Funding Circle Holdings plc (FCH) Earnings Call Transcript & Summary

Good morning, everyone. It's really nice to be able to connect with you all again. I'm pleased today to share our 2021 highlights and numbers alongside my direction for the future of the business. I'm going to kick off with the highlights of the last year. Notwithstanding the fact that 2021 was an exceptional year, we did deliver a great set of results. And I believe we're in the strongest position that we've been as a business. Over the last decade, we've proven our business model. When we launched, we were lending to businesses that have been through crises and recessions. Now we have lived that with them. We have seen the strength of our risk models through this period, delivering positive investor returns in every cohort to our investors. Thanks to our track record, we have strong demand for loans and have attracted a diverse group of investors. In the U.K., we continue to be the leading platform for small business lending with strong brand awareness and customer advocacy as evidenced by our NPS at 82. This gives us a strong base from which to continue our growth over the medium term. We have built a world-class technology platform. At the start of the year, we finished our migration onto our new decisioning and originations platform. This enables us to deliver a superior customer experience with Instant Decision Lending and personalized customer journeys. Today, 70% of our loan applications received a fully automated and instant decision. Our 2021 numbers are strong. Over GBP 2.3 billion was originated through the platform to over 27,000 businesses. And loans under management stood at GBP 4.5 billion at the end of the year. That translated into GBP 207 million in total income. We are focused on delivering profitable growth. And this year, I'm especially proud of the fact that we have exceeded the guidance we set at the half year results and delivered GBP 92 million of adjusted EBITDA and an operating profit of GBP 64 million. In this last year, we have shown the levels of profitability our business can deliver at scale. As at the end of 2021, we had net assets of GBP 288 million, which includes cash of GBP 224 million. As I look ahead for Funding Circle, there is an exciting future, driven by our technology, growth opportunities and aided by market tailwinds. The COVID pandemic has accelerated digitization and online adoption by years in many industries. SME finances are no exception. 68% of SMEs are looking to manage more of their business online. Just as we benefited from our technology in COVID, we'll continue to benefit from this going forward. Our technology platform will continue to drive growth. Not just in our core term loan product category but also in our new products. Our automated lending target is that 80% of applications will receive an automated and instant decision. And this is important. Because not only does it deliver a great customer experience, but it also drives higher conversion and operating leverage. We have attractive growth opportunities. And we're taking the opportunity to reintroduce our medium-term guidance for the U.K. and the U.S. today, aligned to our new medium-term plan. This reflects the maturity that we've reached as a business. At the start of the year, I launched a new medium-term plan, which I'll talk about in more detail later on. At the crux of this is a transition to enable us to help our customers with new solutions. We'll use the decade of learnings we've built to pivot into new areas, FlexiPay, Flexi Card and to integrate into other environments as we serve SMEs where they are. The strong results that we have achieved in 2021 and the innovations and improvements we have delivered for our customers are thanks to the passion and dedication of our team, our Circlers. I want to take the opportunity to thank them for all their hard work this year. Many of those Circlers are part of Funding Circle because we are a mission-led business, using technology and machine learning to help small businesses win. You can see on this slide, Mark and his women's sportswear business, Just Strong. My parents were also SME owners. And in fact, Mark's business, one of the tens of thousands we supported last year, is located just around the corner from where my parents ran their business. So I'm acutely aware of the passion, energy and resilience of small business owners but also the challenges that being a small business owner can bring. This is one of the major reasons I joined Funding Circle nearly a decade ago. We have a huge impact. To date, GBP 14 billion has been originated to over 120,000 businesses globally. This is positive, not just for these small businesses but also for the economy and society at large. Last year, lending through Funding Circle supported over 100,000 jobs and contributed over GBP 7 billion in GDP to the U.K. alone. I'm really proud of this fact. Our Circlers are really proud of this fact. But we still feel that we are scratching the surface in terms of how we can support small businesses. That's why I'm pleased to share where we are heading and the journey we are on. We are at an inflection point. Over the last decade, we have focused on delivering a great term lending product to small businesses. We have been very successful at this. Our customers really value our product. We are in a strong financial position. And our decade of investment and learning in data and technology has built a world-class product. We are in the strongest position that we've ever been. And we'll build on these successes in 2022 and beyond. We are transitioning into a multiproduct platform that provides more for our small businesses, increasing engagement and consequently their lifetime value. We will also distribute more through partners in the U.K., through our API; and in the U.S., through more integrated partnerships providing Lending as a Service. This is an important shift for us as it enables us to leverage the advantages we have built. It won't happen overnight, but we are committed to solving more problems for our customers. The traditional financial sector has not served SMEs well. Despite them being a huge societal impact, they are a very small part of what banks do. And that is true in term lending but also in developing more innovative solutions, such as our FlexiPay set of solutions. The reason is because small business lending is hard. It's hard because they're a very diverse group. A sportswear brand, like Mark's that we've just seen, has very different cash flows and balance sheet to an accounting practice, a dentist, a manufacturer or a restaurant. It's hard because the risks are complex. In small business lending, there are the standard risks that you might associate with an individual, but there are also the sectorial changes and macroeconomic factors that impact that business. Traditional finance providers, banks or specialist lenders have therefore tended to focus either on secured lending because it's easier to underwrite a van or a property than the business itself or they have concentrated their lending on the larger businesses which offer greater security. We have done things differently. We have taken a data-driven approach to solve this problem. And this is how we're doing it. Over the last decade, we've invested heavily in our technology and data science platform. Our unique capability is shaped by the data we've accumulated and how we use it. We have 2 billion data points in our data lake. And this is growing every day. We've accumulated public data on over 26 million businesses, businesses that have thrived as well as those that have failed. In addition, we have proprietary data from over 900,000 applications, which includes more granular financial information on the business. We add to these sources our behavioral data from those applications and the GBP 14 billion of lending for our platform. This data has insights on a variety of borrower behaviors, such as payments events. The combination of this enables us to build accurate AI and machine learning models. In the U.K., we are now on our eighth generation risk model. And I'll go on to talk about what that means in a second. But what matters most is not the vast amount of data we've accumulated but what that delivers for our customers. As we've spoken about previously, we've been rolling out Instant Decision Lending in the U.K. And we've now reached a point where 70% of our U.K. applications receive an instant and automated decision. Last year, that number was 50%. So you can see the great progress that we're making. On average, businesses spend just 6 minutes filling out an application. And that could be a business that's borrowed from Funding Circle before or a business that's brand-new to Funding Circle. For those businesses that receive an instant decision, they'll get that on average in 9 seconds. That's important because getting a decision, whether yes or no, allows a business owner to focus on running the rest of their business. This is all powered by our tech and data platform. We bring world-class capabilities to deliver for our customers as well as for our business. And together, these capabilities built a strong moat around Funding Circle. As we continue to innovate and attract more businesses, we accumulate additional data into our growing data lake, which makes our risk models stronger and more predictive. Our risk models are significantly better than the bureau scores. This enables us to say yes to more businesses whilst delivering strong returns. Our customer experience is slick and quick. We use our decade of experience to deliver instant decisions. Our decision engine provides personalized journeys and propositions, which means that our customers only have to provide what's absolutely necessary to get a decision. And this increases conversion. Our platform also reduces costs, delivering operating leverage as we scale and focus on marketing dollars and pounds on those businesses which we know, thanks to our machine learning models, are most likely to respond, are most likely to be successful in receiving a loan and are then most likely to accept that loan. It is also the strength of this platform that opens up our new growth opportunities in distribution as well as in new products for our customers. Customer advocacy is important to us as it drives our flywheel. Delighted customers translate into repeat customers and enable us to continue to expand our product range. Earlier, I spoke about the fact that customers really value what we do. And you can see this in our NPS and the gap between what we do and what banks do. Our U.K. borrower NPS was 82. This is a remarkable figure when compared to other industry standards. It translates into stable repeat usage with an average Funding Circle customer taking out 2 loans over a 5-year period. However, given our strong customer advocacy, we can do better than this. And we'll increase the level of engagement with our customers as we deliver our new products. It also delivers sustainable income as the proportion of income that we receive from existing investors and borrowers continues to increase. It stands at 54% in 2021, up from 51% the year prior. Oliver is now going to take you through our 2021 numbers. And I'll then come back to talk you through our medium-term plan.

