Business context and reporting period
Upstart Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. The company operates an AI-based consumer-credit marketplace connecting borrowers with lending partners and institutional investors. Its results remain sensitive to loan funding availability, borrower demand and credit performance.
Financial performance and key metrics
Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Total revenue | $134.6 | $157.2 | Down 14% |
| Revenue from fees, net | $146.8 | $179.3 | Down 18% |
| Interest income and fair value adjustments, net | $(12.2) | $(22.1) | Loss narrowed |
| Operating expenses | $178.4 | $215.3 | Down 17% |
| Operating loss | $(43.8) | $(58.1) | Loss narrowed |
| Net loss | $(40.3) | $(56.2) | Loss narrowed |
| Net loss per diluted share | $(0.48) | $(0.69) | |
| Adjusted EBITDA, non-GAAP | $2.3 | $(14.4) | Improved |
For the nine months ended September 30, 2023, revenue was $373.3 million, down 46% year over year, and net loss was $197.7 million versus $53.4 million. Operating cash use was $16.8 million, compared with $421.8 million in the prior-year period. Investing activities used $88.6 million; financing activities provided $187.9 million.
Q3 transaction volume was $1.22 billion, down 34%, and loan count was 114,464, down 39%. Conversion was 9.5% versus 9.7%; fully automated loans increased to 88% from 75%. Contribution margin, a non-GAAP measure, was 64% versus 54%. For the nine-month period, transaction volume fell 65% and loan count fell 68%.
At September 30, cash was $516.6 million and restricted cash was $98.4 million. Total assets were $2.00 billion and stockholders’ equity was $640.8 million. Borrowings were $1.00 billion, comprising $661.3 million of convertible notes and $351.2 million drawn on warehouse facilities; the balance sheet also included $153.8 million payable to securitization note holders. These obligations have differing structures and recourse. Management said cash on hand and operating cash flow should meet liquidity needs for at least the next 12 months.
Material changes versus the prior comparable period
- Lower loan funding availability, elevated consumer risk and higher funding costs reduced platform activity and fee revenue. Higher prices partly offset the effect on platform and referral fees.
- Q3 operating expenses declined, notably sales and marketing. For the nine months, engineering and product development expense rose 29%, including a $39.0 million accelerated stock-compensation charge following cancellation of executive performance awards.
- Net interest and fair-value adjustments remained negative. Nine-month fair-value losses reflected, among other factors, increased loan charge-offs and marks on financial instruments; lower realized loan-sale losses provided a partial offset.
- In July, Upstart completed its UPST 2023-2 securitization and consolidated the transaction. It generated approximately $165.3 million in gross cash proceeds; Upstart retained residual interests and was required to retain at least 5% of the transaction’s economic risk.
- Loans on the balance sheet totaled $972.3 million, including $447.3 million for research and development, $328.5 million of core personal loans and $196.5 million held in the consolidated securitization.
Outlook, commentary, risks and unusual items
The filing provides no specific quantified revenue or earnings guidance. Management said it expects to continue using its balance sheet in the near term to support loan funding while pursuing additional committed-capital arrangements. It reported that arrangements secured in the second and third quarters were expected to provide significant funding through the remainder of 2023 and early 2024. Management also believes liquidity is adequate for at least 12 months, while noting future capital needs depend on revenue, loan purchases and other factors.
- Management reported an Upstart Macro Index of approximately 1.64 at quarter-end, indicating an estimated 64% incremental risk relative to its pre-2020 baseline; the filing cautions that the index is early-stage and unproven.
- Credit performance remains a key uncertainty: institutional-investor loan vintages from 2021 through mid-2022 were below target returns, while 2023 vintages had recovered to target yields, according to management.
- Committed-capital risk-sharing arrangements had $66.1 million of capital at risk. Potential value over time was estimated at $0 to $138.9 million, depending on loan performance; expected cash requirements over the next 12 months were $37.2 million.
- Key risks include constrained investor and bank-partner funding, higher interest rates and defaults, reliance on a small number of lending partners, uncertain AI-model performance in downturns, evolving AI and consumer-lending regulation, and execution risks in new products. Upstart launched a HELOC product in Q3; development of small-business lending was suspended.
- The company reported a securities class action in which the court on September 29, 2023 granted in part and denied in part defendants’ motion to dismiss. Related derivative actions are pending or stayed. The company recorded no loss contingency and said it could not estimate a reasonably possible loss or range.
- The January 2023 workforce plan reduced headcount by approximately 20% (365 employees). Nine-month reorganization expense was $15.5 million, and a $2.6 million software impairment was recorded; no additional reorganization expense was incurred in Q3.
Important facts for investors to verify
- Whether committed-capital funding continues as expected and reduces reliance on Upstart’s balance sheet.
- Subsequent transaction-volume, conversion and fee-revenue trends, along with investor demand and lending-partner concentration.
- Actual credit performance of 2021–2023 loan vintages, fair-value assumptions and realized losses on loan sales.
- Liquidity and funding obligations, including warehouse facility terms, securitization risk retention and the $66.1 million risk-sharing exposure.
- Developments in the securities and derivative litigation, and regulatory scrutiny of AI underwriting and bank-partner arrangements.
- The reconciliation and limitations of non-GAAP measures, particularly adjusted EBITDA, contribution profit and contribution margin.