Q3 2022 Upstart Holdings Inc Earnings Call
Please standby.
Good day and welcome to the upstart third quarter 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Jason Schmidt Vice President of Investor Relations. Please go ahead Sir.
Good afternoon, and thank you for joining us on today's conference call to discuss upstart <unk> third quarter 2022 financial results with US on today's call are Dave Gerard Upstarts, Chief Executive Officer.
So Jay <unk>, our Chief Financial Officer.
Before we begin I want to remind you that shortly after the market close today I'll start issued a press release announcing its third quarter 2022 financial results.
Published an Investor relations presentation, both are available on our Investor Relations website, IR dot upstart dotcom.
During the call we will make forward looking statements such as guidance for the fourth quarter of 2022.
Related to our business and our plans to extend our platform in the future.
These statements are based on our current expectations and information available as of today and are subject to a variety of risks uncertainties and assumptions.
Actual results may differ materially as a result of various risk factors that are 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 request that you. Please.
Limit yourself to one initial question and one follow up.
Later this quarter absorbed will be participating in the city is 2022 Fintech conference on November 15th.
Bush's disruptive Finance conference December 2nd.
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 third quarter 2022 results I'm, David Gerard cofounder and CEO of upstart.
Our results in Q3, we're certainly not what we wanted them to be but I also believe they reflect the upstart team, making the right decisions in a very challenging economic environment for the long term success of the company.
Our revenue was down primarily because loan volume on our platform is down and secondarily because credit markets are extremely cautious and even dislocated.
Higher interest rates and significantly elevated risk in the economy means we're approving about 40% fewer applicants than we would have a year ago and those approved today are seeing offers about 800 basis points higher than they were a year ago.
For the vast majority of the reduction in volume.
Any of our lending partners have reduced their originations raised their rates or both.
Just generally out of an abundance of caution with respect to the economy that theyre upstart powered loan portfolios have met or exceeded expectations. Since the program began in 2018.
But I want to be clear contraction in lending volume in a time of rising rates and elevated consumer risk is a feature of our platform not a bug in fact, it's required in order to generate the returns lenders and investors expect whether due to an increase in expected loss rates caution on the part of lenders or higher yield demanded by credit invest.
Higher interest rates and reduced volumes means that as unhappy as we are with the numbers.
Tim is working as intended.
We're eyes wide open to the challenges of the current macro economy and determined to make the decisions that will optimize for the long term success of upstart.
At the simplest level, we're improving our operational efficiency in the near term. So that we can continue to maximize investment in our AI platform for the long term.
First and foremost we're continually calibrating our risk models to the market performance of credit is and always will be our highest priority. While we don't make predictions about the future. We've chosen to take a conservative position with respect to the direction of the economy in the coming quarters in other words, we assume the worst is in front of us.
Be pleasantly surprised if this turns out not to be the case.
We're strengthening our unit economics, both by increasing our revenue per loan as well as reducing marketing spend and our most expensive acquisition channels and third we're carefully managing our operational and physical plans to make sure that we're on a strong corporate footing for as long as this cycle lasts.
In recognition of the reduction in loan volume in our platform. We unfortunately eliminated approximately 140 hourly positions within our loan operations team representing about 7% of our workforce.
This was disappointing for sure but necessary to keep our operational capacity in line with the current environment. No. Other teams that upstart were affected were also limiting hiring and other functions to a small number of positions that are strategic to our business.
With a healthy balance sheet robust unit economics, and strong pricing power. We believe we're well positioned to navigate an extended period of economic uncertainty, while continuing to invest strategically and future growth.
Despite these challenges I'm very optimistic about upstarts future, there's broad recognition among technology leaders in the industry pundits that AI is perhaps the most transformational technology of our time.
And risk based industries, such as lending are at the forefront of this incredible opportunity as the leader in AI enabled lending, we're well positioned to capitalize on these growing trends and believe that market volatility will only strengthen our position and differentiation over time.
While we dislike the weakened economy as much as you do the increase in default rates that accompany this weakness served to train our AI models faster.
While other platforms continue to retreat to serving Super Prime consumers upstart is rapidly learning how to price and serve mainstream Americans in all market conditions.
Beyond my conviction and AI and the impact it can have in lending my optimism also stems from seeing the rapid progress made by each of our product and machine learning teams some of the areas, where we're making fast progress include.
First model accuracy, our AI models have never been more accurate relative to traditional FICO based model.
And our pace of model development has increased significantly.
It would be more specific the increase in net starts model accuracy in the last four months is as much as we saw in the prior two years.
Second macro reporting and responsiveness and important Gulf of upstart is to help lenders understand the direction of our economy is trending in order to make more informed decisions about their lending programs.