Thank you, Lisa. Good morning, everyone. It's my pleasure to be able to share Funding Circle's 2021 financial performance. However, before I do that, let me begin by recapping how Funding Circle makes money. We have a fee-based income model that we call operating income with some limited investment income. We then have our operating income, where we see 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 around 5%. Servicing fees are more of an annuity stream charged to investors, charged at circa 1% per annum and driven by the loans under management. The proportion of income from servicing fees has increased over time as the loan has grown. Together, the transaction and servicing fee income make up around 80% of Funding Circle's total. 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 1/5 of total income in 2021. Over time, we expect operating income will make up a greater proportion of total income. Investment income will reduce and become less volatile. Let's now look at the group results in overview. By way of context, in half 1, we supported borrowers through participation in the government guarantee programs: PPP in the U.S. and CBILS in the U.K. PPP ended in May. In June, we relaunched our commercial loans in the U.S. In the U.K., CBILS was succeeded by the Recovery Loan Scheme, or RLS. From June, it will relaunch for commercial lending alongside the Recovery Loan Scheme. High levels of investor demand exists in both the U.K. and the U.S. to fund the forward flow of originations. The table shows the performance in 2021 full year and by half, alongside the comparators of half 1, half 2 and full year 2020. Loans under management was GBP 4.5 billion, up from GBP 4.2 billion in 2020. Half 2 was down on the record half 1 LuM of GBP 4.9 billion due to the anticipated loan amortization and prepayments and expected PPP forgiveness. Origination volumes were GBP 2.3 billion, a record level in half 1. Half 2 saw reduced borrower demand as the government schemes ended. And as expected, half 1 saw some pull-ahead of borrower demand from half 2. Operating income at GBP 165.5 million was up 6% year-on-year, driven by higher service fees, both volume and yield. Investment income continued to reduce as the loans on our balance sheet amortized down. And in 2021, we sold the loans in both the U.S. and U.K. on-balance sheet warehouses, realizing GBP 70 million of cash. These loans were initially held on the balance sheet with the intent to sell. And exiting these warehouses is in line with our stated strategy. 2021 saw fair value gains on our balance sheet investments, reflecting an improved view of both actual and forecast credit performance and economic conditions. This performance is also reflected in our returns to investors, which are positive for all annual cohorts despite the impact of the pandemic. We have again revised return expectations upwards. Expenses above adjusted EBITDA reduced to GBP 143.7 million, down 9% from GBP 167.5 million. This is due to the benefits of the restructuring in Continental Europe announced in March 2020 and in the U.S. announced in July 2020, along with continued tight cost control. Expenses below adjusted EBITDA were broadly flat. The 2021 exceptional reflects the subletting of the San Francisco office. I am delighted to report Funding Circle's first full year of both adjusted EBITDA and operating profit with profitability in both half 1 and half 2. Full year adjusted EBITDA was GBP 91.8 million and the operating profit was GBP 64.2 million. Notwithstanding the nature of the government support schemes and the nonrecurring nature of the fair value credits, the overall profit performance demonstrates the power of Funding Circle's platform model. This is also shown in the year-end cash position of GBP 224 million. Net assets also grew to GBP 288 million. As I'm sure you will agree, these are a strong set of results, demonstrating continued progress and a firm position for the future. I will now explain these results in more detail. This and the following slide show full year 2019, 2020 and 2021. 2019 is included to help anchor our results at a time of pre COVID. Additionally, to give greater insight, the half 1 and half 2 figures are given in the table below the charts. In the U.K., loans under management grows to over GBP 3.9 billion as the strong origination levels in half 1 and prior periods flow through. LuM is up over 20% year-on-year. Compared to the record LuM in half 1, we certainly expect to fall through ongoing loan amortization and prepayments. Originations are at GBP 1.972 billion. This is slightly down from 2020. We saw very strong originations in half 2 2020 and half 1 '21 with a below-trend level of originations in half 2 2021. We are seeing continued momentum in the recovery of borrower demand during the second half of '21 and into the early part of this year. This volume performance feeds into record income of almost GBP 160 million, up 4% year-on-year. Within this, operating income of GBP 137.7 million is up 11% and investment income continues to reduce, down 1/4 year-on-year. Within operating income, servicing fees continue to grow, now 32% of the total, up from 20%. The U.K. has continued the strong profitability seen since half 2 2020 with a full year adjusted EBITDA of GBP 61.9 million, a margin of 39% and operating profit of GBP 44.3 million. Of the GBP 61.9 million of adjusted EBITDA, operating EBITDA accounts for GBP 29.7 million, up nearly 40% on 2020's GBP 21.4 million. This is driven by operating income up GBP 13.8 million year-on-year. Investment EBITDA is GBP 32.2 million with investment income down GBP 7.2 million year-on-year and fair value of credit of GBP 10.5 million compared to 2020's charge of GBP 43.9 million. Turning to the U.S. It's fair to say that the impact of COVID on our business in the U.S. was greater than in the U.K. U.S. loans under management was GBP 425 million, down 45% year-on-year. This reflected the expected roll-off of our pre-COVID loans and the expected forgiveness of PPP loans. These are designed to be forgiven by the government if certain criteria are met, for example, around the use of funds to pay salaries. PPP accounted for GBP 207 million of our LuM full year 2020. During the year, GBP 208 million of loans were forgiven, including some originated in the year, leaving GBP 125 million of PPP in the LuM at year-end. It should be noted we made no servicing fee on these loans, so PPP in the LuM is not a driver of income. Originations were GBP 316 million, primarily through the restarted PPP in half 1. The 2021 scheme has some different characteristics to the 2020 programs. Average loan size was lower, but the yield per loan was higher. With PPP ending, we started our commercial lending in June. We have seen suppressed borrower demand in our segments. And given the economic uncertainty, we've adopted a cautious approach to underwriting. We have seen positive month-per-month momentum in originations through the second