Upstart Holdings, Inc.

Good day, everyone, and welcome to the Upstart fourth quarter fiscal year 2020 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Jason Smith, VP of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's fourth quarter and 2020 financial results. With us on today's call are Dave Girard, Upstart's Chief Executive Officer, and Sanjay Dutta, the company's Chief Financial Officer. Before we begin, I would like to remind you that shortly after the market closed today, Upstart issued a press release announcing its fourth quarter and 2020 financial results and published an investor relations presentation. Both are available on our investor relations website, ir.upstart.com. Today's discussion includes forward-looking statements. Please refer to our form 8K, dated March 17, 2021, filed with the Securities and Exchange Commission for a discussion of factors that could cause the company's actual results to differ materially from these forward-looking statements. I would also like to remind you that during the call, we will discuss some non-GAAP measures related to Upstart's performance. you can find the reconciliation of those measures to the nearest comparable gap measure in the press release. To ensure that we address as many analyst questions as possible during the call, we request that you please limit yourself to one initial question and one follow-up. Now, I'd like to turn it over to Dave Girard, CEO of Upstart.

Good afternoon, everyone. Thank you for joining us on Upstart's inaugural earnings call covering our fourth quarter and full year 2020 results. I'm Dave Girard, co-founder and CEO of Upstart. Last quarter was monumental for us as we took the company public in the midst of a historically complex and challenging time for the U.S. and for the world. We began trading on December 16th on the NASDAQ under the ticker symbol UPST. I'm excited to present our quarterly and full year results for the first time as a public company. Upstart has a unique combination of scale, rapid growth, and profits driven by our underlying AI technology. Despite the COVID-19 pandemic and the elevated economic risk resulting from it, Upstart grew revenues 42% in 2020 compared to 2019 and was GAAP profitable as well. Our Q4 2020 revenues were up 39% year on year. Upstart is a fee-based business. We don't make loans, and we aren't exposed to material balance sheet risk. But despite this, we care a lot about how Upstart loans perform. So we're happy to report that the COVID-19 pandemic had no material impact on the returns that our bank partners and loan investors experienced this past year. We're also excited to announce that we've entered into an agreement to acquire Prodigy Software, a leader in cloud-based automotive commerce. Toward the end of last year, we originated the first AI-enabled auto loan on our platform. In this initial phase, Upstart is enabling consumers to refinance expensive and mispriced car loans, saving them on average $72 per month. With the acquisition of Prodigy, we aim to accelerate Upstart's presence and one of the largest buy now, pay later opportunities. Prodigy is bridging the gap between how dealerships operate and the new way that people shop for cars. More than $2 billion in vehicle sales have been powered by Prodigy at franchise dealers from top brands such as Toyota, Honda, and Ford. This acquisition is our first and signals our excitement about the long-term potential of our auto lending initiatives. To step back for a moment, Paul, Anna, and I founded Upstart nine years ago with the idea that modern technology and data science could improve access to affordable credit. Each of us came from extremely modest backgrounds where access to credit was essential to our every step. Credit, both for consumers and businesses, is not just important personally. It's a cornerstone of our economy and essential to the growth and prosperity that Americans expect. There's broad consensus that the credit economy is highly inefficient, if not broken. Models for quantifying risk and pricing loans are not far from a roll of the dice. Millions of consumers don't have access to credit, pay too much for it, or take on credit that they can't ultimately afford. On the other hand, banks in 2021 are swimming in deposits and are looking for more sophisticated tools to lend them out in a responsible and profitable manner. There's far less consensus that modern data science, namely artificial intelligence, can remedy the situation. But Upstart is validating this thesis every day. In a 2018 study, Upstart demonstrated to several large U.S. banks that our AI-based lending platform could almost triple their approval rates while holding losses constant compared to their current risk models. And that was in 2018. Upstart's AI models have improved constantly and dramatically since then. This is an important point. One way to grasp the potential for AI lending and how different it is from traditional approaches is that we look back at our own models from just a few years ago and shake our heads at how simplistic and rudimentary they were compared to our current capabilities. As a public company, our financial results will ultimately speak to how unique and differentiated our AI models are. But it's worth a quick refresher on how the underlying technology actually works. Our AI models, like all AI systems, are fueled by incredible amounts of data and sophisticated software to interpret that data. While most lenders consider only a handful of variables as part of a lending decision, Upstart's model considers more than 1,000 variables about each applicant. You can think of these as the columns in a spreadsheet. And as of December 31, 2020, our model was trained on more than 10.5 million unique repayment events. These are like the rows in a spreadsheet. And we continually upgrade the machine learning software that interprets this data, enabling us to price the next loan on our platform just a bit more accurately. Upstart goes far beyond a singular AI model predicting default risk. We have discrete AI models that improve the entire lending process, including identity fraud, income misrepresentation, loan stacking, prepayment risk, fee optimization, and more. But of course, our model that targets default risk is the centerpiece of our system. It predicts not just the likelihood that a loan will default, but when that default can be expected to happen. The advantages Upstart's AI model offers our bank partners is obvious. Higher approval rates, lower loss rates, and a highly automated digital experience. Upstart enables lending programs that are more predictable, more profitable, and more inclusive. For consumers, the advantages of AI-based lending are equally compelling. Higher approval rates, lower APRs, and fully automated approval, with more than 70% of upstart loans approved in near real time, with zero documentation or phone calls required. In fact, 58% of the loans on our platform in 2020 happened on a mobile device. Consumer expectations for a seamless digital experience have never been higher. And Upstart helps our bank partners meet and beat that expectation. It's also important to say that AI lending can be and should be inclusive, fair, and unbiased. In fact, more so than traditional systems. As a company dedicated to improving access to credit, fairness and inclusion are central to our mission. We test every single loan application on our platform for fairness and share the results of these tests quarterly with the Consumer Financial Protection Bureau. It's also worth noting that we do this rigorous testing on behalf of each of our bank partners. This level of rigor and transparency and fairness testing is quite unique in the personal lending industry. The results of these tests say it all. Upstart's platform offers significantly higher approval rates and lower interest rates to every demographic group tested. That is an outcome we believe every bank should strive for in its lending programs. While better AI models are the primary lever we use to create a more inclusive platform, it's not the only lever. Very soon we'll release a Spanish language version of our product that we believe is the first of its kind among digital lending platforms in the US. While restaurants and retailers routinely offer a Spanish language alternative, online lenders unfortunately do not. Taking out a loan is a big decision and it comes with important obligations. So it's clearly better for the consumer if the entire experience, including disclosures, the loan agreement, and customer support are available in their preferred language. In closing, I want to say that while we're in the first stages of adoption of AI lending, we're confident that this transformation will play out for years and decades to come. Virtually all lending will be AI enabled in the future because the economics are so compelling to all participants. We aim to be the category leader in AI lending and a partner to banks who share our vision. Thank you, and now I'd like to turn it over to Sanjay, our Chief Financial Officer, to walk through our financial results and guidance. Sanjay?

