Q4 2023 Upstart Holdings Inc Earnings Call

Operator: www.UpstartHoldings.com You are currently holding for the Upstart fourth quarter 2023 earnings call. We are still gathering participants, and we'll be starting shortly. I hear and I know, and I sing Here on earth things are better Okay boys, okay girls, okay boys I hear and I know, and I sing, The Ultimate Parody Site!

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You're currently holding for the upstart fourth quarter 2023 earnings call. We are still gathering participants and we'll be starting shortly.

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Operator: www.UpstartHoldings.com. Good day, and welcome to the Upstart fourth quarter 2023 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason Smith, head of investor relations. Please go ahead, sir.

Good day and welcome to the upstart fourth quarter 2023 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Jason Smith head of Investor Relations. Please go ahead Sir.

Reginald Lawrence Smith: Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's fourth quarter and full year 2023 financial results. With us on today's call are Dame Gerard, Upstart's Chief Executive Officer, and Sanjay Datta, our Chief Financial Officer. Before we begin, I want to remind you that shortly after the market closed today, Upstart issued a press release announcing its fourth quarter and full year 2023 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, ir.upstart.com.

Reginald Lawrence Smith: Good afternoon, and thank you for joining us on today's conference call to discuss upstarts fourth quarter and full year 2023 financial results.

Reginald Lawrence Smith: With us on today's call are danger art starts Chief Executive Officer, and Sanjay Dr. <unk>, our chief financial.

Reginald Lawrence Smith: Financial Officer.

Reginald Lawrence Smith: Before we begin I want to remind you that shortly after the market closed today <unk> issued a press release announcing its fourth quarter and full year 2023 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, IR Dot upstart dotcom.

Reginald Lawrence Smith: During today's call, we will make forward-looking statements, such as guidance for the first quarter of 2024 related to our business and our plans to expand our platform in the future. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties, and assumptions; actual results may differ materially as a result of various risk factors that have been described in our filings with the SEC. As a result, we caution you against placing undue reliance on these four booking statements.

Reginald Lawrence Smith: During today's call, we will make forward looking statements such as guidance for the first quarter of 2024 related to our business and our plans to expand our platform in the future. These.

Reginald Lawrence Smith: 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.

Reginald Lawrence Smith: Actual results may differ materially as a result of various risk factors that have been.

Reginald Lawrence Smith: I described in our filings with the SEC.

Reginald Lawrence Smith: 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.

Dave Girard: 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 to 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 table. To ensure that we address as many analyst questions as possible during the call, we request that you limit yourself to one initial question and one follow-up. Later this quarter, Upstart will be participating in Citi's 2024 13th Annual FinTech Conference on February 27th, the Morgan Stanley Technology, Media, and Telecom Conference on March 4th, and the Citizens JMP Technology Conference on March 5th. Now, we'd like to turn it over to Dave Girard, CEO of Upstart Holdings. Good afternoon, everyone.

Reginald Lawrence Smith: In addition to 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.

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

Reginald Lawrence Smith: Blow up.

Reginald Lawrence Smith: Later this quarter upstart will be participating in cities 'twenty 'twenty, 413th annual Fintech Conference on February 27.

Reginald Lawrence Smith: The Morgan Stanley Technology Media and Telecom conference on March 4th and the citizens JMP Technology Conference on March 5th now, we'd like to turn it over to Dave Girard CEO of upstart.

Dave Girard: Good afternoon, everyone I'm, Dave Gerard co founder and CEO of upstart. Thanks for joining us on our earnings call covering our fourth quarter and full year 2023 results.

Dave Girard: I'm Dave Girard, co-founder and CEO of Upstart. Thanks for joining us on our earnings call covering our fourth quarter and full year 2023 results. Despite the difficult lending environment, we delivered solid results to end the year, with revenue up 4% sequentially in our third consecutive quarter of positive adjusted EBITDA. Without question, 2023 was a challenging year for both Upstart and the lending industry, and we're glad to be done with it. With interest rates at their highest in decades, elevated consumer risk throughout, multiple bank failures leading to extreme caution and conservatism among lenders, and a significant dislocation in capital markets, the environment presented one hurdle after another. Considering the challenges 2023 presented, I'm happy with the decisions we took and the progress we made for the long-term success of Upstart.

Despite the difficult lending environment, we delivered solid results to end the year with revenue up 4% sequentially and our third consecutive quarter of positive adjusted EBITDA without question 2023 was a challenging year for both upstart and the lending industry and we're glad to be done with it with interest rates at their highest in decades.

Dave Girard: Elevated consumer risk throughout multiple bank failures, leading to extreme caution and conservatism among lenders and a significant dislocation in capital markets. The environment presented one hurdle after another considering the challenges 2023 presented I'm happy with the decisions, we took and the progress we made for the long term.

Dave Girard: SaaS of upstart.

