Funding Circle H2 2024 Earnings Report

Funding Circle EPS Results

• Actual EPS: GBX 0.80
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Funding Circle Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Funding Circle Announcement Details

• Quarter: H2 2024
• Date: 3/7/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, March 6, 2025
• Conference Call Time: 4:30AM ET

Funding Circle (LON:FCH) (LSE: FCH) is a leading UK lending platform for SME borrowers. Established in the UK in 2010, and now the leading lending platform to SMEs, Funding Circle has extended more than £13.6bn in credit to c.103,000 businesses in the UK. 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. To find out more information, view our investor relations page here: https://corporate.fundingcircle.com/investors/ir-contacts-advisors/

Funding Circle H2 2024 Earnings Call Transcript

Key Takeaways

• Funding Circle sold its US business, generating a gain on sale and narrowing its focus to the UK market where it holds strong brand recognition, proprietary credit data and technology advantages.
• A UK restructuring delivered an annualized £30 million in cost savings, with around half realized in 2024 and the balance expected in 2025, bolstering profitability.
• In FY24, revenue grew 23% and credit extended rose 47%, while term-loan PBT margins jumped to 13.3% (from 5.2%), driving group profit ahead of market expectations.
• New cash-flow products now account for over a quarter of credit extended; FlexiPay revenue tripled year-on-year and shows strong recurring usage from SMEs.
• Management confirmed medium-term targets of 15–20% revenue CAGR and ≥15% PBT margins by 2026, implying at least £250 million in revenue and £35 million in profit before tax.

Presentation

[Lisa Jacobs, CEO at Funding Circle]

Good morning, everyone. Welcome to the Funding Circle full year 2024 results presentation. I wanted to start by welcoming Tony Nicol, our new CFO. It's great to have him in role, and you'll be hearing from him later today after I've run through the results, business, and strategic highlights. 2024 has been a successful year of change and progress for Funding Circle. A year ago, I laid out our plan to be a simpler, leaner, profitable business, and in 2024, we have delivered that. We sold the U.S. business for a gain on sale of GBP 10 million. We're now fully focused on the U.K. market, where we enjoy strong brand recognition, powerful credit data and technology advantages, and deliver a great customer experience.

[Lisa Jacobs, CEO at Funding Circle]

We restructured the U.K. business, delivering an annualized benefit of GBP 15 million in cost savings, about half of which we saw coming through in 2024, and the remainder we'll see in 2025. Alongside this, we've continued to post sustained growth and improved profitability. We grew our revenue 23% to GBP 160 million. Credit extended grew 47% to GBP 1.9 billion in the year, with growth from both our core loans business, where we saw a 33% increase, as well as our new products. Our group profits of GBP 3.4 million was above market expectations, and in our more mature term loans business, we delivered a PBT margin of 13.3%, up from 5.2% the year prior, as the impact of operating leverage on our cost actions flowed through to the bottom line. Through the course of the year, we also launched two share buyback programs.

[Lisa Jacobs, CEO at Funding Circle]

We completed the first GBP 25 million buyback program in October 2024 and are partway through the second. To the end of February, we'd bought back over 11% of our share capital. I'm proud of how the team have delivered in 2024, but what is exciting is there's much more to come. We're on track to deliver our medium-term guidance, which we are confirming will be achieved in 2026. Medium-term revenue growth of 15%-20% CAGR from 2023 and 15% PBT margins. This equates to at least GBP 200 million in revenue and GBP 30 million in PBT in 2026. Over the coming years, we will continue to build a sustainable, high-growth business, expanding our margins. We have great products, strong data and technology, and great customer satisfaction, and we'll leverage these to capitalize on the significant markets opportunity.

[Lisa Jacobs, CEO at Funding Circle]

Before moving on to talk about our performance in more detail, I felt it was important to take a step back and reflect on how Funding Circle has transformed over the last few years. When I stepped into the CEO role three years ago, we set an ambition to capitalize on our opportunity by expanding from a business which focused on SME term loans to one that served more of our customers' needs. Over the last three years, we've made that ambition a reality. Today, our business enables SMEs to borrow for longer-term investment or working capital, pay later, managing their cash flow through FlexiPay, and, as of last year, spend and be rewarded through our Cashback Credit Card. In developing our product to what it is today, we've been guided by regular conversations and feedback from our SME borrowers.

