Upstart(US:UPST)2024-05-07 22:17PART I. FINANCIAL INFORMATION Financial Statements Upstart reported increased Q1 2024 revenue and a narrowed net loss, with improved operating cash flow and a slight decrease in total assets and liabilities Condensed Consolidated Balance Sheets As of March 31, 2024, total assets decreased to $1.93 billion, primarily due to lower loans held at fair value, while total liabilities also declined to $1.31 billion Condensed Consolidated Balance Sheet Data (in thousands) | | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash | $300,529 | $368,405 | | Loans (at fair value) | $1,080,865 | $1,156,413 | | Total assets | $1,927,667 | $2,017,100 | | Liabilities and Stockholders' Equity | | | | Borrowings | $1,005,277 | $1,040,424 | | Total liabilities | $1,314,869 | $1,381,795 | | Total stockholders' equity | $612,798 | $635,305 | Condensed Consolidated Statements of Operations and Comprehensive Loss Q1 2024 total revenue increased to $127.8 million, leading to a narrowed net loss of $64.6 million, primarily due to higher revenue and reduced operating expenses Q1 2024 vs Q1 2023 Statement of Operations (in thousands, except per share data) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Revenue from fees, net | $138,068 | $117,141 | | Total revenue | $127,794 | $102,927 | | Total operating expenses | $195,262 | $234,762 | | Loss from operations | ($67,468) | ($131,835) | | Net loss | ($64,598) | ($129,254) | | Net loss per share, diluted | ($0.74) | ($1.58) | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly improved to $52.6 million in Q1 2024, despite cash and restricted cash decreasing by $28.6 million overall due to investing and financing activities Q1 2024 vs Q1 2023 Cash Flow Summary (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $52,622 | ($75,727) | | Net cash used in investing activities | ($37,547) | ($25,852) | | Net cash provided by (used in) financing activities | ($43,711) | $20,971 | | Change in cash and restricted cash | ($28,636) | ($80,608) | Notes to the Condensed Consolidated Financial Statements Detailed notes explain accounting policies, revenue concentration, fair value measurements, significant borrowings, loan purchase commitments, and the impact of a 2023 reorganization Revenue from Fees, Net (in thousands) | | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Platform and referral fees, net | $77,657 | $103,859 | | Servicing and other fees, net | $39,484 | $34,209 | | Total revenue from fees, net | $117,141 | $138,068 | - The company has significant customer concentration. In Q1 2024, Customers A, B, and C accounted for 39%, 24%, and 11% of total revenue, respectively53 - As of March 31, 2024, the company had total borrowings of $1.005 billion, comprising $351.5 million from warehouse credit facilities and $653.8 million (carrying value) from convertible senior notes152173 - The company has a loan purchase commitment of $32.5 million as of March 31, 2024. The maximum potential future repurchase obligation for loans sold to institutional investors is $11.5 billion202207 - In January 2023, the company implemented a reorganization plan, reducing its workforce by approximately 20% (365 employees) and incurring $15.5 million in related expenses in Q1 2023228229 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2024 revenue growth driven by transaction volume and funding, while navigating macroeconomic challenges and utilizing the balance sheet to fund loans Overview and Key Metrics Upstart's AI lending marketplace focuses on securing committed capital, with Q1 2024 showing improved transaction volume and conversion rates despite macroeconomic influences Key Operating and Non-GAAP Metrics | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Transaction Volume, Dollars | $1,130,799 thousand | $997,447 thousand | | Transaction Volume, Number of Loans | 119,380 | 84,084 | | Conversion Rate | 14.0% | 8.2% | | Percentage of Loans Fully Automated | 90% | 84% | | Contribution Profit | $81,142 thousand | $67,623 thousand | | Contribution Margin | 59% | 58% | | Adjusted EBITDA | ($20,339) thousand | ($31,061) thousand | - The Upstart Macro Index (UMI) was approximately 1.60 as of March 31, 2024, indicating an incremental risk of about 60% to loan repayment performance compared to a baseline environment261 Results of Operations Q1 2024 total revenue increased 24% to $127.8 million, while operating expenses decreased 17% to $195.3 million, largely due to a significant reduction in Engineering and Product Development costs Operating Expenses