Upstart Holdings, Inc. Q3 FY2024 earnings call

• Core product innovation: Model 18 drove conversion improvements, reduced model inference latency by 13% in Q3. - Auto and home lending expansion: Auto originations up 46%, home equity originations more than doubled, HELOC live in 34 states. - Funding supply: Strengthened with committed partnerships, over half of loan funding in longer term committed partnerships. - Credit and servicing: Credit performance strengthening, loan servicing and collections leveraging ML, launched personalization efforts in Q3. - T-Prime program: Expanding reach to super prime credit spectrum, creating competitive credit offers with lending partners.

Personal Loan: Q3 was Upstart's largest quarter on personal loan origination volume in two years. Model 18 drove large conversion improvements. Auto Lending: Originations increased 46% sequentially to $26.5 million. Signed 11th certified digital retailing OEM agreement and began redesign of in-store software. Home Equity (HELOC): Originations more than doubled sequentially, 600 HELOCs originated with zero defaults. Instant approval rate for HELOC applicants rose to 49%, live in 34 states/Washington DC covering 55% of U.S. population. Revenue from fees in Q3 was $168 million, up 28% sequentially, net interest income was negative $5 million, net revenue $162 million, up 20% year-on-year. Loan transactions ~188,000, up 64% year-on-year and 31% sequentially.

• Q4 total revenues expected ~$180 million, consisting of revenue from fees ~$185 million and net interest income ~negative $5 million. - Contribution margin ~59%, net income ~negative $35 million, adjusted net income ~negative $5 million, adjusted EBITDA ~positive $5 million, diluted weighted average share count ~91.7 million shares. - Anticipate September Fed rate cut to impact marketplace pricing, growth driven by model improvements and marketing campaigns.

• Macro environment uncertainties affecting credit trends. - Dependence on model accuracy and market conditions for continued growth. - Intense competition in the fintech space, particularly in the prime credit segment.

Q: Peter Christensen with Citi asked about underlying use cases on the personal loan side and if there were changes in use cases.

A: Dave Girouard said personal loans have always been a generic tool with no radical change in use cases.

Q: Ramsey El-Assal with Barclays asked about Prime customer recovery and EBITDA trajectory.

A: Sanjay Datta said Prime borrowers' stability is reconverging with other segments, and EBITDA is expected to follow growth if models improve and conversion increases.

Q: Arvind Ramnani with Piper Sandler asked about model-driven performance and impact of lower interest rates.

A: Dave Girouard said Q3 growth due to model upgrades like Model 18, and lower interest rates could provide modest lift in Q4.

Q: Michael [ph] for James Faucette asked about small dollar loans and impact of change in administration.

A: Dave Girouard said small dollar loans have positive economics and aren't a drain, and the company's growth isn't heavily dependent on administration changes.

Q: Rob Wildhack with Autonomous Research asked about T-Prime and competitive landscape.

A: Dave Girouard said T-Prime has positive unit economics with thinner margins for prime borrowers, and competition is intense but Upstart's proprietary model provides separation.

Q: Kyle Peterson with Needham asked about rate cut lag and impact on loan size.

A: Sanjay Datta said rate cut lag is 1-3 months, and larger loan sizes due to model improvements are positive for borrowers.

Q: David Schwartz with JMP asked about Q3 expenses and funding side.

A: Sanjay Datta said ~$5M of Q3 expenses were non-recurring catch-up, and Atalia deal has co-investment with mid-single digit percentage of origination dollars.

Q: Simon Clinch with Redburn Atlantic asked about conversion rates and Model 18.

A: Dave Girouard said conversion rate grows with model improvements but is balanced by investment, and Sanjay Datta mentioned product-level conversion insights will be provided.

Q: Giuliano Bologna with Compass Point asked about committed funding and take rates.

A: Sanjay Datta said co-investment is mid to high single digits of origination dollars, and take rates are in similar ballpark with slight potential decrease due to mix and T-Prime program