To support this goal we have developed and are beginning to prototypes, the upstart macro index or <unk>.
This index is a monthly indication of the state of the economy.
Typically with regard to consumer financial health and credit performance at the simplest level <unk> is designed to estimate the level of default to expect in a time period, holding underwriting models and borrowers constant.
What's even more interesting is that we have determined that a handful of common economic variables present in the Dodd Frank stress test can estimate your mine with a high degree of accuracy. We continue to iterate our methodology with the intention of translating widely available forecast of macro indicators and to an expectation for future levels of debt.
Fault.
We believe this is the first time that commonly understood and broadly forecasted economic indicators can predict credit performance and I'm looking forward to sharing more with you as we refine this tool.
Our goal is to be the fastest platform to respond to macro changes and to provide the most relevant and up to date information to our lenders in your mind as a big step in that direction.
Third automation in the third quarter, we saw a record 75% of loans fully automated this came from a variety of efforts, including an experiment to help applicants enter information more accurately that led to an absolute one 8% lift in incident approvals for.
Auto refinance this.
This quarter saw three significant improvements to our auto refi product, we launched a new model to more accurately identify loan payoff amounts we fine tuned our income verification models and finally, we improved the process of reviewing registration cards. These upgrades collectively led to a 20% improvement to our auto refi conversion funnel.
Fifth auto retail in Q3, we shipped our largest software release of the year, including a new build in price feature which allows consumers to build configure and priced auto is that the deal it doesn't yet have them a lot.
Software is in more than 700 dealers now we've also turned on retail lending with three more dealer groups and are now in four states, representing 25% of the U S auto market by population.
And more than one in three auto loan applications were automatically verified about double the prior quarter.
Next while dollar loans this team shipped too many improvements to name, but in Q3, we saw more than 9000 small dollar loans on our platform almost forex the prior quarter and.
And all of these loans were to borrowers who may otherwise would've declined smaller and shorter term loans are critical to reach more consumers and to help our AI models learn as quickly as possible. So we're very excited about this progress.
And seventh small business loans I told you last quarter that we had reached our first $1 million and SMB loans, where now we're close to $10 million in loans originated and the team is rapidly shifting improvements as we look to refine that product.
With the financial impact of these upgrades for our products is muted in the current environment. We're confident that will set us up for a giant leap forward once the economy and credit markets normalized.
Finally, while there is no shortage of caution among banks and credit unions I'm also happy to report that we deployed a record 17, new lenders onto our platform in Q3, including Alliant credit Union, which is a top 10 credit Union by asset size. This compares to 17 lenders launched in all of 2021, while these lenders are starting up.
Consciously it's encouraging that we're planting seeds for funding capacity and our future as of today, we have 83 lenders under contract on the upstart platform.
Before I wrap up I want to say again, we're not pleased with the results. We shared with you today, but when interest rates are rising and the economy is in flux lenders and credit investors naturally become cautious. Despite this caution our lenders will tell you that the performance of your upstart powered credit has met or exceeded expectations over time.
We don't like volatility anymore than you do but we won't allow us to set us off course from our long term goal to reinvent how credit works. Our goal is to become the destination with the best rate and the best process for all forms of credit for everyone. This cant and wont be done by a single bank, but it can be done by <unk>.
<unk> network of banks credit unions and credit investors powered by a modern cloud based AI platform.
Great companies separate themselves from merely good ones during the hardest of times there are clear eyed about how the environment has changed that makes smart and fast decisions in order to ride out the turbulence, but they also retain an optimistic focus on the horizon as they continue to invest in the future.
You have my full commitment to ensure upstart is exactly that type of company.
Thank you and now I'd like to turn it over to Sanjay Our Chief Financial Officer to walk through our Q3 financial results and guidance Sanjay.
Thanks, Dave and thanks to all for joining us today.
As David alluded to the external environment continues to be a challenging one, particularly for those less affluent borrowers with limited access to credit.
Or at the court Upstarts mission.
Consumers have simultaneously little personal savings rates from pre pandemic levels at roughly 9% down to three 3% in Q3.
Level not seen since the great financial crisis, and its 12 credit card balances to all time record highs.
Savings rates has dwindled and credit card balances have been slated to pay for what has been a continuing expansion in real consumption. So.
So far with no corresponding increase in either real wages or labor force participation since the advent of Covid.
As a consequence, the thoughts are on the rise industry.
Industry wide data shows that less affluent borrowers are leading the way with impairment levels and unsecured personal loans that are about twice as high as they were prior to the onset of Covid.
By way of comparison highly affluent borrowers are now roughly back to being in line with pre COVID-19 impairment levels, although they continue to be on the rise.
