Q1 2023 Upstart Holdings Inc Earnings Call
Good day and welcome to the upstart first quarter 2023 earnings today's conference is being recorded at this time I would like to turn the conference over to Jason Schmidt head of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us on today's conference call to discuss ups starts first quarter 2023 financial results with US on today's call are Dave Gerard upstart, Chief Executive Officer, and Sanjay <unk>, our Chief Financial Officer.
Before we begin I want to remind you that shortly after market closed today.
I'll start issued a press release announcing its first quarter 2023 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, IR dot upstart thoughtful.
During the call we will make forward looking statements such as guidance for the second quarter of 2023 related to our business and plans to expand our platform in the future. These.
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.
These forward looking statements, we assume no obligation to update any forward looking statements as a result of new information.
Or future events, except as required by law.
In addition, during today's call unless otherwise stated references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables.
To ensure that we can address as many questions as possible turn the call. We request that you. Please limit yourself to one initial question.
Yep.
Later this quarter upstart will be participating in the Barclays emerging payments.
Fintech for a base of a 10th.
The Bank of America Global Technology Conference June 7th.
I would 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 first quarter 2023 results on Dave Gerard cofounder and CEO of upstart.
Despite the headwinds facing our industry in early 2023, I'm pleased with the progress we made against the objectives that I set out for you previously I'm hopeful that as we move through the year, you'll come to see Q1, as a transitional quarter for upstart.
The economic environment remains turbulent there are many reasons to be optimistic about our future I assure you, we arent waiting around for the economy to improve.
First our development teams made giant leaps forward in each of our main product areas innovation and AI is the primary source of upstart competitive advantage and we continue to break new ground in this area I'll share more about these wins shortly.
Second we accomplished this while taking significant fixed costs out of our business last quarter. I told you that I am committed to running an operationally and fiscally tight ship.
Given our concerted efforts in Q1 to reduce both payroll and operational expenses.
And with that I'll start is now a more streamlined and efficient company.
This up to return to profitable growth soon I'll share more about our cost reduction efforts later.
Finally, I'm pleased to tell you that we secured multiple long term funding agreements together expected to deliver more than $2 billion to the upstart platform over the next 12 months. This is a critical first step toward building resiliency and predictability into our business.
Together I believe these efforts put us in a stronger position, regardless of which direction the economy turns.
Our own analysis, which we launched publicly in March in the form of the upstart macro index, our U M I <unk>.
Is that the financial health of the mainstream American consumer deteriorated rapidly through the first nine or so months of 2022.
Since stabilized if not improved for the last several months.
Personal savings rate, which may be the most relevant predictor of your money.
Bottomed out mid last year at two 7% and has increased to five 1% since then.
Since late 2022 loans on our platform had been priced conservatively relative to you or not so our bank and credit Union partners can feel confident that recent vintages are today performing at or above expectations.
While banks are certainly trading carefully in the current environment, many lenders and institutional investors appreciate the combination of high yield and short duration that upstart powered loans offer.
Irrespective of the environment I push our team very hard to make sure upstart improved constantly in four critical dimensions.
First best rates for all we founded upstart to improve access to credit so delivering the best rates possible to all consumers will always be our true north given.
Given the breadth and diversity of competition will never 100% achieved this goal, but in a fierce effort to do so we can become the market leader in a vitally important segment of our economy.
Better rates are unlocked first and foremost by a more accurate and predictive credit model one that excels at separating good risk from bad and AI is the key to this our.
Our models are to date trained on more than 100 billion cells of performance data and now with an average of 90000, new loan repayments do each day across all of our bank partners. The system is learning and adjusting in near real time to actual loan performance.
We pushed to 'twenty, three new and improved versions of our AI models into production during the first quarter alone about one every three days, we're confident that our AI has never been as sophisticated or as accurate as it is today.
But in order to deliver the best rates for all we also need a diversity of bank and credit Union partners, each with different priorities business objectives and balance sheet issues to solve today, we have almost 100 such partners in order of magnitude more than the 10, we add when we went public in December 2020.
We definitely need a strong presence and reputation in institutional in capital markets.
The limited risk appetite of bank balance sheets will never serve the needs of the entire U S credit market this quarter.
We expanded our roster of institutional partners in ways that should help us deliver quality offers to consumers through all parts of the cycle.
Second more efficient borrowing and lending.
Every quarter, we aim to make our platform more efficient for consumers and bank partners. This improvement come from better AI, which enables more sophisticated risk models, which in turn enable a faster and more efficient experience for consumers and lenders.