Dave Girard: Looking ahead, we remain cautious about the near-term outlook for our business and will continue to operate responsibly in this environment, but I'm hopeful that you'll begin to see the benefits of our work as the economy continues to normalize in 2024. The numbers will show that we've actually become far more efficient. And even while becoming more efficient, we've laid the groundwork to become a more resilient and diversified company that can thrive in a wide range of economic conditions. With regard to efficiency, in Q4, we increased our contribution margin both percentage-wise and in absolute dollars versus the year-ago quarter. We also finished 2023 with 26% fewer headcount than at the end of 2022.

Dave Girard: Looking ahead, we remain cautious about the near term outlook for our business and we will continue to operate responsibly in this environment, but I'm hopeful that you'll begin to see the benefits of our work as the economy continues to normalize in 2024.

Dave Girard: The numbers will show that we actually become far more efficient and even while becoming more efficient we've laid the groundwork to becoming more resilient and diversified company that can thrive through a wide range of economic conditions.

Dave Girard: With regard to efficiency in Q4, we increased our contribution margin both percentage wise and in absolute dollars versus the year ago quarter.

Dave Girard: We also finished 2023 with 26% fewer head count than at the end of 2022.

Dave Girard: Despite this, we hired almost 200 new employees in 2023 as we continued to strengthen our teams and reinforce our priorities. Improved efficiency sets us up well for a return to profitable growth in the future.

Dave Girard: Despite this we hired almost 200, new ups starters in 2023, as we continued to strengthen our teams and reinforce our priorities improve efficiency sets us up well for a return to profitable growth in the future.

But 2023 was not all about efficiency. We also focused intensely on building a stronger upstart for the future. Let me share six areas, where we've made significant progress recently and why I believe the lead us to a bigger and brighter future.

Dave Girard: We also focused intensely on building a stronger startup for the future. Let me share six areas where we've made significant progress recently and why I believe they'll lead us to a bigger and brighter future. Number one, managing the macro. In the last two years, we have experienced an economy unlike any in recent history. In fact, if you look even further into the past, you would be hard-pressed to find an economic cycle similar in form to what we've experienced since the beginning of the pandemic.

Dave Girard: Number one managing the macro and the last two years, we experienced an economy. Unlike any in recent history. In fact, if you look even further to the past you'd be hard pressed to find an economic cycles similar in form to what we've experienced since the beginning of the pandemic, while most of our innovation historically has been focused on selecting the right borrower.

Dave Girard: While most of our innovation historically has been focused on selecting the right borrower at the right price, we learned that disruptions to the macro economy can reduce banks' desire to lend altogether, particularly in unsecured credit, where risk is naturally greater. In 2023, we took on this challenge by releasing the Upstart Macro Index, a tool that provides lenders with a clearer picture of the current state of the economy and enables them to make more refined decisions about their lending programs. We also developed Parallel Timing Curve Calibration, which helps calibrate new versions of risk models faster than what was previously possible.

Dave Girard: At the right price, we learned that disruptions to the macro economy can reduce banks desire to lend altogether, particularly in unsecured credit where risk is naturally greater.

Dave Girard: In 2023, we took on this challenge by releasing the upstart macro index a tool that provides lenders with a clearer picture of the current state of the economy and enables them to make more refined decisions about their lending programs.

Dave Girard: We also developed parallel timing curve calibration, which helps calibrate new versions of risk models faster than what was previously possible while we.

Dave Girard: While we believe predicting the economy's future is unrealistic, we do think lenders can be far more data-driven and nuanced in their decision-making. UMI and PTCC represent a giant first step toward offering a proprietary set of macroeconomic management tools that we expect banks and credit unions will demand for all their lending programs. Such a tool set is vital to Upstart's mission because it has the potential to make appropriately priced credit readily available to more Americans at all parts of the cycle. Number two, extreme automation. Because so much attention goes to our risk models related to credit decisioning, it's often less well appreciated how much progress we've made in building a highly automated and efficient credit origination process. Automation and efficiency are a winning combination in any economic climate.

Dave Girard: We believe predicting the economy's future is unrealistic, we do think lenders can be far more data driven and nuanced in their decision making.

Dave Girard: And PTC represent a giant first step toward offering a proprietary set of macroeconomic management tools that we expect banks and credit unions will demand for all of their lending programs.

Dave Girard: She toolset is vital to ups starts mission because it has the potential to make appropriately priced credit readily available to more Americans in all parts of the cycle.

Dave Girard: Number two extreme automation because so much attention goes to our risk models related to credit Decisioning, it's often less well appreciated how much progress we've made in building a highly automated inefficient credit origination process automation and efficiency are a winning combination in any economic climate and.

Dave Girard: In Q4, we once again achieved an all-time high with 89% of our unsecured loans approved through an instant and fully automated process. Though we expect this number to vary quarter to quarter, the long-term trend has been clear, and it's a big win for us. We believe process automation is a durable advantage for Upstart that creates an obviously better user experience.

Dave Girard: In Q4, we once again achieved an all time high with 89% of our unsecured loans approved through an incident and fully automated process.