The upstart macro index previously referenced by days is our internal way of articulating the impact of the external macro environment on loan defaults in our particular borrower portfolio by controlling for underwriting model changes and shifting borrower characteristics overtime.
The most recent index level of around 1.7 tells us that the keister environment produced 70% more defaults then we would expect from our borrower base and a long run normal macro environment.
This number is also approximately 20% higher than what we had observed when we last reported earnings in August .
As a result of our models adjustments to these changing macroeconomic conditions.
Owns today are being priced at a P et cetera are significantly higher than those from the beginning of the year, which is one of the principal driving factors behind the overall volume contraction our business is currently experiencing.
As David said this is in fact working as intended.
On the loan funding side, a brief period of late summer optimism in the ABS market assistance receded and loan funding in general remains challenging.
Overall financing costs for our securitization investors are up about 500 basis points since last year.
These higher financing costs and the general scarcity of available capital has contributed to the volume pressure on the business.
With the preceding context.
Here now are some of the financial highlights from the past quarter.
On the topline.
From fees of $179 million was largely in line with our expectations.
However, negative fair value adjustments and losses on sale incurred by the loans on their balance sheet, but overall net revenue down to $157 million.
Short of our guidance and representing a 31% contraction both sequentially and year over year.
The volume of loan transactions across our platform in Q3 was approximately 188000 rooms down 48% year over year.
And representing over 125000, new borrowers.
Average loan size was up 14% versus last year.
Our contribution margin, a non-GAAP metric, which we define as revenue from fees minus variable costs for borrower acquisition verification and servicing came in at 54% in Q3 up from 47% last quarter, but still behind our guidance.
We have been successful in expanding our margins through higher take rates and more efficient marketing spend and we expect this to continue in Q4.
Operating expenses were $215 million in Q3 down 17% sequentially.
We reduced our sales and marketing by 46% sequentially to reflect a weakened conversion funnel, which has declined as a result of our higher offer rates.
Engineering and product development grew 16% sequentially and general administrative spend grew 2% sequentially.
Across both areas hiring has now largely been limited to only a few key strategic positions.
Together these components resulted in a Q3 GAAP net income of negative $56 $2 million.
Adjusted EBITDA was negative $14 $4 million.
And adjusted earnings per share was negative <unk> 24 cents based on a diluted weighted average share count of $81 7 million.
We continue to be in a favorable liquidity position with $830 million of total cash and $431 million in net loan equity on our balance sheet.
Our gross balance of loan assets at the end of the quarter was $700 million.
$76 million from last quarter.
Is that total loans made for the purposes of R&D represented $451 million principally within the auto segment and our balance of core personal loans stood at $249 million.
The near term outlook for our business remains tied to the direction of the macro economy and while this has historically proven hard to predict.
We are currently pricing our loans expecting a further degradation in the environment and in our macro index.
The volume assumptions underpinning our revenue and earnings guidance are consistent with this outlook.
In order to provide some additional insight into revenue we are splitting out our topline guidance between revenue from fees, which reflect our baseline volume and fee expectations and net interest income, which includes impacts from fair value and gain on sale.
With these specifics in mind.
For Q4 of 2022, we will expect revenues.
Between 125 and $145 million.
Within that we expect revenue from fees of approximately $160 million and net interest income of approximately negative $25 million.
Contribution margin of approximately 54%.
Net income of approximately negative $87 million.
Adjusted net income of approximately negative $40 million.
Adjusted EBITDA of approximately negative $35 million.
And the diluted weighted average share count of approximately $89 3 million shares.
As ever we will take this opportunity to extend our gratitude to all of the employees at upstart.
Who continued to make daily progress against our underlying business and technology goals.
<unk> to be a challenging external environment around us all.
And with that Dave and I are now happy to open the call to any questions.
Later back to you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again, if you'd like to ask a question. Please press star one.
We'll take our first question from David Scharf with JMP Securities. Please go ahead.
Great. Thanks.
Thanks, and thanks for taking my my questions today.
Hey, Dave or I guess for Sanjay as well.
Wanted to maybe ask a little bit of a kind of longer term strategic.
Strategic question as it relates to structure, obviously funding.
Environment is going to go.
I'll go through dislocations here or there and ultimately resolve themselves.
But I guess in terms of the structure of the business.
Last quarter, you talked about seeking some more.
And our longer term partners.
And.
Reflecting on some of your all digital lending peers.
There seem to be a lot of different ways to skin. The cat in your industry lending club went out and got a bank charter I'm. The Guy has gone for pre funding Securitizations and investment vehicles exclusively.
Lending point.
Always kind of opted for a 60 40 mix between loan retention and securitization.
Obviously as you noted.
