Upstart Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results. Upstart operates an AI-based consumer lending marketplace connecting borrowers with bank partners and institutional loan investors.
Financial and operating results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $228.2 million | $193.9 million | $538.3 million | $315.3 million |
| Revenue from fees, net | $258.3 million | $187.3 million | $572.3 million | $303.5 million |
| Operating income (loss) | $(32.1) million | $36.3 million | $2.7 million | $51.9 million |
| Net income (loss) | $(29.9) million | $37.3 million | $2.8 million | $47.4 million |
| Adjusted EBITDA (non-GAAP) | $5.5 million | $59.5 million | $68.1 million | $80.5 million |
| Adjusted EBITDA margin (non-GAAP) | 2% | 31% | 13% | 26% |
| Contribution margin (non-GAAP) | 47% | 52% | 47% | 50% |
Q2 total revenue rose 18% year over year, while fee revenue increased 38%. The fee increase reflected higher loan volume and pricing, and growth in serviced loan balances. Q2 operating expenses grew to $260.3 million from $157.7 million, with increases across marketing, customer operations, engineering and administration. For the first half, total revenue grew 71%, but net income fell sharply year over year.
Q2 interest income and fair value adjustments, net were negative $30.2 million, versus positive $6.6 million a year earlier. The 2022 amount included a $32.8 million downward loan valuation and $25.4 million of realized loan-sale losses, primarily attributed to rising interest rates. For the first half, this line was negative $34.0 million, including a $52.3 million downward loan valuation and $24.1 million in realized loan-sale losses.
Marketplace transaction volume in dollars was $3.28 billion in Q2, up from $2.80 billion a year earlier but down 28% from the prior quarter. Loans facilitated totaled 321,138, versus 286,864 a year earlier. Conversion rate fell to 13.3% from 24.4%; 73% of loans were fully automated, versus 71%. For the first half, 26% of loans were retained by originating banks, 67% purchased by institutional investors, and 7% funded through Upstart’s balance sheet.
Cash, liquidity and debt
- At June 30, cash was $790.4 million and restricted cash was $124.0 million, or $914.4 million combined. Combined cash and restricted cash declined from $1.19 billion at December 31, 2021.
- Six-month operating cash flow was negative $320.4 million; investing cash flow was negative $4.8 million; financing cash flow was positive $48.4 million. The operating cash use primarily reflected changes in loans held for sale and related working capital.
- Loans carried at fair value totaled $623.8 million, up from $252.5 million at year-end. Management said $483.5 million was held primarily for research and development, including auto lending and expanding personal-loan offerings; $140.3 million was core personal loans otherwise expected to be purchased by institutional investors.
- Total borrowings were $856.6 million, including $661.3 million of 0.25% convertible senior notes due 2026 and $208.1 million drawn under warehouse facilities. Warehouse borrowings carry floating rates. The company reported compliance with applicable warehouse covenants.
- Management stated that cash on hand and expected operating cash flow should meet liquidity needs for at least 12 months, while noting that future requirements depend on growth, working capital, loan purchases and other factors.
Material developments, outlook and risks
- Funding and macroeconomic pressures: Management cited inflation, higher interest rates and investor caution as constraints on institutional funding; some bank partners also paused or reduced originations. Upstart expects to use its balance sheet for short-term loan funding while pursuing more committed third-party capital. No specific numerical revenue or earnings guidance is provided in the supplied filing text.
- Credit and model performance: Management said 2021 institutional-investor loan vintages were underperforming investor target returns to date; bank-retained vintages through 2021 were forecast to meet or exceed targets. The filing warns that the AI models have not been extensively tested through a recession and that post-pandemic support expiration has contributed to higher defaults, particularly among higher-risk borrowers.
- Product expansion: Upstart originated its first small-business loans and introduced small-dollar personal loans in Q2. The company cautioned that new products require investment and their demand, funding and profitability are uncertain.
- Concentration: Two customers represented 50% and 28% of Q2 revenue. For the first half, Cross River Bank originated 52% of platform loans and accounted for 48% of revenue; another bank partner originated 37% of loans and accounted for 30% of revenue.
- Regulatory exposure: Upstart requested termination of its CFPB no-action letter in June 2022, citing the need to update its models during economic change. The company warned of increased CFPB attention to bank-fintech relationships, AI and fair lending, as well as evolving state and federal lending rules.
- Litigation: Securities class actions and a derivative action alleged misleading statements or related misconduct; several earlier class actions were voluntarily dismissed without prejudice. The company said it intends to defend the claims and could not estimate a reasonably possible loss. No loss contingency was recorded for legal proceedings.
- Other notable items: The company repurchased 3.5 million shares for $125.0 million during the first half under a $400 million authorization; $275 million remained available at June 30. Stock-based compensation was $30.3 million in Q2 and $55.4 million in the first half.
Important facts for investors to verify
- Whether institutional and bank funding availability improves, and how much additional loan volume Upstart retains on its own balance sheet.
- Subsequent fair-value marks, realized loan-sale results, credit delinquencies and defaults, and performance of 2021 loan vintages against investor targets.
- Whether conversion rates, loan volume and fee growth recover without further deterioration in contribution and operating margins.
- Cash use, restricted-cash availability, warehouse-facility capacity and covenants, and the company’s ability to fund product development and loan purchases.
- Developments in CFPB oversight, fair-lending reviews, bank-partner relationships and the pending lawsuits, including any estimable financial exposure.
- The assumptions and sensitivity of Level 3 fair-value estimates, which rely on significant unobservable inputs for loans and servicing assets and liabilities.