Thanks, Dave. Happy St. Paddy's Day to everyone, and thank you for joining today. Very grateful to have you with us. I'm Sanjay Dutta, Upstarts CFO, and I'll cover our financial results of our first quarter as a public company, as well for full year 2020, before touching on forward guidance. Our revenues in Q4 were $86.7 million, up 39% from the same quarter of the prior year. Of that amount, revenue from fees represented $84.4 million, or 97% of the total. Underpinning this fee-based revenue was the origination of 123,396 loans by all of the bank partners across our platform, up 57% from the same quarter of the prior year, and a 17.4% conversion rate on rate requests. up from 14.9% in the prior year. Our contribution profit, a non-GAAP metric which we define as revenue from fees minus variable costs for borrower acquisition, verification, and servicing, was $41 million in Q4, up 77% year over year, and representing a 49% contribution margin, up from a margin of 38% in the year prior. The margin improvement was driven by increases in marketing and operating efficiency, as well as a rise in the percentage of loans fully automated to 71%, up from 69% in the prior year. This level of contribution margin is slightly above our expected longer-term trend line, and we expect it to normalize downwards mildly over the coming few quarters. Q4 operating expenses were $76.3 million, up 29% year-over-year, or 25% when netting out the impact of stock-based compensation. Investment in engineering and R&D was our priority over the past year, growing 94% year-over-year to $14.1 million in Q4. However, general and administrative spend grew more slowly than revenue in Q4, increasing 29% year-over-year to $14.8 million, partially benefiting from savings in office and travel costs due to the pandemic. The other expense categories of sales and marketing and customer operations was largely driven by the variable cost increases in borrower acquisition, verification, and servicing previously discussed. Our Q4 gap net income was $1 million, down from $6.1 million in Q4 of 2019. This year-over-year decrease is almost entirely attributable to changes in the fair value of warrants that were granted in our first years as a company and carried on our balance sheet as liabilities up until their exercises in Q4 coinciding with our December IPO. Adjusted EBITDA, in which we adjust for this warrant fair value expense as well as for stock-based compensation, came in at $15.5 million in Q4, up from $7 million in Q4 of 2019. Adjusted net income per share for Q4 was $0.07, based on a diluted weighted average share count of $80.3 million. Quickly now turning to a few full-year highlights. Our fiscal 2020 full-year revenue came in at $233.4 million, growing 42% year-over-year, despite a severe adverse impact from COVID. Contribution profit was $105 million on the year, up 115% over 2019, and representing a 46% contribution margin. Gap net income came in at $6 million for the full year, and adjusted EBITDA was $31.5 million. representing a 13% adjusted EBITDA margin versus 3% a year earlier. On the balance sheet side, we ended with $311 million in restricted and unrestricted cash, largely flowing from the proceeds of our December IPO, and which was up from $80 million at the end of 2019. In terms of loan assets, we carried an aggregate balance of loans, notes, and residuals of $98 million at the end of 2020. down from $266 million at the end of 2019, reflecting the continued reduction in the percentage of platform loans funded through our own balance sheet. This $98 million of loan assets represents the totality of the direct exposure we have to credit risk. To return our attention to 2021, we would highlight a few dynamics which are impacting how we currently forecast the balance of the year. The first is that part of the growth we have been and are currently experiencing is simply the business catching up to where the technology has improved to over the past year. So in a sense, we are recovering to where we otherwise would have expected to be absent the impact of the pandemic. The second is that our contribution margins remain slightly above their historical trend as we emerge from the recovery phase. And we expect them to mildly contract as we return to our normal operating equilibrium. A final note is that we are currently planning to voluntarily repay the PPP loan, which we received in 2020 shortly after the onset of COVID, even though our conclusion remains that it fully meets the eligibility requirements for forgiveness. This decision will have the effect of reducing Q1 2021 net income, adjusted net income, and adjusted EBITDA, all by $5.3 million. With these points in mind, for Q1 of 2021, we are expecting total revenues of $112 to $118 million, representing a growth rate at midpoint of 80% year over year, contribution margin of approximately 44%, net income of $7.8 to $8.3 million, adjusted net income of $13.4 to $14.2 million, adjusted EBITDA of $14.6 to $15.3 million, and a diluted weighted average share count of approximately 92.4 million shares. For the full year of 2021, we now expect revenue of approximately $500 million, representing a growth rate of 114% year-over-year, contribution margin of approximately 41%, and an adjusted EBITDA margin of approximately 10%. In closing, we feel it is worth reiterating how proud we are of how our company has navigated what was a very challenging environment in 2020, and we feel that we are entering 2021 as a much stronger company for it. Our business model has proven to be resilient, the accuracy of our AI models has continued to improve steadily, and most importantly, the credit underwritten by our platform has performed unimpeachably through the turbulence of the past year. We continue to be excited about the sheer magnitude of the opportunity ahead of us, in applying our technologies to the broader landscape of risk across financial services. We look forward to sharing our results with you in the coming quarters.