ROE environment is going to shift and ultimately.
[noise] will emerge on the other side, but in terms of strategically thinking about.
The types of dislocations that are happening right now.
Is it a different longer term funding structure something the company evaluates every now and then.
Hi, This is Dave that's a good question, we certainly think about funding on our platform are pretty much constantly but I will say this we believe fundamentally in our marketplace structure.
In the sense that a lot of lenders, making independent decisions.
Over the long haul is going to get to the right answer I mean marketplace market based economies.
Our historically far more efficient than centrally planned economy. That's a very I would just say a very basic truism.
But having said that so that means we don't want to become a centrally planned economy. We don't believe us being a bank that makes a lot of sense for what we hope to pursue for lots of reasons, but having said that we can certainly do a better job of securing our supply in funding on our on our platform and that can really be through some of the things we've talked to are getting longer.
Term funding agreements in place.
Being in more products more diverse set of products such as secured products like auto loans mortgages et cetera. So it is certainly something we have to think hard about it and do more work on.
But underneath it all we do believe a market based economy and marketplace, where there's a lot of participants on both sides will ultimately have the greatest scale and the greatest opportunity.
We're dealing with volatility today, but over the long haul we're confident this will lead to the greatest outcome for upstart.
Got it and I appreciate the color, Dave and maybe just as a follow up.
Digging a little deeper on the funding side.
Obviously as Sanjay noted.
The ABS markets.
Remain a bit volatile, but at the same time, even though spreads are wider.
Actually seen in the last couple of weeks months, a number of non prime deals start to get done you know in Nova opportune regional management. So.
<unk> remained wider but but investors are stepping up for the unsecured personal loan non prime asset class any further updates you can provide.
Based on either anecdotal discussions you have with the existing bond investors or you know when you would think you might be able to return to the market.
Hey, David This is Sanjay.
As you said, it's volatile we remain in the market and you know we completed a couple of deals.
In Q3, and we're going to be back in the market in Q4, our cadence.
It's generally every sort of two.
Two to three months or so and I think we've been holding to that cadence. So like you said you know what.
<unk> spreads are all pretty volatile and they will sort of dictate the economics in any given deal, but there's always deals to be done or at least until it until now there's there's still to be done so.
Yeah. So we're going to continue with that cadence in <unk> and.
And we have you know.
It wasn't investors, who are contributing to the securitization to our.
You know continue to have interest in contributing a collateral into the securitization as well.
Right got it thank you very much.
We will take our next question from Ramsey El <unk> with Barclays. Please go ahead.
Hi, Thanks for taking my question. This evening I wanted to ask about the on balance sheet loans. It looks like that number went up about $780 million this quarter to around $700 million I'm. Just curious in terms of going forward. What your plans are there do you intend to stay.
Stabilized that number here or ship will go up or go down how should we kind of think about that for modeling purposes.
Hey, Ramsey as it sounds it.
I don't think it's necessarily guide to the specific guideline or a number with respect to our balance sheet. I think we gave some sort of high level parameters last quarter and I think we've obviously operated within that and I think that that will continue to be the case. So I think that you know, whether we draw it up or draw it down over the next quarter or so.
We continue to be an operating decision, we instead of discussing take but I think it'll be within the parameters of what you saw in this last quarter.
Got it Okay and then a quick follow up for me was just on the conversion rate.
On the rate requests I think that as you mentioned, it's a tougher environment that trended I think down.
300, plus basis points quarter over quarter also there just curious from a modeling perspective do we keep that sort of stable here or is that a metric that we could see deteriorate further or is the answer it's just contingent on the environment and how it evolves.
Yeah. Thanks, it's a good question.
I would bring it back to the vocabulary of this upstart macro index.
Would stay referenced which as we said we have recently started disclosing in our investor materials.
It essentially isn't and it sort of an index to try and capture the external macros impact on defaults and.
The simple way to think about our conversion rate is that index went up about 20% versus last quarter.
So that's sort of an expression of the fact that the macros impacting defaults in our portfolio by that amount and when that happens our models recalibrate. If you just go up and essentially.
Essentially approval rates and acceptance rates, let's go down so.
In terms of how to think about it on the go forward. It really kind of amounts to what you think about some macro conditions and as you know defaults are going to continue to go up or normalize or stabilize or maybe even reverse course at some point that will really dictate the offers that we're making and hence the conversion at all.
Got it thank you very much.
One moment please.
Mr. Christian Your line is now open.
Oh. Thank you. Thanks for the question here good evening.
I wanted to ask about.
Again back to the rate request the previous question it looks like they were down considerably.
<unk>.
You know not not even looking at the conversion rate yet, but at least top the very top of the funnel.