In the first quarter, we achieved a record level of automation was 84% of upstart powered loans fully automated across all of our bank partners by this I mean, the loans were approved and verified instantly with zero human intervention from our rate request through loan funding.
No other lending marketplace with this level of automation.
This incident, an automated process, which by the way is 70% of consumers access by our mobile phone create an unparalleled wild moment for the borrower, which is who is often surprised if not shocked to realize that there are no more steps in the approval process.
Consumers rightfully value their time. This delightful moment is often more impactful than the specific rate our bank partners offer.
Efficiency is obviously important for the lender as well our bank partners upstart powered lending programs are open for business 24 hours a day seven days a week and.
In addition to providing the modern all digital experience their customers expect banks can tailor their upstart learning programs to precisely target their business objectives risk appetite and balance sheet needs. When it comes to routine transactions like offering alone.
Ours are inconvenient human intervention is costly and consumers just want what they want when they want it.
Third more resilient.
After all we have experienced in the last year I'm keenly aware that we need to build more resiliency into upstart business lending is inherently cyclical, but we aim to build a platform that largely mitigates that cyclicality, ensuring that credit continues to be available and slowing when it's needed, albeit accurately priced to prevailing conditions.
Central to this resilience is securing the baseline supply long term capital that we can depend on to the markets ups and downs as I mentioned earlier, we've completed agreements with multiple strategic partners as of today and will continue to explore additional partnerships. Our primary goal is to have loan funding capital committed at a level that allow.
US to remain cash flow positive through typical market cycles.
Resilience also comes from our flexible business model with lower fixed costs proven pricing power and durable unit economics, we've always been a capital efficient business, raising and spending a fraction of what peer companies spent.
There are always more ways to drive efficiency.
In Q4, and Q1, we took the necessary steps to reduce upstart head count by almost 30% while.
While clearly a gut wrenching decision it will allow us to return to profitability at a significantly lower loan volumes and has led us to be more focused and nimble and delivering our product roadmap.
We also identified opportunities to reduce our technical infrastructure costs by as much as $10 million annually and sublet some unnecessary office space, both of which will go directly to the bottom line.
On the revenue side reflects up our take rates delivering a record contribution margin of 58% in Q1, our prior record contribution margin was 54% in Q3 of 2020.
Our strong and flexible unit economics are a byproduct of the competitive advantage provided by AI.
All these things together position us well to navigate whatever twists and turns lie ahead, while strengthening our position for the inevitable sunnier markets to come.
The last important lever on resiliency is our product offering itself, which I'll speak to now.
Fourth a broader range of products.
Beyond our core personal loan product is critically important to reaching our potential as a business offering a wider range of solutions. It makes us more relevant to more consumers and also more valuable to our bank and credit Union partners product and borrower diversification can also provide greater resilience to future market cycles.
We continue to make progress in our second Big bet. The auto lending market. This market has had what may be the most tumultuous three years and it's 100 plus years history.
Despite this we've made rapid progress with our products and couldnt be more excited about our potential since our last earnings call, we announced that both accuracy and Mercedes Benz have proved up start as a digital retail provider, becoming our eighth and ninth OEM partners.
We recently launched a new and improved AI model for our auto retail lending product that builds off our existing auto refinance model. We now consider both of these models calibrated and performing on target.
Our footprint of dealers piloting our lending products expanded to 39 since last I updated you and we expect this rollout to continue throughout the year.
We also signed our first external funding agreement for auto retail, which is an important milestone for us and lastly, we're making rapid improvements to our servicing and collections of auto loans, which accrues directly to model performance.
I'm also pleased to let you know that we expect to launch a home equity product later this year.
This is a great fit for upstart for a few reasons first 95% of HELOC are financed by banks and credit unions. So its an asset our lending partners know and value second.
Second he likes naturally served a very prime consumer, namely homeowners, we expect upstart helocs that have annual loss rates less than 1% and.
And third home equity products tend to be counter cyclical to refinance products. We know this because in Q4 2022 HELOC volumes grew 32% year on year, even while mortgage refinance has plummeted.
Importantly, there is a lot of opportunity to improve the process of originated helocs.
The average HELOC today. It takes 36 days to fund what we're aiming for online approval in 10 minutes and funding within five days.
Lastly, I have to mention the incredible progress made they are small dollar loan team by way of context banks feel pressure from regulators to eradicate overdraft fees and instead to provide affordable relief loans to consumers, who have short term cash needs.
