Half Year Results Q&A

Summary

Transcript of the Funding Circle half-year results question-and-answer call dated 9th September 2021. Samir Desai, Founder and CEO, announces he will step back as CEO from the first of January 2022 to become a Non-Executive Director, with Lisa Jacobs, UK Managing Director, becoming CEO. He reports loans under management of approximately £5bn, originations of £1.6bn, total income of £120.6m and £53.3m of AEBITDA. Oliver White, CFO, covers investor funding sources, expected loan returns and how the company earns transaction and servicing fees, then closes with the UK as the engine of the group.

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Full text

Funding Circle
Half Year Results Q&A
9th September 2021

1
Samir Desai: Good morning and thank you for joining us for our H1 2021 results. Today,
you have me Samir Desai, Founder and CEO, Oliver White, CFO and Lisa
Jacobs, CEO Designate, joining the call. We are here to talk about our H1
2021 results, I will introduce the results and talk to the first section on our
model, Oliver will cover the financials, and Lisa will talk to our priorities and
future growth initiatives, but before we start, as you will have seen from the
statement this morning, I have decided that after 12 years I will step back
from being CEO from the first of January 2022 and move to a new role as
a Non-Executive Director on our Board. Lisa Jacobs, our UK Managing
Director, will become our new CEO. I have made this decision at a time
when I believe, as you will see from these results and those over the
previous six months, that the business is in the strongest position it has
ever been. Lisa and I have worked closely together for 9 years, she has
done an amazing job running our largest business and I am delighted she
will become our new CEO. She is the best person to take the business to
the next level in this exciting phase for the company. I also want to reiterate
that I am not leaving the business and remain fully committed to Funding
Circle as a founder, Board member and shareholder.

Samir Desai: I truly believe that we are entering the most exciting period of growth for
our business over the next few years, both in our core business and new
products, and I am looking forward to supporting Lisa and the team in my
new role. Now let’s get on to the H1 results, which I’m pleased to say
represent a very strong period for Funding Circle.

Samir Desai: 2021 has seen us continue the strong momentum we experienced in the
second half of 2020. Our Loans under Management reached a record level
of approximately £5bn in H1 and we recorded originations of £1.6bn. In the
UK, originations were up 109% year-on-year. Our technology platform is
continuing to revolutionise the small business borrowing experience and
now 60% of loan applications receive an instant decision, up from 50% at
the end of the year. We have increased our expectations of loan returns on
our platform for the second consecutive time. Covid was an
unprecedentedly severe recession for small businesses, and the improving
loan performance expectations demonstrate the quality and resilience of
the loans we generate on our platform. We also continue to see high levels
of demand from institutions to fund loans. This all translates into a very
strong financial performance. The group delivered total income of
£120.6m, up 19% year-on-year. We reached profitability for the first time in
H2 2020 and I’m pleased to say we exceeded expectations in H1 2021 to
deliver £53.3m of AEBITDA and £35.5m operating profit, and have now
been profitable for a full 12 month period. This all results in strong growth
in net assets to £254.1m.

Samir Desai: Looking ahead, we are seeing a number of exciting structural trends that
really benefit Funding Circle and we will talk about these later on. In
particular this year we have continued to see the acceleration in the
adoption of online small business lending, which will benefit Funding Circle
2
not just through the second half of 2021 but beyond. Following the Covid
government guarantee programmes we have transitioned to operate our
core loan product alongside the Recovery Loans Scheme in the UK as well
as the existing SBA programme in the US. We will continue to roll out our
Instant Decision Lending platform with a long-term target of 80% of loan
decisions automated. We are also leveraging our technology platform to
launch a number of exciting new solutions including embedded finance via
an API, our new Flexipay product which launched recently and has had
exciting initial results and we have opened up a waitlist for our Charge Card
product. The group has an attractive financial profile: powered by the UK,
we expect to be AEBITDA profitable on an ongoing basis and will invest in
additional growth opportunities.

