Upstart Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Upstart operates an AI-based lending marketplace, connecting consumers and lending partners for personal and auto loans. Results are unaudited.
Key financial and operating metrics
| Metric | Q1 2023 | Prior-year comparison |
|---|---|---|
| Total revenue | $102.9 million | $310.1 million; down 67% |
| Revenue from fees, net | $117.1 million | $314.0 million; down 63% |
| Operating income (loss) | ($131.8 million) | $34.8 million |
| Net income (loss) | ($129.3 million); diluted loss per share $1.58 | $32.7 million; diluted earnings per share $0.34 |
| Adjusted EBITDA (non-GAAP) | ($31.1 million); margin (30)% | $62.6 million; margin 20% |
| Operating cash flow | ($75.7 million) | ($266.8 million) |
| Cash and restricted cash | $451.9 million, including $386.9 million cash | $532.5 million at Dec. 31, 2022 |
| Borrowings | $1.001 billion carrying value | $986.4 million at Dec. 31, 2022 |
Platform and referral fees fell 71% to $77.7 million. Interest income and fair value adjustments, net were negative $14.2 million, versus negative $3.8 million a year earlier; the 2023 figure included $52.4 million of negative fair value and other adjustments. Upstart reported a 58% contribution margin, a non-GAAP measure, compared with 47% in Q1 2022.
Marketplace transaction volume was $997.4 million, down 78%; loan count fell 82% to 84,084 and conversion rate declined to 8.2% from 21.4%. Fully automated loans increased to 84% from 74%. Of Q1 loans funded, 44% were retained by originating lending partners, 44% purchased by institutional investors, and 12% funded through Upstart’s balance sheet.
At quarter-end, Upstart held $982.2 million of loans at fair value: $493.1 million for research and development and $489.1 million of core personal loans. Borrowings comprised $661.3 million principal of 0.25% convertible notes due 2026 and $350.2 million drawn on warehouse facilities. The company reported compliance with warehouse-facility covenants.
Material changes and notable items
- Lower loan volume, weaker borrower conversion, elevated interest rates and risk, and constrained investor funding drove the revenue contraction. Higher interest income from loans held on the balance sheet partly offset adverse fair value adjustments and loan-sale losses.
- Operating expenses were $234.8 million, down from $275.3 million. Sales and marketing fell 76%, while engineering and product development rose 120% to $110.1 million, including a $39.0 million accelerated stock-compensation charge after cancellation of an executive PRSU award.
- A January 2023 reorganization reduced the workforce by approximately 20% (365 employees) and suspended development of the small-business loan product. Q1 included $15.5 million of reorganization expense and a $2.6 million software impairment; a $2.9 million noncash stock-compensation reversal partly offset costs.
- After quarter-end, Upstart signed an agreement to sell a pool of loans with $351.5 million outstanding principal under a capital commitment program. The filing records a $17.0 million negative fair value adjustment in Q1 related to the planned sale.
- No common stock was repurchased in Q1; $222.1 million remained under the repurchase authorization. Common shares outstanding were 82.6 million at March 31.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said it expects to continue using its balance sheet in the near term to support loan funding while pursuing longer-duration committed capital from lending partners and institutional investors. Management believed cash on hand and operating cash flow would meet liquidity needs for at least 12 months, while noting future needs depend on revenue, working capital, loan purchases and other factors.
Management identified macroeconomic uncertainty, high rates, tighter investor funding, borrower delinquencies and defaults, and disruption in the banking sector as material pressures. The Upstart Macroeconomic Index was approximately 1.5 at quarter-end, indicating about 50% incremental repayment risk relative to its pre-2020 baseline. Management said institutional-investor vintages from 2021 through mid-2022 had underperformed target returns, while more recent vintages were reconverging toward target yields.
Risks also include reliance on a small number of lending partners and loan aggregators; the concentration in unsecured personal loans; uncertain AI-model performance in a downturn; evolving fair-lending, consumer-credit and AI regulation; and dependence on securitization, whole-loan sales and warehouse financing. The company reported securities and derivative lawsuits; it believes the claims are without merit, but said potential losses cannot be reasonably estimated and recorded no legal loss contingency. Repurchase obligations may arise for loans sold, including for representation-and-warranty breaches; actual payments to date were immaterial, and recorded contingent liabilities were immaterial.
Important facts for investors to verify
- Whether loan volume, conversion and institutional funding recover, and whether the 12% balance-sheet funding share changes.
- Subsequent fair value marks and realized proceeds on the $351.5 million loan pool, including the Q1 $17.0 million adjustment.
- Loan delinquency, default and vintage returns versus underwriting assumptions, and the sensitivity of fair-value estimates to credit and discount-rate assumptions.
- Liquidity and funding capacity, including warehouse-facility renewal terms, committed third-party capital, and the timing of debt and lease obligations.
- Execution and realized savings from workforce reductions, as well as the status and potential costs of securities and derivative litigation and regulatory matters.