Upstart Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Upstart operates an AI-based lending marketplace, connecting borrowers with lending partners and institutional investors. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $135.8 million | $228.2 million | $238.7 million | $538.3 million |
| Revenue from fees, net | $143.7 million | $258.3 million | $260.8 million | $572.3 million |
| Operating income (loss) | $(33.3) million | $(32.1) million | $(165.2) million | $2.7 million |
| Net income (loss) | $(28.2) million | $(29.9) million | $(157.4) million | $2.8 million |
| Adjusted EBITDA (non-GAAP) | $11.0 million | $5.5 million | $(20.1) million | $68.1 million |
| Adjusted net income (loss) (non-GAAP) | $5.4 million | $1.0 million | $(33.3) million | $59.6 million |
Q2 fee revenue comprised $105.8 million of platform and referral fees, down 50% year over year, and $37.9 million of servicing and other fees, down 19%. Net interest income and fair-value adjustments were a net loss of $7.9 million in Q2, versus a net loss of $30.2 million a year earlier. Q2 net loss per share was $0.34, compared with $0.36.
- Q2 transaction volume was $1.18 billion across 109,447 loans, down 64% and 66%, respectively, year over year. Conversion was 9.4%, versus 13.3%; loans fully automated rose to 87%, versus 73%.
- Contribution profit, a non-GAAP measure, was $95.9 million in Q2 and $163.5 million for the first half; contribution margin was 67% and 63%, respectively. These measures exclude selected direct costs and do not represent GAAP profitability.
- Six-month operating cash flow was positive $86.7 million, investing cash flow was negative $64.3 million, and financing cash flow was negative $44.9 million. Cash and restricted cash decreased $22.6 million during the period.
Financial position and liquidity
At June 30, 2023, Upstart reported cash of $443.7 million and restricted cash of $66.2 million. Total assets were $1.76 billion, including $837.6 million of loans at fair value. Total liabilities were $1.13 billion and stockholders’ equity was $638.1 million.
Reported borrowings were $930.7 million, comprising $279.2 million drawn on warehouse facilities and $661.3 million principal of 0.25% convertible senior notes due 2026; the notes’ carrying value was $651.5 million. The warehouse facilities are secured by loan assets and have floating-rate borrowing costs. The company reported compliance with applicable warehouse covenants. Management stated that cash on hand and operating cash flow should meet liquidity needs for at least 12 months, while noting that future needs depend on business and loan-funding conditions.
Changes, outlook and principal risks
- Compared with Q2 2022, lower marketplace activity materially reduced fee revenue. Management attributed the contraction to constrained investor funding, higher rates and cost of capital, elevated borrower risk, and lower borrower acceptance. Transaction dollars increased 18% sequentially from Q1 2023, which management linked to committed-capital arrangements obtained in Q2.
- Management said the new institutional committed-capital arrangements are expected to provide significant funding for the rest of 2023 and early 2024. Upstart expects to continue using its own balance sheet to support loan funding in the near term, while seeking a more capital-light funding model. The filing provides no specific numerical revenue or earnings guidance.
- The company’s Upstart Macroeconomic Index was approximately 1.68 at June 30, which management described as indicating about 68% incremental repayment risk versus its pre-2020 baseline. Management reported that institutional-investor loan vintages from 2021 through mid-2022 underperformed target returns; more recent vintages were described as reconverging toward target yields.
- Loans held on the balance sheet totaled $837.6 million, including $492.8 million held for research and development and $344.8 million of core personal loans. The company said it may retain loans longer or sell them through secondary sales or securitizations.
- The January 2023 reorganization reduced the workforce by approximately 20% (365 employees) and suspended development of the small-business loan product. First-half reorganization expenses were $15.5 million; a $2.6 million software impairment was also recorded. Cancellation of an executive performance award accelerated $39.0 million of stock-based compensation expense. No additional reorganization expense was incurred in Q2.
- Committed-capital arrangements include credit-risk sharing. Maximum capital at risk was $40.2 million at June 30; the filing gives a potential realization range of $0 to $83.4 million over time, depending on loan performance. The fair value of beneficial interests was $28.7 million.
- Material risks include dependence on lending partners and institutional funding, credit deterioration and fair-value estimation, rising rates and funding costs, concentration in unsecured personal loans and a small number of partners, and evolving AI, fair-lending and consumer-finance regulation. The company also disclosed securities and related derivative litigation; it recorded no loss contingency and said it could not estimate a reasonably possible loss or range.
- Subsequent event: On July 6, 2023, Upstart completed a securitization of $204.7 million of personal loans, generating approximately $162.6 million in net cash proceeds. It retained all residual certificates and consolidated the trust.
Key facts for investors to verify
- Whether committed funding arrives as expected, on what terms, and whether reliance on balance-sheet loan funding increases.
- Subsequent loan-vintage credit performance, delinquencies, charge-offs, and the assumptions used to value loans and risk-sharing interests.
- Whether transaction volume and conversion recover, and how fee revenue and GAAP operating results respond to any recovery.
- Liquidity needs, warehouse-facility capacity and covenants, and the cash required for commitments, risk sharing and the 2026 convertible notes.
- Developments in the securities and derivative cases and in regulatory scrutiny of AI underwriting, bank partnerships, lending and servicing.
- The effect of substantial stock-based compensation and potential equity dilution; the filing reported 83.9 million common shares outstanding on August 1, 2023.