With that, Dave and I are now happy to open the call to any questions. Operator?

Thank you. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, star one to ask a question. And it looks like first we'll go to Pete Christensen from Citi. Your line is open.

Thank you. Good evening. Thank you for the question and congratulations on your IPO. Fantastic. Dave, I wanted to talk about the auto opportunity here. Certainly the Prodigy acquisition will accelerate the front end of the business. But as we think about, you know, building up the financing partners and, you know, customizing the model to suit the the the auto market per se now how should we think about the the timing of scaling that that that product I guess over the the next 12 or so months and then I have a quick follow-up sure thanks for the question this is Dave I'll just say quickly we are just entering the auto lending space

Over the last few months, and you know started this year in one state have expanded to 14 but we're still really in the formative stages of. Establishing this product and refining it so we don't expect it to contribute materially in 2021 this is really a year of building out testing improving the funnel bringing on bank partners. uh, et cetera. And this is, you know, kind of a process that took several years for our personal and product to really reach the state it's gotten to. Certainly we expect this to happen much faster, but 2021 from our perspective, uh, with auto is really a building year and, um, the acquisition of prodigy, we certainly view as an accelerator toward, um, the point of sale, the majority of the market that happens at the dealership, uh, But still, that guidance would hold, which is we don't expect it to be material to our 2021 results.