They've struggled for years to do this both meaningfully and profitably short term loans of a few hundred dollars to existing customers or even to random lock up consumers at rates within the APR limits for nationally chartered banks has seen beyond the reach of the banking industry.
We're building it for them and we believe it has the potential to eradicate more than 70% of pay day loans in the next five years are small dollar product already has 90% automation rates far beyond even our core personal loan product and in Q1, we launched a new AI model for this product that delivered the largest single act.
There is improvement measured in our history with.
We've also expanded the offering to include loan terms as short as three months, which drove a 37% increase in approval rates.
Sure with ever delivered a product with as much impact as much alignment with our mission as we are seeing from the small dollar team.
To wrap things up I want to acknowledge that the financial industry is not out of the woods, yet, but even in this challenging economy I believe upstart is positioned to grow reasonably through our typical run rate model and technology improvements.
The banking and credit markets eventually normalize as surely they will the true strength of our platform will become clear to all.
<unk> success will continue to be built on excellence and leadership in AI.
This I mean, the speed with which we can develop deploy and calibrate new and more accurate AI models.
With the amazing quality of our team. It is this that makes me optimistic about that starts future.
And I would like now to turn it over to Sanjay Our Chief Financial Officer to walk through our Q1 2023 financial results and guidance Sanjay.
Thanks, Dave and thanks to all of you for joining us today.
At a headline level over the past quarter, we've observed continuing stability and consumer repayment trends on the borrower side of our platform.
<unk> balanced by heightened volatility in the banking and institutional funding markets.
In U S consumer personal finance.
A couple of virtuous trends continue to unfold in the aggregate statistics.
The percent of adults participating in the workforce continues to climb steadily.
That population returns to work and.
And the average personal tax burden for each individual has fallen considerably since last year.
Together, leading to a rising level of real disposable income per adult.
On the expenditure side will.
The real consumption per capita continues to moderate and creep back into line with disposable income.
Rising disposable income and moderating consumption expenditures a.
Resulting in a personal savings rate that has now risen in each of the past six months since bottoming out last September .
This particular indicator has demonstrated a strong correlation to bore repayment health since the pandemic and we are seeing this reflected in our upstart macro index, which peaked last October and is showing signs of early recovery.
The ongoing improvement in the consumer physical condition together with the Recalibration of our own underwriting models is resulting in loan performance that as of our Q4 vintages. We believe is on track to deliver Unlevered gross returns of approximately 11%.
Blended average across the banks credit unions and institutional buyers on our platform.
Conversely, the funding side of the ecosystem remains challenging in the current climate.
Increased conservatism among existing lending partners in the wake of the recent bank failures has enhanced our headwinds even as we have brought additional volume onto the platform the implementation of new bank partnerships.
The banking sector turbulence has also contributed to wider market spreads on high yield debt. After a brief period of moderation in January and February .
Which is in turn causing institutional investors, who rely on functioning ABS markets to be increasingly cautious in their deployment of capital.
We have managed to more than offset these headwinds by securing multiple longer term funding agreements.
Which we expect to deliver more than $2 billion in capital over the coming 12 months.
We believe that these deals as well as others in the pipeline will provide us with a stronger and more resilient capital supply over the coming quarters.
With these items as context here are some financial highlights from the first quarter of 2023.
Revenue from fees was $117 million in Q1 coming in above our guided expectations. As a result of some increased funding secured through our longer term capital arrangements.
As well as ongoing take rate optimization.
Net interest income was slightly below guidance at negative $14 million.
Actually our result, that's unrealized fair value adjustments informed by the economics of a balance sheet transaction that was expected to close after the end of the quarter.
Taken together net revenue for Q1 came in at $103 million.
The above guidance and representing a 67% contraction year over year.
The volume of loan transactions across our platform in Q1 was approximately 84000 loans down 82% year over year.
And representing over 53000, new borrowers.
Average loan size of $12000 was up 22% versus the same periods 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.
As a percentage of revenue from fees.
And at 58% in Q1.
Up from 47% last year, and three percentage points above our guidance expectation for the quarter.
We continued expanding our margins in Q1 through higher rates of automation, which had seen the peak of 84%.
Improved marketing efficiency and increased take rates.
Operating expenses were $235 million in Q1 down 15% year over year, but up 14% sequentially due to onetime restructuring costs.
<unk> is part of our reduction in force.
As well as a onetime noncash charge, resulting from the cancellation of a single executive performance based equity award, which accounted for approximately $40 million of the overall expense base in this past quarter.
The majority of the year over year reduction was achieved through sales and marketing, which declined by 76% following the trend in volume.