Samir Desai: Our mission at Funding Circle is to build the place where small businesses
get the funding they need to win. We do this by delivering an amazing
experience for small businesses, powered by machine learning and
technology.

Samir Desai: At Funding Circle we have a long term strategy and you can see from the
chart on the left hand side of the slide that we have consistently grown our
Loans under Management whatever the economic environment.
Additionally, there are a number of structural trends that have accelerated
as a result of Covid and we stand to benefit from going forward. We are
seeing a significant acceleration in the adoption of online borrowing. There
continues to be strong demand from investors to fund loans despite the
impact of Covid, demonstrating the quality and performance of our loans
and the resilience of our platform. Small Businesses have ongoing
financing needs to support their business as they exit Covid, and finally
Government support, not just in the UK and US, but across every country in
the world for small businesses, has shown how strategically important they
are to economic growth.

Samir Desai: Small business lending is underserved by traditional lenders. On average,
it represents less than 2% of bank balance sheets, but small businesses
are 50% of GDP and 70% of employment. Small businesses are
underserved as there is a big disconnect between how much the financial
system cares about this type of lending and how much we as society care
about it and that is why Funding Circle exists.

Samir Desai: Over the past 10 years, we have aggregated huge amounts of data and loan
performance history, allowing us to develop incredibly sophisticated
machine learning models. Our models include the £13 billion of loans we've
lent to small businesses since 2010, 850,000 loan applications, data on
750 million repayment events, and we have built a proprietary data lake
with 2 billion data points in it, containing data on 26 million small
businesses. Our 8th generation machine learning models are three times
as predictive as traditional Commercial Bureau scores, and this is creating
a deep competitive moat around our business.
3
Samir Desai: Our technology platform is revolutionising small business lending.
Borrowers can apply in 6 minutes, 60% of loan applications get a decision
within 9 seconds and are funded within 24 hours. Through this process, we
deliver high credit quality loans and competitive interest rates for
borrowers, comparable or cheaper than banks. It is the combination of the
experience we deliver on our machine learning and technology platform
with loans funded by investors, that is the innovation that Funding Circle
has created.

Samir Desai: This technology delivers huge benefits to our customers but also to
Funding Circle. We reached 50% of loan decisions automated by the end of
2020 and I’m pleased today to announce we met another milestone, with
approximately 60% of loan decisions in the UK receiving an instant
decision. We are well on our way to reaching our long-term target of having
80% of loan decisions automated. Instant Decision Lending delivers a
number of benefits, to customers but also to Funding Circle. We are seeing
credit performance as accurate as non-Instant Decision Lending loans. We
are using the same risk models developed over the past 10 years and credit
performance has been strong. We're seeing higher conversion from
borrowers. Getting an instant decision can improve borrower conversion
by up to 25%. Lower processing costs and scalability from this technology
are driving operating leverage in our business. In the first half of 2021, UK
loan originations were up 109% year on year without us adding any
additional headcount. This technology also allows us to launch new
products, and you may have seen we launched FlexiPay to our existing
customers recently and we will talk more about this a bit later.

Samir Desai: The great experience we deliver to small businesses leads to stable repeat
rates and attractive unit economics. The graph on the left-hand side shows
the average number of loans taken out by a small business, versus the
months from taking the first loan. This shows very stable, predictable
repeat rates across every quarterly cohort. The graph on the right-hand side
shows the lifetime value divided by the marketing customer acquisition
costs. This shows that we're profitable on a first loan basis after marketing
costs and because of the stable repeat rates as borrowers take out more
loans, our unit economics improve as there is very little marketing costs
associated with the repeat loans. Over 48% of operating income in the UK
came from existing customers in H1 2021, which improves the quality of
income and increases the strong moats around our business.

Samir Desai: We are reaching a level of scale, brand awareness and customer
satisfaction in the UK that is unmatched by other Fin Techs. We now have
£4.1bn of Loans under Management which gives us approximately 4%
market share. We have brand awareness of around 50%, which is
significantly higher than other Fin Techs, and is approaching the level of
the top four banks. In terms of customer satisfaction, we have net
4
promoter scores of 83. That compares very favourably to the large banks
and over 80% of customers tell us they would come back to Funding Circle
first in the future. Once they experience this way of borrowing, they never
want to go back.