[Lisa Jacobs, CEO at Funding Circle]

That has given us greater confidence in launching new products, knowing that we are addressing the pain points most felt by SMEs. I'm pleased to say that we've seen the positive impact of this transformation in several areas. First, these new cash flow products have opened up new and diversified growth. In 2024, more than a quarter of our credit extended was thanks to these cash flow products, and FlexiPay revenue grew more than threefold in the year. Second, they've enabled us to expand our share of our customers' financing, with over 70% of FlexiPay revenue coming from existing term loan customers. Finally, they have increased our frequency and depth of interaction with our customers, from every few years to weekly and even daily. To put this into context, three years ago, a customer transacted with us about once every half hour when they were taking a loan.

[Lisa Jacobs, CEO at Funding Circle]

Now, a customer transacts with us every 92 seconds when they take a loan, FlexiPay their suppliers, or spend on their cashback credit card. We've been able to launch these new cash flow products by leveraging our credit data and technology strengths to deliver the same superior customer experience. As a reminder, our risk models are built on our data sets of both public data from our applications, but also the proprietary data that we've been collating over several years. It is these data sets that enable us to produce predictive credit and marketing models using AI. Our technology is scalable and responsive, and the modular design enables faster speed to market as we build new product features and release new products. This delivers better outcomes for our customers. What's important to our customers is speed, ease, and access to finance.

[Lisa Jacobs, CEO at Funding Circle]

Our customers love the fact that they can apply in six minutes, get an instant decision, and have funds in their accounts within 24 hours. 77% of applications receive an instant decision, enabling our customers to go back to doing what they do best: running their business. Our models are three times better at discriminating risk than the Bureau score alone, which means we can accept more businesses at competitive rates for the same level of risk. As a result, our customer satisfaction continues to be high, at 79 NPS for our term loan customers. These strengths have always been the foundation of our business and a key competitive advantage. We'll continue to invest in these to ensure that they stay that way. Importantly, our platform is not static.

[Lisa Jacobs, CEO at Funding Circle]

In line with the launch of our new products, in 2024, the platform has scaled seamlessly to handle a significantly higher level of transactions. We've seen a three-times growth in the monthly active mobile users and a more than doubling in the number of transactions. We are well set up for further growth. As we've continued to invest in our platform in 2024, we've seen a 20% increase in our engineers' productivity, thanks to GenAI platform and process improvements. This enables us to deliver value to our customers quicker. As we have expanded our product sets and scaled our business, we have proven our resilience through the cycle. We've delivered robust and attractive loan returns to our institutional investors whilst continuing to attract and serve strong demand from SMEs. It's important to remember the backdrop within which we have been operating.

[Lisa Jacobs, CEO at Funding Circle]

Over the last few years, we've been through a challenging macroeconomic period. We've faced Brexit, COVID, low growth, and low consumer and business confidence. As a result, business insolvencies and delinquencies have remained high. As you can see on the chart, GDP has barely moved over the last six years, whilst consumer confidence has remained low. Insolvencies have been on the rise since COVID and still remain some 25% above the historic trend. Despite this environment, our business has performed well through the cycle. As I shared on the prior slide, the risk discrimination of our models outperforms the Bureau scores, and we pride ourselves in our effective and efficient risk management. This has meant that even in a stress market, we've delivered average loan returns in excess of 5% above our investors' cost of capital.

[Lisa Jacobs, CEO at Funding Circle]

As a result of this strong track record, we continue to see high demand to invest in our SME loans. We have a healthy pipeline of over GBP 2 billion in future forward flow funding agreements. Our strength in risk modeling has not only delivered robust loan returns, but enabled us to continue to serve SMEs through the cycle. We have seen strong demand from SMEs for both our term loans and our shorter-term cash flow products. As a result, we have grown our credit extended year on year by 47% in a period where other market participants have pulled back. One of the things I'm most proud about is the impact that we have at Funding Circle, something that's even more important in times of macroeconomic volatility.

[Lisa Jacobs, CEO at Funding Circle]

When we get financed to SMEs like Laurence's Business Base Place, who took a loan to manage working capital, it's not only their business that wins, but also their communities and the economy. We play a small part in the lives of our SMEs, but it's an important part and one that gives them the fuel to run and grow their businesses and employ more people. To date, we've extended over GBP 14.5 billion of lending to more than 110,000 SMEs in the U.K. Last year alone, lending through Funding Circle supported over 87,000 jobs, GBP 7.2 billion in GDP contribution, and GBP 2 billion in tax receipts. I'll now move on to talk through our highlights by business unit. Starting with our most mature business unit, term loans, 2024 was a year where we saw significant progress.

