Flow Capital Corp. (FW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Flow Capital's Q3 2022 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Alex Baluta. Please go ahead, sir.

Thank you very much, operator. Thank you, everybody, for joining the call. Good morning. I'm joined by Gaurav Singh, our Chief Financial Officer. After the close of market on Friday, we released our financial results for the third quarter ended September 31. Details can be found on our website or on SEDAR. We had a peak quarter continuing the progress we made last year and in fact last quarter and the progress we've been making pretty much for the last 3 to 4 years. Moving to the financial highlights. Recurring revenue of $1.6 million, up over 40% from last year. Adjusted recurring free cash flow of approximately $400,000 in the quarter that represents $2 million in adjusted free cash flow year-to-date and $2.3 million in adjusted free cash flow over the past 4 quarters. That number represents a record of free cash flow for us going back at least 4 years. Total assets of approximately $53 million compared to $44 million at year-end 2021, and up from $51 million last quarter. Approximate cash of $9.5 million compared to $4.1 million at year-end, although that has since gone down through the payment of some payables as well as an investment that we closed shortly after the quarter. Book value is now up to $0.95 per share, and that's up 27% year-to-date, and it's up from $0.91 last quarter. Note that the numbers -- some of the numbers quoted above are referred to our adjusted numbers, not our IFRS numbers, and we tend to focus on recurring revenue. IFR numbers -- IFRS numbers can be volatile to be unpredictable timing of buyouts and/or unrealized fair value in FX adjustments. Given that we feel the more appropriate metric to view our progress is based on recurring revenue from existing investments and adjusted free cash flow. I'm not going to go into the detailed financial statements, but I do encourage everybody to download the report, either from our website or from SEDAR. So as you know, last 3 years, we've been transitioning away from royalties towards what -- towards venture debt, we would have called those royalties quasi-equity type investments, given the level of risk-free entailed. We've been coming dramatically down the risk curve with the venture debt investments. We really focused on growth companies that have growth north of 20% and our revenue above $5 million and have good strong governance in place easy through existing venture investors or bootstrap companies that have good strong governance. Today, we only have 1 revenue significant -- I should say, revenue royalty if there any significant size remaining. I think our revenue contribution from royalties is down below 20%. And probably by the end of next year, it'll be down to well below 10%, if not 0%, we readily issued term sheets for royalties. It's always about these high-quality senior top of stack type debt loans that we make to high-growth companies. It is worth noting that our revenue this quarter is down sequentially from Q2 this year. Last quarter, we had some gains in the revenue line from early exit, a company called Performio that did phenomenally well. But our numbers this year at $1.67 million did beat our internal forecast for this quarter. Turning to book value, as I said last quarter, honestly, I couldn't be more proud of our performance when it comes to book value and creating shareholder value over the past 4 quarters. I will note that book value is now up almost 28% from the beginning of the year, up over 71% from the year-end 2020 and up over 111% from year-end 2019. I think, our low in the last 4 years in terms of book value is around $0.44 and we're now up to $0.95. I challenge you to find any other company -- a profitable company to us in the same business that we do that have the same or better book value increase over the same time period. In terms of free cash flow, as I mentioned, over the trailing 4 quarters, we generated $2.3 million in adjusted free cash flow from recurring revenues. As I said, we manage our business using that metric. That's probably the most important metric that we've seen that in revenue growth. And our adjusted free cash flow metrics is very simple one. It's recurring revenue, less cash expenses, less interest expense. So no changes in the balance sheet or including that change in cash flow. In terms of new deployments, we didn't have any new deployments in the quarter, although we did close a deal over CAD 2 million just a couple of weeks after the end of the quarter into another SaaS company. While the new deployment this year has been a little bit disappointing, we have seen an interesting immaterial change in our pipeline since about the September time frame. It's worth pointing out that the beginning of the year was a very weird time in terms of the deal flow that we were seeing. I had suggested that what was really going on is companies who are primarily looking for equity to grow their business weren't understanding the changes in the markets as the equity market funding slowed down. But there's a really good presentation out there by a venture capital company called Battery Ventures. They did an analysis of the median multiples, valuation multiples between 2015 and 2020 and then compare that to the peak multiples in 2021. So just to -- and then segmented that by growth rate. So to give you an example, company is growing 20% to 30% had a median multiple to revenue in the 2015 to 2019 time frame of 6.45x, the peak '21 multiple was almost 24x. And by the end of Q2 this year, that multiple had actually reverted to below that need, and it was back down to 6.3x revenue. So we saw this in a lot of our deals in '20, '21 and '22 and companies were still thinking that they were worth 20 and -- 20x, sometimes higher multiples of revenue. that has disappeared from the equity markets. It's taken that a little bit of time to flow through into the expectations and perceptions of the company that we fund. And because of that, we've seen a fairly dramatic increase in the number of deals that we're seeing and the quality of deals that we're seeing. So for example, normally, we see about 1,000 leads per year. We're still on track. Year-to-date, we've seen about 850 deals, and we closed on 3 whereas this time last year, we closed on 7. But what's interesting is that in the last couple of months, the deals that are getting very deep into our pipeline, there's over 10 of them. And there's -- I would argue that most of those are of quality and size that we haven't seen for quite some time. And so one thing to note is we closed on less than 1% of the deals that we see. We're very selective in our deal selection and the deals that we find. Part of that is our focus on quality. But I'm very encouraged by the not the overall-- not the trends in the overall numbers, those are on track, and we continue to try to grow at the top of the funnel. But I'm very encouraged by the types of deals that we started seeing in the last couple of months. Continue on in terms of insurance and related payments. We did not have any access in the quarter, although we are expecting an exit imminently that we'll press release. You'll see that, that deal carrying a compound annual growth rate in terms of return of over 20%, and that excludes the value of the warrants, which are still have a couple of years in terms of life to those ones. So it's worth reiterating the type of investments that we do, we charge a cash yield plus small silver warrants then average leaves us with about 1% to 3% ownership of the company that we invested through warrants. And so right now, it has 16 active investment, 13 more positions and 3 common equity positions. And those warrant positions are important because they represent upside that sometimes takes a longer time to materialize given that the warrants normally have a 6-year life. But when they do, they represent a very meaningful contribution to our return to shareholder -- or return -- shareholder returns over time. We expect that over time, as we reach our $100 million assets and then we continue to grow, our warrant portfolio, which, as I said, is 13 right now, should be over 20. And we do not do deals with our warrants. We call this a minimally dilutive strategy as a replacement for equity. It's been very successful, and those warrants represent a very meaningful contribution to our upside over time and, frankly, downside protection. In terms of assets, just to mention, we went to $53 million, asset this quarter up from $51 million in Q2, largely driven by FX, but we continue to have good performance in all of our underlying investments. And birth -- book value is at $0.95 per share. At the end of the quarter, we had $9.5 million in cash, but that's down a little bit from investments and payable some tax in the U.S. And with that, I will pause my commentary and see if we have any questions. Operator, back to you.

[Operator Instructions] There are no questions at this time. I will turn the call over back to Mr. Alex Baluta. Sir, please proceed.

Thank you very much, operator. I appreciate everybody's time, and I look forward to speaking to you again at the end of the year. Thank you very much.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.