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

Good morning, ladies and gentlemen. Welcome to Flow Capital's Earnings Call for Q4 and Year-end 2024. [Operator Instructions] I would like to remind everyone that today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Flow Capital's risks and uncertainties related to these forward-looking statements, please refer to the year-end 2024 company's management discussion and analysis, which is available on SEDAR. Today's call is being recorded on Friday, May 2, 2025. I would now like to turn the meeting over to Alex Baluta, Chief Executive Officer of Flow Capital. Please go ahead.

Thank you, Joanna, and thank you, everybody, for joining or for listening to the recording. Yesterday morning, on May 1, we released our financial results for fiscal 2024 and Q4. I am joined today by my CFO, Michael Denny. And our numbers, including a recording of this call, our press release and our financial statements can be found on our website at flowcap.com or as filed on SEDAR. Q4 was another record quarter for us, capping off a record year. I'm going to keep these comments unscripted and relatively brief. I'll give you an overview of what we're seeing. And as usual, if you have any questions, please call us or e-mail us at any time. For Q4, we had a 44% increase in interest revenue to $2.7 million, which is a record for us on a quarterly basis. We had a 61% increase in recurring free cash flow to $545,000, and we reported $0.02 per share in free cash flow per share in the quarter. For the full year, we had a 31% increase in revenue to $9.3 million, an 88% increase in free cash flow to $1.9 million for the year, and we reported $0.06 in free cash flow per share. Our assets year-over-year increased 13% to $72 million. During the year, we deployed a record $28.5 million in new deployments, and our book value per share went up $0.01 from $1.19 to $1.20 per share. Some of the other numbers that you won't see in our press release or in our financial statements, I'll highlight now show the long-term track record of progress. Just as a reminder, it was in mid-2018 that we pivoted the company, changed the name to call it Flow Capital and focused squarely on the venture debt space. We now have a 6.5-year -- almost 7-year approaching 7-year track record of performance in this space. For the last 22 quarters, we've been profitable. That's 5 full years of recorded and reported profitability. Q4 this year represented the sixth sequential quarter in a row of revenue growth. And so our longer-term track record performance is really -- we're quite proud of here. If you look at our business model, there's an awful lot of operating leverage in our model, and you're just starting to see that. OpEx in 2020 was $3 million. OpEx in 2025 came in at $3.4 million. Now revenue over that time period was up 75%, OpEx was up 13% and recurring free cash flow from 2020 to 2025 was up 188%. So you can see, in particular, in this last year, where recurring free cash flow was up almost 100%. We're starting to get operating leverage in our business as we increase in scale. Now I will say that our management expense ratio, which is a typical metric that you'll see for asset managers, it's a little different for us because we're a public company, so we're not an LP-GP structure. But nevertheless, we look at it internally as a metric to manage our business by, and we're still pretty high at 5%. We feel strongly that the opportunity here for us to continue to scale our business is here. I'll talk about the market and the industry overall in a minute. And as we scale, we'll see increasing operating leverage in our business, driven primarily by the number of people that we need to manage our business, which you'll see we're starting to get that operating leverage. So management expense ratio is still high. But in spite of that, OpEx only up 13% in 5 years and free cash flow up 188%. Our net interest margin continues to be good. Actually, it's getting even better now as rates are coming down more aggressively in Canada, but also in America. Our assets -- or I should say, our balance sheet, we carry roughly carry about almost $37 million in equity and about $28 million currently, about $28 million in debenture debt, both of which are directly invested into our portfolio. Half of that debt is denominated in U.S. dollars and half of that debt is denominated in Canadian dollars. So -- we do get the benefit of dropping rates. And while we did offer floating loans during -- while the rates were going up, very few companies avail themselves of that. And so what you see is we have a fixed -- most of our portfolio is fixed interest and not floating. And as rates come down, we're benefiting from some increased margins. It's not as big a benefit as the operating leverage we're seeing, but we are seeing some benefit there. Over the last 5 years, you've seen us work to balance kind of three different pillars of our business, including deal flow, access to capital and people. At any given time, we had not enough of one and too much of another. But I think I feel, and it's showing up in our numbers that we're getting to the stage where we have, I think, a fantastic team. We have the capacity with the current team on hand to do a lot more business than we're doing. We're also slowly increasing our average deal size from what was in the -- sometimes sub-$1 million 5 years ago to on average, and we won't look at a deal now below USD 2 million unless it's very special. So you're seeing our average deal size creep up, but we have a team that can scale to significantly more capacity. We have access to capital during the year. We -- one of our highlights of the year was we closed a 3-year line of credit, a warehouse line, we like to call it with Triumph Bank in the U.S. I will say they're a fantastic partner, and I'll recommend them to anybody else if you want -- in our business, if you want a recommendation. And deal flow. So right now, we're actually quite busy in our current pipeline, but deal flow, it's quite lumpy actually. Sometimes it's excellent. Sometimes it's not so good. It's more a function of yield. Historically, over the last 4, 5 years, we've been seeing about 1,000 top of the funnel leads, and we've been closing on less than 1% of that. To me, that's a function of our focus on quality, frankly, and that's one of the reasons why we continue to have an excellent long-term track record. We've press released in the past our 5-year rolling top line performance on our portfolio is in the 24% to 26% range in terms of IRR, even better if you go back 6.5 years. But back to the NIM, the NIM is increasing as rates come down. So if I look at our portfolio overall, it's in quite good standing. We did have some write-downs this year. Part of that, a big part of that was mark-to-market on our equity portfolio. Just