[Lisa Jacobs, CEO at Funding Circle]

Our term loans business now has real scale, and we saw that, together with our actions on cost, flow through to the bottom line with a step change in margin. We've delivered an improved proposition for our customers with an expanded product set. We've attracted new businesses as we've continued our rugby sponsorship for the third year. Our season two content amassed over 33 million views across online media platforms and 12 million in print and radio, delivering improvements in brand awareness and consideration metrics. Finally, we've executed targeted cost actions focusing on management layers and productivity improvements. These have delivered strong top and bottom line growth. In 2024, we saw 33% origination growth, a margin expansion to over 13% in line with our upgraded guidance.

[Lisa Jacobs, CEO at Funding Circle]

The strength in our core business has allowed us to invest responsibly in the big growth opportunity that we see in our newer cash flow products. As a reminder, we entered the shorter-term credit space because we saw a big opportunity to serve our existing SMEs and attract new SMEs. The market is large. There are over GBP 1 trillion in SME B2B payments each year and about GBP 80 billion in SME card transactions. Whilst we might aspire to, we won't finance all the payments, but we see our market opportunity as somewhere between these two. In short, there is a vast opportunity to serve one of our SMEs' largest pain points. Our product serves this need. FlexiPay enables businesses to pay later with a flexible line of credit and repayments over one, three, six, nine, and 12 months.

[Lisa Jacobs, CEO at Funding Circle]

Our businesses use this to spread quarterly tax bills into monthly installments, buy stock in bulk, spread supplier payments, or simply boost their working capital. The Cashback Credit Card further supports businesses' working capital needs and rewards them for their spending. Both products have a similar credit limit of around GBP 17,000. Whilst it remains early for FlexiPay, we're continuing to see strong growth momentum, with transactions doubling in the year. I'm excited about the strong recurring revenue dynamics that we see, which are shown in the chart on the right-hand side. This chart shows the end-of-period outstanding balances for our FlexiPay and credit card portfolio. The bars represent the balances at the end of each period, and the colors represent the cohorts in which each business became a FlexiPay or credit card customer.

[Lisa Jacobs, CEO at Funding Circle]

You can see that growth is driven both by the new customers in each cohort, in other words, the additional color block, but excitingly, we also see really consistent behavior from the prior cohorts. Whilst an SME becomes a FlexiPay customer, they continue to use it as it becomes a part of their ongoing cash flow management tool. This leaves us very confident about the future growth of the product. I'm proud of what we've achieved in 2024. We've executed against our plan. The business is simpler, leaner, and profitable. We've shown strong growth and expanded margins in our core term loans business. Alongside this, we've transformed our business into one that is multi-product. Our newer cash flow products are showing strong growth and recurring revenue dynamics, setting us up well for long-term success. Now, I'll pass to Tony for the financial results.

[Tony Nicol, CFO at Funding Circle]

Thank you, Lisa, and good morning, everyone.

[Tony Nicol, CFO at Funding Circle]

As Lisa has spoken about, this is a strong set of results. We have achieved a lot in the last 12 months to simplify and streamline the business and reach profitability for the full year, both before and after exceptional items. In March last year, we set out financial targets for the term loan and FlexiPay businesses for 2024, and in September, when we presented our half-year results, we upgraded our guidance for the term loan profit margins as well as group PBT. I'm really pleased to say that we have hit these raised targets and are slightly ahead of market expectations. For term loans, we achieved 14.5% revenue growth compared to 10% guidance and 13.3% PBT margins having guided to over 12%. For FlexiPay, we grew revenue by 3.4 times compared to our guidance of three times, with a similar loss to 2023.

[Tony Nicol, CFO at Funding Circle]

For the group, we achieved profit before tax and exceptionals of GBP 3.4 million versus our original guidance of only being PBT positive in the second half of the year. Now looking at the overall P&L and to ground you on the numbers, the table on the left is for the continuing group. The U.S. is presented as discontinued operations and not shown in the continuing business. As a reminder, we sold the U.S. business in July for a gain on sale of GBP 10 million, which covered its trading losses in the first half of the year. The results that follow are presented for the continuing group and before exceptional items. Revenue for the continuing group was up 23% at GBP 160 million, which is more than double the operating cost growth of 9%.

