May 09, 2022
Editor’s note: Upstart Co-Founder and CEO Dave Girouard shared thoughts on first quarter 2022, during the company’s quarterly earnings call. To read more about Upstart’s Q1’22 earnings, visit here.
Good afternoon, everyone. Thank you for joining us on our earnings call, covering our first quarter 2022 results. I’m Dave Girouard, co-founder and CEO of Upstart.
I’m pleased to say that we’re off to a great start in 2022. The Upstart team just delivered our seventh consecutive profitable quarter and our fourth straight quarter with triple-digit year-on-year revenue growth. As the recognized innovator in AI lending, we continue to expand our leadership position in personal lending and are now off and running in our auto lending product.
Despite the macro headwinds that appeared over the first quarter, we saw loan transactions of more than $4.5 billion—a record for the Upstart platform and perhaps for the industry as a whole. At the same time, we added a huge number of lenders and car dealerships during Q1. Today we have more than 500 dealerships on Upstart as well as 57 banks and credit unions, which is up from 42 when I last updated you in February. At this point, we’re adding about a lender per week. This is real progress, considering we had just 10 lenders on the platform when Upstart IPO-ed in December 2020. Additionally, we now have 11 lenders with no minimum FICO score in their credit policies—up from 7 the last time we spoke. I’m confident that our momentum and pipeline for both dealerships and lenders has never been stronger.
We continue to make rapid progress with our Auto refinance product as well. In the first quarter, we transacted more than 11,000 Auto refi loans on our platform, almost twice as many as we did in all of 2021. We also launched our first AI model for Auto Refi that is partially trained by our own auto lending performance data. This kicks off the process of building and deploying increasingly accurate versions of our model, which is our primary source of competitive advantage in the market. In Q1, we also more than doubled the rate of instant approvals for auto refi applicants, another major step toward increasing funnel throughput and delivering a differentiated product experience.
Economic Backdrop
Of course, in recent weeks and months, it’s become apparent that 2022 is shaping up to be a challenging one for the economy and for the financial services industry in particular. In my remarks in our February earnings call, I mentioned the Omicron variant, the clear signs of inflation and the Fed’s plans to counter it, and the market rotation out of high-growth technology. Since then, it’s become clearer just how aggressive the Fed will be with interest rates in order to combat a level of inflation that we haven’t seen in decades. The two-year treasury note, which is the most relevant industry benchmark for our business, has risen more than 200 basis points since October. And of course, the war in Ukraine and the zero-COVID policy in China have only increased the risks and uncertainties facing the global economy. As I said in February, lending is a cyclical industry and always will be, so we expect volume and pricing on our platform to vary accordingly.
As a result of the increased risk in the economy as well as the corresponding higher returns demanded by banks and credit investors, the average loan pricing on our platform has increased more than 300 basis points since October 2021. In addition to increasing rates for approved borrowers, this also has the effect of lowering approval rates for applicants on the margin. Given the hawkish signals from the Fed, we anticipate prices will move even higher later this year, which would have the effect of reducing our transaction volume, all else being equal.
But if you’ve been following Upstart for a while, you’ll know that we’ve been through several disruptions in our industry over the years. And each time, Upstart gained market share and emerged a stronger company. When the economy gets turbulent and nimbleness is at a premium, the advantages of a founder-led company with a closely knit and tenured leadership team become apparent. And that’s what you have in Upstart: three founders involved in the business day-in and day-out, and a proven leadership team, half of which have been with Upstart almost since inception.
Recent performance
I’m proud of how Upstart performed in the last two years, particularly during an economic cycle with no precedent. In the worst year of the pandemic—2020—Upstart grew revenue 42% and generated a modest profit. And, of course, our growth rate and profits since then have been extraordinary by any measure. Even in this challenging environment of 2022, our guidance for full-year revenue implies a growth rate of 47% over 2021 and we expect to be cash-flow positive.
With respect to credit performance, we’re pleased how our models performed on behalf of our lenders during this tumultuous period. While not perfect, our models significantly outperformed traditional FICO-based risk models and learned quickly while doing so.