half and into 2022. Total income was GBP 44.8 million, GBP 25.1 million operating income and GBP 19.7 million investment income. As discussed at half year, we defer the recognition of income earned from PPP originations. As these loans are funded by the Federal Reserve's PPP liquidity facility, they are on Funding Circle's balance sheet, although of no Funding Circle equity invested. As these loans are not held for sale but all forgiven by the U.S. government, we are required to spread the transaction fee earned over the expected life of the loans. This expected life has ensured the projected forgiveness of these loans. GBP 14 million of income in half 2 was income deferred out of half 1. In 2021, the U.S. is adjusted EBITDA positive at GBP 28.4 million and operating profit profitable at GBP 18.5 million for the first time. This elevated level of profitability is as a result of, firstly, the originations performance of business achieved for PPP. PPP illustrated the strength of Funding Circle as a business with a leading online presence, clear scalability and the ability to adapt rapidly. Secondly, investment EBITDA of GBP 37.8 million including an GBP 18.1 million fair value gain in '21 versus a GBP 73.4 million charge in 2020. Year-on-year investment income reduces by GBP 17.6 million. Thirdly, the benefits of the restructuring announced in July 2020 flowed through. Operating expenses above EBITDA reduced GBP 16.4 million year-on-year. Putting this together for Funding Circle as a whole. 2021 saw record loans under management of close to GBP 4.5 billion, up 6% year-on-year, and originations of GBP 2.3 billion. Total income was GBP 206.9 million. We saw continued growth in operating income, up 6% to GBP 165.5 million. In line with our strategy, investment income has reduced over time due to the natural roll-off of the loans within the investment vehicles and our strategy of monetizing those vehicles as opportunities allow. Investment income is down 38% at GBP 41.4 million. 2021 sees the first full year of both positive adjusted EBITDA and operating profit for Funding Circle after initially achieving this milestone in half 2 of 2020. Group adjusted EBITDA is GBP 91.8 million, up from a loss of GBP 63.8 million in 2020. Operating EBITDA is up to GBP 21.8 million from a loss of GBP 11.8 million. And investment EBITDA, reflecting fair value gains, is up at GBP 70 million versus a loss of GBP 52 million in the previous year. Operating profit rose to GBP 64.2 million, up from a loss of GBP 106.3 million in 2020. Within this, exceptional charges of GBP 3.9 million in '21, down from GBP 18.7 million in '20. Turning to costs. Operating expenses have continued to be actively and tightly managed. The half-on-half reduction in costs continue as the full benefits of restructuring actions flow through. Costs are down 12% year-on-year. We continue to invest in technology. We retained a conservative position on capitalizing this spend. Marketing costs remained relatively stable during '21 at 28% of operating income. We expect to see broadly this level of marketing spend continuing. Our balance sheet remains very robust. Net assets of GBP 288 million, up GBP 70 million since 2020, as the profit flows through to net asset growth. The net asset position includes cash of GBP 224 million, up GBP 121 million from the December '20 cash balance of GBP 103 million. We have simplified the balance sheet with securitization vehicles paying down and sold the loans in the U.K. and U.S. warehouses, generating GBP 70 million in cash. Within the net assets, we've got equity investments of GBP 70 million. This is within the guardrail we communicated at the 2020 full year results. Over and above funding the U.S. and FlexiPay growth, this strong balance sheet and cash position puts Funding Circle in a very comfortable position in this time of economic uncertainty. The prior slide talked to our balance sheet. Let's now turn to loan performance and the returns provided to our platform investors. We continue to see an improving outlook for Funding Circle owners. Our credit risk management continues to be proven, our borrowers continue to be resilient and loan quality continues to be good. Our projected returns shown here include a forward-looking element. We continue to be prudent in forecasting ongoing stress, recognizing the uncertain economic environment. In both the U.K. and the U.S., the latest forecast shows a continued improvement in expected returns for our investors. The U.K. is shown on the left and the U.S. on the right. For each annual cohort of originations, we show how the expected returns have evolved over time. As you can see, despite the unprecedented impact of the pandemic, even though cohorts most impacted are returning a 3%-plus return to investors. It's worth briefly explaining the U.S. pattern. The 2020-2021 loan types reflect the types of loans offered through the period. In other words, we began 2020 with our commercial loans, moved to PPP and then relaunched our commercial loan offering. PPP investor returns reflect the unique characteristics of PPP, including 100% guarantee in the loans and the result of low levels of interest charged. The investor returns shown demonstrate the robustness through the cycle of the asset class that Funding Circle has developed. The pie chart on the left of this slide shows our sources of funding for our GBP 4.5 billion of loans. This diversified set of funding sources is broadly stable with asset managers and banks continue to be our largest investors. Year-on-year, the proportion of funding for asset managers is increasing and those of retail, bonds and private funds is decreasing. Within each of these segments, we further maintain a diversified investor base. Retail continues to diminish as a proportion, now down to 5%. Retail has been closed to new lending since the inception of CBILS in May 2020. High levels of institutional investor demand exists in both the U.K. and the U.S. to fund the forward flow of originations. Today, we have confirmed that we will not reopen the retail book to new lending, and we'll manage the wind-down of the book as loans pay down. Since launch in 2020, retail investors have earned average net returns after fees and bad debts of circa 5% annually. The right-hand pie chart shows a proportion of LuM provided by Funding Circle's balance sheet. As a reminder, Funding Circle deploys its equity where it makes the 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 for investor returns. We have GBP 70 million invested, which is less than 2% of the total book. As I'm sure you will agree, whilst acknowledging the exceptional nature of government loan schemes and the nonrecurring nature of the fair value gains, these are an impressive set of results, demonstrating continued progress and a strong position for the future. I would now like to hand back to Lisa to take us through our plans for the medium term in both the U.K. and the U.S. and also our new products.