[Tony Nicol, CFO at Funding Circle]

Expected credit losses, which are required to be booked upfront, increased as the FlexiPay balances grew, with the loss rates consistent with expectations. Profit before tax was up by over GBP 13 million on the prior year at GBP 3.4 million, demonstrating our strong growth and the operating leverage of our more mature term loans business. We continue to have a healthy net assets and cash position with unrestricted cash at GBP 151 million. The reduction on prior year is principally due to the share buyback programmes, and during 2024, we bought back GBP 34 million of shares for GBP 34 million after the GBP 50 million programmes. This represented 9% of the share capital. Looking at the trading businesses, the term loans business has high operational leverage with attractive profit margins and cash generation. Originations grew 33% year-on-year.

[Tony Nicol, CFO at Funding Circle]

As a reminder, alongside commercial loans, we participated in the Recovery Loan Scheme in the second half of 2023 and then seamlessly transitioned to its successor, the Growth Guarantee Scheme in 2024. These guarantee schemes allow us to lend to incremental segments of the market. We have also continued to expand our marketplace referral offering, enabling us to help more SMEs get access to funding solutions. Marketplace referrals account for about 10% of originations. Loans under management, or LUM, leveled out following the previously heightened levels of COVID guarantee scheme loans and now only account for 27% of LUM. We expect LUM to grow during 2025. Revenue reached GBP 142.6 million, up 15% on 2023, a combination of transaction fee income growth and service fee income tracking LUM.

[Tony Nicol, CFO at Funding Circle]

As I mentioned earlier, term loans has good operating leverage with cost growth of only 5%, leading to a significant increase in profit before tax, up GBP 12.5 million to GBP 19 million, with margins over 13%. Now to FlexiPay. FlexiPay continues to scale, with transactions nearing GBP 500 million and end-of-month balances reaching GBP 119 million. Since the introduction of flexible payment terms, the average drawdown period has increased to four months, and the average fee is now 5.8%. The Cashback Credit Card is still at a very early stage, and its results are therefore immaterial. For segmental purposes, we're including it within FlexiPay. The number of active customers using FlexiPay have grown from 6,000 at the end of 2023 to over 11,000 at the end of 2024, and we see continued repeat usage from previous cohorts of customers.

[Tony Nicol, CFO at Funding Circle]

In fact, more than 70% of our 2024 revenue came from customers onboarded in the previous years. This momentum has resulted in significant revenue growth, at 3.4x the level of 2023, to GBP 17.5 million. As a reminder, the dynamics of FlexiPay's P&L is different to term loans and more like a J-curve. We incur certain upfront costs once for each customer, followed by repeat drawdowns. Fees are earned on the drawdowns, and therefore this drives repeat revenues, demonstrating the product's attractive recurring revenue characteristics. Costs grew in line with our expectations as we continued to scale FlexiPay and launch the Cashback Credit Card. This growth is mainly from the upfront marketing costs and expected credit loss provisions and from staff costs. The loss before tax of GBP 15.6 million was slightly better than in 2023 and in line with guidance. Now on to costs.

[Tony Nicol, CFO at Funding Circle]

Group operating costs remain actively and tightly managed, with costs excluding expected credit losses growing 9% relative to revenue growth of 23%. The main cost growth came from the variable-based marketing costs, which remain at around 30% of group revenue. Non-marketing costs, which are more fixed-based in nature, grew a modest 4%, demonstrating strong cost control. The main driver was employers' national insurance costs on our share-based payments, driven by the share price growth in the year. Salary costs, however, were down 2% following the restructuring. Running through the restructuring costs in more detail. As previously mentioned, in May last year, we announced the restructuring of the U.K. business to achieve annualized cash savings of GBP 15 million. We're well on track to achieve this, with savings achieved in the second half of 2024 of GBP 7.5 million. The chart bridges the salary and other overhead movements year on year.

[Tony Nicol, CFO at Funding Circle]

As you can see, the restructuring savings in the second half of the year have fully offset salary and overhead inflationary increases, some new heads at the start of 2024, and absorbed the group costs previously allocated to the U.S. Let me talk through our funding model in more detail. Our business model is capital light, which makes it scalable. We focus on delivering the right funding for the right products. We have a total of GBP 2.8 billion in balances outstanding, covering term loans, FlexiPay, and the credit card. 96% of these balances are term loan balances, where the average term is five years and the weighted average life is 2.5 years. In our term loans business, we operate a platform model. We earn revenue from the upfront transaction fee and the ongoing servicing fee.

[Tony Nicol, CFO at Funding Circle]

The loans are funded by a range of diverse institutional investors, being asset managers, banks, and insurers, who own the loans and earn the interest on them. We use our balance sheet minimally, where it makes the platform stronger. For example, we have a small co-investment alongside our investors in the government guarantee schemes. The remaining 4% of the overall balances outstanding are FlexiPay and credit card balances. These are shorter-term balances in aggregate, with the weighted average term four months, so the capital cycles quickly. In 2024, we did GBP 492 million worth of FlexiPay transactions, and the year-end balance was GBP 119 million. We earn revenue from the drawdown fee on each draw, akin to interest, and an interchange fee on the credit card. These balances are funded from our own equity and with a senior facility from Citi.

