Q4 2021 Upstart Holdings Inc Earnings Call

February 15, 2022

He's doing great.

Good day and welcome to the upstart Q4, FY 2021 earnings call.

Today's conference is being recorded.

The three I would like turn the conference call.

To Jason Smith, VP of Investor Relations.

Please go ahead Sir.

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

With us today are David Gerard upstart, Chief Executive Officer, and Sanjay <unk>, our Chief Financial Officer.

Before we begin I want to remind you that shortly after the market close today upstart issued a press release announcing its fourth quarter and full year 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 first quarter and full year 2022 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 to us 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 address as many analyst questions as possible during the call we.

We request that you please limit yourself to one initial question and one follow up question.

Later this quarter upstart will be participating in jeffries payments and Fintech summit on March 1st J M P's.

Securities Technology Conference on March eight and Morgan Stanley 's Technology Media and Telecom conference on March <unk>.

Now I'd like to turn it over to Dave Girard CEO of upstart.

Good afternoon, everyone. Thank you for joining us on our earnings call covering our fourth quarter and full year 2021 results I'm, Dave Gerard co founder and CEO of upstart.

We're a month and a half into the new year and I'm Grateful finally to have the opportunity to reconnect with the investor community. Some quiet period, just be longer than others. We have seen some epic progress at upstart in the past few months.

I'm excited to share what we've been up to the results we've been seeing and how we're thinking about 2022 and beyond.

Let me state upfront that we're in a multi decade mission to put affordable credit within reach of every American the price of credit is the price of opportunity and the price of mobility, and we want to ensure that opportunity and mobility are available to all Americans, particularly for those whom the financial system has failed in the past.

The light you we've been eyes wide open watching all that's happening in the world in the last few months the rise and fall of the omicron variant the clear signs of inflation and the fed's plan to counter it and of course, the market rotation out of high growth technology.

But through all of it our business continues to get stronger and my confidence in <unk> future has never been greater.

The rare public technology company with triple digit growth and profits were confident that in the economy and market and transition plays to our strength.

I'd like to start by reflecting on 2021, which was a remarkable year for upstart. We grew revenue from $233 million in 2000 $20 million to $849 million in 2021, while generating net income of $137 million.

And with a fourth quarter surge, we're now at more than $1 billion in revenue on an annualized basis too.

2021 will be remembered as the year AI lending came to the forefront kicking off the most impactful transformation of credit in decades.

The gain some perspective on what upstart achieved in 2021.

We looked for another company in the public markets with our combination of scale growth and profits, but we were unable to find one our profits are neither marginal nor a femoral we generated more cash in 2021, then we burned in our entire eight plus years as a private company.

Profits matter for a reason they allowed us to invest significantly in our future by more than doubling our head count in product engineering and machine learning in 2021.

Unusual combination of growth and profit in a heavily competed industry is evidenced of the distinct competitive advantage and clear operating leverage. It also suggests that you're witnessing the creation of an industry defining category artificial intelligence blending and the emergence of the category leader upstart.

In addition to reaching $1 billion in annualized revenue and record profit Q4 with special for other reasons. It was the first quarter with more than $4 billion in loan transactions on our platform a record not just for upstart, but potentially for the entire personal lending industry.

Our bank and credit Union partners originated almost 500000 loans in the quarter.

We also now have 42 banks and credit unions as well as more than 150 institutional investors funding loans on the upstart platform, providing deep and diverse sources of liquidity to keep the engine humming and the AI models learning.

I'm also pleased to report that we now have seven lenders on the upstart platform with no minimum FICO score required.

But perhaps the most important achievement over the last quarter of 2021 was the incredible work done by our auto team.

Through a relentless and determined to cross functional effort. This team put the last essential pieces in place necessary to begin scaling auto lending on the upstart platform I'll come back to this topic in a moment.

I'd like to note that the upstart team accomplished all of this during the second year of a global pandemic, while operating in an almost entirely remote and distributed fashion.

We moved to a digital first strategy, while simultaneously implementing what we call a vertical team working structure.

This new approach is unlocking upstart the ability to execute quickly and efficiently as a multi product company.

What's really exciting is that we're finding talent across the entire U S. In fact in Q4 more than two thirds of our hires were made outside of our California, and Ohio footprint.

I cannot help but express my amazement for all the upstart team accomplished in 2021, particularly given the circumstances under which they accomplished it.

Thank you to the entire upstart team and also to the family and friends that support them.

Now I'd like to move onto 2022, and how we're thinking about the year ahead.

We find ourselves today in the strongest position upstart has experienced to date.

So our mission in 2022 to build on the many successes of the last year.

At the beginning of each year I'd like to clarify in my head and with the team the handful of objectives upstart needs to achieve to make the year and unqualified success right at the top of the list for 2022 was achieving meaningful scale with auto lending on our platform.

We believe in our core that AI lending isn't a one category phenomenon, but will eventually transform virtually all flavors of credit I'm happy to tell you that just a month and a half into the new year. We've accomplished this goal.

Our auto refi funnel performance is now comparable to where a personal loan funnel was in 2019 on a channel adjusted basis based on this progress we now expect $1 $5 billion in auto land transactions on our platform in 2022.

Just as importantly, we now have the confidence to invest the resources necessary to unleash the model and technology improvements in auto lending that made us start the category leader in personal lending.

As I referenced earlier this great leap forward was the product of an intense push by our auto team towards the end of Q4, there are many pieces and parts we needed to get right to enable a minimally efficient funnel and the team worked night and day right up through the holidays to make it happen.

It's worth stating that scaling the auto business from here is no simple task more funnel in model improvements will be necessary and distribution channels and auto refi arent nearly as well established as they are in personal lending.

But even though channel development will require significant time and effort. The good news is that we're confident we're in a class by ourselves I'll start has a unique and proprietary auto refinance product with far less competition than we've had in personal lending.

If you don't have a certain level of funnel efficiency and auto refi you really don't have a product today. We are confident that automotive lending is a category, we can grow into for years to come.

We also continue to make rapid progress in the new product categories that I mentioned in our last earnings call small dollar lending small business lending and mortgage in each case, we've established a core team and are making real progress towards entering the market.

In the case of small dollars in small business lending, we expect to have these products in market. During 2022 in the case of mortgage lending, we hope to be in market in 2023 in each case, we anticipate a year or so of development a year of feeding and testing and then a year to begin scaling a homerun succeed.

For upstart would amount to a new product in market and ready to scale in each of the next two or three years.

Of course, it's very hard to time innovation much less market adoption, but this is the pace. We're aiming for overall the categories. We're in today or expect to enter represent an addressable market of more than six trillion in annual originations.

I'll start is now about the size of that Google was when I joined the company in early 2004, So I've seen this movie before and hope to use what I learned there to build upstart into the most impactful fintech in the world I have some specific personal goals for upstart in 2022 first to transition into a multi product.