Just wondering.
Or are you taking a different go to market approach in terms of attracting new borrowers to to the platform.
And you.
How should we think about.
You know that in context to the.
This potential.
Potential rising like that consolidation and those kinds of themes.
So just wondering how your go to market is changing their top of funnel.
New borrower ads.
Thank you.
Hey, Pete this is Saturday Hum.
Go ahead.
No go ahead go ahead Sanjay.
So I was just all Aladdin or should it can add to that.
Response, but a lot of our marketing activities are in fact governed by the conversion funnel in the sense that you know.
When loss estimates go up conversions go down.
We target our marketing campaign size and of activities to some target because the unit economics and when.
The conversion funnel is weaker we reduce marketing size accordingly so.
There's always this sort of like this two step.
No process, whereby conversion funnel improves it converts more and we expand marketing and the reverse is true of course on the marketing funnel contract.
Well I think the Genesis of the question is like how do you think about spend on lead Gen.
Generally.
Spend on the lead Gen and sort of in a it's sort of a function of how.
Performing our conversion funnel is so.
We will spend up until the point, where the marginal return on the marketing dollar is zero in a sense and so so sort of what I mean is it a conversion funnel improves we will spend more on lead gen. Because it'll be more economical will be able to spend more up until the point, where the marginal cost of zero.
It's first time and so what's been happening recently is as our conversion funnel is impacted by a higher losses.
In the portfolio are target sort of unit economics are contract.
Great. Thanks for the color Sanjay.
We will take our next question from Mike <unk> with Goldman Sachs. Please go ahead.
Hey, good afternoon. Thank you very much for the question.
I just had two first I was just wondering if you could tell us what the transaction fee rate.
As a percentage of funded principal was in the quarter.
Obviously ex the servicing fees and how we should think about the opportunity to continue.
Continue to take pricing going forward.
And then secondly, I was wondering if you could.
Talk about how much of the principal in the quarter was.
Self funded off of the upstart balance sheet versus.
Just the core model. Thank you very much.
Yeah. Thanks, Mike This is Dave I'll take the first part of the question what Sanjay perhaps answer the second and the first we have.
We're able to basically increase revenues by increasing fees on.
On a per loan basis, and then also with Sunday I was suggesting earlier our acquisition spend per loan.
At a time like this can go down a lot.
So in effect.
The unit economics on each loan is significantly better much more sort of gross profit per loan, albeit at a lower loan volumes. So those are things within our control, which is why your contribution margin has.
<unk> gotten higher during this time and I think that's.
It's sort of a form of pricing power that means we can when we would need to be a little bit of a defensive mode.
And make sure that we're monetizing well enough to cover expenses et cetera, and we view that as very positive part of our platform.
We will take our next question from Simon <unk> with Atlantic Equities. Please go ahead.
Hi, guys. Thanks for taking my question.
I was wondering if we could just start with the contribution margin.
If you could talk about.
I guess, how how does the guidance for 59% in the quarter is quite short of that but also implied that you're tracking well above that that's probably entering the quarters I'm just kind of curious about the dynamics that go into contribution margin that are within your control are not within your control and how to think about that going forward.
Yeah. This is Sanjay yeah. That's a great question, so and you see the dynamics in the contribution margin or you know it was up from last quarter.
<unk> 47 to approximately 54, it was sort of our guidance.
Maybe one simple way to think about it is.
When we are funding constrained as a platform we tend to expand contribution margins and we do that by expanding take rates.
And it makes sense to do that when you're funding constrained now when your borrower constrained you sort of do the opposite you want to sell for volume and you can you take down your take rates, a little bit and extend volume.
And I think we would probably assumed we'd be funding constrained for all of this this past quarter.
In reality, we've sort of bounce back and forth a little bit we've been at times funding constrained and at times borrower constrained and at those times, where we've been borrower constrained we've actually acted to reduce our contribution margins a little bit.
And so you know I think that we are sort of bouncing around in between those two states and.
As we go into Q4 to the extent.
We are funding constraint in any given period of time of our contribution margins would it be above the numbers that we produced and probably closer in line to what we had guided but to the extent we are more constrained and again the borrower constraints really come from the fact that our our Macrogenics is so high that the that the approval rates are low.
You'll see sort of lower conversion rates more in line with how we looked in Q2, probably so.
They'll come in sort of a function of where we are between those two states.
Okay I appreciate that and I was wondering if you took me back to the.
Structural view.
<unk> funding.
So the appetite for investment of the Investor base at the moment.
I mean could you go a little bit I mean, how.
Have you got in terms of exploring the idea of what was happening.
Shifting the base towards more long term investors and maybe you can just update about your thinking on that.