Thanks, Oliver. So we've spoken so far about where we stand today as a business. We're in a strong position. We've proven our model. We are market-leading in the U.K. We've built some world-class technology. And we are coming off the back of a strong financial position. Let me talk about what's next. As I said at the beginning, I wanted to set out my direction for the business. our new medium-term plan. It builds on our strong foundations, delivers growth and transforms the business from a single product category into a multiproduct direct and embedded platform. It has three customer focus pillars. First, attract more businesses. Building on the tailwinds of increased online adoption, we will strengthen our multichannel marketing and embed in partners' native environments so that any customer looking for a Funding Circle loan can access it seamlessly, whether directly or through one of our partner sites. Second, we'll say yes to more businesses. We'll optimize our platform, expand our products and leverage our integrations with other lenders through our marketplace to increase conversion of those businesses. Third, we will enter into new product categories, categories which build on our capabilities, build more engagement with our customers and where we know we can build market leadership positions and become #1. Let me take you through each of these pillars. In the U.K., we will attract more borrowers by strengthening our direct channels and embedding our financing solutions in our partners' journeys to reach businesses at the right time and in the right place. At the end of last year, we launched our new API with our first partners, Capitalise and Funding Options. Whilst we've worked with partners for many years, our Instant Decision Lending technology, in combination with our API, is very powerful. This enables our partners to deliver an instant loan offer from their native environments, giving them access to a superior customer experience and enabling us to reach customers at the right time. We expect to see significant growth in this distribution channel over the medium term as we expand our capabilities beyond our direct platform to an embedded solution. We will also increase conversion of those businesses that we attract. And we'll do this by: firstly, utilizing the data analytics and technology that I spoke about today to create personalized journeys and pricing, ensuring that we deliver the right product to the right business at the right time; secondly, by deepening and broadening our marketplace offerings, where we match businesses that we can't support or where we don't have the right Funding Circle product to a marketplace of other lenders; and third, expanding our term loan product propositions to serve a broader range of businesses. As Oliver showed, the U.S. has been hit harder from COVID than the U.K. As we build back, I've taken the opportunity to refine our strategy to fit the market better. Similarly to the U.K., in our U.S. business, we've built some powerful capabilities over the last 8 years. Over that period, we've originated $4 billion. Pre COVID, we reached an annualized run rate of $1 billion. We have nearly 40,000 borrowers in the U.S. And despite the challenging environment over the last 2 years, we've been nimble to respond, pivoting to offer PPP loans and then as of mid-last year, back to our core and marketplace offering. Our analytics and underwriting has been proven resilient with positive returns through the cycle. And this gives us some strong foundations. However, the market in the U.S. is very different from that in the U.K., as you can see on the chart on the right-hand side. The U.S. is a very fragmented market. There are literally thousands of banks across the U.S. market. And the top 10 banks in the U.S. make up just 25% of SME lending compared to nearly 70% in the U.K. That makes building brand awareness very hard. In fact, there are very few financial institutions that have done this nationwide in the U.S. As a result, we'll be refining our strategy to focus on more integrated partnerships. Given the fragmentation across the U.S. market, the capabilities that we have built are very attractive to partners such as regional banks, who are looking to expand their offering into small business lending but simply do not have the capabilities. These banks have seen the impacts of COVID, moving lending online and are looking to partner in order that they may benefit from accelerated digitization. In the U.S., we'll therefore double down on building our partnership business through deeper integrations with existing partners but also with new partners such as regional banks and partners with large SME brands. For these partners, we will offer more than just a regular partnership. We will begin to offer Lending as a Service. This enables our partners to use our technology platform and our loan origination and underwriting expertise to provide loans to their customers. We're really excited about this opportunity. But it is nascent and it will take us some time to scale. We expect to see with each of these partnerships 1 year or so of partner engagement and development, 6 months or so in pilot testing before we see the partnership scaling. We've developed a strong partner pipeline. And we hope to share some updates on new partners soon. In the U.S., we'll also focus on increasing our conversion. As in the U.K., we'll build improved customer journeys, focusing on optimizing and reducing friction in the process, such as reducing document requirements for lower-risk segments. We will also expand our Funding Circle product set, where we will be launching a super prime product imminently. Our third pillar relates to our growth in new products. This marks an important shift in our business and one which is enabled by the capabilities that we've built to date. Today, we have a product that our customers really value. However, we have a term loan product, so businesses do not interact with us frequently, taking out on average of 2 loans after 5 years. We also know that there are many other ways that we can leverage our technology to serve their needs. Our new products, FlexiPay and Card, enable us to play a more important and frequent part in our customers' lives, moving from an annual to monthly and even daily cadence. It also opens up a new and sizable market for us. There are over GBP 1 trillion in small business payment transactions each year. When we launch new products, we do it prudently. You should expect to see 1 year or so of discovery, research and development, followed by 6 months to 1 year of live testing before entering into the ramp-up phase. That means we'll start to see the ramp of FlexiPay at the end of this year. To recap on what FlexiPay is, FlexiPay enables businesses to spread any payment to a supplier over a period of 3 months for a one-off 3% fee. For small businesses, cash flow management is one of their biggest pain points, so FlexiPay provides a really valuable proposition. When we spoke to you at our half year results 6 months ago, we had just launched our beta test to our existing customer base. And whilst we're still early in our developments, we've seen some very positive signs so far, which I wanted to share with you. Our beta trial of 850 customers has delivered usage in excess of our expectations with nearly GBP 12 million of credit lines. Payment is 20% higher than expected. And the average number of transactions is double our expectations. And this shows the level of engagement that we are seeing with our customers. We've now also expanded our beta trial to a new segment of borrowers. These are borrowers that are new to Funding Circle and can apply today through our website. We look forward to ramping up FlexiPay in the second half of the year and launching our FlexiPay Card trial at the end of the year. Oliver will now share what this medium-term plan means in terms of our financial guidance over this year and the medium term.