[Tony Nicol, CFO at Funding Circle]

It is an efficient use of our capital as the balances cycle quickly and has the added benefit of enabling us to iterate and evolve the product. Lisa spoke upfront about the strength of our risk models, and as a result, our loan returns to investors have been stable, robust, and attractive. You can see this in more detail on the slide. The chart shows the net loan returns to our institutional investors after fees and bad debt. We have overlaid the two-year swap rates to give an illustrative view of our investors' cost of funding. The line shows how swap rates have increased in recent years in line with the Bank of England base rate, and accordingly, how we've been able to price these rises into the loans. There have been no changes in our expectations of the returns for each cohort since we reported in September last year.

[Tony Nicol, CFO at Funding Circle]

The loans provide them with attractive, stable net returns each year of around 5% above their cost of funding. It is this track record that means we continue to attract strong demand. We continue to deliver these returns throughout the economic cycle because of the strength in our capabilities to originate, credit assess, and underwrite and manage these loans, and the quality of the borrowers. This has resulted in continuing demand for this asset class from institutions, and as of now, we have forward flow agreements in place providing future funding of over GBP 2 billion compared to around GBP 1 billion a year ago. Our balance sheet remains robust, with net assets of GBP 217 million and cash of GBP 151 million. The main driver of the decrease in both was the share buyback.

[Tony Nicol, CFO at Funding Circle]

The U.S. business had trading losses of GBP 10 million in the first half of the year, which were offset by a GBP 10 million gain on sale. Term loans is cash flow positive, and this helps support the FlexiPay and Cashback Credit Card cash needs as they grow. Much has happened in 2024 from a cash and capital perspective. We have simplified and restructured the business, exiting the U.S. and removing the cash and capital drag that came from it. As a reference point, the U.S. had losses of GBP 23 million in 2023, and we exited for a gain on sale of GBP 10 million. As at the end of December, we had GBP 151 million of unrestricted cash. From this, GBP 16 million will be for the ongoing share buyback. In addition, we retain an operational buffer for stress, currently GBP 45 million.

[Tony Nicol, CFO at Funding Circle]

We do not require to do so from a regulatory perspective, but we believe it is prudent to do. Outside of that, we consider four areas in our capital allocation framework. Firstly, the group's cash needs in terms of delivering against medium-term plan and strategy. Through the course of 2025, we expect the term loans business to continue to be cash generative, which supports the funding needs of FlexiPay and the Cashback Credit Card. Secondly, future growth and product opportunities, whether this is organic or inorganic. There are no specific opportunities on the imminent horizon, but we operate in a large market, and we retain the opportunity to take advantage of these growth opportunities if and when they arise. Thirdly, investing where it makes the platform stronger. As a reminder, we co-invest alongside institutional investors in loans which are guaranteed under the Growth Guarantee Scheme.

[Tony Nicol, CFO at Funding Circle]

We also, from time to time, provide capital for new credit products. This enables us to do R&D in-house, adjusting the products as required. Finally, distributions to shareholders. In the last year, we have committed to GBP 50 million in share buybacks. As at the end of December, we had bought back close to 10% of our share capital and had GBP 16 million remaining of the second buyback programme. We consider capital in a disciplined way to drive long-term value to shareholders and will continue to do so. Now turning to the outlook. Overall, I am really pleased with the performance in 2024 and all that we have achieved. We are early in the new year, but we have made a good start to 2025.

[Tony Nicol, CFO at Funding Circle]

A year ago, we set out our exciting medium-term guidance that over the next three to four years, i.e., 2026 to 2027, we expected compound revenue growth of 15%-20% per year and to reach profit margins of at least 15%. We're focused on delivering on this guidance and anticipate achieving this in 2026. In pound terms, this means reaching revenue of at least GBP 200 million and profit of at least GBP 30 million in 2026. Now back to Lisa to wrap up.

[Lisa Jacobs, CEO at Funding Circle]

Thanks, Tony. As we move ahead into 2025 and beyond, I'm excited about what the future holds as we continue to build on the progress of the last few years and our strengths as the U.K.'s leading SME finance platform. We have four strategic priorities that are focused on profitable, customer-focused growth. First, get to yes. Second, expand our audience.

