May 9, 2023
Editor’s note: Upstart Co-Founder and CEO Dave Girouard shared thoughts on first quarter 2023 results during the company’s quarterly earnings call. To read more about Upstart’s Q1 2023 earnings, visit here.
Good afternoon, everyone. Thank you for joining us on our earnings call, covering our first quarter 2023 results. I’m Dave Girouard, co-founder and CEO of Upstart.
Despite the headwinds facing our industry in early 2023, I’m pleased with the progress we made against the objectives that I set out for you previously. I’m hopeful that, as we move through the year, you will come to see Q1 as a transitional quarter for Upstart. While the economic environment remains turbulent, there are many reasons to be optimistic about our future. I assure you we aren’t waiting around for the economy to improve.
First, our development teams made giant leaps forward in each of our main product areas. Innovation in AI is the primary source of Upstart’s competitive advantage, and we continue to break new ground in this area. I’ll share more about these wins shortly.
Second, we accomplished this while taking significant fixed costs out of our business. Last quarter, I told you that I’m committed to running an operationally and fiscally tight ship. Given our concerted efforts in Q1 to reduce both payroll and operational expenses, I’m confident that Upstart is now a more streamlined and efficient company, setting us up to return to profitable growth soon. I’ll share more about our cost reduction efforts later.
And finally, I’m pleased to tell you that we secured multiple long-term funding agreements, together expected to deliver more than $2 billion to the Upstart platform over the next 12 months. This is a critical first step toward building resiliency and predictability into our business.
Together, I believe these efforts put us in a stronger position regardless of which direction the economy turns. Our own analysis—which we launched publicly in March in the form of the Upstart Macro Index (or UMI)—suggests that the financial health of the mainstream American consumer deteriorated rapidly through the first nine or so months of 2022 but has since stabilized if not improved for the last several months. The personal savings rate, which may be the most relevant predictor of UMI, bottomed out mid last year at 2.7% and has increased to 5.1% since then.
Since late 2022, loans on our platform have been priced conservatively relative to UMI, so our bank and credit union partners can feel confident that recent vintages are today performing at or above expectations. And while banks are certainly treading carefully in the current environment, many lenders and institutional investors appreciate the combination of high yield and short duration that Upstart-powered loans offer.
Irrespective of the environment, I push our team very hard to make sure Upstart improves constantly in four critical dimensions:
We founded Upstart to improve access to credit, so delivering the best rates possible to all consumers will always be our true north. Given the breadth and diversity of competition, we’ll never 100% achieve this goal, but in a fierce effort to do so, we can become the market leader in a vitally important segment of our economy.
Better rates are unlocked first and foremost by a more accurate and predictive credit model—one that excels at separating good risk from bad—and AI is the key to this. Our models are today trained on more than 100 billion cells of performance data. And now with an average of 90,000 new loan repayments due each day across all our bank partners, the system is learning and adjusting in near real time to actual loan performance. We pushed 23 new and improved versions of our AI models into production during the first quarter alone—about one every three days. We’re confident that our AI has never been as sophisticated or accurate as it is today.
But in order to deliver the best rates for all, we also need a diversity of bank and credit union partners, each with different priorities, business objectives, and balance sheet issues to solve. Today, we have almost 100 such partners—an order of magnitude more than the 10 we had when we went public in December 2020. We additionally need a strong presence and reputation in institutional and capital markets, because the limited risk appetite of bank balance sheets will never serve the needs of the entire U.S. credit market. This quarter, we expanded our roster of institutional partners in ways that should help us deliver quality offers to consumers through all parts of the cycle.
Every quarter, we aim to make our platform more efficient for consumers and bank partners. This improvement comes from better AI, which enables more sophisticated risk models, which in turn enable a faster and more efficient experience for consumers and lenders.
In the first quarter, we achieved a record level of automation, with 84% of Upstart-powered loans fully automated across all our bank partners. By this, I mean the loans were approved and verified instantly, with zero human intervention from rate request through loan funding. We know of no other lending marketplace with this level of automation.
This instant and automated process—which by the way, 70% of consumers access via a mobile phone—creates an unparalleled “wow” moment for the borrower, who is often surprised—if not shocked—to realize there are no more steps in the approval process. Because consumers rightfully value their time, this delightful moment is often more impactful than the specific rate our bank partners offer.
Efficiency is obviously important for the lender as well. Our bank partners’ Upstart-powered lending programs are open for business 24 hours a day, seven days a week. In addition to providing the modern all-digital experience their customers expect, banks can tailor their Upstart lending programs to precisely target their business objectives, risk appetite, and balance sheet needs. When it comes to routine transactions like offering a loan, branch hours are inconvenient, human intervention is costly, and consumers just want what they want when they want it.
After all we’ve experienced in the last year, I’m keenly aware that we need to build more resilience into Upstart’s business. Lending is inherently cyclical, but we aim to build a platform that largely mitigates that cyclicality, ensuring that credit continues to be available and flowing when it’s needed, albeit accurately priced to prevailing conditions.