as a reminder, for people may be new to the story, when we do investments, they're senior secured loans in high-growth businesses. Our value proposition is primarily directed at high-growth companies, primarily technology companies. When we do a loan, we take a cash interest, very, very little pick. It's cash interest, but the unique aspect is it's nonamortizing, which in our industry is quite unique. But along with that, we take a small sliver of warrants. It might be anywhere from 1% to 2% of the company in terms of warrants, and that's really just a function of math in terms of the warrant coverage, the average size of the company. Our loans are capped. We don't do more than 1x ARR for a SaaS company. We don't do more than 20% of the enterprise value at underwriting. But when we underwrite, we get a small sliver of warrants. Our warrant portfolio now is in the mid-20, '22, '25. I can't remember the exact number. Michael can tell me. Our current portfolio at the end of '24 had 15 names in it. And so you're seeing us build a treasure trove of these warrant positions in these high-growth companies. And frankly, some work, some don't. But on our loans, we're laser-focused on getting repaid. But we did have some mark-to-market declines as valuations in our sectors or the segments that we focused on did come down from '21, '22, '23 to where they are now. They bounced a little in '24, but nevertheless, we had mark-to-market write-downs on some of our non-loan portfolio. We did have two loans that we took additional ECLs on. They continue to be active businesses. We're working on some restructuring of those companies. And so you'll see that reflected in our total assets. Now that's why our book value per share growth was only $0.01 this year. But overall, our loss ratios continue to be small, and we continue to have excellent top line performance in the portfolio over both the 5 and since inception perspective. And by the way, again, as a reminder, while this was a turnaround of a different entity, we consider inception to be the date that we changed our name, which was early 2018 to Flow Capital and pivoted into venture debt. And that's where we are using our since inception time line from. In terms of the overall market, it's very interesting. This is a very fast-growing segment of the broader venture ecosystem. So you'll see companies are staying private much longer. I heard a stat. I can't remember exactly where it was from, but there's 4,000 fewer public companies in North America today than there was, I think it was a decade ago. So companies aren't going public. Companies are staying private longer. Certainly, in this AI boom, you're seeing incredibly large funding rounds of private companies, which is unlike anything we've seen in the past, we don't play in that verified air, obviously. But broadly speaking, that's applicable to the entire market. In 2024, you saw the venture debt marketplace in America and extrapolates into Canada and Europe as well, grow by 95% in terms of originations. Originations were up to $53 billion in America, again, up 95% year-over-year in 2024. Now there were fewer deals, but larger deal size. So you're seeing that trend. But in the space that we play, which is much more at the smaller deal size, we're doing companies with a minimum of $3 million in revenue. Average revenue is increasing. It's close to double digits now. As I mentioned before, some of the requirements we have in terms of our types of deals we do. But we're seeing more companies turn to venture debt as well. And as I mentioned earlier, we've had challenges. We've always been trying to manage our people, our access to capital and our deal flow. I think the challenge today is just continuing to see those great deals. And since we have a less than 1% close rate, you can see that we continue to be very selective. As we -- some of the mots here we have are we target zero zeros, meaning zero losses in our portfolio. We also -- we also understand how hard it is to repay a capital loss of $1 million based on the net interest margin on the rest of your portfolio. So we are laser-focused on doing the best quality deals we can find. And in spite of that or because of that, we're still growing profitably, and we're having excellent year-over-year performance. And we do feel strongly that the opportunity here is for us -- I mean, look, we're $70 million in assets in an industry that broadly does $60 billion in deployments. We're going to -- we have lots and lots of headroom. In fact, in terms of competition, I'd say it's the same. We're not -- we lose some deals to other term sheets. We sometimes don't -- we're in noncompetitive bids. We've seen some of the industry players that we used to see leave the industry. They were funded by family offices. They weren't sort of -- they were looking at this opportunistically, not as an asset class that they wanted to grow into over the next 10 years or 15 years like we did. So we've actually seen some competitors leave. Some of the competitors that were more focused on revenue-based financing, you saw that blow up on the down -- the original version of blow up, not the upside, the downside. They exited the industry. And I think the bloom on that revenue-based financing rose is long gone. It's not as good for companies as term loans like ours, which are not amortizing. So arguably, we're seeing less competition, but I wouldn't say we're not seeing any. We're always trying to tailor our rates in our solutions. And frankly, as a reminder, the way we differentiate primarily is that we're non-amortizing loans. And so most of the loans that companies are getting from competitors might have an interest holiday of 6 months, 12 months and then they're amortizing. Our perspective is we pick great companies. We want to be fully deployed for longer, but also the companies can use our capital for longer because it's nonamortizing and they pay out in the bullet. And when they pay, it's either a refi, it's an M&A transaction. You'll see in Q1, we released a couple of weeks ago, one of our companies was acquired. They'll do an equity raise or they'll grow and they'll start paying out of cash flow. So there's lots of ways for companies to pay us back. And I think with that, I'll end my statements for the quarter and open it up for questions.

[Operator Instructions] There appear to be no questions. Back over to Mr. Alex Baluta.

Thank you, Joanna. Thank you, everybody, for attending and/or for listening to the recording. Again, please feel free to e-mail us or call us at any time. And we'll see you in only a couple of short weeks as we report Q1 later on in May. Thank you very much. Thank you, operator.

Ladies and gentlemen. Thank you. This concludes your conference call for today. We thank everyone for participating, and we ask that you please disconnect your lines.