Samir Desai: I am so proud of the huge economic impact our team is delivering. Since
2010, we have originated £13 billion of loans to over 120,000 small
businesses. As we have talked about in the past, our Economic Impact
Report with Oxford Economics showed that the lending through our
platform in 2020 alone created and sustained 135,000 jobs and added £10
billion to GDP. Typical Funding Circle borrowers are not startups, they've
been trading for an average of 12 years, have 8 employees, £1 million of
revenue. On average, loans are £80,000 and the average term of the loan is
around 50 months. An example is a business like Bird and Blend who saw
a huge increase in demand during lockdown last year and managed to
increase their headcount from 80 people to 100 during the last year.
Supporting businesses like Bird and Blend are the reason we started
Funding Circle in the first place and the team and I are as passionate about
supporting them today as we have ever been. I’m now going to hand over
to Oliver.

Oliver White: Thank you Samir. The diversification of our investor base is of strategic
importance to Funding Circle. As the pie chart on the left hand side shows,
our largest sources of funds are Asset Managers and Banks. The
proportion of Banks is broadly stable and the proportion of Asset Managers
has increased since December 2020, as new and existing investors
participated in the high level of CBILs originations in the half. Within each
of these segments, we maintain a diversified investor base. Retail
continues to diminish as a proportion, now down to 7%. The Bond
programme reduces through loan amortization and through the successful
sale of the two US warehouses to an Asset Manager. National entities
increase reflecting Funding Circle’s participation in the US Federal
Reserve’s lending programme to facilitate lending to SMEs (the PPP LF
programme). The right hand pie chart shows the proportion of the Loans
under Management provided by Funding Circle’s balance sheet. As a
reminder, Funding Circle deploys its equity where it makes it’s platform
stronger. This may include limited co-investment and investment in new
products. We see the ability to do this as a source of competitive
advantage, we do not deploy capital with the sole purpose of deepening
profit through investment returns. We intend to continue to recycle some
of the investments over time as opportunity for realizations allow, as
demonstrated by the previously announced sale of the US warehouses in
June. Funding Circle’s balance sheet now represents 2% of the total Loans
under Management. This is £105m of equity, within the guardrail
communicated at the Full Year results, of being less than the December
2020 level of £118m.

5
Oliver White: Turning to our loan performance and the returns provided to these platform
investors. We continue to see an improving outlook for Funding Circle
loans. Our borrowers continue to be resilient and loan quality continues to
be strong, notwithstanding the uncertain economic environment. Our
projected returns shown here include a forward looking element. We
continue to be prudent, forecasting ongoing stress, as government support
and interventions phase out ongoing uncertainty continues. In the UK and
also in the US, the latest forecast shows a continued improvement in
expected returns for our investors, the UK shown on the left and the US on
the right. For each annual cohort of originations we show how the expected
returns have evolved. As you can see despite the unprecedented impact of
the pandemic, even those cohorts most impacted are returning a 2% plus
return to investors. This demonstrates the robustness through-the-cycle of
the asset class that Funding Circle has developed

Oliver White: This slide illustrates how Funding Circle makes money. Within our
Operating Income, we receive transaction fees and servicing fees.
Transaction fees are charged to borrowers, are driven by origination
volumes and account for nearly 60% of Total Income. Typical yield is c 5%.
Servicing fee are more of an annuity stream charged to investors at c 1%
per annum and driven by the Loans under Management. Servicing fees
have increased over time as Loans under Management has grown.
Together the transaction and servicing fee income make up around 80% of
Funding Circle’s total income. Investment Income is driven by our equity
invested where it makes the platform stronger. The yield will depend on the
nature of the investment and its risk/reward characteristics. Investment
income represents one fifth of Total Income in H1 21. Over time, we expect
operating income will make up a greater proportion of total income.

