Q2 2021 Upstart Holdings Inc Earnings Call

August 10, 2021

[music].

Good day, ladies and gentlemen, and welcome to the upstart Q2, FY 2021 earnings call. Today's conference is being recorded at this time for opening remarks, I'd like to turn the conference over in adjacent Schmidt.

Please go ahead Sir.

Good afternoon, and thank you for joining us on today's conference call to discuss upstart second quarter 2021 financial results.

With us on today's call are day, Gerard upstart, Chief Executive Officer, and Sunday of data, 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 the second quarter 2021 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, IR dot upstart dot com.

During the call we will make forward looking statements such as guidance for the third quarter and full year 2021 related toward business day.

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 the result of various risk factors that have been described in our filings with the SEC.

As a result, the caution you against placing undue reliance on these forward looking statements. We assume no obligation to update any forward looking statements as of the result of new information or future events, except as required by law.

In addition, during today's call unless otherwise provided 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 limit yourself to 1 initial question and 1 follow up question.

Later this quarter upstart will be participating in the Deutsche Bank Technology Conference on September 9th.

J M P. AI of Fintech conference on September 10th and the Piper Sandler Global Technology Conference on September 13th.

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 second quarter 2021 results I'm, Dave Gerard co founder and CEO of upstart.

First let me once again, thank the entire upstart team for yet another exceptional quarter. The results we announced today don't just happen. They are the product of the extraordinary effort by an incredible team despite.

Despite the ongoing challenges the pandemic has brought to you and your families. You continue to deliver the last year and a half have been a challenge for my family as well and I am grateful to be on this journey with each of you.

I'll start with a leading AI lending platform and our second quarter results continue to demonstrate by this category can generate enormous value in our economy. They also demonstrate why upstart has an opportunity to become 1 of the world's largest and most impactful fintech in the years to come lending.

Lending is the center beam of revenue and profit in financial services and artificial intelligence may be the most transformational change to come to this industry and its 5000 year history.

It's our view that AI led disruption targeting dramatic inefficiency and 1 of the largest segments of our economy is worthy of your attention.

Our Q2 revenues grew to $194 million up 60% compared to the prior quarter.

June was our first month with more than 100000 loans and more than $1 billion in origination volume on our platform.

And we achieved this growth while also delivering record profits with adjusted EBITDA of $59.5 million and GAAP net income of $37.3 million. We're also happy to report that more than 97% of our revenue came in the form of fees from banks or loan servicing with zero credit exposure.

Our demands on our balance sheet.

In the second quarter, we continued to drive separation between our AI powered platform and more conventional lending systems, we eliminated a rule space constraint in our model that handled situations related to the size of loan requested.

With more powerful algorithms and growth in training data our models can now handle that issue natively and with more precision. This led to a boost in approval rates and a more accurate system overall.

We also recalibrated our acquisition models to harmonize them with the funnel of improvements we experienced earlier in the year in other words, our models for digital and offline acquisition caught up to the most recent funnel wins that drove our earlier growth and began to target applicants. They would have previously ignored or Ms prioritized for all.

Also recalibrated to broader bank partner eligibility criteria, enabling us to market to more consumers.

In the second quarter, we also experienced a reduction in cost of funding across the platform, which means better rates for consumers and more loans. This cost of funding improvement was the result of more and better bank offers on our platform as well as the reduction in the yield required by the broader capital markets as our platform continues to demonstrate its unique strength.

And finally, we continue to ramp up marketing to our prior borrowers who qualify for repeat loans on the upstart platform and this contributed meaningfully to our growth in fact, the number of repeat loans on our platform more than doubled from the first quarter to the second quarter of 2021.

We also experienced an important but more nuanced win in Q2 for the first time, 1 of our bank partners decided to eliminate any minimum FICO requirement for their borrowers to us. This demonstrates both our commitment on behalf of the bank to a more inclusive of lending program as well as the increasing confidence and upstarts.

High powered model.

While credit scores can be useful hard cutoffs based on a 3 digit number invented 30 years ago lease far too many creditworthy Americans out of the cold. We're hopeful of second bank partner will make a similar decision in the near future.

I am pleased to announce that we finally began to rollout upstart for Spanish speakers, our first of its kind among digital lending platforms in the U S. This initiative took longer than I would've liked as it turns out expanding from 1 language to 2 and the heavily regulated industry isn't as easy as we expected, particularly because of our platform.

Is it self of fast moving target.

It's these types of efforts, making upstart more accessible to the Spanish speakers and in reducing hard cutoffs based on FICO scores that will make upstart of more inclusive and impactful platform for those that need it the most.

The growth of our platform and the performance of upstart powered loans continues to attract more lenders to upstart. We now have 25 banks and credit unions on the upstart platform and have a robust and growing list of lenders in our pipeline for the second half of 2021.

The launch of New Bank partners as well as expansion of lending programs from existing bank partners improves the quality of offers we can make to consumers an upstart dot com.

Another important service, we provide to banks and to loan buyers is access to liquidity through the capital markets. We do this by managing regular securitization of loans originated on our platform for multiple banks and loan buyers contribute to a single shelf under the U S T brand.

Our most recent securitization included more than a half of $1 billion in collateral originated by 3 different bank partners, which saw net execution of about 107.

This extraordinary result can be attributed to strength in the credit markets as well as broad recognition of upstart of AI enabled collateral. We now have more than 150 institutions, who buy upstart powered loans or bonds.

While our partners don't generally rely on the securitization for liquidity, we believe that the presence of a well established market for upstart powered collateral creates value for our partners and confidence in our platform.

We have said in the past that auto lending is upstart next great opportunity its a market at least 6 times larger than personal loans and at least as inefficient.

We're making rapid progress towards this opportunity in several dimensions.

We started in January offering our auto refinance product in a single state then expanded to 14 states by the end of Q1 and have now expanded to 47 states covering more than 95% of the U S population.

We've also improved our funnel conversion rate about 100% since the beginning of the year, despite expanding from states with minimal funnel friction to those with the most of.

This is critical because funnel efficiency as the primary way, we will scale up auto loan originations just as we've done historically with personal loans.

Upstart powered banks have now originated more than 2000 auto refinance loans in 40 different states and these loans are beginning to provide the repayment data that is the fuel to our AI models.

And lastly, we now have our first 5 banks and credit unions signed up for auto lending on our platform.

We've also made fast progress on our automotive retail solution to day known as <unk> software.

Since the beginning of the year, we've doubled the number of dealerships AK a rooftops using prodigy.

And in Q2 more than $1 billion in vehicles were sold through <unk>. We expect the first upstart powered loan to be offered through this platform before the end of 2021.

Now of a bit about the company itself in June we announced that upstart is moving to a digital first model, where most of starters can live and work anywhere in the U S.

We came to this decision for a few reasons for.

We've shown we can work remotely as the team the.

The arguments against the remote work tend to be historical rather than backed by real facts or data.

Second the tech World It feels like it's on a multi year transition toward work from anywhere and we want to be ahead of the curve.

Third we believe the benefits of in office work can be captured in just a few well considered days together each month.

And fourth.

Given the scale of our ambitions and the talent, we need to aggressively pursue our goals, we need to tap into talent across the entire country.

The good news is digital first has paid immediate dividends to our recruiting efforts that we announced this plan just a couple of months ago over a third of our job offers in the past few weeks have been to candidates outside our footprint.

