lower than the £29.7m of the prior year when CBILS was operating. Total AEBITDA was £11.7m (2021: £61.9m) with an AEBITDA margin of 10%. Operating loss was £3.7m (2021: profit of £44.3m). The reduction in both total AEBITDA and operating profit was driven by the lower levels of income generated post CBILS and reduced investment AEBITDA.
8 Investment AEBITDA is defined as investment income, investment expense and fair value adjustments, and operating AEBITDA represents AEBITDA excluding investment AEBITDA.
The US transitioned away from government-guaranteed loans in May 2021. We restarted commercial lending in July 2021, and although demand started at a low level this has gradually and consistently increased month on month.
We also see continued demand from institutional investors to lend although, with increasing economic uncertainty and rising base rates, concluding funding deals with institutions is taking longer. We anticipate adding further new institutional investors during 2023.
In H2 2022, we funded c.£20m of originations directly whilst concluding a major funding deal which was signed shortly after the year-end. The majority of these loans were sold in February 2023.
Originations for the year were £327m in 2022 (2021: £316m). Originations have continued to grow since PPP ceased in May 2021 with H2 2022 originations of £182m (H1 2022: £145m; H2 2021: £69m).
Total income for the US was £28.6m (2021: £44.8m) comprising operating income of £21.1m (2021: £25.1m) and net investment income of £7.5m (2021: £19.7m). Yields on PPP loans were nearly 40% higher than those on commercial loans, driving the fall in operating income relative to originations year on year.
Similar to the UK, the reduction in investment income reflects the amortising nature of the investment in SME loans held on balance sheet. Additionally, 2021 benefited from six months of interest on the US warehouse which was sold in June 2021.
Operating AEBITDA was negative £18.4m (2021: negative £9.4m). Investment AEBITDA was £14.7m (2021: £37.8m) principally reflecting the amortising loan book and warehouse sold in June 2021 together with large fair value gains in 2021 following the investments delivering strong returns, lower levels of default and an improved economic outlook at that time.
Total AEBITDA was negative £3.7m (2021: positive £28.4m) and operating loss was £9.7m (2021: profit of £18.5m).
Summary Financial Information
Group total income was £148.7m (2021: £206.9m), down 28%, and net income was £153.5m (2021: £235.5m).
Net income is total income plus fair value movements on SME loans held for sale and investments in trusts. The fair value gain in 2021 reflected a strong performance from the consolidated SME loans with lower defaults and higher recoveries than expected.
The Group’s operating loss was £14.7m for the year (2021: profit of £64.2m).
Profit and loss
Operating income includes transaction fees, servicing fees, interest income from loans held at amortised cost and other fees and was £131.4m (2021: £165.5m).
In line with increasing base rates, our average origination fee yields grew in the UK to c.5.5% (2021: 4.7%); yields on CBILS loans in the prior year were fixed at 4.75%. Yields in the US averaged 4.6% with varying but higher yields experienced in the prior year as PPP loans had higher yields on small loan amounts.
Net investment income represents the investment income, less investment expense, on loans within Funding Circle’s investment vehicles and was £17.3m (2021: £41.4m). This decline followed the sale of US and UK warehouses in June 2021 and November 2021 respectively, together with the effect of continued amortisation on the remaining consolidated loans.
The Group took the opportunity to simplify the balance sheet and wound up the UK securitisation (SBOLT-19) in June 2022, subsequently selling the majority of the remaining loans in October 2022. Additionally, we wound up one of the US securitisations (SBIZ-19A) in October 2022 and anticipate doing the same for the remaining US securitisation vehicle (SBIZ-20A) during 2023.
Net income, defined as total income after fair value adjustments, was £153.5m (2021: £235.5m). This reflects the reduction in operating income from the higher levels in 2021 when CBILS was operating together with a reduction in net investment income.
The fair value gain in 2021 reflected a strong performance from the consolidated SME loans with an improved economic outlook, lower defaults and higher recoveries than expected. The consolidated SME loans have continued to perform well, and ahead of our expectations in 2022, however, due to the amortising nature of the remaining loan book, loan sales that have occurred and higher discount rates (affected by higher base rates) utilised in valuations, the total fair value gains are much lower than 2021.
At an overall level, operating expenses were in line with 2021, with increased people costs (driven by increased headcount and inflation) being largely offset by reduced marketing spend (driven particularly by the effect of reduced originations on broker commission levels).
People costs (including contractors), which represent the Group’s largest ongoing operating cost, increased during the year by 15% to £98.4m (2021: £85.9m), before the capitalisation of development spend. This was driven by an overall headcount rise of 10%, largely due to increased investment in the technology and FlexiPay teams, and wage inflation.
The share-based payment charge for the year, included in people costs, was £4.7m (2021: £8.9m) with the reduction driven predominantly by lapses of share awards from leavers.
Marketing costs reduced in the year to £38.4m (2021: £46.9m) driven by lower broker commissions from reduced origination volumes, together with strong cost control from spend optimisation. Marketing spend overall was 29% of operating income (2021: 28%) with the Group investing more in above the line marketing channels (direct mail and online) which were required less when the government schemes were operating.
Depreciation, amortisation and impairment costs of £17.0m (2021: £17.8m) largely represent the amortisation of the cost of the Group’s capitalised technology development and the depreciation and impairment of right-of-use assets related to the Group’s office leases. The Group incurred a write down of £1.8m (2021: £3.9m) on its San Francisco office and associated assets.
Balance sheet and investments
The Group’s net equity was £284m at 31 December 2022 (31 December 2021: £288m). This reduction reflects the Group’s operating losses and the purchase of own shares by the Employee Benefit Trust (“EBT”) offset by foreign exchange gains on its US business and the recognition of deferred tax assets.
The majority of the Group’s balance sheet is represented by cash and equity invested as shown below. The equity invested is in certain SME loans, either directly or through investment vehicles, and in the FlexiPay lines of credit.
1 Trading business includes £22.4m of PPP loans together with the associated Federal Reserve borrowings which we expect will both reduce as the remaining PPP loans are forgiven.
2 US funding loans includes £19.8m of loans funded temporarily whist it was onboarding a new investor. The majority of these were sold in February 2023.
The table below provides a further breakdown of Funding Circle’s net equity invested in products and vehicles:
1 These vehicles are bankruptcy remote
At 31 December 2022, the Group held cash and cash equivalents of £177.7m (31 December 2021: £224.0m). Of this balance £165.6m (31 December 2021: £199.4m) is unrestricted in its use.
Total cash has reduced by £46.3m. £27.0m of this decrease was driven by increased equity investment. The remainder of the reduction was due largely to the funding of our US and FlexiPay operations and the purchase of own shares by the EBT, offset by foreign exchange gains on cash held in the US business.
Free cash flow, which is an alternative performance measure, represents the net cash flows from operating activities less the cost of purchasing intangible assets, property, plant and equipment, lease payments and interest received. It excludes the investment vehicle financing and funding cash flows together with FlexiPay lines of credit. The Directors view this as a key liquidity measure and it is the net amount of cash used or generated to operate and develop the Group’s platform each year.
Free cash flow reduced in 2022 due to lower AEBITDA and large working capital movements associated with CBILS where £27m of fees were received early in 2021 relating to 2020 originations.
The table below shows how the Group’s cash has been utilised: