Editor’s note: Upstart Co-Founder and CEO Dave Girouard shared thoughts on first quarter 2024 results during the company’s quarterly earnings call. For more, please see Upstart’s Q1 2024 earnings press release and the earnings presentation.
Good afternoon, everyone. I’m Dave Girouard, co-founder and CEO of Upstart. Thanks for joining us on our earnings call, covering our first quarter 2024 results.
I’d like to start by saying I’m quite proud of the work Upstarters around the country continue to do to build the world’s leader in AI-enabled lending. With credit availability as constrained as it’s been in more than a decade, we’ve never felt the urgency of our mission more than we do today.
We’re off to a solid start this year, and have made significant progress with our products and with funding. There are many reasons to believe our business will return to growth soon, but we’re also prepared for the current macroeconomic conditions to persist. So we continue to focus on improving our efficiency and financial performance while investing responsibly for the long-term.
In pursuit of efficiency, we minimized hiring, reduced the size of some teams, flattened org structures, and reallocated resources to our highest priorities. Since the beginning of 2024, we’ve cut fixed expenses from headcount by approximately $20M on an annual basis. Our headcount today is as low as it’s been since Q3 of 2021.
We’ve also improved the efficiency of our cloud infrastructure, and reduced our model training and development costs. Year over year, our compute and storage costs have been reduced by 23%, and we expect to generate additional savings in this area.
We believe these actions set up Upstart to return to profitability sooner and to rebound more quickly toward the company we know we can be.
I’m happy to report that the funding situation on our platform is beginning to improve – for banks and credit unions as well as for credit investors. We’re hopeful this trend will continue through 2024. Unfortunately, consumer risk and interest rates remain at or near all-time highs, conspiring to constrain the volume of transactions on our platform.
Given this combination, and assuming rates on Upstart remain at or near their current high levels, we expect to reduce the use of our balance sheet to fund loans that are not for R&D purposes. This will allow us to make better use of those funds elsewhere, though we will continue to be flexible and responsive in using our balance sheet to do the right thing for our business.
Product Progress
We continue our work to make Upstart a platform that can thrive in any macro environment. This work comes in the form of improvements to our core personal loan product as well as progress in the newer products in our portfolio.
Personal loans
Last quarter, I mentioned an initiative to allow applicants to provide collateral to support their personal loan application, with the goal of helping borrowers access credit at lower rates than would otherwise be possible. Today I’m happy to report that we’ve successfully launched our “auto secured personal loan” as a pilot in seven states. Our approach allows qualified applicants to make an informed choice between an unsecured or an auto-secured personal loan which commonly offers a lower APR. Thus far, ASPL rates are on average 20% less than the rate on an unsecured loan. The ASPL also helps many applicants qualify for a loan who would otherwise be declined.
Last quarter, I also shared that we were developing tools to help our lending partners strengthen relationships with their existing customers, which is often their priority in periods of reduced liquidity. To that end, two weeks ago we announced Recognized Customer Personalization or “RCP”. With this new feature, lenders can identify when an existing customer is actively shopping for a loan on Upstart.com and strengthen their relationship by making a compelling offer of credit. This is a capability many banks and credit unions have long requested and we’re pleased with the initial response: 30 of our bank and credit union partners have signed up for RCP already.
In Q1, 90% of unsecured loans on the Upstart platform were fully automated, an all-time high for us. For the borrower, this means no documents to upload, no phone call required, and a final approval in just seconds. For Upstart and our lending partners, it means there’s no human in the loop whatsoever to process and complete the loan application. Automation is a hallmark of AI-enabled lending and Upstart aims to be the best at it.
Auto
We continue to make progress in our Auto business, with 103 dealer rooftops now live with Upstart-powered lending versus 39 a year ago. In keeping with the times, we’ve tasked our auto team to move more quickly toward profitability. This means doubling down on credit quality, making improvements to our in-store platform, and focusing on overall dealership success – all with the goal of improving the unit economics of each dealership. We’ve somewhat reduced our go-to-market investment in auto retail for now and believe a more focused effort today will allow us to scale more quickly in the future.