[Lisa Jacobs, CEO at Funding Circle]

Third, scale our products, and finally, deliver a great lifetime customer experience. Starting with get to yes, our continued credit innovation and product enhancements will enable us to get to yes for more businesses as we bring the right product to the right customer. Second, we will expand our audience through our newer products, targeting new segments whilst also deepening and expanding our distribution channels. Third, our product suite today addresses a large and underserved market opportunity. Our products continue to show good traction and customer satisfaction in the market, so our focus will be on scaling. Term Loans at scale is delivering continued growth momentum alongside strong and improving margins. We will scale FlexiPay and credit card to capture the significant market opportunity and expand our margins as we work through the J-curve of these products.

[Lisa Jacobs, CEO at Funding Circle]

Finally, as our product suite has expanded, we will deliver not just a great customer experience, but an exceptional lifetime experience as their trusted financial partner, enabling us to capture a larger share of our customers' overall financing and be a more important part of our customers' lives. In conclusion, we have executed well in 2024 to put us in a strong position as we enter 2025. Today, we are a simpler, leaner business. We are profitable, we are delivering sustained growth, and we have proven our resilience through the cycle. We have an experienced team, great products, strong credit data and analytics, and a significant market opportunity. We have made a good start this year and are on track for our medium-term guidance with an attractive growth and profitability trajectory, delivering significant value for our customers, partners, and shareholders. Thank you. We will now take questions.

[Operator]

Thank you.

[Operator]

Ladies and gentlemen, if you would like to ask a question on today's call, please signal by pressing star one on your telephone keypad. Again, that is star one for your questions today. We will pause for a brief moment. Now take our first question from Ed Firth from KBW. Please go ahead. Your line is open.

[Ed Firth, Managing Director at KBW]

Yeah, morning, everybody. I had, I guess, two or three questions. The first one was on the litigation issue. I wondered if you could just update us on that and give us any thoughts about, I guess, how that might pan out. Particularly, not so much if the case is won, but if the case is lost, what the potential implications could be. I know you do not expect that, but just to get a sense as to the pluses and minuses would be very helpful. The second question was on share buybacks.

[Ed Firth, Managing Director at KBW]

I noticed you've still got a lot still to go, so I'm not necessarily expecting an update, but has your thinking changed on those, or should we expect that once this one is completed, you would continue with that program, or does the current share price make a difference in terms of your appetite for putting capital to work that way? My final question is, you talk a lot about new products and stuff that you might be rolling out. Could you give us some sort of flavor as to where you might be focusing that thinking in terms of, is it more products for small businesses? Is it expanding the customers into maybe larger business areas? Are you personal sector? Anything on that area would be interesting. Thanks very much.

[Lisa Jacobs, CEO at Funding Circle]

Morning, Ed. I'll take the first, pass to Tony for the second, and then back to me again.

[Lisa Jacobs, CEO at Funding Circle]

In terms of the litigation, the press article to which you're referring to referred to one summary judgment in relation to two loans, which was to the same borrower, and they defaulted in March 2020. I think it's important to note three things. The first is there's been no question raised as to the general enforceability of the loans and the personal guarantees. The thrust of the case does not relate to that at all. It relates to who has the right to the claim. Secondly, it's a summary judgment, so there's been no final decision made on this. Rather, it's just a decision that it warrants further discussion, and it'll now go to court.

[Lisa Jacobs, CEO at Funding Circle]

Thirdly, it's also important to note that the debt sale is related to the sale of loans from an institutional investor on the platform to Azzurro, where Funding Circle is facilitating the loans rather than selling any of our loans. In terms of where we are, Azzurro are progressing to trial. We do not know the exact date of that trial yet, but we do not expect it to be before September. We remain confident that Azzurro will be successful at trial. Given ongoing proceedings, there is not more that we can say at this stage.

[Ed Firth, Managing Director at KBW]

Sorry, just to come back on that, just conceptually, and I am not asking you to predict what happens, but just conceptually, if Azzurro were to lose, then what happens? Do those loans go back to the institution and they can then enforce the personal guarantees, or do they come back to you?

[Ed Firth, Managing Director at KBW]

How would the logic to that work?

[Lisa Jacobs, CEO at Funding Circle]

Yeah, I think I just refer to what I said before, which is that there has been no question around the general enforceability of the loans or the personal guarantees. It is not appropriate to say more at this stage given that proceedings are ongoing.

[Ed Firth, Managing Director at KBW]

Okay. Great. Thanks.