So could you just repeat the very last part of your question what is your thinking in terms of what.
About the shift towards finding more longer term.
Katherine talk vessels.
I see well just to describe it at a high level I mean historically we've.
We've been sort of like three quarters institutionally funded and about a quarter bank funded them that that ratio has changed.
Changed and it's you know the percentage of bank funding on our platform has grown quite a bit it's been a more stable source of capital. The institutional World has obviously been a lot more volatile.
And then within the institutional side.
I think there is a a desire as we talked to you last quarter to enter into some more strategic transactions. Some more sort of a committed sort of type partnerships I would just say we're.
Yeah, you know in a number of encouraging conversations, but they're all quite preliminary.
I think we view this as being something that's not going to happen overnight.
It's something that you know to the extent, we get into those types of partnerships, they're not out of.
You know out of a sense of urgency it's more about doing the right thing for the future of the platform and the and I think those partnerships are available, but they may take.
Sometimes I put into place because they are important and large and strategic sale.
Nothing more concrete than that to report on that on that right now, but I think we're pretty.
Encourage that the at the opportunities that aren't there.
Okay.
Thanks.
We'll go next to James Faucette with Morgan Stanley . Please go ahead.
Thanks, This is sandy BD on for James.
A question on the forward flow funding process, how how volatile is that month to month. So you mentioned some summer optimism and I'm trying to get a sense of.
How how volatile is that what factors determined that volatility is it is it cost of capital opinions about future credit performance, how do those conversations typically go and is there any insight you can provide us into that process.
Sure Yeah, Hi, this is Sanjay again, I wouldn't necessarily characterize it as volatile in so far as you know volatile there's ebbs and flows.
I really would characterize it as a you know a level of funding that degraded pretty steadily.
Let's call it between between I'd say March and August or July August and since then it's been at a pretty stable level. Although you know obviously one month that was much lower than earlier in the year. So since then it's not like there's been a bunch of comings and goings I think there's a you could sort of characterize it as there's been a number of.
Partners of ours, a founding partners of ours predominantly with those who've worked with us for a longer period of time.
So they've been steady.
And stable and in their.
The activity and there's been a lot of people who are maybe those who've been working with us for a period of time and a little bit more sort of dependent on the ABS markets and they've largely sat on the sidelines as they're sort of waiting to see how the world plays out.
Yeah.
Got it and then just a follow up on on profitability.
In terms of the quarter and also the guidance how are you thinking about managing that cost structure going forward.
And how should we think about impact from the recent workforce reductions and how that might.
Reduce pressures are or reduce costs on a run rate basis.
Sure Yeah, I mean, I think the other components of our cost structure, we think about the the contribution margin, obviously and we sort of guided that at a level.
Next quarter, that's you know.
Comparable to where we are now so something in the mid fifties.
They're the reduction enforced that we did really well have them you know as as that runs its course, a positive impact on contribution margins.
Really that was about.
Right sizing.
The size of the Onboarding team that's.
Yeah.
Processing, the incoming loans to be a bit more in line with the volumes that we have.
With respect to the sort of what we call them fixed sort of a payroll between our engineering and technology.
Technology teams and our general and administrative teams.
There, we've pretty much paused hiring except for a couple of very strategic roles that are important to fill and so I think you could expect to see.
Stable sort of fixed opex space.
And that's something that you know we continue to sort of evaluate every quarter and I think we like the size of that Opex space, given where we are now and obviously you know the world can take a number of different directions, and if we start to recover we will be in good shape. If we continue to degrade well, we'll continue to sort of evaluate as we go but you know beyond what we've done with existing reduction in.
Of course, there's no there's no plans in place to go any further at this time.
Got it thanks for taking my questions.
We will take our next question from Vincent <unk> with Stephens. Please go ahead.
Hi, Thanks for taking my questions.
First question actually on the.
On the slide 12 in your deck the upstart platform performance versus target is recovering side. Just wondering if you could talk about that in more detail and seeing that that's improved.
Just wondering if.
Essentially wonder when do you think maybe investor demand can come back with volume demand can come back.
The customers being priced at an 800 basis points higher than your investors are seeing 500 basis points higher is there.
When do you think we can maybe see visibility.
Into improving demand whether it's on the.
Credit demand side or in the borrower demand side.
Hey, Vince this is Sanjay and it is a great question in a sense. It's a million dollar question [laughter] I mean I think are.
Return of sort of confidence and.
And funding in the institutional side.
Requires a convergence.
These two lines and in a sense, where we're chasing a trend that's on the private side.
Or I guess it would be on slide 10, I'll start macro index like that that's the thing that is the moving target for us and our models are calibrating as that is.
Evolving.