Thank you, Lisa. Funding Circle is in the strongest position it has been. And we have proven the resilience of our model over the last 2 years. The economic environment is uncertain. And as previously highlighted, the market continues to be distorted as a result of COVID government loan schemes. However, as demand returns to pre-COVID levels through 2022, we are well placed to capture the opportunity going forward. In 2022, operating income will be in the range of GBP 145 million to GBP 155 million as we start to see demand normalizing from the elevated levels of lending in '21. This level of income is slightly lower than '21 though higher than the half 2 '21 run rate. Investment income will continue to decline and the volatility continue to reduce. Investment income will be in the GBP 10 million to GBP 15 million range. Group total income will, therefore, be in the range of GBP 155 million to GBP 170 million. The business will continue to be adjusted EBITDA positive with a skew to half 2. We see attractive medium-term opportunities, as Lisa has described in the previous pages. I have previously described the U.K. business as the engine of Funding Circle. By 2025, we expect U.K. total income of at least GBP 220 million. And the overwhelming majority of that will be operating income. Adjusted EBITDA margins will be in the region of 30% to 35%. In the U.S., we anticipate at least GBP 70 million of total income by 2025. The business will reach adjusted EBITDA breakeven during '24, incurring maximum further cumulative losses of circa GBP 25 million to get to breakeven. For FlexiPay, we see significant growth trajectory between now and 2025, though it remains early to be precise on income expectations. By 2025, all segments of the group will be profitable. Lisa?