Thanks. That's helpful. And then as we look at the credit profile of your average consumer, I mean, average credit card debt came down 12% in 2020. You certainly have stimulus distributions going out now. How much do you see that as a factor in growth in the personal loan side, considering number one use cases is really dead consensual headwind. And how do you guys think about that?

Yeah, this is Sanjay. Thanks for your question. I'll jump in on this. So I think that the impact of the pandemic and all the stimulus that's been injected in the economy, we think of the impact of that maybe on two levels. One is we believe it's been constructive to credit performance. On the other hand, it's been adverse to volume. And to put it another way, with the stimulus in the economy, the economy's at record savings rates, at least in recent memory, low amounts of consumer spend, that has manifested, as you said, in sort of record low credit card balances. And then on our end, it sort of shows up as smaller, lower demand for loans and smaller loan sizes. And so that's been a headwind through the past year as we've recovered. And it continues to be with another round of stimulus. You might imagine that that will be propagated a little bit. On the other hand, as the effects of the pandemic do unwind and as consumers return to the economy and the savings rates normalize, you might imagine that that would, in fact, become a tailwind on the volume side. So those are the sandbox effects that we think about when we think about the stimulus.

Thank you, gentlemen.

Very helpful. And congrats again on the IPO. Thank you.

Thank you.

Thanks, Keith. Operator, we're ready for our next question.

Thank you. And next we'll go to Ramsey Ellisall from Barclays. Your line is open.

Hi, guys. Thanks so much for taking my question and congratulations on a very strong quarter. I wanted to ask, in the context of the commentary on the 2021 guidance, I think, Sanjay, you mentioned that a key growth driver is the business sort of catching up to where the tech has improved over the past year, kind of catching up to where you would have been. Can you elaborate that in a little bit? What exactly are you talking about there in terms of the underwriting models, in terms of other aspects of the business? Just to share a little more color there. Yeah, sure. Thanks. Great to hear from you, Ramzi. So I would not call this the key driver, but it certainly is a factor in how we think about the recent path of growth and the path forward. But just to kind of briefly describe it, our underlying technology has been improving steadily over the past year. The AI models have gotten more accurate. Our ability to underwrite risk on behalf of our bank partners has improved. And it hasn't necessarily shown up directly in the business because, as you know, the business has undergone a lot of volatility for a lot of extraneous factors. But as the sort of the impact of COVID itself subsides, the business is now catching up to where we otherwise would have expected it to be, you know, had there never been an impact of the pandemic. And so, you know, as rates of return for investors normalize, as the risk in the economy normalizes, we're sort of converging to that sort of, you can imagine a trend line had COVID never happened, we're converging to that trend line. So part of what is, uh, you know, propagated our sequential growth quarter over quarter is that dynamic. Um, and of course that's not going to last throughout the entire year. Um, but there are other things that are creating tailwinds as well, um, that have to do with the ongoing sort of performance of our marketing campaigns, uh, the ongoing improvements we were making this year to the model. And some of the things I described around how, you know, as the, uh, the effect of the, of the time that it does subside, we do imagine some tailwinds as the consumers returned to the economy. So, I think what we're doing is calling out one impact of the sequential quarterly growth in particular, and to the extent that that's moderated in our guidance going forward, that's one of the factors. Okay, that makes a ton of sense. I wanted to ask a follow-up on the credit karma relationship. I just kind of wanted to get an update there in terms of Lightbox, and it seems like you more than maybe backfilled some headwind there. What's going on there? Did things play out the way you thought? And then just a quick bolt on there is what is Prodigy contributing to revenues and EBITDA in 2021?

And I'll hop back in the queue. Sure.

This is Dave. You know, Credit Karma is a really important partner of ours, has been for a while, and we expect we'll continue to be there now part of Intuit, who we had a relationship with with previously. The scale of our partnership continues to grow. I mean, we see ourselves as co-leaders in kind of adjacent areas. So as they've been successful, we've been successful. The relationship continues to become more meaningful to both of us. We don't anticipate that changing. There's certainly a lot of different approaches they take and ways we can work with them. And we will over time make decisions about where it makes sense for us to work with them or not. But we view those as squarely tactical decisions. It is a great partnership. We anticipate it will continue to be a great partnership. Our goal, as much as we have talked about having a lot of our loan sort of lead volume coming through Credit Karma, it's actually important for us to continue to build other channels. We have no desire to reduce the scale of the partnership we have with Credit Karma. In fact, we want to keep building it. We don't essentially view this as a real issue for us. We are a unique company in that we have a proprietary product. Most people in fintech or in lending fintech don't really have a proprietary product, so they seek out proprietary distribution. We actually do have a proprietary product, so we're very happy to have a partnership with somebody like Credit Karma to take advantage of that.