Distributed company that can operate in parallel instead of in cereal.

To break new ground in terms of quality of execution at the $1 billion plus scale with leaders such as Google Amazon and Apple as my Northstar and third to move aggressively to unlock upstarts addressable market.

Simultaneously upgrading our ability to pursue at.

These challenges will keep our leadership team busy in 2022 and well beyond.

I'll start is a unique company both in terms of our technology and our business model, we don't exactly look like anybody else and for this reason, we're often misunderstood.

So in closing I'd like to share a few thoughts about upstart that have struck me in the last few months as useful ways to understand who we are and what we're building.

First I'll start is both the consumer Internet brand as well as our cloud software provider delivering a deeply proprietary and technical product to our bank and credit Union partners. This combination is entirely unique and is central to our competitive position today and in the future.

Were it not for the AI models at the core of upstart, we would have little unique value to offer our bank partners and were it not for our consumer presence and scale, we would not control our destiny and our AI models would not be learning as quickly as they are.

This combination means we can dramatically strengthen the competitive position of banks, who partner with us while simultaneously, helping consumers find the very best credit product available to them.

Second choosing not to become a bank was the right decision for upstart and it's central to our Worldview and very.

<unk> successful bank will serve a particular slice of America incredibly well with a well constructed portfolio of products, a trusted brand durable relationships and a predictable business model. We believe we can help forward thinking banks succeed in their mission with better technology.

Think of ourselves as a consumer Internet brand focused on personal finance, Unlike a bank and Internet brands can speak conserve all Americans and eventually everyone in the world.

This time with an incredible diversity of offerings from hundreds if not thousands of partners each of whom will benefit from leveraging upstart AI.

So in short our goal is to become a technology partner to all of the world's great financial institutions and few of those partnerships to enable the broadest array of financial products at the best price and with the best experience to everybody.

<unk> lending is a cyclical industry and always will be the upstart is not a lender we are a technology provider to this industry. So we expect our growth in transaction volumes to vary considerably from quarter to quarter, but at the same time, we represent a secular change that we believe is both inevitable and durable.

Our core thesis is that over a period of years AI lending will rapidly gained market share over legacy approaches to credit.

Started in the pole position to benefit from that in.

In fact economic volatility such as seen in the last two years only serves to demonstrate the value of modern AI enabled approach to credit origination.

Thank you and now I would like to turn it over to Sanjay Our Chief Financial Officer to walk through our Q4 and full year 2021 financial results and guidance Sanjay.

Thank you, Dave and thanks to everyone for joining today and I hope everyone had an accretive Valentine's day.

Quickly running through our results starting at the top of the P&L net.

Net revenues in Q4 came in at $305 million up 252% year over year.

Revenue from fees constituted $287 million of that amount, representing 94% of overall revenue and up 37% sequentially from last quarter.

The majority of our sequential growth came from additional top of funnel rate requests, which grew at 29% Q on Q.

The balance of growth was driven by higher funnel conversion rates, which were up 140 basis points or 6% relatively Q on Q. Despite the significant expansion in funnel traffic.

The volume of loan transactions across our platform in Q4 was approximately 495000 loans.

301% year over year.

Representing over 400000, new borrowers.

This increase in volume is distinguished by participation across a widening swath of borrower segments.

I know the spectrum, attracting growing numbers of applicants meeting the traditional definition of time, where we have historically not competed.

At the other end, bringing more hidden prime borrowers into the Lendable universe under the National Bank rate cap.

Partner banks increasingly eliminate hard eligibility criteria, leading our models free to perform their magic.

Accordingly, we scaled our marketing program spend in Q4 by 19% Q on Q, while simultaneously improving loan unit economics.

Our contribution margin, a non-GAAP metric, which we define as revenue from these variable costs for borrower acquisition verification and servicing.

Consequently improve through this expansion rising from 46% in Q3 to 52% in Q4.

Our improved contribution margins versus Q3 reflect refinements, we've made to our digital and direct mail targeting models take rate optimizations improvements to lifecycle marketing, which drove a higher proportion of low cost loans and shrinking operations unit costs as our automation rate recovery to 70%.

Operating expenses in Q4 were $244 million growing 22% sequentially over the prior quarter.

Spend on engineering and product development once again led the way as our priority investment area growing 25% sequentially, despite slower hiring than desired.

Growth in general and administrative spend registered at 22% sequentially as operating leverage continues to improve.

Expenses in sales and marketing and customer operations as always grew in proportion to revenue, albeit in Q4 at a rate of increasing economy of scale.

Taken together these components resulted in Q4, GAAP net income of $58 9 million.

Up 102% Q on Q, and then adjusted EBITDA of $91 million.

54% Q on Q.

Adjusted earnings per share for Q4 was <unk> 89 based on a diluted weighted average share count of $98 8 million.

On the full year scoreboard, we tallied $849 million in net revenue in 2021.

Which was a 264% growth over 2020.

Contribution margin of 50%.

Up 400 basis points from the prior year.

And adjusted EBITDA of $232 million.

Representing a 27% adjusted EBITDA margin versus 13% a year earlier.

Yeah.

We ended the year with $1 $2 billion in restricted and unrestricted cash up from $311 million ending the prior year.

The net increase of approximately $855 million was raised in the capital markets.

$266 million was cash earned from operations net of loan transactions.

And $170 million was reinvested back into our balance sheet in the form of loans made in support of new R&D programs.

Consequently, our balance of loans notes in residuals at the end of the year was $261 million up from $140 million in Q3.

And reflecting the accelerated pace of R&D.

Most notably auto lending has been funded since inception entirely from our own balance sheet.

This is as always a temporary incubation period until we reach the point, where the loans can be directed to our bank partners and institutional investors at reasonable scale.

Which we anticipate will begin to happen next quarter.

As we stare down the year ahead of US we are cognizant of the fluidity in the macro environment.

Over the past quarter, we have started to observe what we had long predicted.

Namely a reversal in the trajectory of default rates.

Defaults have been at an unnaturally suppressed levels for more than a year.

As we've consistently messaged the fading of stimulus should presumably leads to a normalization in default rates and as of November . We believe we are seeing that normalization.

As we along with our bank partners investors have been anticipating this shift and.

And as the loans on our platform had been priced accordingly.

We are not expecting any meaningful adverse impacts from rising defaults on our volumes or economics.

Note that this recent upturn in loan default.

Is not to be confused with the longer term secular vintage over vintage increase in absolute default profile on our platform, which has been alluded to in some public forums.

This phenomenon is almost purely a function of changing borrower mix.

As our models extend the frontiers of the profitability and pull more applicants into the Lendable universe overtime.

Viewed in this context rising absolute default rates that are correct, correct correctly predicted and priced or not about when in fact, the feature of our platform and a trend we expect to see continue as we successfully progress against our core corporate mission of expanding access to credit.

Just a.