Oliver White: Turning now to Funding Circle’s H1 financial performance. Let’s begin by
looking at the Group results in overview. Here we show the performance in
H1 2021 alongside the comparatives of H1 2020 and H2 2020. H1 of 2021
saw a continuation of strong CBILS originations in the UK and the
recommencement of the PPP programme in the US. CBILs ended at the
end of March and PPP ended in May, with subsequent fulfillment under
both programmes. June saw the restart of our core product in the US, and
the restart of core and the new Recovery Loan scheme in the UK. Loans
under Management was at a record £4.9bn, up from £4.2bn in H2 2020.
Originations volumes were £1.635bn, slightly up from H2 2020. This strong
volume performance was reflected in total income of £120.6m, up 19%
year on year. AEBITDA is £53.3m and operating profit is £35.5m. This is
the second consecutive half of positive operating profit. The overall profit
performance demonstrates the power of Funding Circle’s platform model.
I am pleased to show the rate of profit conversion from income and
conversion into a cash balance of £168m. Net Assets grew to £254m. As I
am sure you will agree, these are a strong set of results, demonstrating
continued progress. I will now explain these results in more detail

6
Oliver White: In the UK, Loans under Management grew to over £4bn, as the strong
origination levels in H1 and prior periods flow through. Loans under
Management is up 59% year over year and 25% H1 over H2 2020.
Originations are at £1.381b. This is up 109% year on year and 5% down H1
over H2 2020 as the end of H1 21 saw the market transition from the CBILs
programme. This strong volume performance feeds through into record
income of almost £100m, up 67% year on year

Oliver White: The UK has continued the strong profitability seen in H2 2020 with an
AEBITDA of £41m, a margin of 41% and operating profit of £31m. This
impressive margin shows the power of Funding Circle’s platform at scale.
AEBITDA grew £12m from H2 2020 to H1 2021. Operating income grew
£5m, Fair Value swung £9m, reflecting actual performance in the half and
retaining a prudent forward view, and there was a small increase in
marketing costs, reflecting higher brokers costs and marketing ahead of
the return to core and launch of the RLS loans.

Oliver White: Turning to the US. US Loans under Management was £733m, down 9% year
on year and slightly down on H2. This reflected the expected roll off of our
pre Covid loans and the limited originations seen in H2, partially offset by
new PPP originations. Of the £733m of Loans under Management, £333m
are PPP loans. We anticipate these loans will be forgiven in H2 2021 and
H1 2022. Originations in the half were £247m, primarily through the
restarted PPP scheme. This programme had some different
characteristics to the 2020 programmes. Average loan size was lower, but
the yield per loan was higher. In H2 of 21, we helped 3 times the number of
borrowers than in H2 2020. Total income was £20.2m. An additional £16m
of PPP income was earnt in H1, less £1.5m of direct cost. As these loans
are funded by the Federal Reserve’s Liquidity facility, they are on Funding
Circle’s balance sheet, although with no Funding Circle equity invested. As
these loans are not held for sale but will be forgiven by the US government,
we are required to spread this transaction fee earnt over the expected life
of the loans. This expected life is until the projected forgiveness of these
loans. This £16m will be recognized in H2 2021 and H1 2022.

Oliver White: In the half, the US is AEBITDA positive for the first time. This is primarily
driven by the investment AEBITDA of £20.9m including a £7.8m Fair Value
gain, again reflecting H1 performance and retaining a prudent forward view
but also a £5m gain from the sale of the US Warehouses. Operating
AEBITDA was negative £9.1m, but this is after the impact of the
aforementioned PPP transaction fee deferral of £14.5m. Operating Profit
is a positive £3.8m.

Oliver White: Putting this together for Funding Circle as a whole, H1 of 2021 saw record
loans under management of close to £5bn, up 33% year on year and
originations of £1.6bn, in line with H2 2020. Total income of £120.6m, is
7
up 19% year on year and in line with H2 20 total income. Strong Loans under
Management and originations has led to Operating income of £94.5m; up
from £64.8m in H1 20 and £90.9m in H2 20. In line with our expectations,
Investment income has reduced over time due to natural roll-off of the
loans within these investment vehicles.