Change (Q1 2024 vs Q1 2023, in thousands) | Expense Category | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $35,150 | $31,438 | $3,712 | 12% | | Customer operations | $39,408 | $40,590 | ($1,182) | (3)% | | Engineering and product development | $63,091 | $110,071 | ($46,980) | (43)% | | General, administrative, and other | $57,613 | $52,663 | $4,950 | 9% | | Total operating expenses | $195,262 | $234,762 | ($39,500) | (17)% | Liquidity and Capital Resources Upstart's liquidity relies on $300.5 million cash and warehouse facilities, with $1.08 billion in loans held on its balance sheet to manage marketplace funding - As of March 31, 2024, the company held $1,080.9 million of loans on its balance sheet, composed of $394.0 million for R&D, $529.6 million of core personal loans, and $157.3 million of loans held by consolidated securitization353 - The company has a loan purchase commitment of $32.5 million and capital co-invested at risk of $169.6 million under its committed capital arrangements as of March 31, 2024341342 Quantitative and Qualitative Disclosures About Market Risk Upstart faces market risks including discount rate, credit, and interest rate fluctuations, impacting loan portfolio fair value and borrower demand, partially mitigated by interest rate caps - A hypothetical 100 basis point increase in the discount rate would decrease the fair value of loans (excluding those in consolidated securitization) by $12.6 million as of March 31, 2024362 - A hypothetical 10% increase in credit risk would result in a $12.7 million decrease in the fair value of loans (excluding those in consolidated securitization) as of March 31, 2024368 - The company is exposed to interest rate risk on $351.5 million of borrowings under its floating-rate warehouse credit facilities as of March 31, 2024, partially hedged by interest rate cap agreements with a notional amount of $283.8 million374 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2024, the company's disclosure controls and procedures were designed and function effectively378 - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting380 PART II. OTHER INFORMATION Legal Proceedings The company's material pending legal proceedings, including a securities class action and derivative lawsuits, are detailed in Note 12 of the financial statements - For a description of material pending legal proceedings, the report refers to "Note 12. Commitments and Contingencies" and "Risk Factors"382 Risk Factors The company faces significant risks from adverse economic conditions, constrained loan funding, AI model effectiveness, regulatory scrutiny, customer concentration, and cybersecurity threats - The business is adversely affected by economic conditions, with high inflation and interest rates decreasing loan funding from partners, reducing borrower demand, and increasing delinquencies390391395 - A significant risk is the inability to maintain diverse and resilient loan funding from institutional investors, which has been constrained by the macroeconomic environment, leading Upstart to use its own balance sheet for funding396397398 - The effectiveness of the company's AI models is crucial, as failure to accurately predict creditworthiness, especially in changing economic conditions, could lead to higher losses and reduced trust from funding partners402405 - The company has significant concentration risk, with its top three lending partners accounting for 74% of total revenue and 88% of loan volume in Q1 2024436 - The business is subject to a wide range of evolving laws and regulations, including potential challenges to the "true lender" status of its bank partners and increased scrutiny of AI in lending by regulators like the CFPB446568610 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no repurchases of its common stock during the three months ended March 31, 2024 - There were no repurchases of the Company's common stock during the three months ended March 31, 2024676 Other Information During Q1 2024, several executive officers, including the CFO, CTO, and CLO, adopted or terminated Rule 10b5-1 trading plans for company securities - During Q1 2024, CFO Sanjay Datta, CTO Paul Gu, and CLO Scott Darling each adopted a new Rule 10b5-1 trading plan for the sale of company stock681 Exhibits and Financial Statement Schedules This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including officer certifications and XBRL data files - The report includes standard exhibits such as CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and Inline XBRL documents682684