Second the macro topics cause your relates to rising interest rates and inflation.

Our view is that a moderate increase in rates will not have a meaningful impact on our business for two reasons.

An increase in the fed rate does not translate directly into higher cost of funding for our bank partners.

To the extent it does the floating rates on the credit cards that our loans are predominantly refinancing will move in tandem.

This means that the savings that are below us realize measured by the spread between our rates and the rates of the credit being refinanced will remain reasonably constant.

Any decrease in loan demand at the margin from borrowers reacting to higher nominal interest rates.

I'd be more than offset by the growing demand for credit in the broader economy stimulus evaporates.

Evidenced by recovering credit card balances.

As we looked at Q1, we highlight the seasonal contraction, we have historically observed between Q4 and Q1, which we have traditionally associated with tax refund season.

While such seasonality has been attenuated more recently in the wake of Covid and the associated stimulus.

We are expecting a return to the negative sequential pattern here in 2022.

With this as context for Q1 of 2022, we are expecting.

Revenues of $295 million to $305 million, representing a year over year growth rate of 148% at the midpoint.

Contribution margin of approximately 46%.

Net income of $18 million to $22 million.

Adjusted net income of $50 million to $52 million.

Adjusted EBITDA.

<unk> $56 million to $58 million.

And a diluted weighted average share count of approximately $95 9 million shares.

For the full year 2022, we expect revenue of approximately $1 4 billion.

Representing a growth rate of approximately 65% from the prior year.

Contribution margin of approximately 45%.

Adjusted EBITDA of approximately 17%.

And in auto loan transaction volume of approximately one 5 billion.

It is worth highlighting that the decrease in contribution and EBITDA margins, we are guiding for 2022 relative to 2021.

Is intentional and controllable and largely a function of two levers.

One the speed of the ramp up in auto lending, which will reduce our overall contribution margin by about five percentage points until it changed mature scale in operations and customer acquisition.

And to the objective of growing our technical workforce by around 150% this year, which.

Which we view to be the most lucrative reinvestment opportunity for our corporate profits.

Obviously, either or both of these investment decisions remain at our discretion and are susceptible to being revisited shed any changes in our financial trajectory warranted.

Before I turn it over to Q&A.

I want to highlight as a final note that we recently announced the authorization from our board of directors.

Purchase up to $400 million of upstart shares.

It's the volatility in the trading of our stock we have seen what we believe to be attractive buying conditions at various times over the past year.

And our profitability puts us in a position to be able to initiate this program and take advantage of those situations on behalf of our shareholders.

Alright, Thanks, once again to all of the talented up start ups, who are helping to build this company.

And with that Dave and I are now happy to open the call to any questions.

Later.

Thank you.

Question. Please thank known by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure your mute function is.

It turned out to allow your signal to reach our equipment.

Again, Please press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity for question.

And we'll take our first question from framing what the Atlantic equities.

Hi, greetings from the U K.

So.

First of all congratulation on very strong quarter.

I'm really interested in the economics of the auto business I was wondering if you could perhaps walk us through sort of how.

The revenue model is going to work and how it differs.

Different in terms of P&L impact as we've rolled it through from from.

And assumptions.

Okay.

Sure, Yeah, Hey, Simon.

I think so.

So auto economics, I think I would say, we're not yet at the point, where we're ready to give a precise view on auto unit economics.

For the simple reason that.

Almost all of the loans to date.

We have been staying on our balance sheet. So currently were any net interest income off of those loans, which is obviously not our core model.

At some point those loans will start to make their way to banks and investors.

In the prior remarks, we anticipate that happening over the next quarter or so.

And when that happens, we'll begin to pivot to a fee model.

More akin to our core business model, but thats still in front of us.

And then on the cost side consumer acquisition and operations are still things that are.

I would call them sub scale. So we have targets for where we want them to get to but not actual results yet.

So taken all together, we don't have precise guidance I guess, what I would say as a general statement.

Is that the overall take rate.

We earned over the life of an auto loan we anticipate at scale to be in the same ballpark to what we earn on personal loans.

I suspect less of it will be upfront on transaction and maybe more earned ratably over the life of the loan.

But that's that's what we expect to grow into as we scale, but as I said, what we're sort of not yet in that model, where we can we can give you actual guidance yet.

Okay great.

And just a follow up on that as well.

In terms of your rooftop expansion.

Could you talk about.

Pace at which you can expand and sort of what I guess the.

Where you think you might end up too.

This year or.

What kind of bottlenecks you might be experiencing the challenges aren't actually ramping that up rapidly.

Hey, Simon this is Dave.

Yes, I mean, it's not a specific number we're giving guidance on I would say generally he looked at the numbers you can see them in the investment that we did see acceleration in the fourth quarter, which is nice we actually re.

Landed from prodigy to upstart auto retail in the third quarter. So it was it was not.

Nice to see that that didn't cause any disruption in fact, it was an acceleration in Q4.

I think generally the biggest challenge.

For auto retail at the moment is the supply chain that.

Car manufacturers in the auto industry overall is seeing meaning is.

It can be challenging to sell software to a dealership that helps them sell more cars when they don't have enough cars to sell in the first place, but despite that and despite that headwind that we're selling into as you can see we are expanding pretty rapidly. So.

Our expectation is we'll see rapid acceleration of that over the year.

Certainly as supply chain.

<unk> themselves and.

Inventory levels.

Car dealerships et cetera begin to sort of return to normal we think that will be a tailwind that will just further accelerate so we're really pleased with the progress.

We think we would expect.

To continue to accelerate.

Adoption across rooftops through this year.

Okay, great well thanks.

Thanks, David I will jump back in the queue. Thanks.

Thanks, Rod next question.

Next we will take from Pete Christiansen with Citi.

Good evening guys. Thanks for the question.

Crescive results, Dave I know last quarter, you talked about expanding your credit your target credits.

In both directions, both prime and more towards.

The lower end.

Just wondering how you see yourself performing more towards the prime and where cost of capital is as more of a competitive edge there.

Are you seeing headway in that particular area and where do you see your upstart competitors a competitive advantage.

Yes Pete.

Thanks for the question.

We're making pretty quick progress into the primary end of the market, which you know has historically not been a place where we.

Hum.

I had a lot of presence I think it has been relying on us bringing bank partners on board, who have depository funding sort of cost of funding that can compete for those borrowers and that's really what's seen us begin to make headway. There. So I think all else being equal.

The sort of winter in any particular segment of the market is going to be a combination of the cost of funding.

Being available and then the quality of the model.

And.

The higher the more you get into the primary segments of the cost of funding becomes more dominant but still ability to model better having a more efficient process not asking people for documents instant approvals. Those are all things that are helping us win in the primary end of the market also the truth about a lot of marketing isn't as targeted as you'd like meaning you can't.

You can't always targeting a specific part of the credit spectrum, if you will in marketing.