Dave Girard: So we expect this number to vary quarter to quarter. The long term trend has been clear and it's a big win for US. We believe process automation is a durable advantage for upstart that creates and obviously better user experience, who wouldn't want to be approved instantly for alone rather than having to upload documents scheduled phone calls or wait hours or days.

Dave Girard: Who wouldn't want to be approved instantly for a loan, rather than having to upload documents, schedule phone calls, or wait hours or days for a response from a credit analyst? We believe a fast, automated approval is essential to winning over borrowers who have lots of choices and little patience or time, and these tend to be the best borrowers. And it's not just a better user experience. In Q4, 92% of automatically approved applications converted to a funded loan, while only 27% of those involving manual steps converted. That's an astounding difference, more than 3x the conversion rate.

Our response from a credit analyst, we believe a fast automated approval is essential to winning over borrowers who have lots of choices and little patients or time and these tend to be the best borrowers.

Dave Girard: And it's not just a better user experience in Q4, 92% of automatically approved applications converted to a funded loan while only 27% of those involving manual steps converted that's an astounding difference more than three X. The conversion rate improved conversion from automation mechanically reduces our funnel.

Dave Girard: Improved conversion from automation mechanically reduces up-funnel costs associated with customer acquisition and data associated with generating the rate off. Of course, automated loans cost Upstart far less to process in the verification step, contributing directly to our efficiency and allowing us to pass the savings along to our lending partners. We recently began to brand and market our automated approval process to applicants as FastTrack. Just by presenting the benefits of Fast Track to applicants, we've increased our funnel conversion by more than 2%. Number three, strengthening our core.

Dave Girard: Costs associated with customer acquisition and data associated with generating the right offer.

Dave Girard: Of course automated loans cost upstart far less to process in the verification step contributing directly to our efficiency and allowing us to pass those savings along to our lending partners.

Dave Girard: We recently began to brand and market our automated approval process to applicants as fast track.

Dave Girard: Just by presenting the benefits of fast track to applicants we've increased our funnel conversion by more than 2%.

Dave Girard: Number three strengthening our core.

Dave Girard: We've also focused on strengthening our core personal loan product for periods of higher interest rates and elevated risk, such as we've been experiencing in recent quarters. In the coming months, we expect to release an optional feature that allows borrowers to provide collateral to support their personal loan applications. This option will help borrowers access credit at lower rates than would otherwise be possible, particularly at a time when rates and risk are elevated.

Dave Girard: We've also focused on strengthening our core personal loan product for periods of higher interest rates and elevated risk such as we've been experiencing in recent quarters in the coming months, we expect to release an optional feature that allows borrowers to provide collateral to support their personal loan application.

Dave Girard: This option will help borrowers access credit at lower rates than would otherwise be possible, particularly at a time when rates and risk are elevated.

Dave Girard: We've also identified a somewhat different opportunity to assist our lending partners in periods of reduced liquidity when banks tend to prioritize retaining existing customers over acquiring new ones. We're hard at work at developing tools and techniques to help our bank and credit union partners do just that, strengthening their relationships by better serving existing customers. We expect to share more about this later in 2024. As I mentioned last quarter, we've also improved our investment in servicing and collection and are hopeful we'll see dividends from this investment in 2024 and for years to come. The product team working on our servicing platform grew by more than 60% in Q4.

Dave Girard: We've also identified a somewhat different opportunity to assist our lending partners and periods of reduced liquidity when banks tend to prioritize retaining existing customers over acquiring new ones.

Dave Girard: At work at developing tools and techniques to help our bank and credit Union partners do just that strengthening their relationships by better serving existing customers. We expect to share more about this later in 2024.

As I mentioned last quarter, we've also upgraded our investment and servicing and collections and are hopeful we will see dividends from this investment in 2024 and for years to come.

Dave Girard: The product team working on our servicing platform grew by more than 60% in Q4 much of the effort is focused on simply making it easier for borrowers to pay and for servicing agents to handle bars issues quickly and efficiently.

Dave Girard: Much of the effort is focused on simply making it easier for borrowers to pay and for servicing agents to handle borrower's issues quickly and efficiently. But we're increasingly excited about applying our machine learning expertise to this aspect of our product as well, to maximize repayment and optimize handling of bars who may go or have already gone delinquent. We've begun programmatically gathering the data that will unlock the type of efficiency and efficacy gains in servicing that we've long seen on the Origination Center. Number four, upgrading the money supply. In our first 12 years, the lion's share of our innovation has been focused on AI-enabled credit origination. In parallel, we've also developed capabilities related to efficient customer acquisition that are serving us well. But we've directed far less innovation toward the supply side of our business, i.e., the money.

Dave Girard: But we're increasingly excited about applying our machine learning expertise to this aspect of our product as well to maximize repayment and optimized handling of borrowers who may go or have already gone delinquent.

Dave Girard: Begun programmatically gathering the data that will unlock the type of efficiency and efficacy gains in servicing that we've long seen on the origination side.

Dave Girard: Number four upgrading the money supply.