Thanks, Ramzi. I'll put her next question.

Thank you. Next we'll go to John Hecht from Jefferies. Your line is open.

Morning, or excuse me, afternoon and congratulations. You guys gave a good stat about the growth on kind of the bank platforms and the volume tied to that. And I saw you announced the Apple Bank adoption and some other credit unions over the course of the last few months. Maybe can you give us an update on call it the penetration and momentum there and pipeline and any details you can give around that component of the business?

Yep, sure. This is Dave. Let's just say I think our momentum has continued since our IPO. We've signed agreements with three additional banks. We've had two, including Apple Bank, as you referenced, go live on our platform. There's today a total of 15 banks on our platform. I think there's a lot of interesting things happening in the market. First of all, COVID has clearly accelerated the digitization efforts and projects that banks are undergoing because, of course, there's pretty dramatically reduced traffic to their branches, which is a trend that's been going on for years regardless, but accelerated during COVID. So the importance of digital is there, and certainly there's a lot more interest for that reason in our platform. It's also clear that banks have excess deposits these days and a shortage of loans. And that is true almost across the board for banks. One sort of reaction that we've taken to that is we're a little more focused on helping banks get loans from our platform, really referred from upstart.com to the banks. This is something we can readily do. Our volumes are growing, as can be seen very quickly. And so it's really the fastest way to solve a very acute problem that banks have, which is again, surplus deposits and a lack of demand for loans, particularly through branches, which, you know, for a large time had been closed or likely trafficked. So this is really the state of it. We're definitely seeing increased interest from larger banks. I think both because of this excess deposit issue, as well as the fact that our entry into auto is into a category that larger banks are much more familiar with have a lot more history with a lot more confidence in so we would anticipate uh continuing to grow our pipeline of banks i'll also add we um did something super interesting which is signed uh an agreement recently with a very small bank um interesting only because it was uh from start to finish in about a 90-day process and that for us is fairly groundbreaking we don't we don't expect all of our agreements to come together that quickly by any stretch. But one of our goals is certainly to make it faster and easier for banks to join our platform and be onboarded. So that's something we're very excited about.

Okay. No, that's very helpful color. And then, yeah, I know I look at things from a different lens, but just looking at the momentum you guys were exhibiting through the second part of last year, I guess, you know, post the shelter in place period when things started to normalize, And looking at our forecast, the guidance is clearly significantly ahead of that. I'm wondering, so I guess I understand we look through a different lens, but can you guys characterize maybe where some of this improved momentum has come from, despite stimulus maybe knocking down a little bit of secular loan demand? Is it the bank channel? Is it more the consistent credit fund channel? Is it the new product channel? Is it all of the above? Is there any kind of where you can steer us as to – where some of the upside is coming from, you know, maybe in a more meaningful way?

Yes, this is Dave. Let me try to maybe explain why I think our business is doing so well these days. Part of it is internal, and by that I mean, you know, despite all the turbulence last year in the world and the industry, we invested a lot in R&D. Our models and our team kept getting bigger and stronger, you can tell by our R&D spend last year, we did not hold back. And so the technology has been improving dramatically. And I'd even say that COVID accelerated that because a change in the environment is really a learning opportunity for an AI system. So, you know, there was just very fast forward progress in the quality of the technology. That generally means the throughput of our funnel gets much better. Now, at the same time, the environment changed a lot, of course, and two things changed. First, the level of risk in the environment went up a lot. And that really meant that it really stressed out competing models. And we feel like we have pretty significant advantage in an environment where there's elevated levels of risk. And having a system, an AI-based system that can discern risk and handle it properly becomes even more important advantage. The second thing that happened, as we've mentioned, is demand for credit dropped. And this really is because people spent less, weren't traveling, weren't eating out, et cetera. Credit card balance is lower as Sanjay mentioned. And that translates to us as demand for smaller loans. But we are a company that has invested a lot in automation. So smaller loans are something we handle really well from a profitability perspective. When you put those two together, I think what you're seeing is Upstart taking pretty significant market share. in a during a time of turbulence when when different models are handling things differently companies are naturally reacting in different ways whether they're pulling back tightening credit etc that this is really i presented an opportunity for a new platform to shine that is really built differently and i think that's what we've seen play out during 2020 and we are certainly seeing it playing out as we get into 2021 great appreciate the color guys thanks

And again, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Next, we'll go to Ron Josie from JMP Securities. Your line is open.