And that means it's very important to be competitive across as much of that spectrum. As you can because it allows you to do more broad based marketing and that's really what we're seeing is while we're getting some really great progress in digital.

Channels that arent nearly as targeted as you might see elsewhere and being competitive in prime.

It's really helpful for us because it allows us to use those types of marketing channels.

That's helpful.

Just thinking about your rate requests, which were super impressive I think up 30% sequentially by my math.

It seems like you are grabbing more eyeballs can you just explain a bit.

What marketing strategies.

You've expanded upon to drive increased eyeballs to the upstart platform.

Are you seeing greater success is still on the affiliate marketing channel Youre seeing more of a pickup in direct that sort of thing and then ill get back into queue.

Yeah.

I would say it was generally very broad based we saw improvements across every channel and pretty significant ones.

Affiliate channels continued to grow as I mentioned digital it's been very successful we saw in.

In the fourth quarter, we had unprecedented performance and direct mail, which has always been an important channel for US and then also very fast growth in kind of.

<unk>.

Organic.

Users, which also part of which are repeat repeat borrowers. So that's also growing very quickly as we're kind of ramping up our lifecycle marketing efforts.

I don't think it was any single channel. It really was very broad based and we think theres a lot of upside in all these channels going forward.

Great. Thank you great job.

Thank you for your question.

Well move on to our then in London with paper Sandler.

Hey, thanks, and thanks for saying that.

Terrific quarter.

Just a couple of questions on my end.

Can you talk about some of the pricing dynamics.

Your partners and given.

Some of the.

Normalization of consumer credit.

You bet in terms of the impact youre going to see in the business.

Okay.

Sure so.

The way to think about it is we we have prices we charged to our bank partners.

And those are costs that they absorb but in terms of their pricing. The return targets that they are expecting in their loan portfolios and their loan programs those are parameters that they control so for.

Or whatever reason they decide they need a higher return on asset for any particular.

Part of the risk spectrum, they can dial that up anytime they want.

And that will result at the margins at a higher price to the consumer. So these are just kind of dynamics that the 40, plus banks and credit unions in our platform.

I have available to them and can make decisions on their own.

As usual they are trading off.

Things like profitability risk volume these are all sort of.

Ways. They can turn the dials to optimize the program for their business needs in a moment. So so that's the long and the shortage, but these aren't we're not changing our price to two banks based on.

What we charged to banking is not really a function of interest rates out there anything of that nature.

But what the consumer the price to consumers may experience on our platform certainly are a result of what our bank partners are choosing to do in the market.

Terrific and are you able to give us any color on sort of your.

Kind of take rate overall take rate.

As the year progressed.

Just trying to figure out like no.

They've been trending upwards.

Or has it been kind of flat through the year.

Yeah, Hey, Eric it's Sanjay.

So take rates I don't I don't think there is.

Maybe sort of one generalization, we can say about the trend maybe go up and down as a function of other things mix.

Okay.

As one example of things that would change the overall take rate on the platform.

More generally I guess I would say that's what our models get better. It can result in one of two things on the one hand.

Rates can get lowered for the borrowers and then volume increases so that's sort of one one outcome and then there's another possibility which is that the lower rates to borrowers are offset by higher take rates and so our value manifest through a higher take rate and which one of those two it is.

In particular segment sort of it depends on how elastic the demand for our loans. So if small changes and Apr's can result in large changes in volume then that's a good outcome for us in subset. Some segments are rates are getting to the point, where theyre already so much lower than the market that lowering them further doesn't really change the borrowers propensity to take the loan and then so more of our value capture ends up materializing.

It's take rate and so depending on which segments are growing because each one is sort of a different elasticity profile.

Some ken sort of resulting in value as our models improve volume and others can take rate, it's a bit hard to sort of generalize the trend overall on the platform.

Terrific.

With one less.

Suddenly on the EBITDA compression you provided some color in your prepared remarks on ramp up in auto and hiring in tech.

But if you think of like.

Last one for 12 months from now.

What do you think that drive.

On the upside I mean suddenly you have to invest in auto and youre going to have.

That folks, but is any any levers that you have in place at that.

It can drive some upside in.

And EBITDA margins.

Yes, absolutely and I would think that.

If you think about the auto business itself, it's going to go through a cycle much like the personal loan business did we are in the early days you are ramping you are developing your sort of acquisition programs. They are not quite at scale. Your operations are not finely tuned and so in the early days of our personal lines. If you look back through our corporate history, we had a lower level of profitability in that business.

This scale it started pretty directly to the bottom line.

Yeah.

We believe that auto is going to go through a similar cycle, maybe at a more accelerated one because we know the playbook now.

But as it is today, where we're starting to achieve meaningful volume.

Our tax are not as efficient as they are in personal lending our operations unit costs are not as efficient as there in <unk>.

Personal lending, but they will get there and as the models get better the conversion funnel improves all of all of the things that happened to our personal loan business. We anticipate will happen on the auto business and so whereas in 2022, it will be maybe a bit.

Sort of dilutive to our contribution margins.

Scale and at maturity, we think that it will have the same sort of profitability profile as our core business today.

So that's just something that I think we're at sort of like incubating new businesses as we go Dave sort of alluded to a pace of one every six months to 12 months of new business and it will go through an investment cycle, but as we get more and more in our portfolio that have matured and are sort of now.

Clinical cash cows, I think the natural profitability of the overall model for this kind of trend too.

Well every interaction, which we believe is higher than where it is today.

Terrific. Thank you very much.

I'll back in queue.

We will take our next question.

From Ramsey El <unk> with Barclays.

Hi, Thanks, so much for taking my questions. This evening.

I was wondering if you could share your early thoughts on the distribution strategy for the new products, you'll be rolling out obviously proud of you really helps with auto but should we also expect to see karma credit karma or other large distribution partners sort of playing a role.

In auto and also and then these other other new categories.

Hey, Ramsey this is Dave.

I think each of the products are very different in the nature of the channel development I think will be pretty unique to them. So.

We will certainly use the relationships and the expertise we have for example, small business. There's no doubt that in our view direct mail will be important to that and we have what we would consider to be pretty exceptional exceptional skills indirect mail.

There are some affiliate type partners are aggregators in small business, probably not at the scale that some of them are in personal lending.

My question Auto Auto clearly direct mail is a great channel is already proving to be the first channel that's really taking off for us in auto.

And there are some some aggregators, but again not not.

As much single point scale as we see elsewhere. So there.

All different but I think in almost every case the channels, but we have some footprint in today.

Personal lending.

There will be meaningful probably with different weightings, if you will.

And I think we'll see a lot more diversity.

Probably as important as anything else as we add subsequent channels being able to cross sell is going to be really important to us as well and thats the Columbus.

Quite accretive to us so it's a different sort of again varies a lot by by product. We loved the partners that we have and would love to work with them on more products.

Bring them to market and definitely anticipate doing that.

