Upstart Holdings, Inc.

Good day, and welcome to the Upstart First Quarter 2024 Earnings. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jason Smith. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's First Quarter 2024 financial results. With us on today's call are Dave Girard, Upstart's Chief Executive Officer, and Sanjay Datta, our Chief Financial Officer. Before we begin, I want to remind you that shortly after the market closed today, Upstart issued a press release announcing its first quarter 2024 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 of 2024 and the second half of 2024, related to our business and our plans to expand our platform in the future. 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 filings 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 can 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. Later this quarter, Upstart will be participating in the Needham Technology Media and Consumer Conference, May 14th. Barclays Emerging Payments and FinTech Forum, May 15th, B. Reilly Securities Institutional Investor Conference, May 22nd, and Mizzou Technology Conference, June 12th. As well, we will host our annual shareholder meeting on May 29th. Now I'd like to turn it over to Dave Girard, CEO of Upstart.

Good afternoon, everyone. I'm Dave Girard, co-founder and CEO of Upstart. Thanks for joining us on our earnings call covering our first quarter 2024 results. I'd like to start by saying I'm quite proud of the work Upstarters around the country continue to do to build the world's leader in AI-enabled lending. With credit availability as constrained as it's been in more than a decade, we've never felt the urgency of our mission more than we do today. We're off to a solid start this year and have made significant progress with our products and with funding. There are many reasons to believe our business will return to growth soon, but we're also prepared for the current macroeconomic conditions to persist. So we continue to focus on improving our efficiency and financial performance while investing responsibly for the long term. In pursuit of efficiency, we minimized hiring, reduced the size of some teams, flattened org structures, and reallocated resources to our highest priorities. Since the beginning of 2024, we've cut fixed expenses from headcount by approximately $20 million on an annual basis. Our headcount today is as low as it's been since Q3 of 2021. We've also improved the efficiency of our cloud infrastructure and reduced our model training and development costs. Year over year, our compute and storage costs have been reduced by 23%, and we expect to generate additional savings in this area. We believe these actions set up Upstart to return to profitability sooner and to rebound more quickly toward the company we know we can be. I'm happy to report that the funding situation on our platform is beginning to improve. for banks and credit unions, as well as for credit investors. We're hopeful this trend will continue through 2024. Unfortunately, consumer risk and interest remain at or near all-time highs, conspiring to constrain the volume of transactions on our platform. Given this combination, and assuming rates on Upstart remain at or near their current high levels, we expect to reduce the use of our balance sheet to fund loans that are not for R&D purposes. This will allow us to make better use of those funds elsewhere, but we will continue to be flexible and responsive in using our balance sheet to do the right thing for the business. We continue our work to make Upstart a platform that can thrive in any macro environment. This work comes in the form of improvements to our core personal loan product, as well as progress in the newer products in our portfolio. Last quarter, I mentioned an initiative to allow applicants to provide collateral to support their personal loan application with the goal of helping borrowers access credit at lower rates than would otherwise be possible. Today, I'm happy to report that we've successfully launched our auto-secured personal loan as a pilot in seven states. Our approach allows qualified applicants to make an informed choice between an unsecured or an auto-secured personal loan, which commonly offers a lower APR. Thus far, ASPL rates are, on average, 20% less than the rate on an unsecured loan. The ASPL also helps many applicants qualify for a loan that would otherwise be declined. Last quarter, I also shared that we were developing tools to help our lending partners strengthen relationships with their existing customers, which is often their priority in periods of reduced liquidity. To that end, two weeks ago, we announced Recognized Customer Personalization, or RCP, With this new feature, lenders can identify when an existing customer is actively shopping for a loan on Upstart.com and strengthen their relationship by making a compelling offer of credit. This is a capability many banks and credit unions have long requested, and we're pleased with the initial response. 30 of our bank and credit union partners have signed up for RCP already. In Q1, 90% of unsecured loans on the Upstart platform were fully automated. an all-time high for us. For the borrower, this means no documents to upload, no phone call required, and a final approval in just seconds. For Upstart and our lending partners, it means there's no human in the loop whatsoever to process and complete the loan application. Automation is a hallmark of AI-enabled lending, and Upstart aims to be the best at it. We continue to make progress in our auto business, with 103 dealer rooftops now live with Upstart-powered lending versus 39 a year ago. In keeping with the times, we've tasked our auto team to move more quickly toward profitability, which means doubling down on credit quality, making improvements to our in-store platform, and focusing on overall dealership success, along with the goal of improving the unit economics of each dealership. We've somewhat reduced our go-to-market investment in auto