Thanks, Oliver. In conclusion, I'm really proud of what we've achieved as a business over the last decade and delighted to be leading this business going forward. We are at an exciting inflection point as we move towards a multiproduct platform. We have a proven business model that's been tested through the last 2 years and speaks to the platform durability through a changing market. Our technology platform is world-class and is a strong moat around our business. Our full year results have delivered ahead of expectations. And whilst the current environment is uncertain, we are strongly positioned to weather any short-term headwinds. Over the medium term, we've created a great plan. And we have a mission-driven team who are motivated to deliver it. I believe that this business is in the strongest place that it's ever been. We have achieved a lot over the last decade. But as I look ahead, I think the best is yet to come. I'm looking forward to driving the business over the coming years to become a very impactful and very valuable business. Thank you, and we'll now take questions.

[Operator Instructions] We will take our first question now from [ Aleksy Wójcik ] from Goldman Sachs.

Lisa, Oliver, congratulation on the results. It's Lukasz from Goldman here. I've got a couple of questions. So the first one would be on the sort of Lending as a Service. And how do economics here compared to traditional partnership that you have with the likes of Atom bank in the U.K.? Is it more of a subscription revenue? Or is it like a preferential pricing that you give on the origination? Or is there any difference at all? And on the FlexiPay solution, when you sort of say in your guidance that this is not included -- for 2022, this will not generate any revenues and sort of in your long-term guidance, you also do not include anything contributing from FlexiPay, like theoretically speaking, what kind of numbers do you think this can generate over the course of 3 years? And I assume that this business should be fairly accretive to your profits from the moment it's being launched.