And so you know compared to where we thought in terms of those two lines converging, where we thought we were last quarter.
It turns out it turns out with where we are on the lower side of our confidence interval now because of the you know the defaults in the World has continued to rise.
And so it really is a question of you know when will that default trends stabilize and as and when it does you'll see those models converge quite quickly and in fact, the target returns themselves. It has gone up.
To clarify this is obviously something that blends.
The returns in there and the performance of all of our loans, whether they are you know in the bank channel side or the institutional side, but if you look at the return targets on the institutional side, that's really worth up to 500 basis point to sort of numbers come in so.
So yeah, it's a bit it's a bit it's a bit down to how the macro evolves from here.
And how conservatively, what we're pricing with their models. So I think we've signaled confidence in where we are now and where we're pricing runs now, but obviously the world needs to play out a little bit. So we can demonstrate that.
Okay understood. Thank you and then a follow up question just on the costs I guess, what we're thinking about.
The long term and.
Thinking about some of the investments in new products that you're making versus maybe.
In the near term, where maybe there's not a lot of volume or trying to be conservative on expenses, how do you kind of manage the two.
Because it does sound like you are building out the small business portfolio building out auto lending, maybe theres some traction going on there, but maybe you could help us understand why.
When do you when would you be.
The balance between being conservative on the investments or at all the expenses versus long term opportunities with these products. Thank you.
Yeah. This is Dave.
The way the way, we think about that as we would like to to the extent possible continue to invest or even increased investment in the future products because.
That's obviously, what our franchises built on and what will lead to.
Significant growth in the future. So what we've been able to do is maintain that growth and actually continued to invest in the products and a lot of that we can see internally I've shared some of the metrics with it in terms of actual improvements made to each of the products.
But we don't actually benefit from them until really the funding and the economic situation is in a on a better footing. So we're a little bit building towards the future.
But I think the good news is we have not cut back on that investment and the future of our products and when I think we're in a more normalized environment. We will very quickly you see the benefit of things just by way of example, we have the highest ever rate of automated loans, 75% of the loans on our platform in Q3 had no human intervention in them.
That's a record high for us, we're not really benefiting from that.
As a business until we get to a place where you know loan funding when loan prices arent. So high loan funding is abundant etcetera and I think across the board. If you looked at each of our products to actually getting better very quickly and the teams are making very good use of this time.
Payback won't be till some point in the future.
Okay. That's very helpful. Thanks, so much.
Thank you we'll take our next question from Arvind <unk> with Piper Sandler. Please go ahead.
Hi, Thanks for taking my question.
Just had a couple of questions one.
Just as you think about the next.
Kind of 12 months.
Uh huh.
What are some of the downside scenarios.
Macro gets.
A lot worse.
Would you expect kind of further deterioration.
In your in your business, just given sort of the.
Strong exposure to the macro.
Yeah.
Okay.
Sure.
Well look I have no doubt any any business looking to the future of the economy. There are downside scenarios for everybody, we're not different than that I mean, we're a fairly simple business in many ways that we have a fixed cost and then we have contribution margin to offset those and certainly if macro continued to deteriorate cigna.
<unk>.
That would probably translate into lower volumes in our platform and at some point, we will look at our fixed costs and ask whether we can afford that so our first goal is of course routine.
Solvency in a in a in a sort of a solid.
Solid footing. The company has asked me if a large cash balance we have relatively low fixed cost and that's really helped us all through our existence, but so we don't have any fear other than look the thing we want to keep doing and thus far have been able to do so is investing in the products.
Certainly there are scenarios, we could imagine matters. So bad that we would have to cut back investment or pas products et cetera, but we don't see that today I think today, we have enough volume and enough contribution margin to keep.
Optimistically investing for the future and that's what we would you would hope.
Right right. Yeah, you know I I, just think of your kind of I would think of existing cash burn and sort of projected cash burn, which I'm sure you're making adjustments.
But you know just from some of your expense line.
When do you think you might need to go go sort of raise.
Kind of additional capital whether in the form of equity or debt.
Yeah.
We don't see any need to do that Arvind and honestly our cash burn today is quite small even in a very constricted position. We're in I mean.
I think our volumes are pretty dramatically lower than they were yet our cash burn is fairly minimal. So we don't see a scenario, where we have to raise cash and Sanjay said, we have over here $800 million in cash as well as loan assets on the balance sheet.
So that's just not something we anticipate at this time.
Okay perfect. Thank you very much.
Okay great.
I was just going to maybe put some quick back of the envelope numbers to that.
Our cash sort of fixed expense burn across payroll on Opex every month is about $30 million.
And even as.
As your origination scenario, where we're getting a servicing stream of revenue that's about 15 million. So there's sort of a maybe there's sort of $15 million of delta.
