Upstart Holdings, Inc.

Good day, and welcome to the Upstart third quarter 2024 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alice Berry. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's third 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 third 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 fourth quarter 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, uncertainty, 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 our earnings release and supplemental tables. To ensure that we can address as many analyst questions as possible during the call, we request that you limit yourself to one initial question and one follow-up. On November 22nd, Upstart will be participating at the Web Bush Disruptive Finance Virtual Conference. Now, we'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 third quarter 2024 results. We know there's a lot going on this week, and we appreciate you making the time to be with us. I'm happy to report that we continue to strengthen Upstart's position as the fintech leader in artificial intelligence. With our Q3 results, it's clear that our team's efforts are driving improved financial performance today as well as a stronger foundation for the quarters and years to come. With 43% sequential growth in lending volume and a return to positive adjusted EBITDA sooner than expected, we're pleased that Upstart's comeback story continues to play out as we anticipated. When I look across Upstart, I see improvements in so many areas that are important to our future. Our core product is growing quickly, has exceptional economics, and is delivering increasingly competitive rates across the credit spectrum. Our newer products are gaining traction, with both our auto and home lending products expanding nicely quarter to quarter. And our funding supply has never been more durable, with more committed capital than ever, powered by truly innovative partnership structures. Overall, credit performance continues to strengthen and gives us confidence that we're well calibrated to the macro. And finally, our velocity at delivering AI wins has never been better. Consistent with last quarter, these improvements weren't primarily driven by improvements to the macro economy. While the 50 basis point reduction in the Fed rate provided a modest boost of platform volume at the end of September, rates overall continue to be quite elevated. And the upstart macro index, while stable, continues to be well above the historical average. This is all to say that we believe any substantial macroeconomic wins remain in our future. Today I'd like to share some details about the third quarter and the progress that we made. In our core personal loan product, we continue to iterate on our ability to rapidly launch increasingly sophisticated models. Model 18, which I described in some depth last quarter, drove large conversion improvements in Q3, which translated to much of the growth we're reporting today. We also continue to solve ML infrastructure and scaling challenges related to training frequency, process automation, and inference speed. We've set aggressive goals regarding data freshness for our machine learning team, which is critical to proper calibration in a volatile macro environment. We're also working hard to reduce model latency, even in the face of deploying more technically sophisticated models. In Q3 alone, we reduced model inference latency by 13%. I believe that our model training and deployment represent the state of the art in an industry that, for the most part, has yet to discover the power of predictive AI. Q3 was Upstart's largest quarter of personal loan origination volume in two years, despite the significantly elevated rates I mentioned earlier. Our goal is to offer the best rates and best process to all Americans, and we're making significant strides in this direction. This means not just having the best models and highest levels of automation, but feeding them with the most efficient fuel, the capital, so that the end product, the loan, is consistently the best available. While this is a goal we can never 100% achieve, a constant, urgent, and determined effort to offer the best rate and the best process to everybody will make Upstart a formidable brand and a sustainable leader in the industry. Our key prime program, which we announced just a couple of weeks ago, takes a giant leap toward this goal by expanding our reach to the super prime end of the credit spectrum. By working closely with our lending partners, we're creating offers of credit that shine in comparison to anything in the market and bring us closer to our brand that can resonate with all Americans. Originations of Upstart auto loans increased 46% sequentially to $26.5 million. On the retail side, we signed our 11th Certified Digital Retailing OEM Agreement in October. This agreement increases Upstart's franchise dealer market opportunity by 14%. In October, we also began the rollout of a complete redesign of Upstart's in-store software product that improves usability and information access as we continue to modernize the technology stack used by dealerships across the country. On the refinance side, we recently upgraded the loan application experience reducing the average time to fund from 19 days to nine. Car owners who refinance with Upstart now save an average of $800 