Thank you for the question. So I'll take the first one on Lending as a Service to kick off. So Lending as a Service, the proposition that we offer to our partners is that they are able to make use of our technology platform and our underwriting and origination experience to offer loans to their customers. And so that could be embedded in their site, that could be through an API. And the reason why we think there is such an interesting market in the U.S. for this is because of the number of large regional banks that there are, over thousands in the U.S. And actually, what's happened over the COVID period is that as their customers have moved online, these banks want to be able to support them with offering a greater service and a greater proposition. Now it's different from the partnerships that we have with lending partners such as Atom in the U.K. Because this is actually a product that these banks or these partners will provide to their customers as well as providing the funding for those customers, so it's closed loop. With our lending partners in the U.K., they're providing the funding, but they are not offering this directly to their customers. In terms of the second question, I'll answer first a bit and then we'll pass to Oliver. So with FlexiPay, it is very early days and it is quite nascent. And so as a result of that, then we are in a test phase with our customers, and we've shared -- I shared some of the results of that beta test with our customers today. But it's too early for us to be giving precise income figures.

Lukasz, thank you for your question. Yes, in terms of about the accretive nature of FlexiPay, it's probably worth noting for a few years, it will have probably low single-digit losses as we invest and we scale out a new product. But we expect it to be breakeven by 2024. Just in terms of thinking -- of how to think about the accretive nature, so as we've spoken about our platform that we've developed for the core term loans, it's a platform on which we're building FlexiPay. We market it heavily in the U.K. to the small business community. And that marketing equally applies to FlexiPay. And the capabilities and the operational setup we've built at Funding Circle in the U.K. over 10 years again can be leveraged for FlexiPay. So it's very much incremental and therefore, you're very right, very accretive. But there is a small drag over the first few years as we scale up a new product.

Got it. And maybe last question on the demand environment, especially that we're getting into a difficult macro backdrop with the SMEs being squeezed because of the fuel prices, gas prices, electricity prices. Do you see so far this year demand environment, let's say, normalizing post the pull-forward that we have seen in 1H '21 and sort of decelerating growth in second half of '21? Or is it still early to tell what sort of normalized environment for lending looks like?

Thanks for the additional question. As we said, we expected to see this level of reduced borrower demand following the exceptionally high volumes of government schemes in 2020 and 2021. To your point, 2022 has started well and is showing an increase from H2 2021 levels. But we are very mindful of the uncertain economic environment and the continued impact of government schemes. So we expect that demand to normalize through 2022. And we're well placed to capture that opportunity going forward.

We will now go to our next question from Ed Firth from KBW.

I had a series of questions, if that's all right. Should I just go through all of them? Is that the easiest?

Sounds great, Ed.

I guess, the first one was sort of related to that last question. How are you finding demand from funders? So do you still have -- is the wholesale appetite for SME exposure still as strong as it was last year? I guess, that would be my first question. And what is the sort of early indications there? The second question was just sort of looking at the U.K. market generally, I always sort of wonder with you guys, whether you -- and I'm not -- it's not meant to be rude or anything. But how confident are you, Lisa, as a sort of the new CEO that you are sufficiently ambitious as a company? Because having had some direct experience as an SME borrowing off banks, the service they generally provide is truly abominable. And yet your total book is about GBP 4 billion in a total market of over GBP 200 billion. And I still find it amazing that there's not greater demand and more appetite. So I just wonder if you could sort of give some thoughts or give us some comments as to why you think that is a sort of -- why that GBP 4 billion shouldn't be GBP 8 billion or GBP 10 billion or GBP 15 billion or GBP 20 billion, et cetera, if that makes sense. Third question was on the U.S. Could you just talk about -- I mean, how many -- I mean, sort of give us some more detail about have you had conversations with certain regional banks, et cetera? Because I think that sounds really exciting. But I'm not sure of just where we are from an idea. Or is it an idea where you've got two or three counterparties who are ready to go and -- et cetera? So some sort of idea of that. And perhaps connected to that, of the GBP 305 billion that I think you highlighted in the presentation, I'm not talking 2025 but sort of longer term, have you got any sort of sense as to what sort of share of that addressable market you think would be reasonable for us to be thinking about? Sorry, I'm going on. And then my last question. You mentioned in the presentation, it sounds like you've got a sort of time to market of between 18 months and 2 years, I think, if I got that right, in terms of beta testing and then pilot programs, et cetera. I mean, that's -- I probably don't know what I'm talking about. But that seems to me to be an extremely long time. A lot of people are talking to me in the sort of tech world that we don't have to do pilot testing anymore, that you can just launch products and see how it goes and that can be the pilot. So I just wondered how confident you are that, that is the right sort of scale and whether what you could do to reduce that or whether we should -- you could speed up that process to some extent. Sorry, that's a lot of questions, but thanks very much.

I'll quickly get the first one out of the way and then pass over to Lisa. So our demand from our institutional investors in both the U.K. and the U.S. remains strong. We continue to onboard new investors. And we continue to expand the arrangements we have with existing investors.

