Editor’s note: Upstart Co-Founder and CEO Dave Girouard shared thoughts on fourth-quarter and full-year 2023 results during the company’s quarterly earnings call. For more, please see Upstart’s Q4 & FY 2023 earnings press release, the earnings presentation, and a recording of the earnings call.
Good afternoon, everyone. I’m Dave Girouard, co-founder and CEO of Upstart. Thanks for joining us on our earnings call, covering our fourth-quarter and full-year 2023 results.
Despite the difficult lending environment, we delivered solid results to end the year, with revenue up 4% sequentially and our third consecutive quarter of positive adjusted EBITDA. Without question, 2023 was a challenging year for both Upstart and the lending industry, and we’re glad to be done with it. With interest rates at their highest in decades, elevated consumer risk throughout, multiple bank failures leading to extreme caution and conservatism among lenders, and a significant dislocation in capital markets, the environment presented one hurdle after another. Considering the challenges 2023 presented, I’m happy with the decisions we took and the progress we made for the long-term success of Upstart.
Looking ahead, we remain cautious about the near-term outlook for our business and will continue to operate responsibly in this environment. But I’m hopeful that you’ll begin to see the benefits of our work as the economy continues to normalize in 2024. The numbers will show that we’ve actually become far more efficient. And even while becoming more efficient, we’ve laid the groundwork to become a more resilient and diversified company that can thrive through a wide range of economic conditions.
With regard to efficiency, in Q4, we increased our contribution margin both%age-wise and in absolute dollars versus the year-ago quarter. We also finished 2023 with 26% fewer headcount than at the end of 2022. Despite this, we hired almost 200 new Upstarters in 2023 as we continue to strengthen our teams and reinforce our priorities. Improved efficiency sets us up well for a return to profitable growth in the future.
But 2023 was not all about efficiency—we also focused intensely on building a stronger Upstart for the future. Let me share six areas where we’ve made significant progress recently, and why I believe they’ll lead us to a bigger and brighter future:
1. Managing the macro
In the last two years, we experienced an economy unlike any in recent history. In fact, if you look even further to the past, you would be hard pressed to find an economic cycle similar in form to what we’ve experienced since the beginning of the pandemic.
While most of our innovation historically has been focused on selecting the right borrower at the right price, we learned that disruptions to the macroeconomy can reduce banks’ desire to lend altogether, particularly in unsecured credit where risk is naturally greater.
In 2023, we took on this challenge by releasing the Upstart Macro Index, a tool that provides lenders with a clearer picture of the current state of the economy and enables them to make more refined decisions about their lending programs. We also developed parallel timing curve calibration, which helps calibrate new versions of risk models faster than what was previously possible. While we believe predicting the economy’s future is unrealistic, we do think lenders can be far more data driven and nuanced in their decision-making. UMI and PTCC represent a giant first step toward offering a proprietary set of macroeconomic management tools that we expect banks and credit unions will demand for all their lending programs. Such a toolset is vital to Upstart’s mission, because it has the potential to make appropriately priced credit readily available to more Americans in all parts of the cycle.
2. Extreme automation
Because so much attention goes to our risk models related to credit decisioning, it’s often less well appreciated how much progress we’ve made in building a highly automated and efficient credit origination process. Automation and efficiency are a winning combination in any economic climate.
In Q4, we once again achieved an all-time high, with 89% of our unsecured loans approved through an instant and fully automated process. Though we expect this number to vary quarter to quarter, the long-term trend has been clear, and it’s a big win for us.
We believe process automation is a durable advantage for Upstart that creates an obviously better user experience. Who wouldn’t want to be approved instantly for a loan rather than having to upload documents, schedule phone calls, or wait hours or days for a response from a credit analyst? We believe a fast, automated approval is essential to winning over borrowers who have lots of choices and little patience or time—and these tend to be the best borrowers.
And it’s not just a better user experience. In Q4, 92% of automatically approved applications converted to a funded loan while only 27% of those involving manual steps converted. That’s an astounding difference—more than 3X the conversion rate. Improved conversion from automation mechanically reduces up-funnel costs associated with customer acquisition and data associated with generating the rate offer.
Of course, automated loans cost Upstart far less to process in the verification step, contributing directly to our efficiency and allowing us to pass this savings along to our lending partners.
We recently began to brand and market our automated approval process to applicants as “Fast Track.” Just by presenting the benefits of Fast Track to applicants, we’ve increased our full funnel conversion by more than 2%.
3. Strengthening our core
We’ve also focused on strengthening our core personal loan product for periods of higher interest rates and elevated risk, such as we’ve been experiencing in recent quarters. In the coming months, we expect to release an optional feature that allows borrowers to provide collateral to support their personal loan application. This option will help borrowers access credit at lower rates than would otherwise be possible, particularly at a time when rates and risk are elevated.