Dave Girard: In our first 12 years, the lion's share of our innovation has been focused on AI enabled credit origination in parallel. We've also developed capabilities related to efficient customer acquisition that are serving us well, but we've directed far less innovation towards the supply side of our business I E. The money and this needs to change.

Dave Girard: And this needs to change. Today and in the coming years, we are increasing our innovation on the money supply and have a healthy head start in this area. Success in this domain means our funding across products will be more scalable, more reliable, and more competitive with respect to cost. We believe this innovation can be unlocked by long-term partnerships that combine novel risk-sharing and return-smoothing structures with direct and proprietary access to our credit origination engine. After the quarter ended, we closed an agreement with Aries, a leading global alternative investment manager, for them to acquire $300 million in personal loans. Additionally, we signed an agreement with a lending partner that we expect will originate approximately $500 million in loans over the next 12 months. Number five, products for all environments.

Dave Girard: Today and in the coming years, we are increasing our innovation on the money supply and have a healthy head start in this area.

Dave Girard: Success in this domain means our funding across products will be more scalable more reliable and more competitive with respect to cost.

Dave Girard: We believe this innovation can be unlocked by long term partnerships that combined novel risk sharing and return smoothing structures with direct and proprietary access to our credit origination engine.

Dave Girard: After the quarter end, we closed an agreement with areas, a leading global alternative investment manager for them to acquire $300 million of personal loans. Additionally, we signed an agreement with our lending partner that we expect will originate approximately $500 million in loans over the next 12 months.

Dave Girard: Number five products for all environments. We're building a set of upstart offerings that are counter cyclical to each other with the goal of developing a more balanced portfolio of credit products with less volatility and overall volume we're particularly.

Dave Girard: We're building a set of Upstart offerings that are counter-cyclical to each other with the goal of developing a more balanced portfolio of credit products with less volatility in overall volume. We're particularly excited about the rapid progress in our first home lending product, a HELOC. This product is popular in high-rate environments when consumers are reluctant to sell their home or refinance their mortgage. We recently crossed our first $5 million in cumulative key lock originations, and our month-to-month growth is quite encouraging. We're now in 11 states plus Washington, D.C., and expect to add a few more states in the coming weeks.

Excited about rapid progress in our first home lending product a HELOC. This product is popular and high rate environments. When consumers are reluctant to sell their home or refinance their mortgage.

Dave Girard: We recently crossed our first $5 million in cumulative HELOC originations in our month to month growth is quite encouraging. We're now expanded to 11 States plus Washington D C and expect to add a few more states in the coming weeks in Q4, our average HELOC timing to close was down to nine days. This is amazing.

Dave Girard: In Q4, our average key lock time to close was down to nine days. This is amazing progress against our long-term goal of a five-day close and already dramatically better than the industry average of more than five weeks. In Q4, we also launched our first instant approvals for the HELOC product. This means we're now often able to instantly verify identity, income, and home value without any tedious document upload or waiting.

Dave Girard: Progress against our long term goal of a five day close and already dramatically better than the industry average of more than five weeks.

Dave Girard: In Q4, we also launched our first instant approvals for the HELOC product. This means we're now often able to instantly verify identity income and home value without any tds document upload or waiting for.

Dave Girard: We're hopeful this will become a meaningful percentage of our originations this quarter. We expect to drive this instant approval percentage up for HELOCs, just as we've done successfully with unsecured personal loans. Lastly, we successfully integrated our key lock within our personal loan application. This means personal loan applicants who are homeowners may be offered a home equity option in addition to an unsecured loan.

We are hopeful this will become a meaningful percentage of our originations. This quarter, we expect to drive this instant approval percentage up for HELOC, just as we've done successfully with unsecured personal loans.

Dave Girard: Lastly, we successfully integrated our HELOC within our personal loan application. This means personal loan applicants who are homeowners may be offered a home equity option. In addition to an unsecured loan.

Dave Girard: This is an area ripe with opportunity, and we expect to refine and expand this product integration over time. However, high interest rates made 2023 a difficult year for auto lenders. Regardless, we continue to make progress with our auto offering. We use the time to grow and strengthen our relationships with auto dealers, rounding out our retail software with key features most requested by dealers. We also expanded our finance offering with 88 dealerships now offering Upstart Auto Lending, up from 27 a year ago.

This is an area ripe with opportunity and we expect to refine and expand this product integration over time.

Dave Girard: In contrast high interest rates may 2023, a difficult year for auto lenders, regardless, we continue to make progress with our auto offering we used the time to grow and strengthen our relationships with auto dealers rounding out our retail software with key features most requested by dealers. We also expanded our finance offering.

Dave Girard: With 88 dealerships now offering upstart auto lending up from 27% a year ago.

Dave Girard: And we recently announced that we're expanding our AI-powered financing capability nationwide, expecting to reach 90% of U.S. consumers by the end of this quarter. We're confident that steady focus on the auto vertical will be rewarded once interest rates begin to decline. Number six, extending Upstart's AI leadership. While the last couple of years have been challenging, I believe they've ultimately extended our leadership in the application of AI to lending. Our models learned more than at any time in our history.