We continue to limit hiring to only a handful of key strategic positions.
Altogether Q1, GAAP net loss was $129 million and adjusted EBITDA was negative $31 1 million, both comfortably above our guided numbers.
Adjusted earnings per share was negative <unk> 47.
Based on a diluted weighted average share count of $81 9 million.
We ended the quarter with loans on our balance sheet at $982 million.
Sequentially from 1.01 billion the prior quarter.
Of that total loans made for the purposes of R&D, principally within the auto segment represented $493 million of that total.
Our corporate liquidity position remains strong with $452 million of total cash on the balance sheet and approximately $632 million net loan equity at fair value.
In our remarks of last quarter, we expressed optimism that the consumer trends impacting credit positive to us.
The worst is likely behind us.
This is indeed, what we have pursued over the last 90 days.
Consumers reducing expenditures.
Indicates to us that they are overspending loss relative to income.
Increasing numbers of job openings and the economy indicates to us that Americans are returning to work well.
Both of these dynamics could be interpreted as a prelude to economic slowdown.
It is clear to us that both have been beneficial for credit.
This continues to be our perspective, as we look to Q2.
We also expressed confidence last quarter.
Combination of margin expansion workforce reduction in expenditure control, we could create a path to return to EBITDA breakeven at our current lower scale.
And indeed, we now anticipate achieving that in the second quarter.
While painful.
<unk> reduction was carried out with minimal impact to the velocity at which we are developing our newest rounded that's auto lending small dollar loans and helocs.
All areas in which we look forward to sharing more updates in the coming quarters.
With these specifics in mind for Q2 of 2023.
We expect total revenues of approximately $135 million consisting.
Consisting of revenue from fees of $130 million and net interest income of approximately $5 million.
Contribution margin of approximately 60%.
Net income of approximately negative $40 million.
Adjusted net income of approximately a negative $7 million.
Adjusted EBITDA of approximately zero.
And the diluted weighted average share count of approximately $83 1 million shares.
We are happy to be signaling a return to sequential growth in cash profitability in the current market environment.
Our improving guidance is clearly not deriving from obvious improvements to the macro economy just yet.
It is flowing from a combination of tenacious execution operating discipline margin expansion and dealmaking.
As always a huge note of gratitude to the various upstart teams, who have been heads down and laser focused on getting us through this storm.
It will remain resolute over the past year and the <unk>.
Such challenging external circumstances.
While there may yet be a few more twists and turns along the way.
We are optimistic that we have weathered the worst of it and barring any reversal in consumer trends.
We are back on an ascending flight path.
With that David and I are happy to open up the call to any questions.
Operator.
Yeah.
Thank you.
Like to ask a question please signal by pressing star one on your telephone keypad.
A speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Please press star one to ask a question.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Our first question comes from the line of Simon Clench with Atlantic Equities. Please go ahead.
Hi, Dave Hi, Sanjay Thanks for taking my question and congrats on a pretty.
Pretty good quarter here.
I was wondering just could you give us a little bit more detail around the long term funding commitments perhaps.
And how we should think about how that might be applied or flow through for the remainder of the year are there any constraints product categories. It's focused on trying to drive that that we need to know about.
Yeah. Thanks, Kevin This is Sanjay.
Let's see I mean, I guess I would say upfront.
Each agreement.
So it's hard to sort of broadly generalize.
But maybe a couple of headline thoughts first of all.
These agreements.
They did more or less flow from the.
The ability that we've demonstrated over the past couple of quarters to the extensive with our margins and to improve our take rates.
And because we have expanded margins really the way to think about these agreements that we're able to sort of share some modest preferential economics with long term committed investors.
Those.
Preferential economics could take the form of.
So our return premiums or take.
Okay, Great co investment.
Modest discounting in this journey.
All of our investors have a slightly different set of preferences and objectives. So it tends to be a bit different by a counterparty.
They're all are currently focused on personal loans.
So they are sort of restricted to our core business beyond that they tend to mirror.
Our broader institutional programs. So apart from some prior precedent preferential economics that essentially flow from our enhanced our unit economics. They tend to look very similar to what we would normally do through the capital markets.
Great. That's really helpful. Thank you and maybe.
Follow up question to that just on.
On your comments around take rate and I guess, you had a very impressive contribution margins that you generated this quarter and anticipate to generate in the next quarter, how should we think about.
The sustainability of that as you go through perhaps an economic recovery in loan acceleration at some point should we expect those contribution margins to decline and then what does that mean in terms of.