And we've seen an acceptance rate of 80% to these offers a dramatic improvement over what we've seen historically.

Digital first is not just the reaction to the last year and a half it's a sign that we intend to create 1 of the largest and most impactful fintech in the world. We're building a company that will be distributed not just physically but logically able to pursue multiple markets and business opportunities at the same time, we need extraordinary talent in the <unk>.

Leadership to do this right. The digital first will enable us to find that talent wherever it may be.

Digital first of May help us recruit talent wherever it resides but it's our culture and mission that will keep it here we aim to be the go to employer for those driven to build the most modern of technologies artificial intelligence to solve 1 of the most intractable problems financial inclusion to do this upstart must be widely recognized as the <unk>.

Destination company for those destined to have real impact on the world, while experiencing unparalleled career growth.

And the same we were recently honored to be included in the gender diversity index by State Street advisors recognizing of starts role as 1 of the top companies in the U S for women in leadership, the exchange traded fund, which trades under the ticker S. H E helps demonstrate that diversity and strong performance go hand.

The enhanced.

History has shown that turbulent times can provide the backdrop for next generation companies emerge. The past 18 months have been just that for upstart and our team has risen to the challenge we have built the strong and profitable core from which we expect to launch several new products and services in months and years to come.

AI lending will transform financial services in the decade ahead, we aim to make upstart synonymous with that category.

Thank you.

Like now to turn it over to Sanjay, our Chief Financial Officer to walk through our Q2 financial results and guidance.

Jay.

Thank you, Dave and thanks to everyone for joining us today.

We'll dive straight into our most recently quarterly results.

Revenues in Q2 came in at $194 million up 60% quarter over quarter from Q1 of this year.

As a side note, we will omit references to year over year of growth rates for our P&L. This quarter because they are all well above 1000% did the the lapping of last year's pandemic impact.

Of that total revenue $187 million for 97 per cent of the total came in the form of revenue from fees the.

The volume of transactions across our platform. This quarter was approximately 287000 loans of 69% quarter over quarter, partially driven by of 240 basis point quarter over quarter interest in the conversion rate up to $24.4 per cent.

The balance of our growth in transaction volume came from an increase in the number of rate requests. We received for this quarter as our marketing programs scaled in response to the conversion funnel improvements of the prior quarters.

Our contribution profit and non-GAAP metric, which we define as revenue from fees minus variable costs for borrower acquisition verification and servicing was.

It was $96.7 million in Q2 up 73% quarter over quarter, and representing 52% contribution margin up from a margin of 48 per cent in the prior quarter and 32% 1 year ago.

This level of contribution margin remained quite elevated partially due to the ongoing improvements to our conversion funnel.

And in part owing to some 1 time gains realized from the fair value of our servicing rights due to the updating of certain underlying assumptions.

As we have discussed on past, earning calls we continue to expect this level of contribution margin to moderate downwards over the coming quarters, as we accelerate investments in marketing and operations.

Q2 operating expenses for $158 million.

Up 49% quarter over quarter, or 40% quarter over quarter, when netting out the impact of stock based compensation.

Investment in engineering, and R&D remains our priority growing 66% quarter over quarter to $31 million from Q2.

General and administrative spend grew slower than revenue in Q2, increasing 29% quarter over quarter to $26 million.

The other expense categories of sales and marketing and customer operations were largely driven by variable cost increases supporting revenue growth.

We expect the temporarily accelerate expenditures in our fixed expense base over the next 3 to 4 quarters as we contemplate large investments in engineering and in scaling up the go to market function of our product platform for auto commerce.

Our Q2 GAAP net income was $37.3 million up from $10.1 million last quarter and from negative $6.2 million in the same quarter of the prior year.

Adjusted EBITDA, which we adjust for stock stock based compensation came in at $59.5 million in Q2 up from $21 million last quarter and negative $3.1 million in Q2 of 2020.

Adjusted earnings per share for Q2 was 62.

Based on the diluted weighted average share count of $94.8 million.

Turning our attention to the balance sheet, we ended the quarter with $618 million in restricted and unrestricted cash.

From $336 million at the end of last quarter.

This balance reflects the proceeds from the follow on stock offering we completed on April 13th which resulted in an additional $265 million raised net of underwriting discounts as well as the complete paydown of our corporate term loan and revolving debt facilities.

In terms of the loan assets, we carried in the aggregate balance of loans notes and the residuals of $95.3 million up from $73.2 million in Q1 and down from $148 million at the end of the same quarter in the prior year as.

As we have previously highlighted these loan assets represent the totality of the direct exposure, we have to credit risk.

We will now turn to our near term and full year outlook.

We continue to see our contribution margin is slightly above its expected trend line and do it anticipates the mouth contraction over the coming quarters. We do now expect elevated margins to be more durable than we predicted at the start of the year.

With this in mind for Q3, we are expecting.

Total revenues of $205 million to $215 million.

<unk> of year over year growth rate of 221% at the midpoint.

Contribution margin of approximately 45% net.

Net income of $18 million to $22 million.

Adjusted net income of $28 million to $32 million.

Adjusted EBITDA of $30 million to $34 million.

And the diluted weighted average share count of approximately $94.9 million shares.

For the full year of 2021, we now expect revenues of approximately $750 million, representing a growth rate of 221% year over year.

And up from the $600 million that we indicated last quarter.

Contribution margin of approximately 45%.

Up from 42% indicated last quarter.

And then adjusted EBITDA margin of approximately 17% up from 10% indicated last quarter.

I would like to reiterate David's gratitude for all of the hardworking teams upstart, whose efforts are propelling our growth and financial outcomes, which continue to exceed our own internal expectations.

And looking forward to seeing everyone again in another 90 days.

With that Dave and I are now happy to open the call to any questions operator.

Thank you, ladies and gentlemen, if you'd like to ask a question you may signal the pressing star 1 on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Please press star 1 to ask a question of pause for just a moment to allow everyone an opportunity the signal for questions.

We will take our first question from Ramsey El <unk> with Barclays. Please go ahead.

Hi, guys. Thanks for taking my question of this evening and other Super strong quarter here.

I wanted to ask about the components of guidance. If you can kind of help parse this out.

For us rather what is macro kind of or loan market rebounding more broadly versus improvement in the conversion rate you might be anticipating.

<unk> or versus maybe auto contributing I'm, just trying to get an idea from where the.

You know where the drivers are for for the for your guidance increase.

Yeah sure Hey, Ramsey this is sanjay thanks for your questions.

So I think in keeping with tradition of the past few quarters, our assumptions around the macro environment, our static, meaning we're not really predicting either of deterioration or a rebound.

And the economy with respect to our numbers, where you sort of predicting the status quo.

Which I guess.

Fortunately for US means in your credit card balances remained quite low and savings rates remain quite high in the economy. So we're not necessarily predicting of change in either of those.

<unk> and with respect to auto we continue to have.

No meaningful contribution to the economics in fiscal year, 2020, 1 so really everything youre seeing in our guidance is our evolving sort of view of our core personal loan business, how we're seeing the funnel of evolving and obviously.

For the second order effect for how our marketing programs are catching up to the the efficiency of the funnel.

Okay.

I wanted to ask about conversion rates that seems to have been of pretty significant driver of the beat this quarter as well as in past quarters.

Could you talk about the pipeline of improvements that you have.

Maybe in the wings, there what should we expect in the third quarter.

And sort of what.