Dave Girard: And we recently announced that we're expanding our AI powered financing capability nationwide expecting to reach 90% of U S. Consumers by the end of this quarter.

Dave Girard: We're confident that steady focus on the auto vertical will be rewarded once interest rates begin to decline.

Dave Girard: Number six extending upstart AI leadership.

Dave Girard: While the last couple of years have been challenging I believe they're ultimately extended our leadership in the application of AI to lending our models learned more than at any time in our history. We've navigated extreme changes in macro conditions and built tools and capabilities to manage through such changes in the future.

Dave Girard: We've navigated extreme changes in macro conditions and built tools and capabilities to manage through such changes in the future. For example, with our small-dollar product, which I consider to be at the frontier of AI-enabled lending, we've tripled approval rates since August, and this product now represents about 15% of first-time borrowers on the platform. This type of rapid improvement, along with increasing automation and efficiency, gives me confidence that our forward progress in this domain is unparalleled. To wrap things up, I'm pleased to share that in January, we brought Upstarters together in Austin, Texas, to kick off 2024 with our largest Upstart gathering ever. We spent significant time talking about why our mission is so vitally important, and we left with a greater sense of purpose for our work. Upstarters across the country are confident and undeterred by the challenges involved in pioneering A.I.

Dave Girard: With our small dollar product, which I consider to be at the frontier of AI enabled lending we've tripled approval rates since August and this product now represents about 15% first time borrowers on the platform.

Dave Girard: This type of rapid improvement along with increasing automation and efficiency gives me confidence that our forward progress in this domain is unparalleled.

To wrap things up I am pleased to share that in January we brought up starters together in Austin, Texas to kick off 2024, with our largest upstart gathering ever we spent significant time talking about why our mission is so vitally important and we left with a greater sense of purpose of our work.

Starters across the country are confident and undeterred by the challenges involved in pioneering AI lending because they appreciate the size of the opportunity before us and the impact that access to affordable credit can have on the lives of all Americans.

Dave Girard: lending because they appreciate the size of the opportunity before us and the impact that access to affordable credit can have on the lives of all Americans. While many fintechs and even banks retreat from the lending business, we remain strongly committed to it. Americans will always need access to affordable credit.

Dave Girard: While many fintech and even banks retreat from the lending business. We remain strongly committed to it Americans will always need access to affordable credit and by continuing to serve borrowers through this difficult time, we're extending our advantage in training data model calibration products and process once the economy inevitably nor.

Sanjay Datta: And by continuing to serve borrowers through this difficult time, we're extending our advantage in training data, model calibration, products, and processes. Once the economy inevitably normalizes, and lending becomes fashionable again, I believe it will be difficult for others to catch up with. We're excited for the new year and optimistic about what it holds for Upstart. Thank you, and I'd now like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q4 and full year 2023 financial results and guidance. Sanjay

Dave Girard: Realize and lending becomes fashionable again I believe it will be difficult for others to catch up with US. We're excited for the new year and optimistic for what it holds for upstart.

Dave Girard: Thank you and I'd now like to turn it over to Sanjay Our Chief Financial Officer to walk through our Q4 and full year 2023 financial results and guidance Sanjay.

Sanjay Datta: Thanks, Dave, and thanks to all of you for joining us today. The hallmark of our economy in the second half of 2023 has been the remarkable, unrelenting growth in personal consumption, which continued unabated through the balance of the year. This trend stands in contrast to the flagging level of disposable income, which on a real per capita basis peaked before last summer and has since languished. These contrasting fortunes of consumption and income over the back half of last year have left personal fiscal health in as precarious a state as it's been since the great financial crisis, with personal savings rates hovering close to all-time lows.

Sanjay: Thanks, Dave and thanks to all of you for joining us today.

Sanjay: The hallmark of our economy in the second half of 2023 has been the remarkable unrelenting growth in personal consumption, which continued unabated through the balance of the year.

Sanjay: This trend stands in contrast to the flagging level of disposable income, which on a real per capita basis peaked before last summer and has since languished.

Sanjay: These contrasting fortunes of consumption in income over the back half of last year has left personal physical health and its precarious state as they've been since the great financial crisis with personal savings rates hovering close to all time lows.

Sanjay Datta: With respect to the corresponding impact on unsecured credit performance, we continue to see clear signs that the rising default rates of lesser prime, lower FICO borrowers that had played out over the past two years are now stable and showing signs of imminent recovery. However, this same pattern of rising defaults is now in the process of working its way through higher FICO, higher prime borrower segments, as well as prime and more secured products. According to a recent report released by the New York Fed, auto loans and credit cards have now spiked to their highest delinquency rates since the Great Financial Crisis and continue to rise.

Sanjay: With respect to the corresponding impact on unsecured credit performance, we continue to see clear signs that the rising default rates of lesser crime lower FICO borrowers that had played out over the past two years is now stable and showing signs of eminent recovery.

