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Upstart Holdings Inc Earnings - Analysis & Highlights for Q4 2024
Overview
PositivesNegativesOutlook
- Upstart Holdings Inc. upsized commitments with longstanding capital partners in Q4, increasing the commitments by a total of $1.3 billion.
- The company's historical pace of modeling wins and conversion gains will drive the majority of its growth.
- The company's core personal loan product continues to deliver model innovations that separate it from the crowd.
- The company aims to be the unique company that combines high growth and profits.
- Expenses relating to borrower acquisition, verification, and servicing were up 19% sequentially.
- Fixed expenses were marginally up by 3% due to continued catch-up accruals for expenses that were not being incurred earlier in the year at lower volumes.
- The company is starting to see some parts of the market heat up, not yet, but quite back to the fever pitch it was a few years ago.
- The company couldn't have asked for a stronger finish considering the weak environment it faced at the beginning of the year.
- The company expects to continue pursuing tight fixed expense management as a core principle of how it manages its business.
- The company expects to grow profitability to the point where the full year will be breakeven to positive.
- The company expects to see a negative impact on stock-based compensation expense as it completes a shift from multiyear to one-year equity grants.
- The company expects to grow the platform by finding more quality borrowers to approve.
- The company expects to see relatively stable costs as volumes increase and fee revenue increases.
Q&A Highlights from Upstart Holdings Inc Earnings Call Q4 2024
- Analyst asked about the pace of growth and how it compares to the ability to secure capital agreements.
- The company has experienced good expansion on the borrower side in Q4, but there is a challenge in matching the growth with the ability to secure capital agreements. The company is in conversations about creating the capital sources to take those loans from them, but it's more of a quarter-to-quarter activity than a month-to-month one.
- The company has experienced good expansion on the borrower side in Q4, but there is a challenge in matching the growth with the ability to secure capital agreements. The company is in conversations about creating the capital sources to take those loans from them, but it's more of a quarter-to-quarter activity than a month-to-month one.
- Analyst asked about the factors that drove the upside in Q4.
- The company saw an increase in approvability and conversion, with some amount of it coming from improvements to model accuracy, and some amount also coming from a combination of UMI subsiding, corresponding default rates moderating, and rate cuts from last fall. These factors have conspired to lower APRs on the platform.
- The company saw an increase in approvability and conversion, with some amount of it coming from improvements to model accuracy, and some amount also coming from a combination of UMI subsiding, corresponding default rates moderating, and rate cuts from last fall. These factors have conspired to lower APRs on the platform.
- Analyst asked about the potential ceiling for automation and instant approvals in Upstart's model and how close they are to it.
- David Joseph Girouard, CEO of Upstart, stated that while there is a ceiling to automation and instant approvals, it is not 100% and that the company will always have to deal with fraudulent activity and imperfections. He noted that the company has made significant progress in this area and that they are happy with where they are, but there is still room for improvement. He also mentioned that they are applying similar techniques to other products and that there are more wins to be had in automation and instant decisioning.
- David Joseph Girouard, CEO of Upstart, stated that while there is a ceiling to automation and instant approvals, it is not 100% and that the company will always have to deal with fraudulent activity and imperfections. He noted that the company has made significant progress in this area and that they are happy with where they are, but there is still room for improvement. He also mentioned that they are applying similar techniques to other products and that there are more wins to be had in automation and instant decisioning.
- Analyst asked about the operating levers in Upstart's model and how they should think about it over the medium and long term.
- Sanjay Datta, CFO of Upstart, stated that the company has good operating leverage in its business model, which means that as volumes increase and fee revenue increases, they foresee relatively steady take rates and relatively steady contribution margins, and relatively stable costs. He noted that they will make some investments in 2025, but they will be modest, and they are anticipating relatively stable costs. He also mentioned that the company has an ability to transmit a lot of that to the bottom line as their business grows in 2025 and beyond.
- Sanjay Datta, CFO of Upstart, stated that the company has good operating leverage in its business model, which means that as volumes increase and fee revenue increases, they foresee relatively steady take rates and relatively steady contribution margins, and relatively stable costs. He noted that they will make some investments in 2025, but they will be modest, and they are anticipating relatively stable costs. He also mentioned that the company has an ability to transmit a lot of that to the bottom line as their business grows in 2025 and beyond.
- Analyst asked about the impact of fair value write-ups on the net interest income guide for 2025.
- The net interest income guide for 2025 is primarily based on the performance of the assets on the balance sheet, with some incremental fair value marks. The company's net interest income has improved, indicating better performance of assets. The company has moved past underperforming vintages and expects to see a balance sheet that performs as expected.
- The net interest income guide for 2025 is primarily based on the performance of the assets on the balance sheet, with some incremental fair value marks. The company's net interest income has improved, indicating better performance of assets. The company has moved past underperforming vintages and expects to see a balance sheet that performs as expected.
- Analyst asked about the expected growth in EPS relative to transaction volume growth.
- The company expects to be in the ballpark of breakeven or at least breakeven in 2025. Profitability is expected to improve with scale, and there are mechanical changes to the P&L, such as the accounting of stock-based expenses, which have increased the accounting charge of the grants. The company expects to grow profitability to the point where the full year will be breakeven to positive.
- The company expects to be in the ballpark of breakeven or at least breakeven in 2025. Profitability is expected to improve with scale, and there are mechanical changes to the P&L, such as the accounting of stock-based expenses, which have increased the accounting charge of the grants. The company expects to grow profitability to the point where the full year will be breakeven to positive.
- Analyst asked about the sources of recurring business, specifically auto loans.
- The company's growth was driven by conversion in the core business, and the new products are not yet at a scale to significantly impact the overall numbers. The channel mix has remained relatively similar to prior quarters, with the core business being the primary driver of growth.
- The company's growth was driven by conversion in the core business, and the new products are not yet at a scale to significantly impact the overall numbers. The channel mix has remained relatively similar to prior quarters, with the core business being the primary driver of growth.
- Analyst asked about the transaction volume of small dollar loans compared to larger loans, and if there is a difference in conversion rates between the two.
- Small dollar loans account for a small percentage of total loan count, but a larger percentage of total dollar originations. Conversion rates are lower for small dollar loans, but they are also a secondary consideration for applicants who have been declined for larger loans. The company's core product has a higher conversion rate than the small dollar loans.
- Small dollar loans account for a small percentage of total loan count, but a larger percentage of total dollar originations. Conversion rates are lower for small dollar loans, but they are also a secondary consideration for applicants who have been declined for larger loans. The company's core product has a higher conversion rate than the small dollar loans.
- Analyst asked about the impact of improvements in Upstart Holdings Inc.'s underwriting model on loan buyers and how they get comfortable with the company's model.
- Dave Girouard, Upstart's CEO, explained that the company's technology is designed to improve its models over time, leading to more accurate credit decisions and lower rates for borrowers. He also noted that automation reduces friction in the loan process, resulting in higher conversion rates. Sanjay Datta, Upstart's CFO, added that loan buyers who work with the company are aware of the company's evolving models and have chosen to be counterparties based on their understanding of how the models work.
- Dave Girouard, Upstart's CEO, explained that the company's technology is designed to improve its models over time, leading to more accurate credit decisions and lower rates for borrowers. He also noted that automation reduces friction in the loan process, resulting in higher conversion rates. Sanjay Datta, Upstart's CFO, added that loan buyers who work with the company are aware of the company's evolving models and have chosen to be counterparties based on their understanding of how the models work.