[Tony Nicol, CFO at Funding Circle]

To pick up on the buybacks then, as you said, the buyback program is ongoing. As of now, there is still about GBP 8 million of that program to be bought back. There is still a little way to go. The way we think about the buybacks is in line with our overall capital allocation framework and consider the capital in a disciplined way, driving the best long-term value for shareholders. As that program concludes, we will consider that along with that framework.

[Tony Nicol, CFO at Funding Circle]

Your reference to the share price and considering it to be undervalued, absolutely, we still consider the share price to be materially undervalued.

[Lisa Jacobs, CEO at Funding Circle]

I'll pick up on the final question around new products. I think where we are today, we've launched over the last few years FlexiPay and the business credit card. We see a huge opportunity in this space. As I said in the presentation, there's about GBP 1 trillion in small business B2B transactions. There's about GBP 80 billion in SME card payments each year. Our focus at the moment is very much on continuing to grow into those markets. You can see in the presentation that I shared the success that we're having in building that product, both in terms of increasing the frequency that we have interacting with our customers, but building that base of recurring revenue over time.

[Lisa Jacobs, CEO at Funding Circle]

That continues to be our focus. Alongside that, we're not standing still in term loans. We're not standing still in terms of the product features that we're building. You've seen over the last few years as we've used our credit innovation to continue to unlock new segments, whether that's younger businesses, businesses through the Growth Guarantee Scheme, and working with our partners through marketplace as well. We continue to innovate in there. I guess beyond the next horizon of those two to three years, what I'm particularly excited about is over the longer term, setting out this vision of being our customer's trusted finance partner and continuing to evolve our product mix beyond that.

[Lisa Jacobs, CEO at Funding Circle]

We have the right capabilities there in terms of the risk models, in terms of the technology that we are building, but also importantly, in terms of that customer base that we are building and the level of frequent interaction we have with them, which has moved from every few years to weekly to daily. As I said in the presentation, we are now having a customer transact with us every 92 seconds, which is a really good spring point for further product growth beyond the next few years.

[Ed Firth, Managing Director at KBW]

If I read that correctly, it is really about deepening and broadening the relationship with the sort of SME customer franchise. That is the core part of it.

[Lisa Jacobs, CEO at Funding Circle]

Yes, that is correct. That is correct.

[Ed Firth, Managing Director at KBW]

Perfect.

[Lisa Jacobs, CEO at Funding Circle]

Thanks, Ed.

[Ed Firth, Managing Director at KBW]

Great. Thanks so much.

[Operator]

Thank you. As a reminder, that is star one to ask a question over the conference call.

[Operator]

We'll pause for a further moment. There appears to be currently no further questions on the conference call, so I'd like to hand over to Jack to take some questions over the webcast.

[Jack Gault, Director at Headland Consultancy]

Thank you. We've had several questions from Rahim at Investec. I'll read them out one at a time. His first one is, can you talk about how the current economic uncertainty is impacting borrower demand and the outlook for returns?

[Lisa Jacobs, CEO at Funding Circle]

Thanks, Rahim. Obviously, what we shared in the presentation was over the last few years, we've faced quite a challenging macroeconomic environment. If you look at that by Brexit, by COVID, actually things that have really impacted our small business user base. You see that in the insolvency data that I shared. It's up still. There was a depression in COVID amongst insolvencies.

[Lisa Jacobs, CEO at Funding Circle]

There was an increase following COVID, and now it is still trending about 25% over historic trends. Similarly, if you look ahead, some of the challenges that our businesses have now are around taxes, around what is coming up in terms of national insurance changes, as well as the overall economic environment. We are in quite a similar stage where the backdrop continues to be mixed. What I would say, though, is that we have, throughout that period, shown the strength and resilience of the model through the cycle, both in terms of the returns that we have delivered to our investors, which have been on average about 5% above their cost of capital, which has enabled us to continue to attract strong institutional investor demand for loans, about GBP 2 billion in forward flow agreements.

[Lisa Jacobs, CEO at Funding Circle]

Secondly, we have, through this period, continued to see good demand from SMEs, and we have been able to serve that demand. One of the important changes we have made to enable that over the last few years has been focusing not just on term loans for investment purposes, but also on more working capital products and expanding our product sets to address that. Despite what we see going forward, we think the business model is proven through the cycle. We will continue to deliver well, and we see that in the resilience of our business and the resilience of SMEs as well.

[Jack Gault, Director at Headland Consultancy]

He then has a couple of questions on FlexiPay. The first one is, can you indicate how much additional capital you require to support future growth in FlexiPay over the next few years in the context of the GBP 90 million of deployable cash?