For Upstart loans originated and funded by our banks and credit union partners, we saw significant over-performance since the beginning of COVID, which has normalized to “on target” performance in recent months. There’s been no meaningful under-performance of returns with any of our more than 50 lending partners since the program’s inception in 2018, despite significant periods of economic disruption.
For loans funded by institutions and capital markets, we’ve observed more volatility, which is natural given their broader risk aperture. The unprecedented level of government stimulus caused the majority of these post-COVID vintages to over-perform significantly; the abrupt termination of these stimulus programs has caused some of the more recent vintages to underperform.
And finally, we’re confident that our models are currently well calibrated to the latest consumer credit conditions, performing inline with expectations, and are more accurate than at any time in our history.
Looking forward
Let’s turn now to our new product efforts. One of our most important initiatives for 2022 is the accelerated rollout of our Auto Retail product. Since acquiring Prodigy in April of 2021, we expanded our dealership footprint from about 100 rooftops at the time of the acquisition to more than 500 today, making Upstart one of the fastest growing Auto retail software in the industry. Upstart’s active dealership footprint over the last 90 days spans 35 different OEMs including Toyota, Subaru, and VW.
At this point, we’re also well into phase two, which is the introduction of Upstart-powered loans into our auto retail software. This represents the next critical step in modernizing the car buying experience. Without question, our early progress in delivering loans through our retail software has exceeded our most optimistic expectations. While lending is enabled in just a handful of dealerships in California, the uptake and win rate for the loan product—technically termed a “retail installment contract”—has been far better than anticipated.
Our auto teams are working quickly to smooth some of the product’s edges, filling in a few missing features, and completing integrations with various legacy dealer systems—all in the interest of moving toward a broad-based roll-out. Our goal is to enable lending in a few dozen dealerships in four states this quarter—representing about 25% of the U.S. population—followed by a full nationwide rollout in Q3.
Based on what we know now, we expect the auto retail lending business to contribute meaningfully to Upstart’s monthly transaction volumes by the end of the year, setting us up for a significant ramp in 2023. As I’ve said before, auto retail is perhaps the largest of all “buy now pay later” markets, so this is one of the most exciting developments in Upstart’s history. You should feel confident that we have a lot of executive attention on getting it right.
I’m also pleased to share that we began publicly testing our small dollar loan product in the past few weeks. I first mentioned this to you in our earnings call last November. It’s designed to help consumers with unexpected and immediate cash needs. Think a few hundred dollars repaid in just a few months. But it’s also important to remember that we’re building a bank-ready product, at bank-friendly APRs—always operating within the 36% rate cap prescribed to nationally chartered banks and to those that serve U.S. military service members. This is a strategic initiative to our mission to improve access to credit and we believe it will accelerate the pace at which we can bring more and more marginalized Americans into the mainstream banking system.
While I told you in November that we aim to launch the small dollar loan “before the end of 2022,” our small-dollar team set an aggressive goal to launch the product by the end of Q1. And I’m pleased to report that they achieved this ambitious goal. Of course, we still have lots of work to do to realize the opportunity in small dollar lending but the team’s ambition is inspiring.
Additionally, I’m happy to share that our small business lending team is likewise making impressive progress and is aiming to have their product in the market within a few months. The first version of our SMB pricing model will include more than 500 variables about both the applicant and the business. It will also feature our loan-month modeling framework, which was one of the most impactful innovations added to our personal loan product a few years back. Our initial testing suggests that “version one” of our SMB model will deliver higher accuracy—as measured by Area Under the Curve, or AUC—than peer models that have been in the market for years. We’ll begin to cautiously test this new product in the second half of the year. I’m excited about our SMB product for two reasons. First, business lending is central to far more banks than is consumer lending, so our bank partners are ready and waiting for this. And second, despite the interest banks have in business lending, FDIC data suggests that 77% of large banks and almost 90% of small banks have no online application process whatsoever.
Investment in AI
We’re also hard at work on some fundamental upgrades to the infrastructure that underpins our AI models and how we develop them. It’s important to realize that the surface area over which we’re implementing AI has expanded dramatically. First, we’re now working on seven or eight unique models that target different aspects of credit targeting and origination. And we’re implementing these different models across five different credit products as of now. Second, the amount and types of data used to train our models has grown exponentially and will continue to do so. As such, the time and processing power required to retrain our models has similarly increased.
