Upstart Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Upstart operates an AI-based consumer-credit origination and servicing platform for bank partners. The unaudited financial statements are prepared in accordance with U.S. GAAP.
Financial and operating performance
| Metric | Q1 2020 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $64.0 million | $121.3 million | Up 90% |
| Revenue from fees, net | $68.0 million | $116.2 million | Up 71%; platform and referral fees were $107.0 million, up 78% |
| Interest income and fair value adjustments, net | $(4.0) million | $5.2 million | Improved $9.2 million, largely from reversal of prior-year negative fair value adjustments |
| Operating expenses | $63.4 million | $105.8 million | Up 67%; all reported expense categories increased |
| Income from operations | $0.6 million | $15.6 million | Operating margin, measured against fee revenue, increased from 1% to 13% |
| Net income attributable to Upstart | $1.5 million | $10.1 million | 2021 diluted GAAP EPS was $0.11 |
| Adjusted EBITDA | $3.7 million | $21.0 million | Non-GAAP; margin increased from 6% to 17% |
| Operating cash flow | $(86.5) million | $43.1 million | 2021 benefited from loan-sale proceeds and working-capital movements |
| Investing cash flow | $108.7 million | $0.9 million | 2020 included substantial loan-sale proceeds |
| Financing cash flow | $(30.1) million | $(19.3) million | 2021 primarily reflected debt repayments |
Transaction volume was $1.73 billion, up 54%; loans facilitated rose 102% to 169,750. Conversion rate improved from 14.1% to 22.0%, while fully automated loans edged up from 70% to 71%. Contribution profit, a non-GAAP measure, increased from $25.7 million to $55.8 million, and contribution margin rose from 38% to 48%.
Sales and marketing expense rose 37% to $49.4 million; customer operations rose 97% to $17.4 million; engineering and product development rose 171% to $19.0 million; and general and administrative expense rose 72% to $20.0 million. Stock-based compensation increased to $8.6 million from $2.0 million. Management attributed expense growth mainly to headcount, marketing, verification and platform operations, and public-company-related costs.
Balance sheet, debt, and liquidity
At March 31, 2021, total assets were $488.6 million, total liabilities $168.0 million, and stockholders’ equity $320.6 million. Cash was $257.0 million and restricted cash was $79.0 million, for combined cash and restricted cash of $336.1 million. Borrowings were $41.9 million, down from $62.6 million at year-end 2020; the filing states $20.5 million was due within 12 months. Upstart reported compliance with applicable debt covenants and expected available liquidity and operating cash flow to meet needs for at least 12 months.
Near-term maturities and facility timing merit attention: the $15.0 million term loan matures October 1, 2021; the fully drawn $5.5 million revolving facility expires June 1, 2021; and the $100 million warehouse facility’s borrowing period ran through May 2021, although its stated maturity was May 2022. The warehouse balance was $16.3 million at quarter-end. Upstart also had $82.4 million of loan-purchase commitments, generally due after the banks’ short holding period.
Material changes, outlook, and risks
- Growth and drivers: Management linked fee-revenue growth primarily to higher loan volume and service-price increases made in response to COVID-19 market conditions. It expects to continue investing in AI models, platform improvements, marketing, personnel, and new products. The filing provides no specific financial guidance for future quarters.
- COVID-19: Origination volumes recovered after the sharp disruption in 2020. At the pandemic peak, about 5.6% of platform borrowers had entered hardship programs; approximately 95% of those borrowers had exited and resumed payments. Management cautioned that future economic conditions, unemployment, credit performance, and funding availability remain uncertain.
- Funding and concentration: In Q1 2021, originating banks retained about 17% of platform loans and institutional investors purchased about 81%. Two customers represented 60% and 25% of revenue, and two bank partners accounted for 60% and 25% of total revenue, respectively. Credit Karma generated 53% of loan originations, leaving the business exposed to key partner and aggregator relationships.
- Regulation and model risk: The company highlighted evolving consumer-lending and AI regulation, fair-lending scrutiny concerning model variables, and its CFPB no-action letter, which expires November 30, 2023 unless terminated earlier. Its AI models have not been extensively tested in a recession without substantial government support. Bank-partner, true-lender, usury, licensing, and fair-lending challenges could affect operations or loan enforceability.
- Fair value and credit risk: Loans, servicing assets and liabilities, and securitization interests include Level 3 fair-value estimates using significant unobservable assumptions. Loans more than 90 days past due had $3.6 million of principal outstanding but only $15,000 of fair value at quarter-end; loans are placed on non-accrual at 120 days past due and charged off no later than then.
- Contingencies: The maximum outstanding balance of loans subject to potential repurchase obligations was $6.224 billion, although historical repurchase payments were immaterial and recorded contingent liabilities were also immaterial. The company reported no loss contingency for ordinary-course legal proceedings at quarter-end, while describing regulatory and litigation risks in detail.
- Unusual items and subsequent events: Upstart voluntarily repaid its $5.3 million PPP loan principal in March 2021 and recorded the repayment as other expense. After quarter-end, it acquired Prodigy Software for approximately $98.8 million in cash and stock, and completed a follow-on offering of 2.3 million shares at $120 per share, receiving $263.9 million net proceeds.
Most important facts for investors to verify
- Whether volume growth, conversion improvements, and higher contribution margin persist without further pricing increases or disproportionate marketing spend.
- Whether bank and institutional-investor funding remains available on acceptable terms, particularly given customer, bank-partner, and aggregator concentration.
- Repayment, extension, or refinancing of the June and October 2021 corporate facilities and the warehouse facility’s borrowing-period expiration.
- Loan delinquency, default, hardship-program, repurchase, and fair-value trends, including the performance of loans under weaker economic conditions.
- Regulatory developments concerning AI fair lending, the CFPB no-action letter, bank-partnership structures, and the reported 2020 late suspicious-activity filings and remediation.
- Prodigy integration costs and results, the use of follow-on offering proceeds, and the dilution and expense implications of equity compensation.