[Jack Gault, Director at Headland Consultancy]

His second question on FlexiPay is, can you help us to understand the underlying margins being generated by FlexiPay revenues from clients who have been using the product for two years, i.e., being past the J-curve?

[Tony Nicol, CFO at Funding Circle]

Okay. Taking the capital piece first, as I mentioned earlier, term loans is cash generative, and it supports the funding needs of FlexiPay. As FlexiPay grows, more money is required to go into those lines of credit. Therefore, the capital needs are in part driven by the speed of growth of FlexiPay and the Cashback card. It requires modest capital, but to the extent that the product is performing better than expected, those capital needs may grow to create longer-term sustainable revenues and profitability.

[Tony Nicol, CFO at Funding Circle]

In terms of the underlying margins generated by FlexiPay, as we talked about before, FlexiPay has J-curves, and each cohort incurs costs upfront of the expected credit losses and the marketing costs to onboard them. Over a period of 12-18 months, they then are cash generative. Those early year cohorts are beyond that and are now cash generative. If you think through the costs that are the cost base of it, once it is past that, it has a relatively limited cost base. Your top line flows through to bottom line very quickly.

[Jack Gault, Director at Headland Consultancy]

Rahim's final question is, do you see any further cost savings potential beyond the GBP 15 million delivered to date?

[Tony Nicol, CFO at Funding Circle]

When we made the decisions to do the restructuring earlier last year, that was with the intention to be future-proofed for the growth and delivering on our strategy.

[Tony Nicol, CFO at Funding Circle]

As I set out in the presentation, the way I think about costs are there are more variable costs and the non-variable costs. Marketing is very much a variable cost and grows in line with revenue. We typically spend around 30% of revenue on marketing. The non-marketing costs are far less variable. There's a small element that I would consider variable in that on areas like sales and collections teams and data. On the whole, that's largely fixed in nature and therefore would have more of an inflationary growth. Long story short, I'd expect some cost growth, but more inflationary on the non-marketing costs.

[Jack Gault, Director at Headland Consultancy]

We then had a couple of questions on Azzurro, which I think Lisa addressed in her first answer. One question that remains is, how does the company plan to address potential implications for its loan documentation processes?

[Lisa Jacobs, CEO at Funding Circle]

Thank you.

[Lisa Jacobs, CEO at Funding Circle]

I'd refer back again to the fact that there's no questions been raised in the court case regarding the validity of the loans and the enforceability of the loans and the personal guarantees. We're confident that through that process, Azzurro will win.

[Jack Gault, Director at Headland Consultancy]

The next question is on Marketplace. In H1, you disclosed 11% of term loan origination through Marketplace where you act as a broker and earn a fee. What was the percentage for the full year? Do you expect this to remain at this level?

[Tony Nicol, CFO at Funding Circle]

Marketplace originations for the full year were around the 10%-11%, so similar to the first half of the year. We'd expect that kind of level for go forward basis.

[Jack Gault, Director at Headland Consultancy]

The final question is, we can see that COVID-19 loans amortized by GBP 714 million in the year. Does COVID-19 loans include RLS and Growth Guarantee Scheme loans?

[Jack Gault, Director at Headland Consultancy]

If not, what was the total balance of all government loan schemes as at the end of 2023 and 2024?

[Tony Nicol, CFO at Funding Circle]

We look at the loans in a slightly different way to that in that we see the COVID loans were very, very different in nature to the loans that have been originated since. They were the only loans that were being originated at the time. As we've talked about before, the COVID loans continue to amortize down at a quick pace. As at the year end, about 27% of our loans under management were the COVID loans, and we'd expect those to continue to amortize down very quickly. We do not split the go forward government guarantee scheme loans from other loans. They are a relatively modest portion of our loans under management.

[Jack Gault, Director at Headland Consultancy]

There are no further questions on the webcast, so I'll hand back to Lisa for any final remarks.

[Lisa Jacobs, CEO at Funding Circle]

Thank you all for joining today. I appreciate it as a busy reporting day. Just in summary, we executed well in 2024. I'm really proud of the performance, and we're in a strong position as we enter 2025. Most importantly, I'm excited about the future as we deliver against strong growth and profitability trajectory, delivering significant value for our customers, partners, and shareholders.

Participants

Executives

• Lisa Jacobs, CEO
• Tony Nicol, CFO

Analysts

• Ed Firth, Managing Director at KBW
• Jack Gault, Director at Headland Consultancy