Upstart Holdings, Inc.

Good day and welcome to the Upstart Q1 FY 2021 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jason Schmidt, Head of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's first quarter 2021 financial results. With us on today's call are Dave Girard, Upstart's Chief Executive Officer and and Sanjay Duttak, our Chief Financial Officer. Before we begin, I wanted to remind you that shortly after the market closed today, Upstart issued a press release announcing its first quarter 2021 financial results and published an investor relations presentation. Both are available on our investor relations website, ir.upstart.com. During the call, we will make forward-looking statements, such as guidance for the second quarter and full year 2021 related to our business. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties, and assumptions. Actual results may differ materially as a result of various risk factors that have been described in our findings with the SEC. As a result, we caution you against placing undue reliance on these forward-looking statements We assume no obligation to update any forward-looking statements as a result of new information or future events, except as required by law. In addition, during today's call, unless otherwise stated, references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables. 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 our quarterly earnings call covering our first quarter 2021 results. I'm Dave Girard, co-founder and CEO of Upstart. I want to start by thanking the entire Upstart team for another amazing quarter. Despite the many obstacles the past year has put in front of you, you have continued to deliver. Most of you have never been in an Upstart office, yet the pace of innovation and the pursuit of our mission have never been stronger. Upstart is a leader in the application of artificial intelligence to consumer lending, and our first quarter results continue to demonstrate our leadership in this emerging category. Our Q1 2021 revenues were up 90%. Our profits were up by a factor of seven over the first quarter of 2020. Despite softer loan demand from consumers due to government stimulus programs, almost 170,000 loans were transacted by our bank partners in Q1, more than double the volume from just two quarters ago. Not unusual to see fast growth in a fintech company, but it's quite rare to see that growth paired with real profits. So it's worth explaining what's driving our core personal loan business and why we're so optimistic about its future. Our growth is primarily technology and model driven, which manifests as increasing conversion rates in our borrower funnel. In the first quarter of 2021, we launched a variety of model and technology upgrades that together unleashed the growth that you're seeing. To help you understand this dynamic, let me call out three examples. First, We launched a new version of our core credit decisioning AI model that our bank partners use to price loans. This model is actually an ensemble or a blend of multiple machine learning models that work together to generate a more accurate risk assessment. Historically, we've achieved big wins by adding new and more sophisticated model forms to this ensemble. Other wins have come by simply upgrading one of the existing models. But the big win we saw in the first quarter included an upgrade to the algorithm that governs how these models are blended together. This upgrade led to higher approval rates and lower interest rates, which of course translates into more loans. Second, we launched some improvements to our verification models that reduce the amount of friction applicants experience in applying for a loan, including those coming back to upstart for a second loan. These improvements included more refined fraud signaling, and increased automation of income verification. This reduction in friction increased the conversion rate of our funnel, leading to more growth. It also helped us to more efficiently process the larger volume of applications that we experience, leading to higher profit. This is the essence of technology-driven growth. And third, we upgraded the models that underpin our marketing acquisition program. That means for every dollar we spent on marketing, we brought incrementally more consumers to the platform and to our bank partners. AI has almost unlimited potential in spend targeting, lifecycle marketing, and even content generation. Applying AI to our customer acquisition efforts is a relatively new area of investment for us, and we expect it will be a significant source of growth in the future. Of course, this growth couldn't happen without the confidence of our bank partners and institutional investors. We continue to add new bank partners to our platform to see existing bank partners expand on their upstart-powered lending programs and to add institutional investors who are happy to invest their capital into upstart-powered bonds or high-quality loan assets with predictable yield. We've built an increasingly sophisticated supply chain of money that funds upstart loans, from super-efficient bank depository capital to broad and deep institutional and capital markets funding. While most consider money to be the ultimate commodity and lending to be a zero-sum game, We've built a proprietary platform that continues to accrue advantages by the day. It's the types of AI model upgrades described here, paired with the support of our bank partners, that have allowed Upstart to grow loan volumes by a factor of 20 in the last four years, while reducing acquisition costs and generating real profit. Our optimism for the future comes from two facts. First, we continue to have a lengthy backlog of projects that will improve our funnel throughput and lead to more growth in the future. And second, we don't see competitors on the same AI-centric journey that Upstart is on. As we've said in the past, auto lending is Upstart's next big