Great. Thanks for taking the question and what a quarter. Both David and I have a question here. I'll kick off and David will follow. So, you know, Sanjay, I just wanted to maybe understand a little bit more about the acquisition channels and, David, your comments there on risk. But, you know, total funded loans accelerated in the quarter on the toughest comps of the year. Rate requests also accelerated. So clearly things are going well. Can you just talk a little bit more about the acquisition channels that you used this quarter? And most importantly, just the strategy going forward. I get Credit Karma, but maybe things besides Credit Karma is the first question.

David, I don't know if you want to ask your second one. Sure. Hi, Ron. Thanks for the question.

I guess I would say the overall mix or spread between channels has not evolved greatly. We continue to improve all of our channels. And really the dynamic that we think about is when the underlying strength of the models improves, it improves our ability to convert loans in the funnel. And when that happens, it creates expansiveness. It allows us to send larger campaigns at better unit economics. And so there has been a growth across channels. I wouldn't really point to any one specific channel as having an outsized impact in the expansion that we're seeing.

Okay. Got it. Great. Thank you. We'll go back to the queue. Appreciate it.

Next we'll go to Matt Chandler from Bank of America. Your line is open.

Yes. I know it's been talked about a bunch of times on this call, but I'm trying to figure out the difference. You did talk about changes that the credit card did in November affecting your ability to take on that incremental, do that last loan through getting that last lead through them because of their changing the ability for you to get that at the right price. Yet you accelerated in the quarter and it looks like you're going to accelerate rather dramatically for the year, the coming year. what changed there and how easy is it for you to just repurpose marketing dollars from one platform to another?

Um, sure. Now this is Dave. Um, so yeah, let's say, I mean, there was a little noise about back and forth with, with credit karma last in the fall, um, in terms of them having a program that we had elected not to participate in. Uh, but frankly, that was all sort of a small matter and, and, um, sort of demand for our product into all channels, including Credit Karma, frankly overwhelmed it. Any sort of, as we said, sort of like back and forth between us and Credit Karma deciding how we work together is a little bit of, I don't know, a sideshow compared to what is really just the emergence of a product that is distinct in the market. Our ability to model and help our banks successfully underwrite you know, the torso of the market, the breadth of the market is really what is unique. And Credit Karma is an important partner. But as Sanjay said, our channel mix has not really changed. And what I think that really means is increasingly consumers find their way to the best product. And that's our belief. We don't believe in the notion of a captive FinTech that owns its customers. We believe that like the sort of origins of the Internet itself, the foundations of Google and Amazon, that consumers find their way to what they want, the best product for them. And I think that's what you really see happening here. Particularly in this challenging time, Upstart has the best product for most consumers. And whether it's through Credit Karma or whether it's through other channels, they're finding their way to it. So I think that's really the summary of it. I think it is an important and great partnership. But our growth in what we're kind of showing and what we're demonstrating, you know, for the coming year, what we're guiding towards, It's really a cross-channel thing. It's not particularly about one channel, and we're growing on all fronts, basically.

Okay, and then just a second question on a kind of longer-term basis, and this goes to, you did talk about your bank source loans going up quite a bit from the worst parts of COVID when the banks weren't really all that active. But just longer-term, and you did add some banks, Sid, I think you're up to 15 now. Why wouldn't most small banks, why isn't small and medium banks just running to this platform? If it's largely a very high margin origination fee for them for a product that they did not have and could not do on their own and services their customers.

Right. Now, it's a great question. We ask ourselves that sometimes, admittedly, but You know, banks are built on a conservative structure. They are conservative by nature, and AI is a very new technology from their perspective. So they tend towards making sure everything is as it should be, that their regulators are supportive of it, that they've seen it through cycles. So I think this is almost a perfectly expected adoption rate for banks. They are not purely driven by, you know, incremental profits or desire to grow, probably a little different than most businesses in many ways. But it is happening and the pipeline is growing. And fortunately, we've built our model such that we are not dependent on how many banks and how quickly these banks adopt our technology. We've developed a platform that flows loans, you know, through to capital markets and institutional buyers if banks are not ready and willing to fund them and hold them. And that's why our business can grow as quickly as it does. The models can continue improving as rapidly as they are. And the banks can come on board when they're ready to do it, when they're confident, you know, when they've gotten the ideas through their risk committees, credit committees, compliance committees, and, you know, they have a lot of committees. But that's okay. We're going to be there and the model keeps getting better. And, you know, 15 is a great number, you know, 30, 40, 50 will be better. But at some point it becomes commonplace that, Banks who are winning market share, who are doing well, who are serving their customers with the very best product are using something like Upstart to help them do it. And when it becomes commonplace, there's certainly, I think, a moment of acceleration in the future where it's really a mainstream technology that most banks use. It's only a question of when that day comes.

