Upstart Holdings, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY2022. The filing was signed February 15, 2024. Upstart operates an AI-based consumer lending marketplace connecting borrowers with banks, credit unions and institutional investors. Its revenues primarily come from platform, referral and servicing fees.
Financial and operating performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $513.6 million | $842.4 million | Down 39% |
| Revenue from fees, net | $560.4 million | $907.3 million | Down 38% |
| Net loss | $240.1 million | $108.7 million | Loss widened |
| Operating loss | $256.5 million | $113.9 million | Loss widened |
| Net cash used in operating activities | $160.5 million | $674.7 million | Cash use decreased |
| Adjusted EBITDA (non-GAAP) | $(17.2) million | $37.2 million | Turned negative |
| Contribution margin (non-GAAP) | 63% | 49% | Improved |
Platform and referral fees fell 43% to $414.1 million; servicing and other fees fell 16% to $146.3 million. Net interest income, expense and fair-value adjustments were a net loss of $46.9 million, compared with a net loss of $64.8 million in 2022. Revenue figures include fee revenue and this separate net interest/fair-value line; therefore, total revenue was $513.6 million.
Marketplace loan transaction volume declined 59% to $4.65 billion, and loan count fell 61% to 437,659. Conversion rate decreased to 9.7% from 14.1%, while the fully automated loan share rose to 87% from 75%. Management attributed lower volume and conversion primarily to reduced funding availability, higher borrower risk and funding costs, and resulting higher loan rates and lower approval and acceptance rates.
Operating expenses decreased to $770.1 million from $956.3 million, largely reflecting lower sales and marketing costs. Engineering and product development expense increased 18% to $280.1 million, including a one-time $39.0 million expense from cancellation of the CTO’s performance-based restricted stock units. General and administrative expense increased 15% to $212.4 million. Contribution margin is a company-defined non-GAAP measure and does not represent GAAP profitability.
Liquidity, debt and balance-sheet exposure
- At December 31, 2023, cash was $368.4 million and restricted cash was $99.4 million; the company also held $5.0 million in certificates of deposit. Cash and restricted cash totaled $467.8 million.
- Total borrowings had a carrying value of $1.040 billion, including $661.3 million principal of 0.25% convertible senior notes due August 2026 and $387.4 million drawn under warehouse facilities. Warehouse debt is secured by loans and bears floating rates. The company reported compliance with facility covenants at year-end.
- Loans on the consolidated balance sheet totaled $1.156 billion, including $411.1 million of research-and-development loans, $566.2 million of core personal loans and $179.1 million held in a consolidated securitization. Loans are measured at fair value using models with significant unobservable inputs.
- Management stated that cash on hand should be sufficient for at least the next 12 months, while noting that future needs depend on operating performance, working capital and loan purchases.
- Committed-capital risk-sharing arrangements had a maximum exposure to losses of $98.5 million at year-end; expected cash requirements for those arrangements over the next 12 months were $21.5 million.
- Cash flow from investing activities was negative $118.5 million; financing activities provided $214.3 million, including borrowings and securitization-note proceeds. The company made no common-stock repurchases in 2023.
Material changes, outlook and notable items
- Management linked the sharp contraction in marketplace volume and revenue to continuing macroeconomic and capital-market constraints. It secured multiple committed-capital arrangements in 2023 and expects to keep pursuing additional funding sources; it also used its balance sheet to support marketplace loan funding.
- Upstart Macro Index (UMI) was approximately 1.65 at year-end, which management described as indicating about 65% incremental risk to loan repayment performance relative to its baseline. UMI is an early-stage, company-specific measure and is not a general economic indicator.
- Management reported that core personal-loan vintages originated in Q1 2021 through Q2 2023 were forecast to underperform their original target returns; Q3 2023 and later vintages were forecast to perform in line with targets. The company disclosed an error in prior supporting calculations: previously reported expected returns for the Q1 2018–Q3 2023 portfolio were overstated by 0.9–1.3 percentage points. The correction did not affect financial statements or forecasts prepared for actual funding partners or investors.
- In January 2023, the company reduced its workforce by approximately 20% (365 employees), suspended small-business-loan development and recorded $15.5 million of reorganization expense, along with a $2.6 million software impairment. The company also launched a HELOC product in 2023.
- No formal numerical FY2024 revenue or profitability guidance is provided in the supplied filing text. Management cautions that macroeconomic conditions, interest rates, loan funding, credit performance and model effectiveness may materially affect future results.
- Material risks include dependence on a few lending partners (the top three generated 63% of revenue and originated 80% of marketplace loans), institutional funding availability, credit losses and fair-value estimates, regulatory uncertainty around AI and bank-partnership lending, and consumer-data and cybersecurity risks.
- The company disclosed pending securities and derivative lawsuits related to alleged prior statements. It recorded no loss contingency for legal proceedings and said it could not estimate a reasonably possible loss range. A motion to dismiss in the Crain securities class action was granted in part and denied in part; a reconsideration motion was pending.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified valuation of Level 3 financial instruments as a critical audit matter.
- After year-end, Upstart agreed to sell a $299.7 million pool of core personal loans under terms that include performance-linked payments. In February 2024, it obtained a waiver relating to certain UAWT warehouse-facility covenants for the January collection period and paid down $15.3 million.
Key facts for investors to verify
- Whether marketplace originations, conversion and revenue recover as funding availability and borrower demand change.
- Actual credit performance of 2021–2023 loan vintages, the assumptions behind UMI, and the effects of risk-sharing arrangements.
- Liquidity available after restricted cash, warehouse-facility needs, loan purchases and the 2026 convertible-note maturity.
- How much of the loan portfolio remains on Upstart’s balance sheet, and how sensitive its fair value is to credit losses and discount-rate changes.
- Whether lending-partner and investor concentration decreases, and whether committed-capital arrangements remain available on acceptable terms.
- Developments in the Crain litigation and related derivative actions, regulatory inquiries, and state challenges to bank-partnership lending models.
- The corrected historical loan-return disclosures and the potential effects of the post-year-end loan sale and warehouse covenant waiver.