Oliver White: This top line performance feeds through into Group AEBITDA of £53.3m,
up from a loss of £84m in H1 2020 and £20.3m profit in H2 2020. Operating
AEBITDA is up at £19.1m and Investment AEBITDA, reflecting fair value
gains, is up at £34.2m. Compared to H2 2020, fee income is up £4m,
investment income down £4m, Fair Value swings £30m, and costs improve
by £3m, with a small increase in marketing more than offset across other
cost lines. Operating profit grows to £35.5m up from £7.2m in H2 of 2020.

Oliver White: Turning to costs. Operating expenses have continued to be actively and
tightly managed. H1 costs were in line with H2 2020 and 12% down year
on year. As anticipated marketing costs are slightly up on H2 at 29% of
operating income, but are down year on year. We are beginning to see the
return to more normal levels of marketing spend and expect to see broadly
this level of marketing spend continuing.

Oliver White: Net Assets are £254.1m, up £37m since end December, as the profit
converts into net asset growth. The net asset position includes cash of
£168m up £65m from the December 20 cash balance of £103m. Within the
net assets, are equity investments of £105m. Funding Circle deploys its
equity where it makes the platform stronger. This may include limited co-
investment and investment in new products. Our absolute equity invested
at June 2021 is £105m. This is within the guardrail we communicated at
the Full year results of no more than the equity invested at that time of
£118m. I would now like to hand over to Lisa to take you through our
ongoing priorities and new products.

Lisa Jacobs: Thank you Oliver. Today’s results are another example of the strength of
the Funding Circle business model. I am privileged to have been asked to
lead Funding Circle into this next exciting stage of growth, and over the
next few slides I will show that there are a number of future growth
opportunities to be excited about. I know many of you on this call and I look
forward to working with you again, but for those who I don’t know, I look
forward to meeting you in future. A little bit about my background, I’ve been
with Funding Circle for 9 years, firstly as Chief Strategy Officer and most
recently as MD of the UK business. It has been really inspiring to see the
business grow and evolve over the last 9 years. We have achieved a great
deal as a company so far, but there is still so much more to come.

Lisa Jacobs: As I look ahead to the future, we exited 2020 with a great deal of
momentum and I am pleased that we have been able to continue this
8
during the first half of this year The Funding Circle Flywheel drives
significant competitive advantage. As we get more repeat customers on
the platform, this generates more data. This feeds into our machine
learning models, which improve. This allows us to deliver a better
borrowing experience with more automation, less documents required,
faster decisioning, and that in turn drives higher conversion, lower costs,
and more operating leverage in the business. This technology allows us to
launch new products, which expands the size of our ecosystem, which in
turn leads to more repeat customers and more data.

Lisa Jacobs: Since Covid we have seen an acceleration in a number of structural trends,
which benefit Funding Circle, and we've proven the power and resilience of
our model. In the UK, following the completion of CBILs we are operating
our core, non-guaranteed loans for borrowers as well as the Recovery Loan
Scheme for other borrowers. We were the first FinTech platforms to be
accredited to the Recovery Loan Scheme and we’re proud to be playing our
part to help businesses at this time. Our other priority for this year in the
UK is launching new products using our technology platform to help solve
more small business problems and I’ll talk about this more over the next
few slides. In the US, now that the PPP has finished we are originating
government guaranteed loans through the SBA on behalf of banks.
Alongside this, we continue to operate our referral model for borrower
needs outside these offerings, partnering with other providers, given the
scale and diversity of the US lending ecosystem.

Lisa Jacobs: The new solutions we have been working on in the UK are a particular
source of pride to me. I have seen first-hand the level of innovation and
creativity across the team to get us to a stage where we are ready for beta
testing. Our new API will allow us to natively embed our Instant Decision
Lending technology into partners' websites and platforms. We have been
building the technology since the beginning of the year and we’re now in
the sandbox testing phase with about 5 initial partners. These are in the
commercial finance space initially and through 2022 we expect to on-board
new partners and optimise the API.