So naturally, the opportunity to improve the infrastructure we use to build, train, and deploy AI models is enormous. In an effort broadly referred to internally as “Machine Learning to Heaven” or “ML2H’, we’re working to dramatically upgrade this infrastructure. Our goals with ML2H are to allow hundreds of research scientists to seamlessly and securely build new models and add data to existing models, train and test them in an automated fashion, and deploy them across the entire model ecosystem simultaneously. The system we’re working toward will provide maximum leverage to our research scientists, productizing and automating how new models are trained, tested, and deployed.
Another important area we’re investigating is the means by which our AI models include assumptions about the macro-economy. While our models have long considered the current macro context at the time a loan is priced, we’ve consistently said that we aren’t and don’t aim to be macro forecasters. And yet, macro events will always have some degree of impact on the performance of Upstart-powered loans. So given our product is designed to target a particular return to our lending partners, that implies there’s always some view of the macro future inherent in our models.
Given this reality, we intend for our product to explicitly share the macro adjustments that are embedded in the models. And furthermore, to allow our partners to input their own macro assumptions. This will provide significantly more transparency to our lending partners, and will also put our focus squarely on risk ranking, which is the heart of what makes Upstart’s models unique.
Closing thoughts
A few weeks back, we celebrated Upstart’s 10th anniversary. It was a wonderful opportunity to remember all we’ve been through—to stop for a moment to reflect on how we got where we are today. And to share the gratitude that I feel for all those who have been part of that journey—our employees past and present, our investors and partners, and of course, our friends and families that made this all possible. Some of the old-timers—the OG Upstarters, if you will—shared some of their favorite moments in Upstart history. We talked about the street curb we sat on for lunch each day in our Palo Alto office, because we had no better place to gather.
When I had the chance to speak to the team, I told them that I’m not particularly adept at celebrating the past. It’s just not me. I’m far too excited about—and paranoid about—the future to spend too much time toasting to our success in the past.
As we shifted toward talking about the future, I told our team we need to act with urgency TODAY, with a healthy dose of paranoia. We’re a company grounded in reality, with our eyes wide open as to the evolving risks we see in the industry and in the world. At the same time, we have to pair this urgency about the present with optimism and absolute determination about the future.
Fortunately most of our leadership team HAS been here—so we know the drill and are confident that we can navigate whatever 2022 and beyond might hold. And we know we can blend that urgency for today with an optimistic eye on the horizon. Because although we serve a cyclical industry, we represent a secular change that the financial services industry desperately needs.
Artificial Intelligence will reshape the economics of lending in ways that will reverberate for decades. We’re today pursuing opportunities that represent more than $6 trillion in annual originations, so there’s little question about the scale of the addressable market. We see a clear path to building a company with more than $10 billion in revenue in the coming years and are maniacally focused on achieving that goal.
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Forward-Looking Statements
This blog post contains forward-looking statements, including but not limited to, statements regarding our outlook for the first quarter and full year of 2022 and regarding auto loan originations providing growth opportunities. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “target”, “aim”, “believe”, “may”, “will”, “should”, “becoming”, “could”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements give our current expectations and projections relating to our financial condition; macroeconomic factors; plans; objectives; product development; growth opportunities; assumptions; risks; future performance; business; and any investments; and results of operations, including revenue, contribution margin, net income, non-GAAP adjusted net income, adjusted EBITDA, adjusted EBITDA margin, basic weighted-average share count and diluted weighted-average share count. Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The forward-looking statements included in this press release and on the related teleconference call relate only to events as of the date hereof. Upstart undertakes no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. More information about factors that could affect our results of operations and risks and uncertainties are provided in our public filings with the Securities and Exchange Commission, copies of which may be obtained by visiting our investor relations website at www.upstart.com or the SEC’s website at www.sec.gov. These risks and uncertainties include, but are not limited to, our ability to sustain our growth rates; the effectiveness of our credit decisioning models and risk management efforts; overall economic conditions; geopolitical events, such as the Russia-Ukraine conflict; disruptions in the credit markets; our ability to retain existing, and attract new, bank partners and lenders; and our ability to operate successfully in a highly-regulated industry..