Upstart Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Upstart provides an AI-based lending platform and related services to bank partners, primarily for consumer loans. Unless otherwise noted, dollar amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $310.1 million | $121.3 million | Up 156% |
| Revenue from fees, net | $314.0 million | $116.2 million | Up 170%; platform and referral fees were $271.8 million and servicing and other fees were $42.2 million |
| Interest income and fair value adjustments, net | $(3.8) million | $5.2 million | Declined $9.0 million, mainly due to lower loan fair values |
| Income from operations | $34.8 million | $15.6 million | Operating margin was 11% of fee revenue, versus 13% |
| Net income | $32.7 million | $10.1 million | Diluted EPS was $0.34, versus $0.11 |
| Operating cash flow | $(266.8) million | $43.1 million | Outflow primarily reflected purchases of loans held for sale |
| Cash and restricted cash | $1,012.7 million | — | At March 31; included $757.8 million cash and $254.9 million restricted cash |
| Borrowings | $769.2 million carrying value | — | Included $661.3 million principal of 0.25% convertible notes due 2026 and $121.6 million warehouse borrowings |
- Transaction volume was $4.535 billion across 465,537 loans, compared with $1.729 billion and 169,750 loans in Q1 2021. Conversion rate was 21.4%, down from 22.0%; fully automated loans rose to 74% from 71%.
- Management-defined contribution profit increased to $147.8 million from $55.8 million, while contribution margin eased to 47% from 48%. Adjusted EBITDA was $62.6 million, or 20% of revenue, versus $21.0 million, or 17%. These are non-GAAP measures.
- Operating expenses totaled $275.3 million, up from $105.8 million. Sales and marketing rose 170%, customer operations 178%, engineering and product development 163%, and general and administrative expense 117%.
- Stock-based compensation expense was $25.1 million, versus $8.6 million. The reported net income and non-GAAP results should be considered alongside this recurring compensation expense.
Material changes and financial position
- Loans carried at fair value increased to $598.0 million from $252.5 million at year-end 2021. Upstart reclassified all loans previously held for investment to held for sale at the start of 2022.
- Fair value and other adjustments were a net expense of $18.0 million, compared with net income of $2.8 million a year earlier. Management attributed the portfolio decline primarily to rising market interest rates; the loan valuation rollforward recorded a $19.5 million downward fair value change.
- Total assets were $2.0 billion and total liabilities were $1.1 billion at March 31, 2022. Warehouse borrowings increased during the quarter; the company reported compliance with applicable warehouse facility covenants.
- Cash and restricted cash decreased by $178.5 million during the quarter. Investing cash flow was positive $5.2 million and financing cash flow was positive $83.1 million.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management said cash on hand and operating cash flow should meet liquidity needs for at least the next 12 months, while noting future capital needs depend on growth, working capital, loan purchases and investment requirements.
- Upstart authorized a common-stock repurchase program of up to $400 million in February 2022; no shares were repurchased under it during Q1. The program is discretionary and may be suspended or terminated.
- Management identified macroeconomic and credit-market uncertainty as important risks. Higher rates may reduce borrower demand, raise borrower payment burdens and pressure loan values; the company also cautioned that its AI models have not been extensively tested in a downturn without substantial government assistance.
- Funding availability is important to the business. Bank partners and institutional investors may reduce loan purchases or require less favorable terms. Two bank partners together represented 77% of loans facilitated by count and 77% of total revenue in Q1 2022; one partner alone accounted for 46% of revenue.
- Regulatory and legal risks include fair-lending and AI-model oversight, bank-partnership and “true lender” challenges, licensing and state interest-rate restrictions. The CFPB no-action letter described in the filing covers specified unsecured closed-end loans and expires November 30, 2023 unless terminated earlier.
- Loan purchase commitments were $114.2 million at March 31. The maximum potential balance of loans subject to repurchase and indemnification provisions was $15.4 billion; actual payments had historically been immaterial, and recorded contingent liabilities were immaterial. The company reported no loss contingency recorded for ordinary-course legal proceedings and did not believe identified matters would materially affect the financial statements.
- The company reported a $19.5 million downward loan fair value change, while also recognizing an $8.7 million net gain related to servicing rights upon loan sales. Both depend on estimates and valuation assumptions; loans and servicing assets and liabilities are Level 3 fair value measurements.
Most important facts for investors to verify
- Whether loan volumes, conversion, fee growth and contribution margin remain resilient as rates, credit conditions and funding-market demand change.
- How loan delinquencies, defaults, recoveries and fair values develop, including the effects of loans retained on Upstart’s balance sheet.
- The sustainability and diversification of funding across bank partners, whole-loan buyers, securitizations and warehouse facilities, including exposure to the two largest bank partners.
- Cash use and liquidity needs, including loan purchases, the $114.2 million purchase commitment, warehouse maturities and the 2026 convertible notes.
- Progress and outcomes relating to fair-lending reviews, CFPB oversight, the no-action letter and other regulatory or legal matters.
- The effect of stock-based compensation and other exclusions on non-GAAP performance measures, and whether any share repurchases are made under the authorized program.