Nov. 7, 2023
Editor’s note: Upstart Co-Founder and CEO Dave Girouard shared thoughts on third quarter 2023 results during the company’s quarterly earnings call. To read more about Upstart’s Q3 2023 earnings, visit here.
Good afternoon, everyone. Thank you for joining us on our earnings call, covering our third quarter 2023 results. I’m Dave Girouard, co-founder and CEO of Upstart.
While 2023 continues to be a difficult environment for consumer lending, I can state with confidence that we’re making rapid progress in building the world’s first and best AI lending platform. We do this with a focus on our mission and with an optimistic eye toward the transformation of an industry that is inevitable over the next decade and beyond.
In the third quarter, rates were at an all-time high in our marketplace – higher than we expected them to be – reflecting both decades-high interest rates and significantly elevated risk in the consumer economy. This is not a path we would have chosen, and is obviously not constructive to our growth, but it reflects the reality of operating responsibly in this environment.
That said, we believe the economic trends continue in the right direction – inflation is waning, interest rates presumably are peaking or have peaked, the jobs market remains strong, and many retailers are suggesting that consumer spending is softening. We continue to look for a return to normal for personal savings rates, which are highly correlated with risk and therefore with pricing on our platform.
From a financial perspective, we’d of course prefer to be growing quickly, but this is a time when it’s wise to be operating in a conservative mode. In that light, we were EBITDA positive for the second straight quarter. Our contribution margins are still near record highs. And finally, we remain confident that our personal loan models are calibrated and Upstart-powered credit is performing as expected right now.
Not only are we financially secure, we also continue to invest in our AI platform. Last quarter, we launched model 15.0, the latest version of our core personal loan underwriting model. This new version increased our model accuracy by about 15%, the largest improvement we’ve seen since we began tracking improvements in 2018 by about a factor of 1.5x. Our previous most impactful model launch added personalized timing curves (what we’ve come to call our loan-month model) for a giant accuracy improvement. This version improves the accuracy and precision of these personalized timing curves and also adds personalized macro effects for the first time.
Last week, we also launched an upgraded version of the Upstart Macro Index to account for seasonal patterns in repayment behaviors. Over the last decade, we’ve measured a distinct seasonal pattern with respect to loan repayments. The time from January through April represents the best seasonal loan performance in our experience, likely due to borrowers receiving extra cash in the form of state and federal tax refunds. Performance then generally degrades marginally each month until the early Fall and then flattens or modestly improves through end of year. With a seasonally adjusted UMI, we’ll have a more accurate lens into changes in the financial health of consumers and that should result in less volatility in loan pricing and approvals from month to month.
Our auto retail platform saw a huge boost recently as we partnered with a major OEM to implement our software in support of the launch of a new vehicle. Our technology powered their consumer reservation, deposit, and customization system for this amazing new vehicle and was implemented quickly at more than 99% of all of their dealerships in the US. We see this as a harbinger to a future where consumers can choose exactly the car they want online and have it delivered directly to them with none of the friction and inconvenience many associate with the car buying experience. We’re partnering with leaders in the industry to unlock this future.
Separately, we also expanded our roster of car dealerships that have gone live with Upstart lending from 61 to 69. And we’ve added support for rooftops in Arkansas, Maryland, and Virginia, expanding our reach to 70% of the US population. We also signed agreements with two of the largest national non-prime auto lenders to help fund our auto lending solutions.
I’m also excited about the progress with our home equity product. As of today, the Upstart HELOC is available to homeowners in Colorado, Michigan, Washington, and Utah; and we expect to be live in Alabama, Kentucky, Tennessee, and Washington DC in the coming weeks. We’ve received encouraging feedback from applicants about how fast and easy the process is, even at this nascent stage. A home equity product helps diversify our business in two critical ways: first, it’s a very prime product, with annual loss rates expected to be 1% or less. And second, it’s counter-cyclical to a refinance product because it’s an effective way to tap equity in a home during a higher rate environment such as we have today. More than 90% of HELOCs are offered by banks and credit unions today, so it’s a good fit with the Upstart platform and our partners.