Great I know, it's early days so I appreciate your read on that.

I also wanted to follow up here with a question on the repurchase authorization.

Unusual to see a company you guys are sort of solidly in growth mode. It's unusual to see that sort of in the capital allocation mix. How should we interpret that is this more a sign that you're you just feel that the share price is undervalued and you wanted to signal that to the market or is there a decreased likelihood of capital allocation other directions like M&A coming in coming on the back of that.

Yeah, Hey, Ramsey this is sanjay thanks for the question.

Yes, I would say importantly, we have not run out of things to do by any stretch as you know we're growing quickly in hiring a lot. So this isn't a.

Our capital structuring decision its economic opportunism.

And it's really a function of two things that are somewhat unique in our stage first of all.

One of them is the volatility of our stock is well known.

You sort of seen it over the past year.

And we.

We have a conviction that there's just been numerous instances over the past year were at knowing what we know about our business and our opportunity. We are of the opinion that it's been undervalued and then the second component is we are actually profitable so because of that sort of.

A unique feature we have the actual ability to take advantage of that conviction on behalf of our shareholders. So so it is opportunistic and I think that the volatility in our stock continues we'll watch it and we'll be in a position to do.

To take advantage of that aspect, but it's not really a conviction around returning capital to shareholders as much as it is taking advantage of the volatility of the stock and the profitability, we have as a business model already.

Great that's super helpful. Thanks, so much.

Thank you. Thank you.

Okay.

Next we'll move on to Andrew Boone.

<unk> Securities.

Hi, guys. Thanks for taking my questions.

Wanted to go first to default rates. So Sanjay I think you talked about hitting a feature not a bug.

But can you just give us a little bit more detail can you provide any incremental just pieces of data that gives us more confidence there talk about cohorts or anything else to just give us a little bit more confidence.

Yes, Andrew Thanks.

So I guess, what I was just trying to maybe draw distinction between two different things that often get conflated.

One of them, we just talked about a lot is the fact that with each successive vintage that's originated on.

On our platforms.

The absolute level of delinquency and default goes up and that's reflected in our securitizations.

And so the first time I was making was that.

In our view not not a bad thing it's happening because we are expanding our universe of.

Pivotal borrowers overtime.

And anytime you go from a situation, where you have a small amount of data and youre acting conservatively.

Over time, having a lot more data and then relaxing your constraints around risk than your average delinquencies will rise just mathematically.

And as long as you're predicting that correctly and pricing the loans accordingly.

Our view is that this is a good thing.

In fact, I would say, it's mainly the best single installation of our entire history of success in corporate value creation as a platform. That's what we're doing we're expanding the frontiers of approve ability and making the universe bigger.

Whereas we started from a position of more conservative so.

So I would say like putting that aside so thats one thing thats happening, but that's just sort of reflection of our.

Business journey.

The second point, which is different.

But equally about delinquencies is that if you imagine that sort of delinquency by vintage which were each vintage has a higher delinquency than the last.

It is a true statement that every single one of those individual data points.

Is lower than where we had expected it to be and so that's a statement that's equally true about all vintages and equal in magnitude about all vintages and where we have been of the belief that that's because of the stimulus in the economy and we've been consistently messaging that.

We have been predicting that that would revert at some point in those docks would return to the sort of position, where we had originally expected them to be and Lo and behold since October November each of those vintage curves is now reverting back to where we expected. So so this is something thats more of a local phenomenon. It's not just about the secular vintage over vintage profile of our business, but it is.

More about each individual vintage Richard returning to a higher level of default.

But the fact that we had been sort of predicting it for more than a year.

And seen it finally materialize separately.

It's not a huge Bachelor business. If you are in some temporary suspended state of abnormality as long as you don't delude yourself into thinking that that's the new normal and the eventual resumption.

Resumption of normality shouldn't shouldn't be a big surprise and so we're going through that shift, but that's something that is new as of October and November it's not sort of a longer term sort of increase in default profile, which.

Youre asking too because we see it discussed a lot in the public forum. So we thought it was worth clarifying.

Great that's helpful.

And then my second question is just on the $1 $5 billion goal.

Can you just help us understand the potential upside as well as downside like where would that be higher and why might that be lower.

As we think about that goal for 2022. Thank you.

Yeah.

Sure.

Well look obviously, it's early in the year.

And we have sort of achieve lift off if you will with auto. So that's why we feel comfortable presenting that number.

Yes, but we have a long way to go and.

It certainly depends on it depends on us continuing to make progress through the year. So there are certain certainly scenarios, where it could be better than that and some where we would be less than that and thats our best view.

We have sitting here in February .

But but but just like in the personal loan world for US It comes down to our models improving as quickly as possible us removing friction us getting better at finding distribution channels and acquisition channels getting better cross selling so theres, probably seven or eight key.

Inputs to that Formula of how good does that business look.

December and certainly it is one of the most central.

Areas of focus for the company in 2022 and.

Yes, we're just sharing that we have enough confidence to put a real number out there are meaningful number and we're going to go to work and take that business as far as we can this year, but we're optimistic.

We're just really excited because there's a certain thresholds you cross where it becomes real and viable and there was a time when we really needed 5100% improvements to the funnel in order to really have this thing start to scale and now we've done that and we can sort of get to the place where we can get much smaller wins one in.

At a time to really grow from here.

Feels like what personal loans felt like just a couple of years ago. In fact, one of the points. We made is that our our auto funnel today looks it looks much like what the personal loans funnel look like in 2019.

That obviously was the beginning of a lot of growth. So that's what gives us some confidence in that market.

Was there anything flavor.

Thank you guys.

Okay.

Thank you.

And next we'll move on to Mike <unk> with Goldman Sachs.

Hey, good afternoon. Thanks for the question I just have two.

First I was just wondering if I could follow up on the margin commentary.

Could we expect upstart to get back to 2021 margins in in 2023 or.

What does that visibility look like.

And when you when you talk about hiring the technical workforce could you just provide a little bit more color on what the key areas of investment there or is that simply a doubling of this engineering and product expense.

And then second I was wondering if you could just comment on whether youre seeing any changes in institutional investor loan demand could you just remind us.

How reliant you guys are on the securitization markets and have you seen any changes there. Thank you.

Yes, Andrew this is Sanjay so a multi part question.

Let's see the first question is.

Whether we may see a return to our current margin structure in 2023.

I guess I would say that it's obviously a little bit hard.

With that far in terms of the investments we'd be making.

I would say this there's no fundamental reason why our business overtime.

Turn to our existing profile and in fact beat it.

It's really just going to be a function of how quickly we are incubating and investing in new businesses. So auto is the one that we're obviously investing in this year.

I suspect by 2023, it will be accretive to the bottom line not reducing our margins.

They have a slightly different margin profile in terms of the timing of the cash flows that we think it'll be in a similar ballpark.

And so each new business when you get into.