retail for now and believe a more focused effort today will allow us to scale more quickly in the future. We're making fast progress with our home equity product, which continues to exceed our expectations. We knew it would be an attractive product in a high-interest rate environment, and the team's progress thus far has been impressive. Less than a year after launch, we're offering an upstart key lock in 19 states plus Washington, D.C., covering 33% of the U.S. population. This is up from 11 states last quarter and now includes Florida, our largest state to date. I mentioned last time that we were beginning to automate verification of borrower information, and I'm happy to report that we're now able to instantly verify 36% of HELOC borrowers. This includes instant verification of identity and income without any tedious documents to upload. In another sign of progress, when we offer applicants a HELOC as an alternative to a personal loan, we're seeing a lift in the percentage of applicants taking one of our offers. This validates our approach to integrating our personal loan and Keylock applications, creating a single unified funding form for multiple products. Lastly, but perhaps most importantly, we signed our first funding deal for the upstart Keylock and expect to begin selling loans on a forward flow basis to this partner in the next few weeks. I'm excited to see this product scale through 2024 and beyond. Our small dollar loan product continues to expand rapidly, with Q1 originations up 80% quarter to quarter. Consumers love these small relief loans because they're fast and simple and so much more affordable than the more expensive flavors of credit normally available for them. Today, about 60% of applicants who come to us for a small dollar loan and initially qualify actually get the loan, which is a super strong conversion rate at this stage. From a what's in this for upstart perspective, I'll say first that this product is core to our mission. We're meaningfully expanding to the percent of Americans we invite into the world of bank quality credit with a small but important first step. The beauty of this relief loan is that it's primarily offered to those who don't today qualify for our personal loan. So instead of declining them entirely, we give them the opportunity to perform on a small loan and start them on a better financial path. And of course, our risk models are learning rapidly by extending credit to someone who would otherwise be turned away. These small loans are rapidly expanding the frontier of understanding of our models and represent a long-term opportunity to serve Americans with fairly priced credit. We continue to invest in our ability to service upstart loans and help those borrowers who become delinquent return to financial health. For example, We made it simpler and easier for borrowers to adopt auto pay, a key leading determinant of credit performance. These efforts have led to an increasing number of borrowers enrolled in auto pay for 24 straight weeks. In another example, we launched a new channel to contacting delinquent borrowers. Just in its initial deployment, this channel is projected to reduce gross losses more than 3%. This is just the beginning. We see a wealth of opportunities to reduce roll rates improves recoveries, all while helping borrowers get themselves on a better financial footing. As I mentioned earlier, we're seeing improvements in the funding side of our business. These improvements are both in the bank and credit union segments, as well as on the institutional and credit fund side. The liquidity challenges many banks and credit unions experienced in 2023 seem to be waning. Many lenders now once again facing a shortage of assets. This new challenge is compounded by the fact that the cost of funding for many regional and community banks has risen. They're now paying more for deposits. While still cautious about the direction of the economy, many lenders are now looking for ways to generate healthy and appropriately risk-adjusted yield from their balance sheet. We saw eight new lenders join our platform in Q1, and a number of existing lenders increased their funding. The number of new lenders and the total available funding on Upstart from lending partners are both at their highest since prior to the 2023 bank failures a year ago. We also continue to make progress with institutional capital, working to renew and extend existing partnerships and to bring investor partners who paused in the past back to the platform. And as mentioned previously, we signed the first partnership to fund Upstart's home equity product. As a result of this progress, We expect to be borrower constrained as long as the rates on Upstart platform remain as elevated as they are currently. Altogether, we're hopeful that we're headed into a period of stable funding in excess of our needs. We expect this will allow us to reduce the use of our own balance sheet and to redeploy that capital to other important goals. To wrap things up, our lean organization is making rapid progress on building a product portfolio and a platform that will accelerate the financial industry's migration to AI-enabled lending. With the interest in AI soaring, just last week we launched a first-of-its-kind AI certification program to help bank executives prepare for this brave new world. Just in the first couple days, several hundred individuals registered for the course, reflecting the broad demand to upskill in this area. Some of you on today's call also may find the course to be of interest. I want to thank Upstarters for their resilience and perseverance through a clearly challenging period. We find strength and durability in our focus on the mission and the satisfaction we find in pursuing it together. I approach every day confident that the Upstart team is unmatched in both its capacity to execute as well as its unity of purpose. Thanks. I'd like now to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q1 2024 financial results and guidance. Sanjay?