What is baked into guidance in terms of that conversion rate.

Hey, Ramsey this is Dave.

Like always we kind of have a significant backlog of projects that we're working through that potentially improved the funnel conversion I mean, just the kind of the core way we grow is.

Improvements to our models of some of the technology that helps.

It helps borrowers get through the funnel and we continue to have.

A significant number of mobile upgrades that we expect and such we don't always know exactly the.

Exactly what the impact will be of the scale of it.

So I think that's on balance reflected in the guidance, which is the continued pipeline some smaller things some net of potential that the larger impact the summer related to approvals and rates offered to consumers others are off related to the friction reducing friction so it's a little bit of of mass.

We don't we don't have anything particular, the 0.2 other than to say the.

He is working really hard to get upgrades and improvements into the model that are going to make the consumer product better and it's going to make you know make up starts business more successful.

And what about what might be baked into guidance.

Okay.

Yeah.

And maybe as part of that I can just address.

The the initial assumption of entity, which we did of but continuing progress in terms of conversion rates on our funnel of where were sort of pushing up against the 25% of this quarter.

But a lot of the growth actually did also come from scaling up of our marketing programs.

2.2.

The scale up to the the past few quarters of of gains that we've had and if you look at the breakdown of those let's see the actually the majority of the of the growth. This quarter sequentially came from the the top of the funnel of in fact.

And so that sort of plays into how we think about things going forward there was additional gains.

This quarter on the funnel and so.

The conversion rates and the and in fact, the contribution margins actually went up even though we scaled our marketing campaigns more.

More than 50% quarter over quarter.

But a lot of what we're thinking about next quarter and in the back half of the year also has to do of scaling up the marketing programs to continue to cut the for that funnel efficiency.

And our historical sort of breakdown between.

Top of funnel and then conversion rate efficiency tends to be about 50, 50, and I think that's the rough.

Ballpark for how we're thinking about the back half of the year, you know without getting into specific projects I think that's the the rough breakdown in terms of how we see the rest of the growth happening this year.

Okay terrific. Thanks for your response I appreciate it.

That's revenue.

Sure.

We'll take our next question from Ron Josey with JMP Securities. Please go ahead.

Great. Thanks for taking the question and other Super strong quarter, Dave You mentioned in your opening remarks, the goal of launching multiple new products for years to come so maybe there's a little bit of a bigger picture question, but just talk about upstart core AI approach. The data corporates that you have as you think about these newer opportunities in verticals to go through so obviously, we're in personal lines were.

In autos as well, so maybe talk to us a little bit about verticals remind us there and or potentially expanding the borrower profile, which I think you mentioned targeting customers previously ignored maybe going further down funnel. If you will and I have a follow up thank you.

Yes sure.

Theres just a lot of opportunities that we have always considered what we're building is kind of a of core technology and have chosen in the first place to deploy it which is unsecured personal loans of of certain nature.

The loans that are.

$50000, that's the range of our platform today serving of.

A bunch of the kind of use cases for consumers, but the there's obviously a much bigger world out there auto and our efforts in auto were really the first time to expand this technology into a secured loan which behaves differently and has very different attributes to it has a bunch of different problems to solve but benefits enormously from all of the history and the personal lend.

<unk> World, which is very focused on underwriting and individual.

I would just say look we look for inefficiencies in the market that are very large where the opportunity to improve.

The life for the access to capital of credit for the consumer is vast and we think theres a lot more on the unsecured lending space for share personal loans are a very very useful tool in so many ways and so we expect to do a lot more just within the personal lending to solve more problems with that tool.

So auto being the secured loan we're just getting into refinance now and and as you've heard will be into the purchase side of auto.

Hopefully by the end of the year, we will start have loans flow into that.

And we just see a lot of opportunity out there, we don't think credit isn't solved the problem almost anywhere.

In terms of people getting rates that makes sense for them based on their true risk. So you will definitely see us move beyond personal loans non OPEC, but frankly, we have so much on.

Uncharted territory, even in those 2 categories that we're not in a particular rush to do so we are excited to move beyond those 2 categories I think in the months and years to come you'll see us go beyond them, but.

There's so much to be done right and these 2 categories and that's you know most of our near term effort is right there.

Got it that's super helpful and just a quick follow ups on did it to your last answer I think you talked about marketing and gains in the funnel of this quarter. So can you just talk a little more of our please talk a little bit more of just the the expansion of the marketing channels, we've relied quite a bit on credit karma in the past and so we'd love to hear how that's evolving thank you.

Sure.

And then I guess I'll say that.

Did a significant expansion once again of our marketing programs. We grew our marketing spend for about the from about I think $40.45 million to $46 million last quarter to 71 plus.

So we grew our programs by more than 50% of it and yet they've got more efficient.

Alright.

Contribution margins actually went up which is which is rare.

The.

Underlying that is just the the continued strength of the funnel.

And then in terms of channels, we are definitely seeing a lot of.

Our strongest growth in channels that are more of sort of direct to the consumer to the borrowers.

The country concentrations.

In the.

Marketing channel of distribution.

Definitely declining across the board.

That's great. Thank you guys.

Thanks, Rob next question we'll.

We'll take our next question from John Hecht with Jefferies. Please go ahead.

Afternoon day.

David Thanks for taking my questions.

I guess, maybe moving a little but just for the other side of the network is talk about maybe some of the investors.

Obviously, the performance of the assets very strong, but any changes in terms of kind of the composition of investors.

Or geographical presence of how the investors are tying into the platform.

Over the past 2 or 3 months.

John Youre, referring to the loan investors.

Correct, yes.

Sure Yeah, I mean I think.

The only things to call out really as I say, the sick and ongoing expansion of the overall universe of investors and we tend to get continue to get a lot of.

You are new folks who are working with us as the product matures as the histories in the curves.

Sure and Thats been an ongoing.

Sort of evolution for a couple of quarters now.

With respect to geography, I mean, we've got some.

Engagement with international investors now which is.

Let's say more recent and of course, the the credit markets themselves as the as a macro statement are pretty constructive right now.

But overall I would just characterize it as of continuing evolution of the program, that's working really well and expanding the okay.

It's helpful I.

I think Dave mentioned that there was a couple of banks that kind of.

And of sets dropped the FICO require of us because there is that they have a greater faith in the score I know it sounds maybe that's reset but that seems like a pretty positive development.

Have you seen the market change in terms of maybe adoption of volumes coming out of those institutions and do you think there are more to come.

Yes, I think.

I would see it doesn't a trend that we would have hoped for which is.

The FICO of FICO of minimum meaning of bank, saying, we only went above 660 FICO of 680, FICO or what have you is.

From our perspective.

A bit of a guardrail you know the model itself of course should should convey risk and help you make the right decision in FICO has a bit of an artifact of of history.

In terms of it being hard cutoff, so but of course, we're not here to tell banks what their credit model. She looked like so so we gladly put the constraints on that makes sense for the risk committees, but we're just happy to see as these banks see performance over time.

In this particular case and we are hopeful this will be of trend as they start to trust. The model of the model of actually it does include FICO FICO as part of the model. It's just not a hard constraint on who can get alone and who can't.

And I think that trend to us as you know.

In retrospect, it's fairly obvious that should happen, but I think it's really.

Taken some time and probably will take some time to flush through.

There's so much history with FICO of that naturally.