We are planning on getting into the business lending small business lending later this year small dollar lending maybe 2023 is the year, we get into home or mortgage.

They will each have a slightly different margin profile, but more importantly, a cycle of investment and so really this begin to begin to take the form of portfolio investment.

But I do think that as I said, we know the playbook on these businesses now we know how to get them to profitability.

And beyond and we've proven that in our core business and so I think that our ability to incubate new businesses and get them to profitability will improve over time and in the long run I don't see why we.

We would not need.

Meet if not exceed our current level of profitability for profitability as we scale multiple businesses.

You asked a little bit about the technical hiring which is a big sort of a big objective of ours in the coming year.

I mean, it's pretty broad computer scientist data scientists machine learning engineers product managers.

So these are the people that are refining our models, leading our expansion into new areas building accelerating strength in our core business.

They are refractory and our platform from a single product platform into a multi product platform. There we are protecting our code base.

To listen to our suite of micro services building.

Building out bank facing cloud unsold and auto dealer facing consoles and their readiness for.

Forays into small dollar lending and business lending and mortgage lending so it's very broad.

But as we've said.

It's pretty much two are.

In our view if there is a direct line between the work that's been done on the technical side.

And the bottom line of our business because that's ultimately what's at the core of the value that we're creating as a business.

Yeah.

And then last question was on the reliance that we have on institutional investors and securitization markets, which I view to be a little bit differently.

So look the supply chain of money more broadly is obviously very important to us it includes banks.

What are you using your own balance sheet to fund the loans that they originate and then the excess.

Volume that we have it gets funded in the institutional world.

I would say that.

The direct reliance we have when you sort of exceed the balance sheet capacity of your aggregate banking footprint is on the buyers of the loans.

What we call a forward flow buyer and so.

They do absorb a significant amount of the capacity that we.

That we create.

The securitization markets are almost more of an indirect thing for us because it's the loan buyers themselves that then securitize the loans and so.

It's more of a we don't touch the securitization markets directly other than we help run the deals that the investors themselves contribute into so so I think each of those investors has maybe a different answer as to what kind of liquidity.

Need from the securitization markets behind them, but.

I would say there is a significant.

A fraction of them that are more than happy to sort of buy the loans and just earn the yield without looking.

Quiddity in the ABS market so.

So I would say the reliance on the securitization market is less relevant to us directly.

Great. Thank you for all the color side very very helpful.

Okay. Thank you.

Okay.

Thank you next we'll move on to teams fit with Morgan Stanley .

Thank you very much I wanted to kind of ask a related question as well.

Sin.

The kind of normalization of the lending markets and borrowing markets et cetera can you talk a little bit about what your sense of.

Your bank partners et cetera are right now to continue to increase their the size of their loan books.

What do you think generally speaking what's your appetite to do so this year.

Sure James.

I don't think we're seeing any particular trend in one way or another I think we're just kind of still early in the game, meaning we're bringing new lenders on the platform. They are mostly in starting in growth mode.

There are few that are at kind of.

Would they would think of as their own peek or run rate. So.

How.

I'll say for sure last year, there was a very.

Severe need for loans out there almost unprecedented in terms of excess deposits lack of loans in the banking world last year and that certainly anticipated I think theres <unk>.

There's a lot more.

Belief that that situations correcting itself. So maybe they won't have as much demand, it's really hard to say, but I don't I can't say that we are seeing a trend.

One way or the other I think mostly our hope is we're going to bring on a lot of <unk>.

Bank capacity and it's going to continue to.

Create a better sort of net experience for consumers on the platform and.

We feel pretty good about that this year so.

I guess the shorter answer is we're still in the early days of this and we don't see a place where bank demand is going to drop off in our platform are if anything we would certainly expect it to continue to expand.

Yeah.

Good and then the other question I had was as you look at the kind of performance of your underwriting and that kind of thing in a normalized market. What are you benchmarking against and how are you kind.

How quickly can you make adjustments, where you deem necessary et cetera, I think they are.

Certainly get a lot of questions on how the performance of <unk>.

Start loans are comparable to that of other underwriting mechanisms, especially in a changing environment.

Yes, I mean, I think the thing that's unique about US is there's really two separate functions that operate very independently.

The accuracy of the model is really the domain of the machine learning team and that sort of side of the house. Their whole goal is model accuracy, nothing more or less they don't want the models to be under predicting or over predicting defaults or prepayments they want to be as accurate as they can and there's nothing more to what theyre doing and then trying to upgrade.

The models and continually get better at that.

On the other side you sort of have the business that is bringing more banks on bringing more investors on.

<unk>.

Sort of feeding the engine if you will.

And again those banks decide what return they need given what they're seeing in the market what are the choices. They have in terms of deploying.

Their balance sheet or their deposits.

So that just plays out in a business sense, but.

That might mean again, if banks decide they want a higher return on the loans that are getting to the upstart platform. Then they can choose to do that and that's just the dynamic.

It's effectively a marketplace dynamic where the choice of return versus.

Risk and volume et cetera is really in the hands of the bank partners and they make those choices and the core function of upstart more than anything else is to be as accurate as possible.

On the risk models and that does mean as the economy is shifting.

The environment shifting that our models are keeping up with it as quickly as possible and trying to get as accurate as possible that is certainly trickier in times when things are changing very quickly as they did two years ago. When COVID-19 first hit and as they have in the last few months as really stimulus has gone away and what kind of returning to normal but again, that's that's the primary job of that model, but but but.

What the consumer ends up experiencing in terms of prices. It was really a function of all of that coming together.

That's really great color. Thanks, a lot.

You bet.

Thank you and next we'll move on to John Hecht with Jefferies.

Afternoon, and thanks very much for taking my questions first one is.

A few different questions on the auto side is what is it.

How maybe can you talk about origination activity, thus far how many loans you have on your balance sheet and then what's the cadence of the $1 5 billion over the course of the year and whats the mix is indirect versus refi.

Yeah, Hey, John This is Sanjay I'll take the first question.

Auto loans on our balance sheet I would say it's.

It's.

I'll call. It a majority, but it just may be the most significant category of loans, we have right now the biggest category of.

The new loans that were sort of running R&D on.

And as far as the cadence of the one five over time, so we're not giving us split explicitly between refunding retail other than to say that refi is the program thats off the ground and up and running and our retail program is still much earlier stage. So what that ultimate split will look like by the end of the year, we're not really guiding to.

But.

Certainly in the early half of the year and then this initial surge that I think is giving us confidence that sort of telegraphed. These numbers, it's really more about the funnel that's driving the refi business.

And as to the cadence over time.

We'll see I mean, I think we're not giving sort of.

So near term or current numbers, but where I would say the run rate that gives us reasonable level of confidence that we will get there and it will grow hopefully linearly as we as we go through the year.

Okay. Thanks, and then last quarter, you were talking about different parts of the market are different parts of the year that were crowded and so you guys. Given your models are able to find.