And would you really want them to do it, to fully come on board tons of small banks? and doing this and taking customers? Because in the end, you make more EBITDA for funded loan if you source it yourself.

This is Dave again.

You know, we're a little neutral to that, whether the customer comes to Upstart.com, which is a model that has a higher revenue profile. or whether the bank sources the customer and they're only paying us what we would call our platform fee, which is essentially a lower revenue profile but higher gross profit. So frankly, we're kind of neutral to them. We like both. And we, of course, want upstart and upstart loans to be ubiquitous and customers be able to find them wherever they go. So we don't necessarily have a favorite in that race. We certainly would like to see both grow rapidly over time.

Thank you. This is Sanjay. I would just add, you know, we always want to solve what's best for the borrower, and every borrower has a different sort of combination of cost of capital and risk. But if that's the best answer for the borrowers out there, then absolutely it's in the interest of our platform. And I'll just add that we are, from a dollar perspective, somewhat even diagnostic. We will make a lower dollar per loan because we're banks tend to have better offers, we'll convert more loans, and the two effects tend to net each other out in our financials.

Great. Makes sense. Thank you. Thanks, Matt. Operator, next question.

Thank you. Next, we'll go to David Scharf from JMC Securities. Your line is open.

Hi. Good afternoon. Thanks for squeezing me in. Ron set me up well, and I'd like to say there was some complex technological problem, but I actually hung up on the call instead of hitting the unmute button. But hey, I'd like to let's follow up a couple things. One is with this increased demand, which is obviously just breathing right through, you know, any stimulus headwinds and so forth. Obviously, we need demand on the other side of the network. Can you speak a little bit about you know, on the funding front, you know, Sanjay kind of what developments you're seeing in terms of maybe the number of investors that are, uh, you know, signing up for kind of the latest securitization, any developments on forward flow arrangements and the like, um, just overall breadth of, uh, funding partners that are emerging.

Yeah. Hey David, happy to, um, and we won't take, we won't take personally hanging up on our call. Um, On the funding side, I guess I would say obviously in the depth of the COVID impact, which is really Q2 of last year coming into Q3, a lot of funding sources, whether they be banks or institutional investors, obviously concerned about risk, obviously pulled back. Risk premiums went very high, required yields went very high. That sort of underpinned a bit of what you saw in terms of the business cycle on our side. As the sort of You know, broader risk landscape started to clear a bit. The smoke started to clear a little bit as we got to the end of the year. People felt more comfortable. I think you saw some of the original investors sort of coming back into the fray. And then certainly as we got towards the end of the year, you saw other funding sources that maybe were sitting on the sidelines with respect to digital, if you will. um, um, waiting to see what would happen in that first macro shock that we, you know, we then were able to, to observe over the course of 2020, um, really coming to the space and, um, and starting to participate, showing interest. And so our pipeline today, I'd say is as good as it's ever been with respect to demand for, um, for loans on the funding side. Uh, they've talked a little bit about the demand or the interest from the banking side. Um, and that's been really, um, Patrick T. O' Really, really sort of encouraging on the institutional side equally. You've seen a lot of new names and interest. I think you probably would have seen that manifest in the securitization markets at the end of the year in Q1 Patrick T. O' Which are some of the most constructive markets we've seen certainly since we began our shelf so Patrick T. O' So I think a lot of folks are, you know, a combination of starting to feel more comfortable now, even though yields are still or required returns are still above where they were pre-COVID there's certainly a much higher level of comfort and there's a broader secular sort of trend where a bunch of people who are just kind of waiting to see what the first macro shock did to some of these digital platforms now feel pretty good about participating and recognizing that the performance is actually very good, if not better than some of the other, you know, parts of the economy and therefore showing interest where they didn't before. So I think that the short summary of all of that is we feel really confident on the funding side and, the rapid reconstruction of our own volume that you've seen in the results and our guidance, funding has not been an obstacle to that in any way.