However, the same pattern of rising defaults is now in the progress of working its way through higher FICO higher prime borrower segments as well as primary and more secured product.

Sanjay: According to a recent report released by the New York Fed auto loans and credit cards have now spiked at our highest delinquency rates since the great financial crisis and continue to rise.

Sanjay Datta: Within unsecured lending, our view is that the near-term risk in credit has shifted to the primary customer segment. And as a result, we are becoming increasingly conservative in our underwriting of these higher cycle boards. The funding markets continue to be oversaturated with assets on offer in the secondary markets, largely coming from banks who continue to reduce the size of their balance sheets through asset sales. Despite these ongoing distractions, institutional loan buyers appear increasingly comfortable with the prospect of a soft economic landing, or perhaps even that no landing will be required, and there is an increasing anticipation of rate cuts at some point later in 2025. The general outlook on the macroeconomy seems increasingly consistent with our own long-held view that inflation is on the wane and that significant unemployment risk in this labor market is unlikely.

Within unsecured lending our view is that the near term risk in credit is shifted to the primary customer segment.

Sanjay: And as a result, we are becoming increasingly conservative in our underwriting of these higher FICO borrowers.

The funding markets continue to be over saturated with assets on offer in the secondary markets largely coming from banks, who continue to reduce the size of their balance sheets through asset sales.

Sanjay: Despite these ongoing distraction institutional loan buyers appear increasingly comfortable with the prospect of a soft economic lending or perhaps even that no lending will be required and there is an increasing anticipation of rate cuts at some point later in 2024.

The general outlook on the macro economy seems increasingly consistent with our own long held view that inflation is on the wane and that significant unemployment risk in this labor market is unlikely.

We are optimistic that our ongoing partnership efforts with institutional funding markets will become increasingly constructive over the course of the coming year should these macro trends volt.

Sanjay: The example of the partnerships that Dave announced earlier that have closed since the end of last year or hopefully indicators of mortgage things to come in 2024.

Sanjay Datta: We are optimistic that our ongoing partnership efforts with the institutional funding markets will become increasingly constructive over the course of the coming year should these macro trends worsen. The examples of the partnerships that Dave announced earlier, which have closed since the end of last year, are hopefully indicators of more good things to come in 2020. With this environment as context, here are some financial highlights from the fourth quarter of 2023. Revenue from fees was $153 million in Q4, slightly above our guidance of $150 million and up from $147 million last year.

Sanjay: With this environment as context here are some financial highlights from the fourth quarter of 2023.

Sanjay: Revenue from <unk> was $153 million in Q4, slightly above our guidance of $150 million and up from $147 million last year net.

Net interest income was negative $13 million in Q4.

Sanjay: With continued R&D portfolio charge offs in line with expectations and a downward revision to the outlook of our risk capital investments, reflecting the deterioration in the prime borrower loan performance.

Sanjay: Taken together net revenue for Q4 came in at $140 million above our guidance and up 4% from the prior quarter.

The volume of loan transactions across our platform in Q4 was approximately 129000 loans up 12% sequentially and representing over 82000, new borrowers.

Sanjay: Average loan size of $10000 with flat versus the same period last year and down 9% sequentially.

Sanjay Datta: Net interest income was negative $13 million in Q4, with continued R&D portfolio charge-offs in line with expectations and a downward revision to the outlook of our risk capital co-investments, reflecting the deterioration in the prime borrower loan. Taken together, net revenue for Q4 came in at $140 million, above our guidance and up 4% from the prior quarter. The volume of loan transactions across our platform in Q4 was approximately 129,000 loans, up 12% sequentially, and representing over 82,000 new borrowers. The average loan size of $10,000 was flat versus the same period last year and down 9% sequentially.

Sanjay: Our contribution margin and non-GAAP metric, which we define as revenue from fees minus variable costs per borrower acquisition verification and servicing as a percentage of revenue from fees came in at 63%. In Q4, just ahead of guidance and up 10 percentage points from last year.

Sanjay: As Dave highlighted we continued to benefit from high levels of loan processing automation and fraud modeling efficiency.

Sanjay: Achieving another new high end percentage of loan fully automated at 89%.

Sanjay: Operating expenses were $188 million in Q4 down 9% year over year, but up 5% sequentially as increasing sales and marketing spend somewhat offset efficiencies in automation and servicing costs.

Sanjay: Altogether Q4, GAAP net loss was $42 million.

Sanjay: While adjusted EBITDA was positive $1 million, both just ahead of guidance.

Sanjay: Adjusted earnings per share was negative <unk> 11 based on a diluted weighted average share count of $85 6 million.

Sanjay Datta: 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, came in at 63% in Q4, just ahead of guidance and up 10 percentage points from last year. As Dave highlighted, we continue to benefit from high levels of loan processing automation and fraud modeling efficiency. Achieving another new high in the percentage of loans fully automated at 89%. Operating expenses were $188 million in Q4, down 9% year-over-year but up 5% sequentially as increasing sales and marketing spend somewhat offset efficiencies in automation and services. Altogether, the Q4 gap net loss was $42 million, while adjusted EBITDA was positive $1 million, both just ahead of guidance. Adjusted earnings per share was negative 11 cents based on a diluted weighted average share count of 85.6 million.