opportunity. The auto lending industry is about six times the size of personal lending, and we believe it has at least as much mispricing and inefficiency, with millions of consumers paying far more than they should to finance a vehicle through a process that is displeasing to all. Our early exploration in this market has confirmed our hypothesis that there's a wide open opportunity for Upstart and our bank partners to deliver a superior product to the market, meaning more accurate pricing, instant approvals, and elimination of friction. I'm happy to report that we're making very fast progress in this new and exciting category. Since January, we've expanded our auto refinance product from a single state to 33 states, representing more than two-thirds of the U.S. population. States have various rules and regulations that impact the process of refinancing a car loan, and we're building the best possible process for each. At the same time, we're actively encouraging the states that have yet to adopt modern conveniences, such as digital signatures and electronic liens and titling, that make it easier for consumers to access the best possible loan. This is one area where the COVID pandemic has helpfully pushed states toward adopting these remote-friendly technologies sooner. We're also working to eliminate friction in the borrowing process with the goal of delivering an auto refi product with the same quality experience and instant gratification that has made us the leading personal lending platform. Only it's happening much faster this time. Given the complexities of auto lending, it's no small effort to build a refi product that is as simple and as accessible as an unsecured loan, but we're well on our way to doing that. To date, We've activated only a couple of marketing channels to reach enough consumers to test and iterate on our auto refinance product. In fact, you can't yet find an auto loan offer on upstart.com. That will all change in the coming months as we begin to more proactively market and cross-sell our auto refinance product. I'm also happy to report that we closed our acquisition of Prodigy, a leader in automotive commerce software. Prodigy is like Shopify for car dealerships, helping to create the modern multi-channel car buying experience that dealerships need and consumers rightfully expect in 2021. In addition to modernizing the car buying experience, Prodigy will allow us to bring upstart AI-enabled auto loans to dealerships across the country where the vast majority of loans are transacted. Despite potential distractions from the merger, The small but mighty Prodigy team increased our dealership footprint by 45% in the first quarter. Even at this early stage, almost $800 million in vehicles were sold through Prodigy in Q1 2021. During the quarter, we became a certified digital retail provider for Subaru of America retailers. As I said last quarter, we believe Prodigy will enable Upstart to tap into one of the world's largest buy now, pay later market opportunities. To realize this potential, we're significantly increasing investment in Prodigy's technology and go-to-market teams. The first quarter wasn't just a win from a financial perspective. We also made significant strides in our ongoing fair lending effort. From our perspective, if you want to be the industry leader in AI-enabled lending, you also need to be the leader in fairness, transparency, and inclusiveness. And conversely, if you're not making clear and ongoing investments in fairness testing, it's questionable whether you're really doing AI. Last fall, the Consumer Financial Protection Bureau, the nation's preeminent regulator in matters of consumer protection, renewed its no-action letter with Upstart. As a reminder, the purpose of so-called no-action letters is to reduce potential regulatory uncertainty for innovative products that may offer significant consumer benefit. While Upstart is now in our second three-year no-action letter with the CFPB, we know of no other lending platform that has received a no action letter from the Bureau related to fair lending. As part of this renewal, we developed more sophisticated tests that raised the bar significantly in terms of how fairness is measured. Additionally, we increased our level of transparency by sharing the source code for the fairness tests we perform across every single Upstart loan applicant for all of our bank partners. In the first quarter, we executed these new tests for the first time and recently delivered the results to CFPB. Our 2020 access to credit testing demonstrated once again that Upstart's platform improved access to credit in the form of increased approval rates and lower APRs for every traditionally underserved demographic tested. From my perspective, we've raised the bar on thoroughness and rigor of fairness testing. At the same time, when it comes to AI governance, I believe we're setting a standard for proactive cooperation between industry and government. 2020 was a transformative year for Upstart. The COVID-19 pandemic presented an opportunity for our technology and our team to shine during a very difficult period, and they did just that. We came into 2021 from a position of strength with a business that's growing very quickly and generating significant profits at the same time. And we're now building on that strength. We're upgrading our AI models and technology. We're adding bank partners to our platform, and we're expanding quickly into even larger market opportunities. It's clear to us that AI has unlocked a brighter future for lending, where consumers can access credit at a price that's fair and reasonable, with an experience worthy of 2021. AI lending is a transformational opportunity to create a better product for consumers and for banks, and Upstart has become synonymous with this exciting new category. Thank you. I'd like to now turn it over to Sanjay, our Chief Financial Officer, to walk through our Q1 financial results and guidance.