Banks of the light on it and feel comfortable with it so but it's a good thing it means they can borrow they can length of people. They couldnt bunch of before the performance is as good or better than it was it doesn't have any impact there.

So generally we view of it it's a good thing for consumers and good things for forward looking banks.

Okay. Thank you very much guys.

Yeah.

Thanks, Sean that's the question please.

We'll take our next question from Pete Christiansen with Citi. Please go ahead.

Good afternoon, gentlemen, thanks for the question.

Yeah.

Reiterate pretty impressive results there.

Wanted to dig into the average loan size a little bit.

I know that you called out it was an AI change, which.

The minimum.

And I guess you could also make the argument that government disbursements of.

The increased savings I'm sure those of contributors, but I was just curious if theres been any use case changes or any noticeable changes between debt consolidation and perhaps other other use of this I don't know the vacation home improvement et cetera.

Just curious if you've seen any any underlying developments there and then I have a follow up.

Sure Yeah. Thanks for the question is the Sanjay.

I don't think any very stark changes in use case I think there's a combination of things that are internal to our models.

Example of that Dave mentioned is 1 example of that.

That's something that will.

At the margin.

Change in the mix to the.

The lower sized loans there's other.

The other changes to our model of that increasingly will compete.

For an expanded universe of overtime and what that means is where we're extending downwards.

On the Prime Minister spectrum in terms of our capabilities and of course that will have an effect on the loan size mix as well.

And then we think that there's probably some macro effects continuing in the economy.

And those are a little bit harder harder to measure, but we have seen since <unk>.

Certainly the onset of Covid.

The clear trend that I think is is moderating, but it's still at the visible which is the loan sizes of demand for loans in terms of what's being requested has moderate the downwards in the last 18 months.

Thanks, That's helpful and then and then looking at your on the on the supply side.

Again.

You've obviously expanded your network with investors.

I know that.

Recent past.

There hasn't been enough demand to satisfy your investor demand I guess.

For loans, just wondering if you could talk about the supply demand balance now.

Whether or not third party investors are are getting enough supply.

If theres any other constraints there.

Sure Yeah, I mean, we've had <unk>.

Definitely robust increases on the supply side, both with our number of banking partnerships, which has increased.

Nicely as well as the investment dollars that flow through to the institutional world.

But I think we're in very much the same position of equilibrium that we've been in the past which is.

There is the the finding the borrowers economically and profitably tends to be.

The the limiting factor in our growth and I think that's probably still the case, even at this new level of volume.

That's helpful. Thanks, gentlemen.

Thank you. Thanks for your next question please.

We'll take our next question from Nat Schindler with Bank of America. Please go ahead.

Yes, all right. Thank you guys and just before the question I wanted to do a quick quibble with some of my colleagues here on the sell side pretty impressive results in another strong quarter seem a bit understated. When you were talking about quadruple digit growth, which might be of first in my career.

Yeah.

It's more impressive because as you mentioned early on this was on the back of an like even if you take that out the Q2 of last year was you turned off revenue so, but if you compare it to Q2 of 19, you're still looking at <unk>.

Fivefold growth.

On.

That year, and if you look at the Transunion data and other data on the personal loan market, obviously, the personal loan market, it's still down as credit card balances have fallen.

I know you mentioned that in your forward guidance youre not predicting any change to the to what has happened, but as we think about.

What do you.

I think your growth would have been.

On the more normal maybe in the first half of this year in a more normalized market for personal loans, where credit card balances are higher than they are on stimulus packages pushing down the need for personal lines.

Hey, Matt. This is this is Dave.

It's of course very difficult to speculate but for sure I think what we would say has happened is a shift in leadership and a shift in market share driven by a significant disruption to the market I E. The pandemic.

And.

So.

A difficult time in the market, whether that's a recession or some other kind of event.

Really begins to show the differences between the strength of platform and I think that's really what happened with that really explains the very very large growth in market share and et cetera. That's happened. During this time, so it's a little hard to exactly say what would've happened. If there wasn't this disruption I think we're on the good trajectory, but I do.

The nature of the pandemic and the stresses that put on banks and lenders and consumers for time et cetera, just the uncertainty of it all sort of.

Leaned into our strength and gave us a benefit that we might.

Might have just taken much longer to get to the position we got ourselves to so that's how I interpreted it really of course almost impossible to guess what would have happened if things had been different last year.

But I'm guessing the.

None of the.

I'm not aware of any of your other competitors in the Fintech World, which I would imagine at the same sort of <unk>.

Strength in being fully online businesses and the like that the.

The pandemic share.

<unk>.

I don't think they're growing its buybacks over 2000, <unk> Q2.2019.

<unk>.

I haven't heard of anyone in the space growing at that kind of rate of.

So you are taking share that says something for the better mousetrap, but.

How should we start thinking about how the starts normalizing out as we move to a normal market, where the personal loan market is actually growing.

And so the shrinking as it is right now.

Yeah, I'll, just say you know, it's a little a little difficult I mean, we certainly feel this is happening with the bit of the headwind meaning the.

The demand side for credit is still down of Sanjay referenced earlier and.

When that will change we don't know we don't bank on it we don't included anything any sort of assumptions about that in our guidance but.

But you know.

We benefited also because our credit was resilient and responsive and our bank partners saw that investors saw that and that allowed us to come back quicker.

The economy is considered normalized by everybody whatever that means maybe unemployment gets all the way back to pre COVID-19 levels, I think youre going to see a lot more activity in the market by everybody by other banks, who don't work with us by Fintech competitors. So I would just say I think there's a chance.

We're hopeful there'll be a boost in demand by people spending more in need of spending tapping credit again as the minds of pre pre pandemic.

But there's also more I think competition out there who is now back on the game and fully.

Focused on themselves growing so how that nets out a little hard for us the judge but those of the dynamics that we would expect to see in the coming quarters.

Oh, great. Thank you guys.

Thanks, Matt Thanks for the.

Thanks for your question. The I think we have time for 1 more question.

Yes, Sir our final question is from Mike <unk> with Goldman Sachs. Please go ahead.

This is Adam Hotchkiss on for Mike. Thanks for taking the question I believe you mentioned auto loans to date, but could you give us a sense for how many of those are during the quarter and how the margin profile of that product compares to the traditional personal loan product.

And then on Prodigy, you mentioned you of double dealers since the beginning of the year, which seems like a pretty rapid pace of growth. There could you talk a little bit just about the enterprise sales strategy, that's driving that and the.

Sort of the pacing for <unk> in the back half of the back half of the year relative to the first half.

Okay. Good Yeah, Hi, Adam This is Sanjay welcome welcome back of the party.

I'll take the first question and defer to Dave on the second but with respect to auto.

They throw out a couple of numbers in terms of of our ramp it's still very early days, obviously, but we're starting to.

The results and the Bill repayment history.

We're starting to sort of improve the funnel sequentially month over month. So we're in a good path there I think and with respect to margins I think it's still very early we're still in the early stages of engaging with banks and engaging.

With investors in understanding of the effects of fees on the conversion funnel and things like that but I think our expectation remains that.

The loans are clearly bigger and so there will be of higher dollar revenue per loan.

And we're expecting.

Probably a similar dollar growth.

Contribution profit per loan as we see in personal loans. So the percentages will be all of the different because of the loan sizes bigger, but that's our that's our current assumptions.

Yeah, and Adam the thanks for the second question you asked about sort of the go to market for the promise of <unk> software and how that looks yes, we said as I said earlier, we with double the number of rooftops.