Central to this resilience is securing a baseline supply of long-term capital that we can depend on through the market’s ups and downs. As I mentioned earlier, we’ve completed agreements with multiple strategic partners as of today and will continue to explore additional partnerships. Our primary goal is to have loan funding capital committed at a level that allows us to remain cash-flow positive through typical market cycles.
Resilience also comes from a flexible business model, with lower fixed costs, proven pricing power and durable unit economics. We’ve always been a capital-efficient business, raising and spending a fraction of what peer companies spend. But there are always more ways to drive efficiency. Between Q4 and Q1, we took the necessary steps to reduce Upstart headcount by almost 30%. While clearly a gut-wrenching decision, it will allow us to return to profitability at a significantly lower loan volume and has led us to be more focused and nimble in delivering our product roadmap. We also identified opportunities to reduce our technical infrastructure costs by as much as $10 million annually and sublet some unnecessary office space, both of which will go directly to the bottom line.
On the revenue side, we flexed up our take rates, delivering a record contribution margin of 58% in Q1. Our prior record contribution margin was 54% in Q3 of 2020. Our strong and flexible unit economics are a byproduct of the competitive advantage provided by AI.
All these together position us well to navigate whatever twists and turns lie ahead while strengthening our position for the inevitable sunnier markets to come.
The last important lever on resiliency is our product offering itself, which I’ll speak to now.
Moving beyond our core personal loan product is critically important to reaching our potential as a business. Offering a wider range of solutions makes us more relevant to more consumers and also more valuable to our bank and credit union partners. Product and borrower diversification can also provide greater resilience through future market cycles.
We continue to make progress in our second big bet—the auto lending market. This market has had what may be the most tumultuous three years in its 100+ year history. Despite this, we’ve made rapid progress with our products and couldn’t be more excited about our potential. Since our last earnings call, we announced that both Acura and Mercedes-Benz approved Upstart as a digital retail provider, becoming our eighth and ninth OEM partners. We recently launched a new and improved AI model for our auto retail lending product that builds off our existing auto refinance model. We now consider both of these models calibrated and performing on target. Our footprint of dealers piloting our lending product expanded to 39 since last I updated you, and we expect this rollout to continue throughout the year. We also signed our first external funding agreement for auto retail, which is an important milestone for us. Lastly, we’re making rapid improvements to our servicing and collections of auto loans, which accrues directly to model performance.
I’m also pleased to let you know that we expect to launch a home equity product later this year. This is a great fit for Upstart for a few reasons: First, 95% of HELOCS are financed by banks and credit unions, so it’s an asset our lending partners know and value. Second, HELOCs naturally serve a very prime consumer —namely, homeowners. We expect Upstart’s HELOCs to have annual loss rates less than 1 percent. And third, home equity products tend to be countercyclical to refinance products. We know this because in Q4 2022, HELOC volumes grew 32% year on year even while mortgage refinances plummeted. Importantly, there’s a lot of opportunity to improve the process of originating HELOCs. The average HELOC today takes 36 days to fund, while we are aiming for online approval in 10 minutes and funding within five days.
Lastly, I have to mention the incredible progress made by our small-dollar loan team. By way of context, banks feel pressure from regulators to eradicate overdraft fees and instead to provide affordable “relief” loans to consumers who have short-term cash needs. But they’ve struggled for years to do this both meaningfully and profitably. Short-term loans of a few hundred dollars to existing customers—or even to random walk-up consumers—at rates within the APR limits for nationally chartered banks has seemed beyond the reach of the banking industry.
Well, we’re building it for them. And we believe it has the potential to eradicate more than 70% of payday loans in the next five years. Our small-dollar product already has 90% automation rates—far beyond even our core personal loan product. And in Q1, we launched a new AI model for this product that delivered the largest single accuracy improvement measured in our history. We’ve also expanded the offering to include loan terms as short as three months, which drove a 37% increase in approval rates. I’m not sure we’ve ever delivered a product with as much impact and as much alignment with our mission as we’re seeing from the small-dollar team.
To wrap things up, I want to acknowledge that the financial industry is not out of the woods yet. But even in this challenging economy, I believe Upstart is in position to grow reasonably through our typical run-rate of model and technology improvements. And when the banking and credit markets eventually normalize—as surely they will—the true strength of our platform will become clear to all.
Upstart’s success will continue to be built on excellence and leadership in AI. By this, I mean the speed with which we can develop, deploy and calibrate new and more accurate AI models. Together with the amazing quality of our team, it is this that makes me optimistic about Upstart’s future.
This transcript contains forward-looking statements, including but not limited to, statements regarding economic uncertainty, our long-term success, and our future growth. 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”, “look forward”, “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; investments; and results of operations, including revenue, contribution margin, net income (loss), non-GAAP adjusted net income (loss), 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 transcript 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 from recent years; our ability to manage the adverse effects of macroeconomic conditions and disruptions in the credit markets, including inflation and related monetary policy changes, such as increasing interest rates; our ability to access sufficient loan funding, including in the securitization and whole loan sale markets; the effectiveness of our credit decisioning models and risk management efforts; 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.