We’ll bring some pricing advantage to the HELOC market over time, but there are two predominant advantages we expect to see sooner: The first is speed and ease of access, because the banks and credit unions that originate most HELOCs today take more than a month on average for the applicant to receive funds. We’re aiming for less than five days.
Second, our existing platform unlocks customer acquisition advantages that others can’t match. Each month, more than 80,000 homeowners apply for a personal loan on Upstart. Some large fraction of them can and will be better served with a home equity product that offers a lower rate. After all, personal loans and HELOCs are just two different ways to solve the same customer need. By integrating our personal loan and HELOC application processes, which we expect to do before year end, we’ll take a giant step toward becoming customer-centric rather than product-centric. The tradeoffs between price, time, and effort will change over time – and we’ll help applicants choose the best product for them.
Now let’s talk about the funding side. Despite the difficult lending environment, we’ve seen some great success with credit unions in the last couple of years. We attribute this to the fact that credit unions are extremely focused on delivering the products that their members want, with an intense focus on the quality of experience. They also map well onto current and future Upstart products, with approximately $29 billion in personal loans, $266 billion in auto loans, and $82 billion in HELOCs funded by credit unions each year.
So we’re doubling down on credit unions by building features and capabilities that will strengthen our partnerships. In recent weeks and months, we upgraded the Upstart Performance Console to enhance visibility into originations and loan performance trends, improved connectivity to the core systems that power credit union financials and operations, delivered features that make it easier for new members to join a credit union, and enhanced our partners’ ability to cross-sell other products to existing members. We’re also unlocking loan participation, where a loan originated by one credit union can be fractionalized and sold to a network of other credit unions. This significantly improves liquidity in the system and allows us to reach the long tail of small credit unions in an economic and constructive way.
On the capital markets side, we continue to pursue a large number of committed funding partnerships in order to strengthen the reliability of loan funding on Upstart. With banks retrenching, paying more for deposits, and likely facing even more imposing capital requirements, we believe it’s important to find alternative sources of funding, even for the primest of loans. We’re in discussions about partnerships and structures that can enable at-scale funding across the entire credit spectrum and are excited to innovate in this space.
Lastly, we’re investing significantly in servicing and collections, a vital part of our business where improvements can go directly to the bottom line. We recently launched a new version of our funded borrower dashboard, which is the experience borrowers see while in the process of repaying a loan. We also recently launched our first mobile application, which is initially focused on loan repayment. Servicing and collections is clearly an area where AI can lead to better results, and we believe the surface area upon which we can apply our AI expertise is broad. We’ve brought some incredible new talent to this aspect of our business and are excited about its potential.
To wrap up my remarks today, there are plenty of reasons to remain optimistic about Upstart: first, even with our rates at all-time highs, we continue to grow fee revenue and invest in our teams and core AI. Second, our models are learning and improving at an unprecedented pace, creating more separation from traditional approaches to lending. Third, the competition to serve mainstream American consumers with responsible lending products has waned considerably given the challenges in the markets in recent years. And fourth, we believe there’s an inevitable period of normalization – when both rates and risk levels return to long-term averages – that will provide Upstart with a tailwind over a multi-year period in the future. We aren’t waiting around for that period, but we’ll certainly be ready when it arrives.
Speaking of the future, last week I had the privilege of participating in the U.S. Senate’s AI Insight Forum. It was a very productive bi-partisan discussion on how to maximize the benefits of AI while mitigating risks. I focused my remarks on the lessons we’ve learned on our journey to use AI responsibly to help establish America as the global leader in AI-enabled lending. Hearing about the challenges other industries are facing deploying AI reinforced to me that lending is one of the most compelling examples of how AI can clearly improve the lives of all Americans. I left more excited than ever about the opportunities ahead of us.
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.