Funding commitments become less important in that regard, but just like to think about how all that ties together.
Sure Yeah.
I mean, I guess the punch line is there I think there are probably sustainable for as long as we want them to be.
Theres really two underlying factors I would point to one is the extent to which we are sort of investing for the short term versus the long term and the other is the general elasticity.
Of the.
The loan demand on the borrower side and so currently as an example.
Because it is quite high credit is in demand on the borrower side.
And so that.
And that creates a.
Sort of pricing ability on our side, but maybe the more important thing is when we're when we're sort of solving for the near term P&L.
We are optimizing take rates as much as possible against that elasticity and we are managing our marketing programs to deliver.
You know.
Loans that are profitable in the in the near term I think that as the economy evolves and certainly if it improves what you would see is on the one hand, a declining in elasticity. So there'll be more sort of provision of credit on the supply side and so borrowers will have more choice.
But the other factor would be you know in our case, we would then start to rebalance how we trade off the short term for the long term and so by reducing take rates and <unk>.
<unk> growing marketing campaigns, we can generate more volume.
Harvest more lifetime value of the customer harvest more.
James on the model learning side things that won't necessarily show up in this quarter's P&L, but make provide value over time and so when you put all of that together.
You get a an improving economy I think you'd probably see take rates that that may not go back to where they were before but would probably moderate with the economy improving.
Thanks, that's really helpful. Thank you.
Okay.
Our next question comes from the line of Ramsey El <unk> with Barclays. Please go ahead.
Hi, This is John coffee on for Ramsey.
A question for you on your slide 18 really regarding your conversion rates. So it looks like your conversion rates had declined from about 21% last year to 8%.
I was just trying to understand the drivers of this a little bit better is most of it just the supply of credit or is it sometimes that potential borrowers are hitting that that ceiling for interest rates or the trigger there are deciding to defer.
Some kind of purchases to later on when there may be a little bit more of a stable economic conditions.
Yeah, Hey, John Yeah.
Yes. It is.
It doesn't have much at all to do with the supply side I think maybe that the single most explanatory.
Variable would be what we call our upstart macro index or <unk>.
<unk>, which is also in our investor materials.
And that basically reflects the fact that you know apples to apples.
The same consumer is defaulting at our rates.
That is you know maybe it's a two.
Two to three times higher than they were.
2021.
And because of that.
Consumer repayment pattern change, we are pricing loans very differently right, including much higher default premiums in the loans.
And then compounding that of course, there is the higher base interest rates, which are requiring investors to demand higher sort of returns when you add those two up our like for like price per alone has gone up quite dramatically and in some cases, you know 500 to 2000 basis points and because of that change in pricing two things are happening one is a lot less.
Borrowers are getting approved right.
So a lot of them are being pushed above the 36% ETR threshold and then even for those who are still getting approved their prices are a lot higher than that maybe less.
<unk> supposed to taking the loan so those two things combined have resulted in the Kentucky conversion rate.
Alright, great. Thank you and just for a very short follow up I noticed that your your loans on your balance sheet actually declined a little bit quarter over quarter should we think of last quarter or the fourth quarter is a bit of a high watermark or is that still too early to say.
Okay.
Good question, John I mean, I think that we I think continue to think of the balance sheet along the lines of the parameters, we've expressed to the market, which as you know there's a certain number we won't go above and that's probably roughly where we were.
Last quarter.
We also said in our remarks that there is a.
A transaction that did not complete in Q1, but we expect it to complete in Q2.
And that will bring our balance sheet.
Next quarter now from there we made sort of continue to use the balance sheet as it.
As a platform tool, but I think that youll, probably see us remain a sort of.
Got it.
And where we are sort of peaking.
Peaking at the $1 billion range and then.
No.
Having our flowing from there based on where they were transacting or accumulating.
Great. Thank you.
Okay. Thanks.
Our next question comes from the line of Peter Christiansen with.
Yes.
Good afternoon, and thanks for the question.
I just wanted to dig a little bit into the secured funding the $2 billion.
I just wanted to I just wanted to understand is this.
Yes.
These funds.
Like securing minimums from existing partners or is it incremental from from new funding partners. If you could just provide a little bit more color on on that.
How it is.
Pairs to the to the existing run rate I guess the business day.
Sure Yeah. Thanks, Pete this is sanjay.
I think a lot of it is coming from partners that are new to the platform that we've never worked with before.
Some of it is coming from existing partners.
Would either sort of stepped away.
From a funding during the turbulence of the past few quarters and are coming back to the platform or they're re upping on significant size I'm committing forward.