The beginning of the year the.

The acquisition happened earlier, this year and prodigy in our views of V.

Very good product and a very small team.

So it is a huge area of investment for Us in fact, I think we've set of couple of times. This is an area, where we kind of overspend to build our go to market and that team is largely what you would think of as an inside sales team very focused on on fast volume sales.

And we are we care most of that I mean, there is absolutely some of bits of revenue that come from the use of that product. That's not really the long term plan for monetization. It's of course to the offers of credit through it.

But today, we're focused on ramping that team of very quickly both really in the sales and marketing functions and as well by the way on the R&D side because part of it is just a great leadership position is growing very quickly and has done that with.

Very very modest sales teams and we definitely believe it makes a lot of sense for us to invest more in that so that's happening right now.

<unk>.

We're tracking very aggressive goals for the number of rooftops that are signed up every quarter and that's something we're watching very carefully.

Thanks, Dave Thanks, Sanjay really helpful.

Thanks, Adam.

This does conclude today's question and answer session I would like to turn the conference back to your speakers for any additional or closing remarks.

Hey, This is Dave just just kind of wrap up here and I just wanted to reiterate we're obviously pleased with the results I think they do illustrate the type of company. We are building. We think we have an opportunity to build 1 of the top handful of fintech from the world because we are in a very very large space and.

Because we think AI really is the future. It's the most transformational change that's happened in the space. So that's why we're excited.

So thanks to all of the upstart team for delivering the results and thanks for everybody out there for being with US we look forward to seeing some of you over the next quarter. Thank you.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

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Good day, ladies and gentlemen, and welcome to the upstart Q2, FY 2021 earnings call. Today's conference is being recorded at this time for opening remarks, I would like to turn the conference Ofer the Jason Schmidt.

Please go ahead Sir.

Good afternoon, and thank you for joining us on today's conference call to discuss upstart second quarter 2021 financial results.

With us on today's call our nature of our upstart Chief Executive Officer, and Sunday of data, our Chief Financial Officer.

Before we begin I wanted to remind you that shortly after the market closed for the upstart issued a press release announcing the second quarter 2021 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, IR dot upstart dot com.

During the call we will make forward looking statements such as guidance for the third 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 the result of various risk factors that is the looks.

Scribed in our filings with the SEC.

As a result, the caution you against the placing undue reliance on these forward looking statements. We assume no obligation to update any forward looking statements as of the result of new information or future events.

As required by law.

In addition, during today's call unless otherwise provided references to our results are provided of 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 of many analysts questions as possible during the call. We request that you limit yourself to 1 initial question and 1 follow up question.

Later this quarter upstart will be participating in the Deutsche Bank Technology Conference on September 9.

<unk> AI Fintech conference on September 10th and the Piper Sandler Global Technology Conference on September 13th.

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 second quarter 2021 results I'm, Dave Gerard cofounder and CEO of upstart.

Right the ongoing challenges the pandemic has brought to you and your families. You continue to deliver the last year and a half have been a challenge for my family as well and I am grateful to be on this journey with each of you.

I'll start as the leading AI lending platform and our second quarter results continue to demonstrate by this category can generate enormous value in our economy. They also demonstrate why upstart has an opportunity to become 1 of the world's largest and most impactful fintech in the years to come.

Lending is the center beam of revenue and profit in financial services and artificial intelligence may be the most transformational change to come to this industry and its 5000 year history.

It's our view that AI led disruption targeting dramatic inefficiency and 1 of the largest segments of our economy is worthy of your attention.

Our Q2 revenues grew to $194 million up 60% compared to the prior quarter.

June was our first month with more than 100000 loans and more than $1 billion in origination volume on our platform.

Our demands on our balance sheet.

Also recalibrated to broader bank partner of eligibility criteria, enabling us to market to more consumers.

And finally, we continue to ramp up marketing to our prior borrowers who qualified for repeat loans on the upstart platform and this contributed meaningfully to our growth in fact, the number of repeat loans on our platform more than doubled from the first quarter to the second quarter of 2021.

We also experienced an important but more nuanced when in Q2 for the first time, 1 of our bank partners decided to eliminate any minimum FICO requirement for their borrowers to us. This demonstrates both our commitment on behalf of the bank to a more inclusive of lending program as well as the increasing confidence and upstarts.

High powered model.

While credit scores can be useful hard cutoffs based on a 3 digit number invented 30 years ago lease far too many credit worthy Americans out of the cold. We're hopeful of second bank partner will make a similar decision in the near future.

I am pleased to announce that we finally began to rollout upstart for Spanish speakers, our first of its kind among digital lending platforms in the U S. This initiative took longer than I would have liked as it turns out expanding from 1 language to 2 and the heavily regulated industry isn't as easy as we expected, particularly because of our platform.

Is it self of fast moving target.

It's these types of efforts, making upstart more accessible to the Spanish speakers and reducing hard cutoffs based on FICO scores that will make upstart of more inclusive and impactful platform for those that need it the most.

The launch of New Bank partners as well as expansion of lending programs from existing bank partners improves the quality of offers we can make to consumers an upstart dot com.

Another important service, we provide to banks and to loan buyers is access to liquidity through the capital markets. We do this by managing regular securitization of loans originated on our platform, where multiple banks and loan buyers contribute to a single shelf under the U S T brand.

Our most recent securitization included more than a half of $1 billion in collateral originated by 3 different bank partners, which saw net execution of about 107.

This extraordinary results can be attributed to strengthen the credit markets as well as broad recognition of upstart AI enabled collateral we now have more than 150 institutions, who buy upstart powered loans or bonds.

While our partners don't generally rely on the securitization for liquidity, we believe the presence of a well established market for upstart powered collateral creates value for our partners and confidence in our platform.

We have said in the past that auto lending is upstart next great opportunity its a market at least 6 times larger than personal loans and at least as an efficient.

We're making rapid progress towards this opportunity in several dimensions.

We've also improved our funnel conversion rate about 100% since the beginning of the year, despite expanding from states with minimal funnel friction to those with the most of.

This is critical because funnel efficiency as the primary way, we will scale up auto loan originations just as we've done historically with personal loans.

Upstart powered banks have now originated more than 2000 auto refinance loans in 40 different states and these loans are beginning to provide the repayment data that is the fuel to our AI models.

And lastly, we now have our first 5 banks and credit unions signed up for auto lending on our platform.

We've also made fast progress on our automotive retail solution today known as <unk> software.

Since the beginning of the year, we've doubled the number of dealerships AK a rooftops using prodigy.

And in Q2 more than $1 billion in vehicles were sold through <unk>. We expect the first upstart powered loan to be offered through this platform before the end of 2021.

Now a bit about the company itself in June we announced that I'll start is moving to a digital first model, where most of starters can live and work anywhere in the U S.

We came to this decision for a few reasons for.

First we've shown we can work remotely as a team the.

The arguments against the remote work tend to be historical rather than backed by real facts or data.

Second the tech World It feels like it's on a multi year transition toward work from anywhere and we want to be ahead of the curve.

Third we believe the benefits of in office work can be captured in just a few well considered days together each month.

Fourth given.

Given the scale of our ambitions and the talent, we need to aggressively pursue our goals, we need to tap into talent across the entire country.

The good news is digital first has paid immediate dividends to our recruiting efforts the Wii.