And then Ed, let me come to your second question on the U.K. market and how confident are we in terms of our ambition. So you are right that we offer a very good proposition to our customers as we shared in the presentation. And as a result of that, we do have very high customer advocacy. And what tends to happen is once a business borrows from us, they will come back and borrow from us again. And for us, what we have concentrated on is providing a really great term loan proposition. What we are doing with FlexiPay is actually providing a proposition that businesses can use more frequently. And therefore, we can be a more integral part of their lives, of their business lives, of their financial lives. And we think that, that will support us in terms of bringing more businesses on at the right time. And business has come back to us for a term loan 2 times over 5 years, whereas we're seeing a much higher engagement with FlexiPay. And that will give us that ongoing relationship with businesses that currently businesses have with their banks. In terms of the U.S. and the Lending as a Service and the conversations that we've had with regional banks. We do have a pipeline of conversations going with banks and also with partners who have a large small business presence. And these are businesses who are attracted to Funding Circle and actually through COVID have been -- we've increased the number of conversations that we're having as those banks are looking to increase and improve the online offering to small businesses. We expect to have some news coming soon, and we'd like to update you on how those partnership conversations are going when we can. In terms of the share of the addressable market, as I said, the U.S. market is very fragmented. And we don't need to have a lot of the share of the market in order to make Lending as a Service very successful. And so we don't expect that this will be a winner-takes-all market. But we expect to build some good integrated partnerships with these regional banks, with these large SME brands in order to capture more of that. It's too early to say at this stage exactly what number that would be. In terms of the time to launch, one of the things that we concentrate on as we are rolling out new lending products is making sure that we're doing so in a prudent way and the risk is good. And so that is -- and we also are focused on delivering a very great customer experience from a technology perspective. And so that is what takes us time to launch these products to test them. We're already in testing with FlexiPay and have a good number of learnings from that, which will enable us to ramp in the second half of the year. But it is quite different for us to ensure that we're testing credit products in a prudent way versus noncredit products.

Okay. But if we take something like the U.S., I mean, you do U.S. lending today. I'm not quite sure why it's not just like a sort of -- I mean, I'm sure I'm being oversimplistic here. But if you do a partnership with a U.S. regional bank, why is it not just a sort of straight plug in and off we go?

So Lending as a Service, you're right that we already offer loan propositions. But the partners with whom we work have a relatively slow development cycle. And so we are beholden to that.

[Operator Instructions] We'll go to a question now from Orson Rout from Barclays.

First one is just on the balance sheet's use of cash. You've spoken a lot about becoming a multiproduct platform with the new product launches. To what extent are you spending time looking at potential M&A? And if you are, in which areas would acquisitions likely be concentrated? So that's the first question. Then the second one is just on inflation. Because from speaking to companies, we hear from everywhere how tight the labor market currently is. What are you currently seeing on this front? And how do you expect the cost base to develop with the current inflation backdrop? And maybe beyond this, what kind of attrition have you been experiencing over the last couple of months?

Orson, in terms of M&A, as you've heard just now, we have a very ambitious, very exciting and very grounded plan based on organic activity. It's pretty fair to say we'd always be open to any small add-on M&A. But it's not something we're actively pursuing. We look at anything opportunistically. It certainly does not underpin our ambition or our plans or our financial guidance. In terms of inflation, I think you're right. I think us, like every other fintech, is definitely experiencing some pressure, experiencing some probably heightened degrees of attrition. As a business, we have very strong colleague engagement. We invest a lot in our colleague proposition. We certainly probably expect there will be some wage inflation creeping in during the year. We're looking to mitigate that through efficiencies in terms of protecting our technology investment. We work with third parties outside of the U.K. just to give us some additional optionality and some additional mitigation to that. I'm not sure, Lisa, if there's anything you'd like to add?

No, I think that covers it.

We now have a question from Robert Sage from Peel Hunt.

Most of my questions have been answered actually. But just as a very small add-on to the previous questioner, when I'm looking at your staff numbers, I understand the point about wage inflation. They have gone up by a fairly significant amount, including some net growth in the second half of the year. And I was wondering if you could give some sort of guidance in terms of your workforce size over the next, say, 1 to 5 years.

The increase you've seen is primarily through investment in our tech teams. As you've heard already this morning, we are a technology platform. In order to grow and to scale, we continue to invest in tech. And that's the driver of the numbers you've seen so far. We don't really have guidance to give in terms of the growth. We think we will -- we are a platform. We are scalable. But as we do pursue new areas, we will selectively add teams, particularly in tech, particularly in risk and analytics. But the growth will be controlled and it will be modest.

Thank you. As we have no further questions at this time, I'd like to turn the presentation back to your speakers for any additional or closing remarks.

Good morning, everyone. We have no further questions from the webcast. So I think that is it from us, other than to say thank you for everyone for attending and for your questions. And we're very happy to follow up if anyone has any further queries.