Sanjay: We completed the full year with net revenue of $514 million.

Sanjay: Down 39% from 2022.

Sanjay: Our contribution margin of 63% up 14 percentage points from the prior year and adjusted EBITDA of negative $17 million, representing a negative 3% adjusted EBITDA margin versus 4% a year earlier.

We ended the year with loans on our balance sheet at $977 million.

Sanjay: Before the consolidation of securitized loans down from $1.01 billion the prior year.

Sanjay: That balance loans made for the purposes of R&D, principally auto loans with $411 million.

Sanjay: In addition to loan held directly we have consolidated $179 million of loans from an ABS transaction in the third quarter.

Sanjay: From which we retained a total net equity exposure of $38 million.

Sanjay: We ended the year with $368 million of unrestricted cash on the balance sheet and approximately $590 million in net loan equity at fair value.

Sanjay: Some amount of the core personal loans added to our balance sheet in Q4 were aggregated in anticipation of a secondary loan sale that was completed following the close of the quarter totaling $300 million.

Sanjay Datta: We completed the full year with net revenue of $514 million, down 39% from 2022; a contribution margin of 63%, up 14 percentage points from the prior year; and adjusted EBITDA of negative $17 million, representing a negative 3% adjusted EBITDA margin versus 4% a year earlier. We ended the year with loans on our balance sheet of $977 million before the consolidation of securitized loans, down from $1.01 billion the prior year. Of that balance, loans made for the purposes of R&D, principally auto loans, were $411 million. In addition to loans held directly, we consolidated $179 million of loans from an ABS transaction in the third quarter, from which we retained a total net equity exposure of $38 million. We ended the year with $368 million of unrestricted cash on the balance sheet and approximately $590 million in net loan equity at fair value.

Sanjay: Despite the promising economic indicators around inflation unemployment, we believe we are not yet completely out of the woods from a macro perspective.

Sanjay: Excess money in our collective savings accounts plentiful during the stimulus years has largely been spent after accounting for the effects of inflation and with historically low savings rates. The cash account balances in the economy continued to contract.

Sanjay: As noted we believe rising delinquencies are now making their way over to the primary more affluent segments of the borrower base, which is causing us to increase the conservatism in our loan pricing for those borrowers.

Sanjay: Considering the lingering credit risk and keeping in mind, the traditional seasonal softness in the first quarter of the year for.

Sanjay: For Q1 of 2024, we expect.

Total revenues of approximately $125 million.

Sanjay: Consisting of revenue from fees of $133 million and net interest income of approximately negative $8 million.

Sanjay: Contribution margin of approximately 61%.

Sanjay: Net income of approximately negative $75 million.

Sanjay: Adjusted net income of approximately negative $33 million.

Sanjay: Adjusted EBITDA of approximately negative $25 million and.

Sanjay: And a diluted weighted average share count of approximately 87.0 million shares.

Sanjay Datta: Some amount of the core personal loans added to our balance sheet in Q4 were aggregated in anticipation of a secondary loan sale that was completed following the close of the quarter, totaling $300 million. The excess money in our collective savings account, plentiful during the stimulus years, has largely been spent after accounting for the effects of inflation, and with historically low savings rates, the cash account balances in the economy continue to grow. As noted, we believe rising delinquencies are now making their way over to the primary, more affluent segments of the borrower base, which is causing us to increase the conservatism in our loan pricing for those borrowers, considering the lingering credit risk. And, keeping in mind the traditional seasonal softness in the first quarter of the year, for Q1 of 2024, we expect. Total revenues of approximately $125 million, consisting of revenue from fees of $133 million and net interest income of approximately negative $8 million.

Having observed the stabilization and recovery of delinquency trends from lower Prime borrowers, we believed to have cause for optimism coming into the new year and so it has been disappointing to see how the primary borrower segments are now quickly following suit and extending the strain of the current environment.

We will as always continue to act in the best interest of the credit by quickly reacting to raise prices and lower conversions in these segments.

And the belief that this will always lead to the best long term outcome for our business.

Sanjay: If the earlier arc of the less affluent borrowers is any indication the same cycle amongst primary borrowers will soon normalize and when it does we continue to have conviction that we will be very well positioned to capitalize.

Speaker Change: Continuing thanks to all of the upstairs, who are persevering through this right.

Speaker Change: With that Dave and I are happy to open the call to any questions.

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Speaker Change: Thank you if you'd like to ask a question. Please send not by pressing star one on your telephone keypad.

Speaker Change: You're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Speaker Change: Press Star one to ask a question.

Speaker Change: Our first question is going to come from Kyle Peterson from need Ham. Please go ahead Sir.