In exchange for a longer term agreement so.
So I think in almost every case, you can view as sort of being additive to.
Interest rates et cetera, so, but we do believe I mean, the reason we've been able to grow in overtime is predominant cause the technology and the models get better and those those tend to lead to growth and even in a difficult environment as we have today that.
Still it is still true.
Okay. Thank you. Thank you both.
Thanks Pete.
Our next question comes from the line of Giuliano Bologna with Compass point. Please go ahead.
I was curious and looking at kind of the mix of bank versus nonbank.
Institutional investors on the platform.
There's a sense of like where that mix may have shifted this quarter, where that might go going forward.
Hey, Joanna.
You're asking about the sort of mix of banks or institutional investors.
That's right yes.
Yes, I mean, I guess split that at a headline level.
I would say that obviously the AR.
The events that we went through in March.
Particularly impacted the banking sector.
It definitely had an impact.
And so the dynamic there as you know we continue to bring you sort of lending partner Bank credit Union partners aboard but existing ones are obviously, becoming a little bit more conservative I think that impacted capital markets less. So so you may have seen a bit of a shift towards institutional dollars mm.
How that plays out for just a bit hard to tell I mean, the banking sector is obviously right now in a bit of turbulence.
That may increase or it may moderate and I think depending on you know what.
That thinking what that sector experiences over the coming quarters.
Looking at Plessey reflected at that reflected in their ability to or the appetite to lend and undertake take more balance sheet risk.
That makes sense and then kind of looking through some of the past disclosures.
To to banks that seem to be the primary enablers of B b loan sales or kind of the the marketplace side of the platform.
Add up the volumes of those two banks it seems to imply that they are actually much more than the loans that are being sold have institutional investors and retain but I'm, sorry, I couldn't acquire one or two of those banks accounts for 50.
50, Foster as we're getting close to 60% of all of your kind of bank funding side of the platform, but I'm curious to know what level of concentration there is on the banks on the funding platform quite have you seen any any of those partners pull back in there and theyre buying activity recently.
Yes, there are really three banks on our platform at surveys.
Honda, which where they they originate.
Originate loans.
Some cases, they hold some of them and in other cases, they end up selling them to institutional partners. So there are three of those are banks on our platform and it's quite possible to move volumes between them. It's quite purposeful that we can do that generally speaking the fees and the profits on the loans that end up in the institutional side are higher than they are on the bank on that.
Tend to be the primary loans that banks were originating and holding on your balance sheet. So that's sort of.
With this structure that youre seeing there, but but it's not really you know in a true sense of revenue concentration. These are again, many many institutional buyers are behind those banks, but we do have multiple are what we would call marketplace lending partners on.
On the platform.
And I'm curious to know what do you think about it you know floating concentration with any partners are there any partners that are kind of you know, 10% or more of your overall funding or 15% or more of your overall funding or is it more diversified than that.
Yeah, Julien I think what you'll see in our revenue concentration disclosures.
When the financials come out is that those concentrations are going down.
And I think in terms of <unk>.
Source capital dependency.
I don't think anything is far greater than that.
The ballpark that you just mentioned.
Got it. Thank you very much I'll jump back in the queue.
Okay.
Thank you.
The next question comes from the line of James Faucette with Morgan Stanley . Please go ahead.
Hey, Thank you very much and thanks for the detail today wanted to go back on the secured funding and thank you you made the comment that there were some preferential terms that you were able to offer to them.
Yes, a couple of questions associated with that.
Going forward, what would be the right level of mixed or targeted mix for for that group and it sounds like you are planning to add more to that firstly and secondly, how much should we expect that you may have to harmonize at least some of those terms into other sources of capital.
Hey, James This is Dave.
Good question, So I would say first of all.
One of the comments I had made.
In my remarks earlier without we would like to have.
Any particular month capital committed such that we can be cash flow positive as a business so sort of a baseline of capital.
That we feel very good about being solid will be there and that would be a pretty dramatic reduction in AR.
Cyclicality. So so that's I think what we would try to do.
I generally think we are benefiting from the fact that we have very strong margins and that we can share a bit of them.
With the preferred partner in a preferred partners one that is making a longer term.
Commitment to us so I think that's the structure that we would expect to have for the long haul and I think it makes sense that if they're going to commit to you you're going to make some special came to them and their can all of course also continues to be plenty of sort of at will participants in the marketplace month in month out and we don't expect that to go away. We think it's a good thing but.