Announced this plan just a couple of months ago over a third of our job offers in the past few weeks have been to candidates outside our footprint.

And we've seen an acceptance rate of 80% to these offers a dramatic improvement over what we've seen historically.

Digital first it's not just the reaction to the last year in the house, it's a sign that we intend to create 1 of the largest and most impactful fintech in the world. We're building a company that will be distributed not just physically but logically able to pursue multiple markets and business opportunities at the same time we.

We need extraordinary talent and the leadership to do this right. The digital first will enable us to find that talent wherever it may be.

Digital first may help us recruit talent wherever it resides but it's our culture and mission that will keep it here we aim to be the go to employer for those driven to build the most modern of technologies artificial intelligence to solve 1 of the most intractable problems financial inclusion to do this upstart must be widely recognized as the.

The destination company for those destined to have real impact on the world, while experiencing unparalleled career growth.

And this thing we were recently honored to be included in the gender diversity index by State Street advisors recognizing of starts role as 1 of the top companies in the U S for women in leadership, the exchange traded fund, which trades under the ticker S. H E helps demonstrate that diversity and strong performance go hand.

Enhanced.

History has shown that turbulent times can provide the backdrop for next generation companies emerge. The past 18 months have been just that for upstart and our team has risen to the challenge we have built a strong and profitable core from which we expect to launch several new products and services in months and years to come.

AI lending will transform financial services in the decade ahead, we aim to make upstart synonymous with that category.

Thank you and I'd like now to turn it over to Sanjay Our Chief Financial Officer to walk through our Q2 financial results and guidance Sanjay.

Thank you, Dave and thanks to everyone for joining us today.

We'll dive straight into our most recently quarterly results.

Revenues in Q2 came in at $194 million up 60% quarter over quarter from Q1 of this year.

As a side note, we will omit references to year over year of growth rates for our P&L. This quarter because they are all well above 1000% does the the lapping of last year's pandemic impact.

Of that total revenue $187 million for 97% of the total came in the form of revenue from fees the <unk>.

Volume of transactions across our platform. This quarter was approximately 287000 loans of 69% quarter over quarter, partially driven by of 240 basis point quarter over quarter interest in the conversion rate up to $24.4 per cent.

The balance of our growth in transaction volume came from an increase in the number of rate requests. We received for this quarter as head of marketing programs scaled in response to the conversion funnel improvements of prior quarters.

Our contribution profit and non-GAAP metric, which we define as revenue from fees minus variable costs for borrower acquisition verification and servicing.

It was $96.7 million in Q2 up 73% quarter over quarter, and representing 52% contribution margin up from a margin of 48% in the prior quarter and 32% 1 year ago.

This level of contribution margin remained quite elevated partially due to the ongoing improvements to our conversion funnel.

And in part owing to some 1 time gains realized from the fair value of our servicing rights due to the updating of certain underlying assumptions.

Q2 operating expenses for $158 million.

Up 49% quarter over quarter for 40% quarter over quarter, when netting out the impact of stock based compensation.

Investment in engineering, and R&D remains our priority growing 66% quarter over quarter to $31 million from Q2.

General and administrative spend grew slower than revenue in Q2, increasing 29% quarter over quarter to $26 million.

The other expense categories of sales and marketing and customer operations were largely driven by variable cost increase of supporting revenue growth.

We expect the temporarily accelerated expenditures in our fixed expense base over the next 3 to 4 quarters as we contemplate large investments in engineering and in scaling up the go to market function of our product platform for auto commerce.

Our Q2 GAAP net income was $37.3 million up from $10.1 million last quarter and from negative $6.2 million in the same quarter of the prior year.

Adjusted EBITDA, which we adjusted for stock stock based compensation came in at $59.5 million in Q2 up from $21 million last quarter and negative $3.1 million in Q2 of 2020.

Adjusted earnings per share for Q2 was 62.

Based on the diluted weighted average share count of $94.8 million.

Turning our attention to the balance sheet, we ended the quarter with $618 million in restricted and unrestricted cash.

From $336 million at the end of last quarter.

In terms of the loan assets, we carried in the aggregate balance of loans notes and the residuals of.

$95.3 million up from $73.2 million in Q1 and down from $148 million at the end of the same quarter in the prior year as.

As we have previously highlighted these loan assets represent the totality of the direct exposure, we have to credit risk.

We will now turn to our near term and for your outlook.

With this in mind for Q3, we are expecting.

Total revenues of $205 million to $215 million.

<unk> of year over year growth rate of 221% at the midpoint.

Contribution margin of approximately 45% net.

Net income of $18 million to $22 million.

The adjusted net income of $28 million to $32 million.

Adjusted EBITDA of $30 million to $34 million.

And the diluted weighted average share count of approximately $94.9 million shares.

For the full year of 2021, we now expect revenues of approximately $750 million, representing a growth rate of 221% year over year.

And up from the $600 million that we indicated last quarter.

Contribution margin of approximately 45% of.

Up from 42% indicated last quarter.

And then adjusted EBITDA margin of approximately 17% up from 10% indicated last quarter.

I'd like to reiterate David's gratitude for all of the hardworking teams upstart.

Efforts are propelling our growth in the financial outcomes, which continue to exceed our own internal expectations. Thanks, and looking forward to seeing everyone again in another 90 days.

With that Dave and I are now happy to open the call to any questions operator.

Again, Please press star 1 to ask a question of pause for just a moment to allow everyone an opportunity the signal for questions.

We will take our first question from Ramsey El <unk> with Barclays. Please go ahead.

Hi, guys. Thanks for taking my question of this evening and other Super strong quarter here.

I wanted to ask about the components of guidance. If you can kind of help parse this out.

Price of our fresh rather what is macro kind of loan market rebounding more broadly versus improvement in the conversion rate you might be anticipating which.

Or versus maybe auto contributing I'm, just trying to get an idea from where the.

Yes.

For the drivers are for for the for your guidance increase.

Yeah sure Hey, Ramsey this is sanjay thanks for your questions.

So I think in keeping with tradition of the past few quarters.

Our assumptions around the macro environment, our static, meaning we're not really predicting either of deterioration or a rebound in.

And the economy with respect to our numbers, where you sort of predicting the status quo.

Which I guess.

Fortunately for US means in your credit card balances remained quite low and the savings rates remain quite high in the economy. So we're not necessarily predicting of change in either of those.

<unk> and with respect to the auto we continue to have.

No meaningful contribution to the economics in fiscal year 2021, so really everything youre seeing in our guidance is our evolving for review of our core of personal loan business, how we're seeing the funnel of evolving and obviously the.

For the second order effect.

Of our marketing programs are catching up to the the efficiency of the funnel.

Okay.

I wanted to ask about conversion rates that seems to have been of pretty significant driver of the beat this quarter as well as in past quarters.

Could you talk about the pipeline of improvements that you have.

Maybe in the wings, there what should we expect in the third quarter.

And sort of what is baked into guidance in terms of that conversion rate.

Hey, Ramsey this is Dave.

Like always we kind of have a significant backlog of projects that we're working through that potentially improved the funnel conversion I mean, there's the kind.

Of the core way we grow is.

Improvements to our models of some of the technology that helps.

It helps borrowers get through our funnel and we continue to have a.

A significant number of model upgrades that we expect and such we don't always know exactly the.

Exactly what the impact will be of the scale of it.