Opportunity in other parts of the market.

Just as we get into early 'twenty two here and now you've got your goals is there is there anything we should think about in terms of where you see opportunity that with where that might cause a mix shift to occur over the course of this year.

Yeah.

Well.

I'd say in the personal lending category, we're pushing really across almost all parts of the credit spectrum as I think we signaled last earnings call and I think that'll continue.

We are definitely bringing on more banks that really trend toward the primer end of the spectrum and will make us more competitive there and we would anticipate that we'll keep going at the same time.

The core mission of the company is to make it affordable credit available to everybody and that means kind of continuing to expand the perimeter or people that we can bring within that sort of national bank level. So that also is continuing as well, including the small dollar product, which is really going to help you would help us move that part of the market, even faster I think as well as the Spanish product, which.

Still nascent for us, but I think it's showing promise says wait.

A way to just bring more people in the fold. So it's really hard to say where that will go on balance of the personal lending product. We're really in a strong position today and can continue to push on all parts of that market.

And then of course, the newer products.

The great thing that we're excited about it is we are really comfortable now we have kind of crossed the chasm. If you will on auto we feel confident when building that product and the important thing about that is the second one.

At least in our view, it's much harder than the ones that come acrobat, so proving that our models and our technologies and our skills and our teams can can adapt to a second very different product.

Just gives us that much more confidence as we get into small dollars small business and eventually.

A lot of people want to hear about the mortgage market. We just think that we're building the skills and the confidence you got in each of the subsequent products are also building credibility with bank partners with capital markets investors et cetera that are necessary.

To make progress in those categories as well.

Great. Thanks very much.

Thank you and we will take Nat Schindler with bank of America.

Yes, hi, Thank you. Thanks for taking my questions. So two quick questions. One can you just explain a little bit I understand the invest mean on in the operation.

Hi.

Thanks.

Why would contribution margins come down from the Q4 levels.

With 52% Youre going down to 46% and 45 for the full year just wondering if there's any detail there.

And as Sanjay.

It's almost singlehandedly a function of.

Well its two things one when we do have.

A significant surge on the revenue side as we had in Q4, we do tend to overshoot, our contribution margin because we plan to spend against what we were expecting to do in.

In revenue and when we have a good quarter.

So on one hand, the Q4 numbers, maybe a little bit inflated, but I think the more the more important thing is as we get into Q1 and into 2022, the auto business is starting to scale.

And thats at a level, where the contribution margins today are much lower.

Theyre much lower for three reasons, one certainly for the period of time.

There were putting the stuff on balance sheet. There is no fee revenue model. So contribution margin is all about fee revenue from fees and right now as we.

We sort of originating auto loans and put them on balance sheet. There is no fees coming in as interest income and so for some period of time there'll be no fee revenue and then even when there is as I said earlier I think maybe more of it.

Maybe earned ratably over the license alone compared to personal loans, which is all our non transaction. So the revenue profile will be different but I guess equally importantly, all of the unit cost to originate an auto loan or currently subscale compared to personal lending so, whereas our CAC is at a certain level.

Our customer acquisition costs at a certain level and personal loans is very efficient in auto it's not there. We're still building. Our program is learning what works. The funnel is still getting better as Dave said, it's still sort of circa 2019 in terms of efficiency and then our operations costs still equally are not at scale, yet we sort of overbuilt in order to sort of build this business and ran.

It quickly and make sure we have safety margin and when we're operating at scale as we are in personal lending those will be much more efficient much more finely tuned. So the combination of the fee model the acquisition costs, which is still immature the operations, which is still sort of early stage are such that.

As the volume of auto gets bigger.

The mix between the two the auto will pull down the overall contribution margin and in rough terms I think we will run the personal loan business at a contribution margin that is close to 50%, but as I said I think auto as it scales. If we get to the numbers that we're talking about it should pull down the full year numbers by on the order of 5%.

Makes sense and then on separate question on auto.

Over the last 18 months or so there has been such absolutely absurd appreciation in the used car market, but I think conceptually the single highest depreciated category.

I saw.

And at least in last year.

And with <unk>.

That has made the gain on sales of loans very high because the basically the risk on an auto loan went to zero.

Because you could just sell the if your repo the car you could sell it for more than <unk>.

Market force of the loan was paid off.

So what's going to happen and if that normalizes and how if suddenly stimulus.

Theres always stimulus added to that price appreciation, if stimulus goes away price appreciation sort of falling off how is that going to affect auto loans over the next year or 18 months as you're comparing certainly to the <unk>.

Well.

The sort of recent phenomenon.

Used cars.

Gaining value is obviously any of US who grew up.

We all got advises that spending as low as you can on the used car because they only go down in value.

And we're in a unique situation.

Right now.

That situation is certainly not baked into our model and assumption that you used the price of used cars going to continue to go up that that's I think it's.

Safe to say nowhere in our models. So we arent, we aren't banking on the sort of unnatural.

Situation, we're seeing in the market with respect to auto pricing either for new or used cars. So that's.

We don't see that as something necessarily impactful to us.

If theres any mean reversion, though and prices actually go down to go back.

To re normalize.

Not that this will happen, but if it does happen does that make the loan more risky.

And just as the if the price goes up faster as long as the loans rest of the less risky if the price comes back fast shouldnt be.

Loans be much riskier.

Yeah.

Yeah, Hey, Matt I guess, maybe another way of putting it is that we're not.

We're not.

Maybe there is an analogy to where we are in sort of general lending on defaults were in an abnormal situation, but we're not.

We're not diluting ourselves into believing that that's sort of the new normal and we're not pricing accordingly.

So.

Put another way these auto loans that we're writing.

If the world did not normalize they'd probably over perform.

Because we are not sort of baking in assumptions that reflect the current reality and so the current reality, what it's doing is inflating values and so if the world does normalize presumably our returns would go back to what you would expect in a normal environment.

So we're not we're not sort of baking in the current world in that respect into intermodal pricing.

Okay, great. Thanks, guys.

Thank you. Thank you.

That does conclude today's question and answer session I would like to turn the conference back over to Dave Gerard for any additional or closing remarks.

Alright, just kind of wrap it up thanks, everybody, we're really happy with our 2021 turned out and obviously, we're feeling pretty bullish and optimistic about 2022. So thanks for listening today, thanks for all who have.

Stuck with us through all of this market turmoil and we're looking forward to a great year and we will be in touch with you all very soon.

Thank you that does conclude today's teleconference. We do appreciate your participation you may now disconnect.

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Good day and welcome to the Q4.

Slide 2021 earnings call.

Today's conference is being recorded.

<unk> I would like to turn the conference over to Jason Smith VP of Investor Relations.

Please go ahead Sir.

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

With us today are Dave Gerard upstream Chief Executive Officer, Sanjay <unk>, our Chief Financial Officer.