I do think we want a significant fraction of the funding to be more long term committed in and getting a little bit of a preference for doing that and lastly, as we've said I think we feel comfortable given our margin structure that we can afford to do that the other thing I'll add is this is all as Sanjay said earlier entirely related to personal loans today I think we will push for this kind of <unk>.
Structure on other products as well I I kind of believe that secured products are ones that are much prime or like the HELOC product will have probably I would just say less of a need for it because they they will just tend to be more normal familiar products in one set.
Lenders leaned toward even in more difficult times. So that's how we're thinking about it I don't know if there I think there will always be kind of.
Well hopefully harmonize these types of agreements into a consistent structure Sanjay said, they're starting off a little bit spoke by you know probably not hard to imagine that that would happen, but over time I think we would really like to almost program and ties. It. So it's a little more structure, but I do believe that there'll be sort of longer term partners and there'll be at world partners co existing in our in our platform.
Yeah Yeah.
And then on AWN I appreciate all that David then.
Are you feeling about the state of your cost base now on a on a run rate basis I know that here in the in the you know.
June quarter, Youre expecting to roughly be adjusted EBITDA breakeven about those programs have been fully implemented but you know should.
Should we take that to mean that you.
Your you feel like Youre at the right cost base in that.
The kind of the first quarter would've been roughly the bottom from a revenue generation perspective, and that you can grow at least for the remainder of this calendar year on a sequential basis or are there incremental.
Actions that may be needed to be taken just trying to think through kind of how you're seeing the business and its evolution from this point.
Higgins as Sanjay Yeah, I think we're in very good shape as it been a personnel from a personnel perspective.
We did what we needed to do in Q1, and we're past that I think our workforce numbers are in very good shape now.
Barring any dramatic reversal and the business and the economy I think we're all sort of grow from here.
Still more work to be done on the Opex side as Dave mentioned, these sort of programs to sort of reduce.
Large consumers of compute.
Our machine learning models require a lot of sort of training.
The resources and we want to get more efficient at that are our engineering footprint.
You know the resources we consume.
Can get more efficient as well so I think that this will be an ongoing.
Instead of initiatives, but I think by and large.
Your model is right, which is I think we're at a good place we can tighten up a little bit more but I you know, we're sort of indicating that we think are we think there's a nice path for growth from here on out and and.
As we did as we demonstrated before our cost basis is going to scale very efficiently with the top line and it'll sort of provide that provide nice margin material addition, as we grow.
That's great thanks for that side of it.
Thank you.
Our next question comes from the line of Reggie Smith with Jpmorgan.
Good evening gentlemen, congrats on the quarter and on securing the <unk> 2 billion in funding.
My question I know in the past you use you've been asked about becoming a bank and not wanting to do that which I can totally appreciate.
My question for you and I guess, it kind of relates back to the funding as well.
Would you would you consider like a warehouse type a funding mechanism in it and does any of your $2 billion.
Is any of instruction and in that kind of way, where you pay a fixed rate and you you hold more loans on balance sheet.
Or is it all is all that you're doing that you talked about.
Is all of that 2 billion that you're talking about purely.
Arm's length.
Outside of balance sheet.
Right.
Yeah.
Yeah that that's generally what we would term forward flow commitments. So loans that are purchased monthly.
By a third party an outside third party. So so that's that's what that is it's not on our balance sheet.
Warehousing and our side they can be using.
They could be leveraging on their side if they if they chose to but that's separate from anything going on with us.
So.
Let me see what was the other part of the question.
So would you consider warehouses that is that also something that you would not.
Let's see.
Yeah, we've had modest warehouse capacity for many years. So when the loans are on our balance sheet to some extent, we have those are financing them and it's more efficient use of our equity capital, but that's still you know that's under that umbrella of the loan totals as Sanjay said, we aim to stay at no more than 1 billion on our balance sheet.
And those tend to be warehoused outwardly some of the market. So we do use that for our capital efficiency, but it's it's not a primary funding mechanism just as our balance sheet ultimately is not a primary funding mechanism.
Got it thanks, Eric.
The loans on our balance sheet, when we say, we have a $1 billion of assets in the balance sheet.
Less than half of that is the actual loan equity, allowing us the rest of his finance, but we still consider that to be a balance sheet. That's really what we're interested in with the long term arrangements with third parties.
He is the risking in.
And they can they can finance it.
Yeah, No I appreciate that the I guess the crux of the question was would you consider being more I guess balance sheet intensive, but it sounds like you're comfortable with 1 billion and that's kind of where are you where you.
Where you want to remain at least for the foreseeable future.
My second question guidance.