per year, and we're optimistic that we can increase the amount saved by our borrowers in the months ahead. Our home equity business continues to scale like you'd expect from a fast growing startup, with originations more than doubling on a sequential basis. And I'm also happy to report that with more than 600 HELOCs originated to date we still have zero defaults. Growth in the HELOC product was driven predominantly by conversion rate improvements, a common theme if you've followed Upstart for long. Better targeting and higher qualification rates, combined with a 50% increase in close rates of those offered loans, led to these strong results. We exited Q3 with an instant approval rate for HELOC applicants of 49%, up from 42% in Q2. This means we're able to instantly verify applicants' income and identity without the need for tedious document uploads. We're now live in 34 states and Washington, D.C., covering 55% of the U.S. population. We expect to expand to more states with our HELOC product this quarter. We continue to invest heavily in servicing and collections. And as I've said before, we're particularly focused on leveraging machine learning to customize the borrower experience and improve repayment rates. and this effort is beginning to pay off. I'm increasingly confident that loan servicing and collections will become another area where we have unique and sizable competitive advantage over time. In Q3, we launched multiple personalization efforts, including optimizing the time of day to call and the time of day to send emails. We don't have concrete results for these initiatives yet, but they're part of our broader push to use machine learning and data to create a materially differentiated loan servicing experience. We also expanded support coverage to include Sundays without adding headcount to the team. And finally, we began exploring the use of large language models to reduce our spend even further. Our work to improve operational efficiency combined with machine learning means we believe we can continue to improve roll rates even while reducing the cost of servicing each loan. Last quarter, we continued to see strong loan performance with roll rates from one day delinquent to charge off down 13% year over year. Even more compelling is that 30-day delinquency rates have trended down sequentially through Q3, despite the fact that the third quarter has traditionally been a seasonally worse quarter for loan servicing. We're confident that there are many more wins in this part of our business in the coming quarters. On the funding supply of our business, we continue to strengthen our position quarter to quarter. A few weeks back, we announced a partnership with Blue Owl whereby their Adelia affiliate will purchase up to $2 billion in loans from the Upstart platform over 18 months. Similar to last quarter, I'm happy to report that in Q3, well over half of our loan funding was in the form of longer-term committed partnerships. Today, I want to call the incredible work done by our capital markets team, who have risen to the challenge of developing important and innovative partnerships with several of the market leaders in private credit. Innovation on the funding side of our business is a trend I expect to continue throughout 2025. Banks and credit unions continue to increase their funding on the Upstart platform as their liquidity improves and they ramp up their lending. This year we signed 24 new lenders, which is already more new lenders and new capital than was added in all of 2023. In addition, More of our existing bank and credit union partners are expanding their lending programs with us, bringing more low-cost capital with more attractive rates to upstart borrowers. The T-prime program I mentioned earlier is one important way they're doing this. I'm also pleased that loan funding has kept pace nicely with our regrowth of originations. The volume of loans on Upstart's balance sheet continues to trend down, even while loan originations have accelerated. We're also in a stronger cash position as a result. Keeping supply and demand in balance while we regrow our core business will continue to be a challenge, but we're in a strong position to manage this important dynamic. Last quarter, I told you that Upstart was turning a corner. Now we can say that we're clearly gaining momentum. Even without a significant boost from the macro economy, we're in growth mode and our credit is performing well. Our core business is expanding again and our newer businesses are making fast progress. We're hopeful that we'll see macroeconomic wins in the quarters to come, but we're not waiting around for them. Upstart's mission is simply to improve access to credit. Now, our strategy to accomplish this goal is to provide the best rates and best process to everybody. This isn't AI for AI's sake. It's because more than a decade ago, we recognized that it's the right tool to accomplish this ambitious goal. We believe that success in this regard will result in a generational company with immeasurable impact on American families and the U.S. economy. We're making rapid progress against this goal, and as a brilliant leader in our industry once said, it's day one here at Upstart. Thank you, and I would like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q3 2024 financial results and guidance. Sanjay?