Before we begin I want to remind you that shortly after the market close to the upstart issued a press release announcing its fourth quarter and full year 2021 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, IR dot upstart dot com.

And assumptions.

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.

As 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.

<unk> are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables.

To ensure that we address as many analyst questions as possible during the call. We request that you. Please limit yourself to one initial question and one follow up question.

Later this quarter upstart will be participating in jeffries payments.

Fintech summit on March 1st JMP is sick.

Securities Technology Conference on March eight and Morgan Stanley 's Technology media and Telco conference on merchandise.

Now I'd like to turn it over to Dave Girard CEO of upstart.

Good afternoon, everyone. Thank you for joining us on our earnings call covering our fourth quarter and full year 2021 results.

Dave Gerard cofounder and CEO of upstart.

We're a month and a half into the new year and I am grateful and finally to have the opportunity to reconnect with the investor community. Some quiet periods just be longer than others. We have.

<unk> seen some epic progress at upstart in the past few months and I'm excited to share what we've been up to the results we've been seeing and how we're thinking about 2022 and beyond let.

Let me state upfront that we are in a multi decade mission to put affordable credit within reach of every American the price of credit is the price of opportunity and the price of mobility, and we want to ensure that opportunity and mobility are available to all Americans, particularly for those whom the financial system has failed in the past.

But like you we've been eyes wide open watching all thats happening in the world in the last few months the rise and fall of the Omicron variant the clear signs of inflation in the fed's plan to counter it.

And of course, the market rotation out of high growth technology.

But through all of it our business continues to get stronger and my confidence in <unk> future has never been greater as.

Has the rare public technology company with triple digit growth and profits were confident that in the economy and market and transition plays to our strength.

And with a fourth quarter surge, we're now at more than $1 billion in revenue on an annualized basis.

2021 will be remembered as the year AI lending came to the forefront kicking off the most impactful transformation of credit in decades.

The gain some perspective on what <unk> achieved in 2021, we looked for another company in the public markets with our combination of scale growth and profits, but we were unable to find one.

Profits are neither marginal nor a femoral we generated more cash in 2021, then we burned in our entire eight plus years as a private company.

Profits matter for a reason they allowed us to invest significantly in our future by more than doubling our head count in product engineering and machine learning in 2021.

Unusual combination of growth and profit in a heavily competed industry is evidenced of the distinct competitive advantage and clear operating leverage. It also suggests that you are witnessing the creation of an industry defining category artificial intelligence blending and the emergence of the category leader upstart.

In addition to reaching $1 billion in annualized revenue and record profit Q4 with special for other reasons. It was the first quarter with more than $4 billion in loan transactions on our platform.

Record not just for upstart, but potentially for the entire personal lending industry.

Our bank and credit Union partners originated almost 500000 loans in the quarter. We also now have 42 banks and credit unions as well as more than 150 institutional investors funding loans on the upstart platform, providing deep and diverse sources of liquidity to keep the engine humming and the AI models learning.

I'm also pleased to report that we now have seven lenders on the upstart platform with no minimum FICO score required.

But perhaps the most important achievement over the last quarter of 2021 was the incredible work done by our auto team.

Our relentless and determined cross functional effort. This team put the last central pieces in place necessary to begin scaling auto lending on the upstart platform I'll come back to this topic in a moment.

I'd like to note that the upstart team accomplished all of this during the second year of a global pandemic, while operating in an almost entirely remote and distributed fashion.

We move to a digital first strategy, while simultaneously implementing what we call a vertical team working structure.

This new approach is unlocking upstart the ability to execute quickly and efficiently as a multi product company.

What's really exciting is that we're finding talent across the entire U S. In fact in Q4 more than two thirds of our hires were made outside of our California, and Ohio footprint.

I cannot help but express my amazement for all the upstart team accomplished in 2021, particularly given the circumstances under which they accomplished it.

Thank you to the entire upstart team and also to the family and friends that support them.

Now I'd like to move on to 2022, and how we're thinking about the year ahead.

We find ourselves today in the strongest position upstart has experienced to date and it's our mission in 2022 to build on the many successes of the last year.

At the beginning of each year I'd like to clarify in my head and with the team the handful of objectives upstart needs to achieve to make the year, an unqualified success right at the top the list for 2022 was achieving meaningful scale with auto lending on our platform.

We believe in our core that AI lending isn't a one category phenomenon, but will eventually transform virtually all flavors of credit.

Happy to tell you that just a month and a half into the new year. We've accomplished this goal in fact, our auto refi funnel performance is now comparable to where a personal loan funnel was in 2019 on a channel adjusted basis based on this progress we now expect $1 $5 billion in Ottawa and transactions on our platform.

In 2022.

It's worth stating that scaling the auto business from here is no simple task more funnel in model improvements will be necessary and distribution channels in auto refi arent nearly as well established as they are in personal lending.

If you don't have a certain level of funnel efficiency and auto refi you really don't have a product today, we are confident that automotive lending as a category, we can grow into for years to come.

<unk> in market during 2022 in the case of mortgage lending, we hope to be in market in 2023.

In each case, we anticipate a year or so of development a year of feeding and testing and then a year to begin scaling.

Homerun success for upstart would amount to a new product in market and ready to scale in each of the next two or three years and of course, it's very hard to time innovation much less market adoption, but this is the pace we're aiming for.

All the categories. We're in today or expect to enter represents an addressable market of more than six trillion in annual originations.

I'll start with now about the size of that Google was when I joined the company in early 2004, So I've seen this movie before and hope to use what I learned there to build upstart into the most impactful fintech in the world.

I have some specific personal goals for ups, starting 2022 first to transition into a multi product distributed company that can operate in parallel instead of in cereal.

Second to break new ground in terms of quality of execution at the $1 billion plus scale with leaders such as Google Amazon and Apple as my Northstar and third to move aggressively to unlock upstarts addressable market, while simultaneously upgrading our ability to pursue it.

These challenges will keep our leadership team busy in 2022 and well beyond.

I'll start is a unique company both in terms of our technology and our business model, we don't exactly look like anybody else and for this reason, we're often misunderstood.

So in closing I'd like to share a few thoughts about upstart that struck me in the last few months as useful ways to understand who we are and what we're building.

First I'll start is both the consumer Internet brand as well as a cloud software provider delivering a deeply proprietary and technical product to our bank and credit Union partners. This combination is entirely unique and is central to our competitive position today and in the future.

Second choosing not to become a bank was the right decision for upstart and it's central to our Worldview a very.

Think of ourselves as a consumer Internet brand focused on personal finance, Unlike a bank and Internet brands and speak conserve all Americans and eventually everyone in the world.

This time with an incredible diversity of offerings from hundreds if not thousands of partners each of whom will benefit from leveraging upstart AI.

Our core thesis is that over a period of years AI lending will rapidly gained market share over legacy approaches to credit and <unk>.

<unk> is in the pole position to benefit from that.