Very strong numbers in particular I guess the.
The interest net interest in kind of fair value I guess that implies a pretty sharp sequential improvement. There was curious what was driving that and if you could talk a little bit about the performance you're seeing.
Of your loans that are held on balance sheet loss rates and things of that nature.
Yeah sure Sanjay.
So as far as the guidance I would say you know Q1 was the anomaly.
In a sense a.
Which as you know normally you'd expect your balance sheets have some modest positive income we tend to hold our loans at fair value. So we mark to market, we don't use seasonal accounting.
And so when interest rates are going up which has happened with a lot in the last year, it's taken a toll.
Paul on the valuations Q1 in particular.
Isn't necessarily have adverse sort of interest rate movements, but what it did have is we books unrealized fair value marks.
That reflected a balance sheet transaction now.
No. It was not a balance sheet transaction that completed in Q1.
So that's why it's unrealized.
But but because it was a balance sheet transaction that we were anticipating or expecting them and we expect it to close.
Early in Q2.
We sort of reflected the economics of that transaction in Q1 and that will be in our disclosures. So I think you could think of it that is as of Q2 going forward.
We're not really anticipating any large significant transactions beyond the one we've already accounted for and therefore, I think what youre seeing now.
In our guidance for interest income just sort of reflects ongoing normality.
It's sort of like income rate I'm, sorry interest rate stability, no large transactions and some modest.
Hum.
Modest income from our remaining balance sheet.
So that's how I would think about the guidance as for performance, but I think the best way to think about it is in our investor materials, we generally display.
What we're intending to do with a blended average across our platform with respect to gross return delivery and how we think each vintage is.
<unk> is trending.
The simple summary is you know vintages that are on our balance sheet from back in 2021.
Or 2022.
Are likely going to under deliver.
As as they are across the broader platform I think anything is.
Certainly Q4.
Forward so anything on from the last six to nine months are well on track to over deliver in our opinion and so you know that the performance of our balance sheet will just reflect the underlying vintages that you see on the broader platform.
Got it and if I could sneak one more in.
On the take rate.
You talked about I guess shneur of economics.
Curious is is there a way to kind of parse.
The impact of.
Stronger pricing origination fees that are paid by borrowers versus.
Maybe what your partners are or paying you.
Was there any change there or when you talk about better pricing.
I don't think there's anything necessarily more to parse there then fees primarily borne by our.
Borrowers that are getting.
Getting loans funded through institutions tend to flex up at times like this so that's really what you're seeing I mean, you know yield requirements are going up.
Loss expectations going up and also the fees going up all of which we certainly don't love, but its the reality of the economy. We're sitting in that we have to play in.
And we would really be happy to see all of that reverse itself over the next year. If if if we're so fortunate.
No I got it that wasn't that wasn't clear to me I'm, sorry, I've got a couple of calls going on so I didn't I didn't catch that part that it was that was primarily a bottle whiskies. Okay. Thank you.
North.
Yeah.
Yeah.
Our last question comes from the line of Simon Klensch with Atlantic Equities.
Hi, guys I'm going to jump back into queue. Thanks for taking my question again.
Just curious going back to your the pace of your new model rollouts or updates through.
The quarter was you know pretty staggering and they'll just.
Someone who doesn't really know about these things I was wondering if you could talk us through perhaps the risks and challenges.
Challenges of all of that kind of pace of rollout.
And two I guess, how to think about that in terms of the benefits going forward because you know.
Previously, we havent needed got many rollouts to create significant benefits for you guys.
Yeah, Simon it's a good question. It's important I would just say to state that we have different models in production for each product that we have so this four products to auto products personal loan product small dollar product each of whom have related but different models that pushed to production. There's also models that are more focused on automation.
And then the pricing so things that deal with fraud and in those kinds of things. So you know all across the I don't know exactly how many AI models in the distinctive AI models, we have but it's quite a few and those teams are working in parallel. So this isn't the same model being updated or retrained every three days, it's less than that but but there's a lot of them and each one of them.
You know generally are making some part of our product line I got much better. So that's the pace, which you know couple of years ago, We were probably maybe doing one a month or so so it's quite a difference.
But that sounds like a sensible thank you.
Thanks Simon.
This concludes today's question and answer session I will turn the call back for any additional or closing remarks.
Just want to thank everybody for listening today, and as we said, where we're happy with what we've achieved in the first quarter, we're actually pretty optimistic about 2023, so thanks for sticking with us.
Yeah.
This concludes today's call. Thank you for your participation and you may now disconnect.
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