Editor’s note: Upstart Chief Financial Officer Sanjay Datta shared third-quarter 2024 results and guidance for Q4 during the company’s quarterly earnings call. For more, please see Upstart’s Q3 2024 earnings press release and the earnings presentation.
Thanks Dave, and thanks to all of you who are joining us today, on what I am sure has been a distracting week for everyone here in the U.S.
The macro environment continues to be an influential factor on our business, though with respect to consumer credit it has in our view remained relatively stable since our last report a quarter ago. As anticipated, this has allowed our risk models the freedom to continue improving borrower selection and driving conversion gains.
Our belief is that inflation is largely behind us, a remnant trace from an historically large increase in the money supply that occurred between 2020 and 2021. The enduring strength of our labor market also continues to astonish, and our view is that the US economy now suffers from a structural shortage of workers, making the odds of significant near-term unemployment in our estimation remote in any scenario short of an economic meltdown. Consumers in the US have continued their remarkable spending spree, perhaps even a little too remarkably for our taste, but Americans did enjoy a surge of disposable income entering 2024 that provided some support for the ongoing spend levels as well as some welcome breathing room in savings rates. Consequently, consumer defaults on unsecured credit have stabilized over the course of the year, easing down from their peak to a lower but still-elevated level of stress, as reflected in our Upstart Macro Index.
Taken as a whole, the macro currents around us have become much less choppy, and in their current state no longer appear to represent a direct headwind to our business. With all of this as context, here are some financial highlights from Q3 of 2024:
Results
Revenue from fees was $168 million in Q3, up 28% sequentially from the prior quarter and 8% ahead of guidance, as various model accuracy enhancements continue to produce improved conversion. Net interest income was negative $5 million, less than half the net interest income loss we experienced in the same quarter a year ago. Taken together, Net Revenue for Q3 came in at $162 million, $12 million above our guidance and up 20% year-on-year.
The volume of loan transactions across our platform in Q3 was approximately 188,000 loans, up 64% from the prior year and up 31% sequentially, and representing over 118,000 new borrowers. Average loan size of $8,400 was up from $7,700 in the prior quarter, driven higher by the model wins which allowed more borrowers to qualify for full personal loans, at the expense of the smaller relief loans that they otherwise would have been presented with.
Our contribution margin, a non-GAAP metric which we define as revenue from fees, minus variable costs for borrower acquisition, verification and servicing, as a percentage of revenue from fees, came in at 61% in Q3, up 3 percentage points sequentially and four percentage points above our guidance for the quarter. Our margins benefited from higher conversion rates on personal loans as well as improved automation and efficiency in the borrower onboarding process.
Operating expenses were $207 million in Q3, up 13% sequentially from Q2; expenses that are considered variable, relating to borrower acquisition, verification and servicing, were up 20% sequentially, less than the growth of the corresponding fee revenue base. Fixed expenses were up 12%, as the improved trajectory of the business triggered some catch-up accruals for expenses that were not being incurred earlier in the year at our lower volumes, some of which will be temporary in nature. We continue to pursue tight expense management as a core principle, and have implemented some further streamlining of operational headcount since the end of the quarter.
All together, Q3 GAAP Net Loss was $7 million, significantly ahead of guidance and due, in large part, to gains made on the refinancing of some of our outstanding convertible debt. Adjusted EBITDA was positive $1 million, also comfortably ahead of guidance, and accomplishing our goal of breaking through to positive adjusted EBITDA one quarter ahead of schedule. Adjusted earnings per share was ($0.06) based on a diluted weighted average share count of 90.1 million.
We ended the third quarter with loans on our balance sheet of $537 million before the consolidation of securitized loans, down from $686 million in the prior quarter, continuing the progress we’ve made over the past year in reducing the size of the balance sheet and establishing strong relationships with a handful of strategic capital partners. Of that loan balance, loans made for the purposes of R&D, principally Auto loans, stood at $399 million. In addition to loans held directly, we continue to consolidate $119 million of loans from an ABS transaction completed in 2023, from which we retained a total net equity exposure of $18 million. We ended the quarter with $445 million of unrestricted cash on the balance sheet, up almost $70 million from the prior quarter. In Q3 we also completed the refinancing of roughly half of our outstanding convertible debt with a new issuance that pushes the maturities on this tranche out to 2029.
On the funding side of our platform, we see encouraging signs that the markets are becoming increasingly constructive. Liquidity in the banking and credit union sectors continues to improve, and increasing numbers of lenders are dropping their required rates of return on our platform. On the institutional side, the large amounts of money that have been raised under the banner of private credit, initially earmarked mainly for corporate lending, are now increasingly finding their way over to consumer assets. In our return to the ABS markets this past month, we saw high levels of oversubscription and significant tightening of spreads for each class of bonds. These are signs that the capital markets are returning to their core function, and once again embracing risk in the pursuit of yield.
As we look ahead to Q4, we continue to presume a roughly stable macroenvironment, with minimal change to credit trends in either direction. We expect the September fifty basis-point rate cut from the Fed to work its way into our marketplace pricing over the course of this quarter, providing some modest lift to volumes. Beyond that, much of the growth we are anticipating this quarter will be driven by continuing improvements to our models and marketing campaigns, which we expect will generate higher application volumes and borrower approval rates. Expanded availability of funding is not perceived to be a driver of growth in this quarter, but we are assuming that it will also not constrain it. On the expense side, we will continue to pursue optimized margins and frugal fixed expense management. With this as context, our guidance for Q4 is:
- Total Revenues of approximately $180 million, consisting of Revenue from Fees of $185 million, and net interest income of approximately negative $5 million
- Contribution margin of approximately 59%,
- Net income of approximately negative $35 million,
- Adjusted net income of approximately negative $5 million,
- Adjusted EBITDA of approximately positive $5 million, and a
- Diluted weighted average share count of approximately 91.7 million shares.
Thanks to all once again for joining us on this call, and now Dave and I will be happy to open up the lines for any questions.