Every month that we have to rely on contribution margin for.
To cover them, so that that's sort of like on a downside scenario, where the gaps might be and you know as you saw we've got about $800 million in total cash on the balance sheet. So.
Steve said that that can take us for quite some runway.
Right right. Yeah, I guess you can be you can be quite quite patient in a in that case.
Yeah, that's pretty much the questions I had.
Thank you.
We will take our next question from David <unk> with Wedbush Securities. Please go ahead.
Hi, Thanks for taking my question, so I'm looking on slide 11.
The in period losses versus expectations can you walk through what this is telling US is it is it basically saying that 25% that loss in period defaults or 25% above what you were modeling it and I guess marrying that with slide 10, with the U M. I at one point.
And should we expect this line on on page 11 to go up toward 70% just could you talk through that a little bit.
Yeah.
Yeah, Hey, David This is Sanjay.
Sure. Yeah. These are a important question. So let me start with slide 11. This is essentially.
In any given calendar period, along the X axis for all of the loans, we have outstanding at that time.
A cohort of view, it's just all you know of all vintages that are existing in our Q3 of 2022, what were the what were the losses incurred in that period versus what had been modeled.
At the time of it.
At the time of origination.
So you know that that would say that you know of all the vintages that were still active or are outstanding in that quarter. The losses were 25% higher now we see a lot of those same vintages compose.
The populations in the prior quarters that were below or on target. So.
So you're correct in that what is causing this in a sense is what you see on slide 10, which is.
Our our sort of expression of the macro impact on the environment now.
Now the fact that the macro index is at 1.7 does it doesn't it doesn't suggest that there were 70% higher than what we had modeled I guess the the other side of the equation is where are we pricing loans. So today, we're pricing loans at a 2.0.
Sort of equivalent macro index, so to put another way if it's that macro next stays at $1 seven.
And were pricing new loans at a 2.0 they should in fact over performed it should come under losses by you know to the tune of them.
17% 17, 20 per cent, so because we rapidly adjust the model to recalibrate to where the sort of U M. I is trending.
Hmm.
We're sort of able to in a sense of price price these trends into into into the lungs.
So did you get back to your original question what would what should we expect that that line to do on slide 11 going forward.
You know a lot of the existing loans to the extent the economy continues to degrade them, they're already priced in so yes is the economy degrades and then those losses will increase but then you also got.
<unk> got fresh production of loans being put into the population that are priced at much higher <unk> and so the answer will be similar in the balance of those two.
Very helpful. Thanks for that and then.
My second question relates to promotional activity in the third quarter related to gift cards. What was this new and are you able to say how much that contributed to originations in the third quarter and.
What level should we expect in the in the fourth quarter, if that's going to continue.
Sure Yeah, Hey, this is Sanjay again so.
So I guess, taking a step back I think that the way to think about that and I sort of allude.
I alluded to this in one of the prior questions is in Q3 itself, we had sort of gone back and forth between our funding constrained environment and the borrower constrained environment. So in a sense of sort of the availability of funding or a lack thereof is competing with you know the loss trends in the economy and our ability to approve.
And so you know that.
There there was some period of time in Q3, where we were actually borrower constrained and we took that decision to sort of run a marketing campaign, where we provided some incentives in order to get some of the origination numbers up a little bit I think the overall impact on the numbers, it's pretty de Minimis.
It was de Minimis within that month, and certainly within the entire quarter. It wasn't a very big impact but.
Yeah.
The fact.
Good Oh, sorry, Sanjay I was going to say I mean, what you're seeing there is we are pretty constantly trying to find the lowest cost source of borrowers and in that case I believe it was really incentive people that are already on our platform that essentially no other acquisition costs associated with them, but what we're generally doing in all up here.
It's trying to.
Acquire users at the lowest possible cost and gift cards to promote someone who has no other associated cost with them, meaning from digital or some direct mail or from a partnership et cetera can be a very can be a very good way to do that.
Very helpful. Thanks, very much.
And there are no further questions at this time, Mr. Gerard I will turn the conference back to you for any additional or closing remarks.
Thanks Al Thanks for listening, we definitely appreciate the spin of <unk>.
<unk> time, particularly for the mission that we're on in the business that we've chosen but we are confident in it we're committed to it and I'm pretty neat need to make sure. We make all the right decisions now, particularly in terms of credit performance and as well as <unk>.
Sorta fiscally responsible but we're extremely confident that all of the investments we're making today continuing to do are going to lead us to a much stronger position and we'll be in a growth mode. Again soon enough. So thanks all for listening today.
This concludes today's call. Thank you for your participation and you may now disconnect.
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