We’ve also identified a somewhat different opportunity to assist our lending partners in periods of reduced liquidity, when banks tend to prioritize retaining existing customers over acquiring new ones. We’re hard at work at developing tools and techniques to help our bank and credit union partners do just that—strengthening their relationships by better serving existing customers. We expect to share more about this later in 2024.
As I mentioned last quarter, we’ve also upgraded our investment in servicing and collections and are hopeful we’ll see dividends from this investment in 2024 and for years to come. The product team working on our servicing platform grew by more than 60% in Q4. Much of the effort is focused on simply making it easier for borrowers to pay and for servicing agents to handle borrower issues quickly and efficiently. But we’re increasingly excited about applying our machine-learning expertise to this aspect of our product as well, to maximize repayment and optimize handling of borrowers who may go or have already gone delinquent. We’ve begun programmatically gathering the data that will unlock the type of efficiency and efficacy gains in servicing that we’ve long seen on the origination side.
4. Upgrading the money supply
In our first 12 years, the lion’s share of our innovation has been focused on AI-enabled credit origination. In parallel, we’ve also developed capabilities related to efficient customer acquisition that are serving us well. But we’ve directed far less innovation toward the supply side of our business—i.e., the money—and this needs to change.
Today and in the coming years, we are increasing our innovation on the money supply and have a healthy head start in this area. Success in this domain means our funding across products will be more scalable, more reliable, and more competitive with respect to cost. We believe this innovation can be unlocked by long-term partnerships that combine novel risk-sharing and return-smoothing structures with direct and proprietary access to our credit-origination engine.
After the quarter end, we closed an agreement with Ares, a leading global alternative investment manager, for them to acquire $300 million of personal loans. Additionally, we signed an agreement with a lending partner that we expect will originate approximately $500 million in loans over the next 12 months.
5. Products for all environments
We’re building a set of Upstart offerings that are counter-cyclical to each other, with the goal of developing a more balanced portfolio of credit products with less volatility in overall volume. We’re particularly excited about rapid progress in our first home-lending product—a HELOC. This product is popular in high-rate environments when consumers are reluctant to sell their home or refinance their mortgage.
We recently crossed our first $5M in cumulative HELOC originations and our month-to-month growth is quite encouraging. We’ve now expanded to 11 states plus Washington, D.C., and expect to add a few more states in the coming weeks. In Q4, our average HELOC time-to-close was down to nine days. This is amazing progress against our long-term goal of a five-day close and already dramatically better than the industry average of more than five weeks.
In Q4, we also launched our first instant approvals for the HELOC product. This means we’re now often able to instantly verify identity, income, and home value without any tedious document upload or waiting. We’re hopeful this will become a meaningful percentage of our originations this quarter. We expect to drive this instant approval percentage up for HELOCs just as we’ve done successfully with unsecured personal loans.
Lastly, we successfully integrated our HELOC within our personal loan application. This means personal loan applicants who are homeowners may be offered a home-equity option in addition to an unsecured loan. This is an area ripe with opportunity, and we expect to refine and expand this product integration over time.
In contrast, high interest rates made 2023 a difficult year for auto lenders. Regardless, we continued to make progress with our auto offering. We used the time to grow and strengthen our relationships with auto dealers, rounding out our retail software with key features most requested by dealers. We also expanded our finance offering with 88 dealerships now offering Upstart auto lending, up from 27 a year ago. And we recently announced that we’re expanding our AI-powered financing capability nationwide, expecting to reach 90% of U.S. consumers by the end of this quarter. We’re confident that steady focus on the auto vertical will be rewarded once interest rates begin to decline.
6. Extending Upstart’s AI leadership
While the last couple of years have been challenging, I believe they’ve ultimately extended our leadership in the application of AI to lending. Our models learned more than at any time in our history. We’ve navigated extreme changes in macro conditions, and built tools and capabilities to manage through such changes in the future.
With our small-dollar product, which I consider to be at the frontier of AI-enabled lending, we’ve tripled approval rates since August. And this product now represents about 15% of first-time borrowers on the platform. This type of rapid improvement, along with increasing automation and efficiency, gives me confidence that our forward progress in this domain is unparalleled.
To wrap things up, I’m pleased to share that, in January, we brought Upstarters together in Austin, Texas, to kick off 2024 with our largest Upstart gathering ever. We spent significant time talking about why our mission is so vitally important, and we left with a greater sense of the purpose of our work. Upstarters across the country are confident and undeterred by the challenges involved in pioneering AI lending, because they appreciate the size of the opportunity before us, and the impact that access to affordable credit can have on the lives of all Americans.
While many fintechs, and even banks, retreat from the lending business, we remain strongly committed to it. Americans will always need access to affordable credit, and by continuing to serve borrowers through this difficult time we’re extending our advantage in training data, model calibration, products, and process. Once the economy inevitably normalizes and lending becomes fashionable again, I believe it will be difficult for others to catch up with us.
We’re excited for the new year and optimistic for what it holds for Upstart.
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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.