Upstart Holdings, Inc. — Q2 2021 Form 10-Q
Business context and period. Upstart operates an AI-based consumer credit platform used by bank partners to originate and service loans. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons below are to the same 2020 periods unless noted.
Financial performance and liquidity
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Total revenue | $193.9 million, versus $17.4 million | $315.3 million, versus $81.3 million |
| Net income attributable to common stockholders | $37.3 million, versus a $6.2 million loss | $47.4 million, versus a $4.7 million loss |
| Diluted earnings per share | $0.39, versus a $0.42 loss | $0.51, versus a $0.32 loss |
| Net cash from operating activities | Not presented quarterly in the supplied cash flow statement | $135.9 million, versus $70.5 million used |
| Net cash from investing activities | Not presented quarterly in the supplied cash flow statement | $39.7 million used, versus $123.6 million provided |
| Net cash from financing activities | Not presented quarterly in the supplied cash flow statement | $210.0 million provided, versus $37.4 million used |
Margins and operating metrics. Q2 operating income was $36.3 million, or 19% of fee revenue; net income margin was 19%. Management’s non-GAAP Adjusted EBITDA was $59.5 million (31% margin), and Contribution Profit was $96.7 million (52% Contribution Margin). For the six months, Adjusted EBITDA was $80.5 million (26% margin) and Contribution Profit was $152.5 million (50% margin). These non-GAAP measures exclude specified expenses and should be considered alongside GAAP results.
Q2 loan transaction volume was $2.80 billion across 286,864 loans, versus $163.9 million and 11,876 loans. Conversion was 24.4% versus 8.7%; 71% of loans were fully automated versus 58%. Six-month transaction volume was $4.52 billion across 456,610 loans.
Balance sheet and liquidity. At June 30, 2021, cash was $506.3 million and restricted cash was $111.2 million; total assets were $904.6 million and stockholders’ equity was $716.1 million. Total borrowings were $6.1 million, down from $62.6 million at December 31, 2020, after repayment of the $15.0 million term loan and $5.5 million revolving facility, plus other repayments. Management said cash on hand and operating cash flows should meet liquidity needs for at least 12 months. The company received $263.9 million net proceeds from its April follow-on offering.
Material changes versus prior period
- Revenue from fees rose 1,308% in Q2 and 273% in the first half, primarily due to sharp loan-volume growth; management also cited higher service prices in response to pandemic-related market conditions. Comparisons reflect the substantial contraction in activity during 2020.
- Q2 operating expenses increased to $157.7 million from $28.7 million. Sales and marketing rose to $75.9 million, driven mainly by borrower acquisition spending; engineering and product development rose to $31.4 million, and stock-based compensation increased to $21.2 million from $2.5 million.
- Cash and restricted cash increased by $306.2 million in the first half, supported by the follow-on offering and operating cash flow. Operating cash flow also reflected working-capital movements, including loan sales and increases in payables to investors.
- Upstart acquired Prodigy Software in April for approximately $89.0 million of consideration, primarily stock, to expand its auto-lending and dealership commerce capabilities. The acquisition added $66.9 million of goodwill and $23.2 million of intangible assets; acquired-business results were not material for the period.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expects continued investment in AI models, marketing, products, and operations, and anticipates expenses may increase. It expects loan automation to level off over time and notes that results may be seasonal, with demand generally lower in Q1.
- Funding and concentration: Bank partners and institutional investors are important sources of loan funding. One bank partner generated 62% of first-half revenue and originated 60% of first-half loan volume; another generated 23% of revenue and originated 32% of volume. A single customer represented 62% of first-half revenue, and a second represented 23%.
- Credit, model, and macroeconomic risk: Management said pandemic hardship-program participation peaked at about 5.6% of borrowers; approximately 95% of affected borrowers had exited those programs by June 30, 2021. The company cautions that its AI models have limited testing in severe downturns and that defaults, funding availability, or changes in borrower behavior could materially affect performance.
- Regulatory and legal risk: The filing highlights evolving fair-lending and AI oversight, state usury and “true lender” challenges, and the CFPB no-action letter, which expires November 30, 2023 unless terminated earlier. The company also disclosed prior federal and state inquiries, including fair-lending and licensing matters. It recorded no loss contingency for ordinary-course legal proceedings at June 30, 2021 and said it did not believe identified matters would materially affect the financial statements.
- Repurchase exposure: The maximum potential amount associated with contractual loan repurchase obligations was $8.15 billion in outstanding loan balances at June 30, 2021; the recorded contingent liability was immaterial. Actual historical repurchase payments were also described as immaterial.
- Unusual items: Upstart repaid its $5.3 million PPP loan plus accrued interest in March 2021; the principal repayment was recorded in other expense. Q2 results also included a $4.4 million incremental stock-compensation charge from an option modification. The reported tax benefit was primarily associated with a valuation-allowance release related to the Prodigy acquisition.
Important facts for investors to verify
- Whether loan-volume growth, conversion, and fee pricing are sustainable after the unusually weak 2020 comparison period, and how borrower acquisition costs evolve.
- Whether customer and bank-partner concentration declines, particularly dependence on the largest bank partner and loan aggregator channels.
- Credit performance and investor funding demand through less favorable economic conditions, including whether AI model outcomes remain predictive without extraordinary government support.
- Regulatory developments affecting fair lending and AI, the CFPB no-action letter, state lending and true-lender rules, and any outcome of disclosed inquiries.
- The quality and sensitivity of Level 3 fair-value estimates, loan repurchase obligations, and the company’s liquidity and access to diversified loan funding.
- The effect of stock-based compensation, acquisition integration, and continued operating-expense growth on GAAP profitability and cash generation.