HELOC
We’re making fast progress with our home equity product, which continues to exceed our expectations. We knew it would be an attractive product in a high interest rate environment and the team’s progress thus far has been impressive. Less than a year after launch, we’re offering an Upstart HELOC in 19 states plus Washington DC, covering 33% of the US population. This is up from 11 states last quarter and now includes Florida, our largest state to date. I mentioned last time that we were beginning to automate verification of borrower information and I’m happy to report that we’re now able to instantly verify 36% of HELOC borrowers. This includes instant verification of identity and income, without any tedious documents to upload. In another sign of progress, when we offer applicants a HELOC as an alternative to a personal loan, we’re seeing a lift in the percentage of applicants taking one of our offers. This validates our approach to integrating our Personal Loan and HELOC applications, creating a single unified funding form for multiple products. Lastly, but perhaps most importantly, we signed our first funding deal for the Upstart HELOC and expect to begin selling loans on a forward flow basis to this partner in the next few weeks. I’m excited to see this product scale through 2024 and beyond.
SDL
Our small-dollar loan product continues to expand rapidly, with Q1 originations up 80% quarter to quarter. Consumers love these small relief loans because they’re fast and simple and so much more affordable than the more expensive flavors of credit normally available to them. Today about 60% of applicants who come to us for a small dollar loan and initially qualify actually get the loan, which is a super strong conversion rate at this stage.
From a “what’s in this for Upstart?” perspective, I’ll say first that this product is core to our mission. We’re meaningfully expanding the percent of Americans we invite into the world of “bank quality” credit with a small but important first step. The beauty of this relief loan is that it’s primarily offered to those who don’t today qualify for our personal loan. So instead of declining them entirely, we give them the opportunity to perform on a small loan and start them on a better financial path. And of course, our risk models are learning rapidly by extending credit to someone who would otherwise be turned away. These small loans are rapidly expanding the frontier of understanding of our models and represent a long-term opportunity to serve Americans with fairly priced credit.
Servicing & Collections
We continue to invest in our ability to service Upstart loans and help those borrowers who become delinquent return to financial health. For example, we made it simpler and easier for borrowers to adopt autopay, a key leading determinant of credit performance. These efforts have led to an increasing number of borrowers enrolled in autopay for 24 straight weeks.
In another example, we launched a new channel for contacting delinquent borrowers. Just in its initial deployment, this channel is projected to reduce gross losses more than 3%. This is just the beginning; we see a wealth of opportunities to reduce roll rates, improve recoveries, all while helping borrowers get themselves on a better financial footing.
Funding Progress
As I mentioned earlier, we’re seeing improvements in the funding side of our business. These improvements are both in the bank and credit union segments as well as on the institutional and credit fund side.
The liquidity challenges many banks and credit unions experienced in 2023 seem to be waning, with many lenders now once again facing a shortage of assets. This new challenge is compounded by the fact that the cost of funding for many regional and community banks has risen as they are now paying more for deposits. While still cautious about the direction of the economy, many lenders are now looking for ways to generate healthy and appropriately risk-adjusted yield from their balance sheet.
We saw eight new lenders join our platform in Q1 and a number of existing lenders increased their funding. The number of new lenders and the total available funding on Upstart from lending partners are both at their highest since prior to the 2023 bank failures a year ago. We also continue to make progress with institutional capital, working to renew and extend existing partnerships and to bring investor partners who paused in the past back to our platform. And as mentioned previously, we signed the first partnership to fund Upstart’s home equity product. As a result of this progress, we expect to be borrower constrained as long as rates on the Upstart platform remain as elevated as they are currently.
Altogether, we’re hopeful that we’re headed into a period of stable funding in excess of our needs. We expect this will allow us to reduce the use of our own balance sheet and redeploy that capital to other important goals.
To wrap things up, our leaner organization is making rapid progress on building a product portfolio and a platform that will accelerate the financial industry’s migration to AI-enabled lending. With the interest in AI soaring, just last week we launched a first-of-its-kind AI certification program to help bank executives prepare for this brave new world. Just in the first couple days, several hundred individuals registered for the course, reflecting the broad demand to upskill in this area. Some of you on today’s call also may find the course to be of interest!
I want to thank Upstarters for their resilience and perseverance through a clearly challenging period. We find strength and durability in our focus on the mission and the satisfaction we find in pursuing it together. I approach every day confident that the Upstart team is unmatched in both its capacity to execute as well as its unity of purpose.
Thank you all for joining us today. In closing, I want to assure you that we’re taking the necessary steps to return to growth and to get back to EBITDA profitability, all the while continuing to invest in our future with a relentless pace of innovation. We look forward to showing you our progress through 2024 and beyond.
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Forward-Looking Statements
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.