So I think that's on balance reflected in the guidance, which is the continued pipeline some smaller things some of that and potential with the larger impact the summer related to approvals and rates offered to consumers others are off related to friction reducing friction. So there it is.

A little bit of of mass and we don't we don't have anything particular to point to other than to say the.

He is working really hard to get upgrades and improvements into the model that are going to make the <unk>.

Senior product better and it's going to make.

Makeup starts business more successful.

And what about what might be baked into guidance.

Okay.

Yeah.

And maybe as part of that I can just address.

Is it the initial assumption the ANZ, which is we did have but continuing progress in terms of conversion rates on our funnel of what were sort of pushing up against the 25% of this quarter.

But a lot of the growth actually did also come from scaling up our marketing programs.

2.2.

The scale up to the past few quarters of of gains that we've had and if you look at the breakdown of those let's see that actually the majority of the of the growth. This quarter sequentially came from the top of the funnel of in fact.

And so that sort of plays into how we think about things going forward there was additional gains.

This quarter on the funnel and so.

The conversion rates and the and in fact, the contribution margins actually went up even though we skills of our marketing campaigns by more than 50% quarter over quarter.

But a lot of what we're thinking about next quarter and in the back half of the year also has to do of scaling up the marketing programs to continue to cut the for net funnel efficiency.

And our historical sort of breakdown between.

Top of funnel and then conversion rate efficiency tends to be about 50, 50, and I think that's a rough.

The ballpark for how we're thinking about the back half of the year, you know without getting into specific projects I think that's the the rough breakdown in terms of how we see the rest of the growth happening this year.

Okay terrific. Thanks for your response I appreciate it.

Thanks, Rob the.

Sure.

We'll take our next question from Ron Josey with JMP Securities. Please go ahead.

Great. Thanks for taking the question and other Super strong quarter, Dave You mentioned in your opening remarks, the goal of launching multiple new products for years to come. So maybe this is a little bit of a bigger picture question, but just talk about upstart core AI approach. The data corporates that you have as you think about these newer opportunities in vertical as the go through so obviously, we are in personal lines were.

Yes sure.

Theres just a lot of opportunities that we have always considered what we're building is kind of of our core technology and of.

Chosen in the first place to deploy which is unsecured personal loans of of certain nature.

Meeting loans that are thousands of $50000 is the range of our platform today serving.

A bunch of of kind of use cases for consumers, but there is obviously a much bigger world out there auto and our efforts in out of where really the first time to expand this technology into a secured loan which behaves differently and has very different attributes to it has a bunch of different problems to solve but benefits enormously from all of the history and the personal when.

<unk> World, which is very focused on underwriting and individual.

So I would just say look we look for inefficiencies in the market that are very large where the opportunity to improve.

The life for the access to capital of credit for the consumer is vast and we think theres a lot more in the unsecured lending space for share personal loans are a very very useful tool in so many ways and so we expect to do a lot more just within personal lending to solve more problems with that tool.

So auto being the secured loan we're just getting into refinance now and and as you've heard will be into the purchase side of auto.

Hopefully by the end of the year, we will start have loans flow into that.

And we just see a lot of opportunity out there, we don't think credit isn't solve the problem almost anywhere.

In terms of people getting rates that makes sense for them based on their true risk. So you will definitely see us move beyond personal loans and auto, but frankly, we have so much on.

Uncharted territory, even in those 2 categories that we're not in a particular rush to do so we are excited to move beyond those 2 categories I think in the.

The months and years to come you'll see us go beyond them, but.

There is so much to be done right and these 2 categories and that's most of our near term effort is right there.

Got it that's super helpful and just a quick follow ups on did it to your last answer I think you've talked about marketing and gains in the funnel of this quarter. So can you just talk a little more of our please talk a little bit more of just the.

The expansion of the marketing channels, we've relied quite a bit on credit karma in the past and so we'd love to hear how that's evolving thank you.

Sure.

And then I guess I'll say that.

We did a significant expansion once again of our marketing programs. We grew our marketing spend for about the from about I think 40% 4500.46 million last quarter to 71 plus.

We grew our programs by more than 50% of it and get the got more efficient.

Alright, so our contribution margin is actually went up which is which is rare it's just kind of.

Underlying that is just the continued strength of the funnel.

And then in terms of channels, we are definitely seeing a lot of.

Our strongest growth in channels that are more of sort of direct to the consumer and to the borrow or so.

The country concentrations.

And.

Marketing channel of distribution.

Definitely declining across the board.

That's great. Thank you guys.

We'll take our next question from John Hecht with Jefferies. Please go ahead.

Afternoon.

David Thanks for taking my questions.

I guess, maybe moving a little bit just to the other side of the network is talk about maybe some of the investors.

Obviously, the performance of the assets very strong but.

Any changes in terms of kind of of the composition of investors or.

Our geographical presence of how the investors are tying into the platform.

Over the past 2 or 3 months.

John Youre, referring to the loan investors.

Correct, yes.

Sure Yeah, I mean I think.

The only things to call out really as I say, the sick and ongoing expansion of the overall universe of investors and we tend to get continue to get a lot of.

You know folks who are working with us as the product matures as the histories in the curves mature and thats been an ongoing.

Sort of evolution for a couple of quarters now.

With respect to geography, I mean, we've got some.

Engagement with international investors now which is.

Let's say more recent and of course, the the credit markets themselves as the macro statement are pretty constructive right now.

But overall I would just characterize it as the continuing evolution of the program, that's working really well and expanding the okay. That's helpful of it.

I think Dave mentioned that there was a couple of banks that kind of.

And of sets dropped the FICO require of us because there is that they have a greater faith in the score I know it sounds maybe thats reset, but that seems like a pretty positive development and have you seen the market change in terms of maybe adoption of volumes coming out of those institutions that do you think there are more to come.

Yes, I think.

I would see it doesn't a trend that we would have hoped for which is.

The FICO of FICO of minimum meaning of bank, saying, we only went above 660 FICO of 680, FICO or what have you is.

From our perspective.

A bit of a guardrail the model itself of course should should convey risk and help you make the right decision in FICO has a bit of an artifact of of history.

In this particular case and we are hopeful this will be of trend as they start to trust. The model of the model actually it does include FICO FICO was part of the model. It's just not a hard constraint on who can get alone and who can't.

And I think that trend to us is.

In retrospect, it's fairly obvious that should happen, but I think it's really.

Taken some time and probably will take some time to flush through.

There's so much history with FICO that naturally.

Thanks for the light on it and feel comfortable with it so but it's a good thing it means they can borrow they can length of people. They couldnt mentioned before the performance is as good or better than it was it doesn't have any impact there.

So generally we view of it it's a good thing for consumers and good things for forward looking banks.

Okay. Thank you very much guys.

Yeah.

Thanks, Sean that's the question please.

We'll take our next question from Pete Christiansen with Citi. Please go ahead.

Good afternoon, gentlemen, thanks for the question.

Yes.

Theater, it pretty in principle of results there.

1 of the dig into the average loan size a little bit.

I know that you called out was AI.

AI change, which.

The minimum amount and I guess you can also make the argument that government disbursements of.

The increased savings sure those of contributors, but I was just curious if theres been any use case changes or any noticeable changes between debt consolidation and perhaps other other uses ethanol vacation of improvement et cetera.

I'm just curious if you've seen any any underlying developments there and then I have a follow up.

Sure Yeah. Thanks for the question as of Sunday.

I don't think any.

