Upstart(US:UPST)2024-08-07 01:00Financial Data and Key Metrics Changes - Revenue from fees was $131 million in Q2, down 9% year-over-year, while net revenue for Q2 came in at $128 million, down 6% year-over-year but $3 million above guidance [23][25] - Net interest income was negative $3 million, an improvement both year-on-year and sequentially [25] - GAAP net loss for Q2 was $54 million, and adjusted EBITDA was negative $9 million, both ahead of guidance [25][28] - Average loan size decreased to $7,700 from $9,500 in the prior quarter [24] Business Line Data and Key Metrics Changes - The volume of loan transactions across the platform in Q2 was approximately 144,000 loans, up 31% from the prior year and up 21% sequentially [23] - Automation of the core unsecured loan product reached 91% in Q2, up from 73% two years ago [10][24] - The small dollar relief product saw 57% sequential growth in the number of loans in Q2, becoming the second product to reach break-even economics [12] Market Data and Key Metrics Changes - The Upstart macro index has fallen for three consecutive months, indicating a downward trend in credit default rates [21] - The company ended Q2 with loans on its balance sheet of $686 million, down from $924 million in the prior quarter [25][26] Company Strategy and Development Direction - The company is focusing on its core personal loan product while expanding into auto loans, small-dollar relief loans, and home equity lines of credit [11][12] - Upstart has rebuilt its funding supply by securing long-term funding partnerships, reducing reliance on its balance sheet for loan funding [7][16] - The company aims to offer the best rates and processes for all credit products, with significant improvements in model accuracy and fraud detection [8][11] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about returning to sequential growth and EBITDA profitability, attributing progress to internal improvements rather than macroeconomic factors [6][7] - The macro environment is no longer seen as a direct impediment, with expectations for continued improvement in credit performance [29] - Future guidance for Q3 includes total revenues of approximately $150 million and positive adjusted EBITDA in Q4 [28][29] Other Important Information - The company has secured financing to scale up its auto and small-dollar loan offerings and expects to complete its first forward-flow sale of HELOC loans soon [22] - Delinquency rates have decreased by 16% year-over-year, and support costs per current loan have been reduced by 30% [15] Q&A Session Summary Question: Trends in loan demand and credit performance in July - Management indicated that July showed a positive trajectory, reflecting optimism for Q3 [30][31] Question: Impact of fixed versus variable costs on profitability - As the business expands, contribution margins may shrink due to reductions in take rates, but fixed costs are expected to grow slower than the top line, leading to operating leverage [32][33] Question: Future conversion rates and model improvements - Management expects continued improvement in conversion rates driven by model accuracy, with potential for further gains [36] Question: Small dollar loans as an acquisition channel - Small dollar loans are seen as a way to acquire customers for larger loans, with positive economic performance [37][38] Question: Balance sheet runoff pace - The medium-term direction is expected to be a reduction in the balance sheet, though timing may vary based on borrower growth and capital agreements [40][41] Question: Funding levels compared to previous years - Funding markets are improving, but not yet at the levels seen in 2021 and early 2022; plans to return to the ABS market are in place [46] Question: Impact of interest rate cuts on growth - Lower interest rates would be beneficial for the business, potentially improving conversion rates [56] Question: Marketing efficiency improvements - Improved marketing efficiency is linked to better funnel conversion rates and model accuracy [58][60]