No, no, it's helpful. I mean, certainly the ABS markets have been incredibly receptive of this paper. Hey, quick follow-up. You know, I think Dave may have mentioned early on in the prepared remarks about a Spanish language version coming soon. And You know, I know there are some unsecured, you know, consumer installment lenders that have historically focused or very, you know, kind of high mix of Spanish speaking borrowers in the US. It's typically been a little further down the credit spectrum, higher APRs than your averages. As you contemplate that target borrower? Are we expected to be looking at the same general FICO range and use of proceeds of your existing platform? Or is this a kind of potentially maybe a different kind of end market in credit profile?

Yeah, great question. I don't know. Go ahead.

Go ahead, Dave.

Yeah, maybe I'll start in hand with Sanjay at his thoughts. Yeah, there really has been an unfortunate shortage of online lending platforms that have offered their product for the Spanish speaking population. And the ones you refer to generally, you know, our retail base, you actually physically go into a shop or store and sit down and get a loan and generally higher rates and all that goes with that. So this is really, in our view, the first or one of the first where it's a purely online experience, but it is tailored for the Spanish-speaking market. And that's not a trivial matter, and there's a reason not everyone has done this because you have to go across everything from the marketing to the disclosures, the privacy policy, the loan agreement, the customer support. So doing it, you can't do it partially. And maybe that at least somewhat explains why it hasn't happened in the market. But in our view, it's really important because being able to take out a loan is an important thing. It's a big obligation. We don't yet, you know, because we have not launched this product yet, we cannot yet speak to exactly how the demographic will compare to our current sort of borrower base that has gone through our platform to date. But it is the identical product in the sense of it's an online product, and it's really just tailored for the language. We're not going into retail lending or anything of that nature. It is really still a purely digital product, just for clarity. I'll let Sanjay add anything if he would like to.

Sure, yeah. I mean, just on the specific point of mix, we don't anticipate that this will change our mix meaningfully. I mean, from a modeling perspective, we view this as allowing us to bring our product to a new demographic that is obviously a big and fast-growing and important one in the U.S. But it's also a demographic that our models have typically performed very well with, which is to say a demographic that's been historically underserved by traditional lending models. So we view this as expansion of our product offering, but no real change to the underlying mix or strategy.

Got it. Thank you, and congrats.

Thank you, David. Operator, I think we have time for one more question.

Thank you. Our next question comes from Pete Christensen with Citi. Your line is open.

Thanks for another round here. Dave, I want to ask you a bit of a high-level question here. Certainly in fintech, there's this concept of the super app, and you see it certainly among some payments companies, some of the challenger banks. You know, the credit functionality isn't there yet, but we can kind of see where the evolution is going. One could think that could be a threat to Upstart just by having, you know, multiple banking products on one app. But on the other hand, you know, I kind of think of that as potentially an opportunity for another referral distribution channel or even the opportunity to white-label perhaps to challenger banks or even some of these other fintechs. Just curious to hear what you're thinking. This is obviously a bit off in the grand scheme of things, but how do you think about how the fintech market is evolving in that way and could Upstart play a meaningful part in that?

Yes, Pete, that's a good question.

So let me first say, you know, I think there will be emergence of new age banks that will challenge the larger banks that have been around for decades. I think that is a good and healthy thing. And there's a whole bunch of them vying for it. And I'm sure at least some of them will be very successful in doing that with lightweight models, et cetera. We don't in any way see that as a threat to us. If anything, having banks that new banks, if you will, that are sort of tech forward and, and very hypersensitive to the quality of experience they're giving to their customers is a good thing. And we would hope to partner with them over time. We think lending is a very special and unique function. And for nine years, we've been building these models that do it in a unique manner. So we don't at all feel threatened in any way that, you know, some of these new banks will suddenly become lenders. They have a large captive audience that will never get loans elsewhere. I think, you know, one of the fallacies of FinTech is in some sense for banks themselves is believing you own your customers. It's a free world out there. If the internet has done anything in the last 30 plus years, it has shown that a better product is a few clicks away. And we are firmly of the belief that consumers are going to go to the best place for the best product. And, you know, the super bank idea, we're just not believers in it. Not to say there won't be some new banks, that they won't be successful, that they won't have multiple products, but in no way do we see a world where consumers aren't going to go find the best mortgage available, the best personal loan available, the best credit card available. And we'll simply take it all from one provider. It's not, not our view on the way the market's likely to head.

Thanks. Really insightful. Congrats again on the quarter. Thanks.

Thanks, Pete. Okay, thank you. David, I'll turn the call back to you.

Sure. I just want to say thanks to everybody for joining us on our first earnings call and hope it was helpful for all. And we will see you again in a few short, in a couple of months.

Thanks for joining us today.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.