Lisa Jacobs: We’re focused on helping solve more problems for our customers and the
new products will help support small businesses to manage a number of
cashflow and payments challenges. These new products also deliver a
number of benefits to us as a platform. Firstly, they bring us into a more
frequent part of customers’ lives. Typically our existing customers use our
core loan product every 1-2 years, but FlexiPay and Card brings us more
into daily and monthly usage. This extra usage enables us to accept more
customers who in time graduate to longer term core loan products which
supports growth in the core lending. Additionally, the market is huge in this
space, we estimate over £1 trillion is the addressable market for UK small
businesses and finally these products align with our mission as a
company.

9
Lisa Jacobs: At our results in March we spoke about launching a payment finance
product that will help small businesses spread the cost of bills over a 3
month period, and today I am really proud to say that FlexiPay is now live
and in beta testing for our existing customers. This is a unique payment
product offered, empowering small businesses to buy now and pay later.
It’s powered by our machine learning and technology platform and
businesses can apply within minutes and access up to £30,000
immediately. They can then settle any outstanding invoices instantly for a
one-off 3% fee and spread the repayment over 3 months interest free.

Lisa Jacobs: We launched FlexiPay in beta earlier this quarter and whilst it is still early
days the feedback has been really positive. Firstly you can see on the right
hand side of this slide that we have customers across the entire UK that
are starting to access FlexiPay and the feedback shows that this is a
product that customers feel can significantly help them to manage their
payments to suppliers. I wanted to highlight two examples. Both Livity from
Intrit and Carl from Advanced Joinery were two of the first users of FlexiPay
and both spoke about how using FlexiPay enables them not just to manage
their cashflows but also to manage and improve their relationships with
their own suppliers, which could then lead to better terms in the future.

Lisa Jacobs: Finally, I wanted to spend a minute on our card product. As Samir
mentioned in March, we are planning to launch a Business Charge Card
product to help small businesses finance their day-to-day spending. The
wait list is open and we are now well on our way for a 2022 launch. I hope
that shows you the progress we are making with these new products and
the possible opportunities going forward. I wanted to finish by saying how
excited I personally am about our future. We have come a long way in the
last 11 years, and the business today is the strongest it has ever been, but
our best days are certainly still to come. I look forward to updating you all
on our progress in the future and hopefully meeting you all in due course.
Now I’d like to hand back to Oliver who will take us through the outlook.

Oliver White: Thank you Lisa. Turning to the full year outlook. The business performed
strongly in H1 and the financial performance was above expectations. We
are mindful of the uncertain economic environment however. In line with
our expectations, there has been an initial reduction in lending as we have
transitioned to operating our core loan product alongside government
guarantee programmes in the UK and the US. As the economic
environment becomes clearer, we anticipate an acceleration in lending and
we are well placed to capture this going forward. We continue to expect
AEBITDA will be skewed towards H1, with an expectation of H2 AEBITDA
profit in the low single digit millions

Oliver White: As a reminder of how we think about Funding Circle in the medium-term.
The UK is the engine of Funding Circle. It represents 80% of group total
income. The business continues to offer operational leverage, is AEBITDA
and Operating Profit profitable and indeed has been AEBITDA profitable
10
since 2018. It is also cash generative. The UK business has strong growth
opportunities in the core market over the medium term. Additionally we
have growth opportunities in the US and in new products. The US is five
times the size of the UK market but at an earlier stage of development. PPP
provided a boost to volumes and revenues in H1 of 21 post PPP as we
invest to grow market share, the US will likely be AEBITDA loss making for
the next few years. We will carefully manage that level of investment. New
products represent a big but early stage opportunity to support more
customers by leveraging our technology platform. We announced the beta
test of FlexiPay. These new products will generate a small income
contribution initially, stepping up in the future following a successful roll
out. For the group as a whole, powered by the UK, we expect to be AEBITDA
profitable on a go forward basis and will invest in additional growth
opportunities. Thank you

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