Very start changes in use case I think there's a combination of things that are internal to our models.

The example that Dave mentioned is 1 example of that.

That will.

At the margin.

Change in the mix too.

The lower size loans.

The other changes to our model of that increasingly we will compete.

The expanded universe of overtime and what that means is we're extending downwards.

On the Prime Minister spectrum in terms of our capabilities and of course that will have an effect on the loan size mix as well.

And then we think that there's probably some macro effects continuing in the economy.

And those are a little bit harder harder to measure, but we have seen since <unk>.

Certainly the onset of Covid.

The clear trend that I think is is moderating, but it's still at the visible which is that loan size of the demand for loans in terms of what's being requested has moderated downwards in the last 18 months.

Thanks, That's helpful and then and then looking at your on the on the supply side.

Again.

You've obviously expanded your network with investors.

I know that.

Recent past.

There hasn't been enough demand to satisfy your investor demand I guess.

For loans I was just wondering if you could talk about the supply demand balance now.

Whether or not third party investors are are getting enough supply.

If theres any other constraints there.

Sure Yeah, I mean, we've had.

Definitely robust increases on the supply side, both with our number of banking partnerships, which has increased.

Nicely as well as the investment dollars that flow through to the institutional world.

But I think we're in very much the same position of equilibrium that we've been in the past which is.

There is the.

Finding the borrowers economically and profitably tends to be.

The the limiting factor in our growth and I think that's probably still the case, even at this new level of volume.

That's helpful. Thanks, gentlemen.

Thank you. Thanks, Pete the next question please.

We'll take our next question from Nat Schindler with Bank of America. Please go ahead.

Yes, hi, Thank you guys and just before the question I wanted to do a quick quibble with some of my colleagues here on the sell side pretty impressive results in another strong quarter seem a bit understated. When you were talking about quad drupal digit growth, which might be of first in my career.

What's more impressive is as you mentioned early on this was on the back of an like even if you take that out the Q2 of last year was turned off revenue so, but if you compare it to Q2 of 19 Youre still looking at for.

Fivefold growth.

On.

That year, and if you look at the Transunion data and other data on the personal loan market, obviously, the personal loan market, it's still down as credit card balances of fallen.

I know you mentioned that in your forward guidance youre not predicting any change to the to what has happened, but as we think about.

What do you.

I think your growth would have been.

On a more normal maybe in the first half of this year in the more normalized market for personal loans, where credit card balances are higher than they are on stimulus packages pushing down the need for personal loans.

Hey, Matt. This is this is Dave.

Of course.

Very difficult to speculate but for sure I think what we would say has happened as of <unk>.

<unk> in leadership and a shift in market share driven by a significant disruption to the market I E. The pandemic.

<unk>.

So.

A difficult time in the market, whether that's a recession or some other kind of event.

Really begins to show the differences between strength of platform and I think that's really what happened with that really explains the very very large growth in market share and et cetera. That's happened. During this time, so it's a little hard to exactly say what would've happened. If there wasn't this disruption I think we're on the good trajectory.

But I do think the nature of the pandemic and the stresses that put on banks and lenders and consumers for the time et cetera, just the uncertainty of it all sort of.

Leaned into our strength and gave us a benefit that we might.

But I'm guessing the.

None of the.

No I didn't mind of where of any of your other competitors in the Fintech World, which I would imagine at the same sort of.

Strength in being fully online businesses and the like the the.

The pandemic helped.

Helped.

I don't think Theyre growing that's buybacks over 2000, <unk> Q2.2019.

I haven't heard of anyone in the space growing at that kind of rate.

Obviously, you are taking share that says something to the better mousetrap, but.

How should we start thinking about how the starts normalizing out as we move to a normal market, where the personal loan market is actually growing.

So its shrinking as it is right now.

Yeah, I'll, just say, it's a little a little difficult I mean, we certainly feel this is happening with the bit of the headwind, meaning the demand side for credit is still down of Sanjay referenced earlier and.

When that will change we don't know we don't bank on it we don't included anything any sort of assumptions about that in our guidance but.

Right.

We benefited also because our credit was resilient and responsive and our bank partners saw that investors saw that and that allowed us to come back quicker. When the economy is considered normalized by everybody whatever that means maybe unemployment gets all the way back to pre COVID-19 levels.

I think youre going to see a lot more activity in the market by everybody by other banks, who don't work with us by Fintech competitors.

So I would just say I think theres the chance.

So there'll be a boost in demand by people spending more in media spending tapping credit again as they might have pre pre pandemic.

Also more I think competition out there who's now back in the game and fleet.

Focused on themselves growing so how that nets out a little hard for us the judge but those of the dynamics.

But we would expect to see in the coming quarters.

Great. Thank you guys.

Thanks, Matt Thanks for the.

Thanks for your question I think we have time for 1 more question.

Yes, Sir final question is from Mike <unk> with Goldman Sachs. Please go ahead.

This is Adam Hotchkiss on for Mike. Thanks for taking the question I believe you mentioned auto loans to date, but could you give us a sense for how many of those of during the quarter and how the margin profile of that product compares to the traditional personal loan product.

Sort of the pacing for product in the back half of the back half of the year relative to the first half.

Okay. Good Yeah, Hey, Adam This is the Sunday welcome welcome back of the party.

I'll take the first question and defer to Dave on the second but with respect to auto.

They throw out a couple of numbers in terms of a ramp it's still very early days, obviously, but we're starting to.

The results and Bill repayment history.

With investors in understanding the effects of fees on the conversion from line things like that but I think our expectation remains that.

The loans are clearly bigger and so there will be of higher dollar revenue per loan.

And we're expecting.

Probably a similar dollar growth.

Contribution profit per loan as we see in personal loans. So the percentages will be all of the different because the loan sizes bigger, but that's our that's our current assumptions.

Yeah and Adam Thanks.

Thanks for the second question you asked about sort of the go to market for the promise of <unk> software and how that looks as we said as I said earlier, we with double the number of rooftops.

Beginning of the year the acquisition happened early this year and prodigy and argues.

Very good product and of.

Very small team.

So it is a huge area of investment for Us in fact, I think we've said a couple of times. This is an area, where we kind of overspend to build our go to market and that team is largely what you would think of as inside sales team very focused on on fast volume sales.

But today, we're focused on ramping that team of very quickly both really in the sales and marketing functions and as well by the way on the R&D side because part of it is just has a great leadership position is growing very quickly and has done that with.

The very very modest sized teams and we definitely believe it makes a lot of sense for us to invest more in that so that's happening right now.

<unk>.

We're tracking very aggressive goals for the number of rooftops that are signed up every quarter and that's something we're watching very carefully.

Thanks, Dave Thanks, Sanjay really helpful.

Thanks, Kevin Thanks, Adam.

This does concludes today's question and answer session I would like to turn the conference back to your speakers for any additional or closing remarks.

Hey, This is Dave just just kind of wrap up here and I just wanted to reiterate we're obviously pleased with the results I think they do illustrate the type of company. We are building. We think we have an opportunity to build 1 of the top handful of fintech in the world because we are in a very very large space.

And because we think AI really is the future it's the.

Transformational change that's happened in the space. So that's why we're excited.

So thanks to all of the upstart team for delivering the results and thanks for everybody out there for being with US we look forward to seeing some of you over the next quarter. Thank you.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

Q2 2021 Upstart Holdings Inc Earnings Call

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