Sanjay Datta: Contribution margin of approximately 61%. Net income of approximately negative $75 million. Adjusted net income of approximately negative 33 million dollars, adjusted EBITDA of approximately negative $25 million, and a diluted weighted average share count of approximately 87.0 million.

Kyle Peterson: Oh, great. Good afternoon, thanks for taking.

Kyle Peterson: Taking the questions just wanted to start off.

Kyle Peterson: Funding in and what's the kind of constraint of growth right now is as the constraint right now on funding whether it be committed capital or other.

Operator: Having observed the stabilization and recovery of delinquency trends from lower-prime borrowers, we believed we had cause for optimism coming into the new year, and so it has been disappointing to see how the prime borrower segments are now quickly following suit and extending the strain of the current environment. We will, as always, continue to act in the best interests of the credit by quickly reacting to raise prices and lower conversions in these segments, confident in the belief that this will always lead to the best long-term outcome for everyone. If the earlier arc of the less affluent borrowers is any indication, this same cycle amongst primary borrowers will soon normalize, and when it does, we continue to have conviction that we will be very well positioned to capitalize.

Kyle Peterson: Are there buyers are kind of a borrower demand getting people below that 36% threshold. So let's see what the gating factors are right now.

Kyle Peterson: Hi, Kyle this is Dave.

Kyle Peterson: I think it's there's not an obvious excess of funding or borrowers. It does tend to bounce back a little bit.

Kyle Peterson: Back and forth.

Dave: Because the price the pricing alone so high the approval rates relatively low compared to our history.

Dave: But it's still a funding constrained environment. So it's not definitively leaning one way or the other right now.

Operator: Thanks to all of the Upstarters who are persevering through this. With that, Dave and I are happy to open the call to any..., operator. Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Got it that's helpful and then.

And just a follow up on our core personal loans held on balance sheet and see that sequentially.

Kyle Peterson: Again, press star 1 to ask a question. And our first question is going to come from Kyle Peterson from Needham. Please go ahead, sir.

Sequentially, our it ticked up quite a bit I guess adjusting for that the loan sale. It looks like it. It did continue to glide down, but I guess, excluding some noise in the loan sales and some of the timing issues should we expect that the core personal loans on the.

Dave Girard: Thanks for taking the questions. I just wanted to start off on funding and what's the constraint on growth right now. Is the constraint right now on funding, whether it be committed capital or other buyers or kind of borrower demand, getting people below that 36% threshold. So we'll see what the different gating factors are right now. Hi Kyle, this is Dave.

Dave: Sheet to continue to run down at least outside of the committed capital and risk sharing agreements or could that bounce around a bit.

Dave Girard: I think there's not an obvious excess of funding or borrowers; it does tend to bounce back a little bit back and forth. Because the price, the pricing of loans is so high, the approval rates are relatively low compared to our history. But it's still a funding constrained environment. So it's not definitively leaning one way or the other right now.

Dave: Hey, Kyle this is sanjay.

Sanjay: The things we referenced.

Sanjay: Is that one of the reasons, we aggregated a bit more than usual.

Sanjay: In the prior quarter on our balance sheet was in anticipation.

Sanjay:

Sanjay: The balance sheet deal that we did.

Sanjay: That closed subsequent to the end of the quarter, we've disclosed it as a subsequent event, but it's a transaction that.

Sanjay: Dave Dave referenced.

Dave: So that was that was a $300 million transaction.

Sanjay Datta: That's helpful. And then, you know, just to follow up on the core personal loans, helping the balance sheet, and see that, at least sequentially, it picked up quite a bit, I guess, adjusting for that, the loan sale looks like it, it did continue to glide down. But I guess, you know, excluding some noise in the loan sales and some of the timing issues, should we expect the core personal loan? on the balance sheet to continue to run down, at least outside of the community capital and risk sharing agreements, or could that bounce around a bit? Hey Kyle, this is Sanjay.

Speaker Change: Okay. That's helpful. Thanks, guys.

Speaker Change: Thanks, Scott and our next our next question is going to come from David Scharf from citizens JMP Securities. Please go ahead.

David Scharf: Hi, Yes, good afternoon, and thanks for taking my questions.

David Scharf: So David I'm wondering.

David Scharf: In light of your commentary about.

David Scharf: Sort of delinquencies stabilizing.

David Scharf: Or.

David Scharf: On kind of the lower tier borrowers and kind of seeing more deterioration among.

Prime can you remind us sort of what the.

Sanjay Datta: Yeah, I think one of the things we referenced is that one of the reasons we aggregated a bit more than usual in the prior quarter on our balance sheet was in anticipation of a balance sheet deal that we did that closed subsequent to the end of the quarter. We've disclosed it as a subsequent event, but it's a transaction that Dave referenced. That was a $300 million transaction. Thanks, guys!

David Scharf: Borrower FICO mix is that you're targeting I mean, I know from secure.

David Scharf: Securitization docs very often had sort of an average FICO in sort of that $5 7 million.

Speaker Change: Hello, I'm, sorry, $676 90 range, but can you define for us a little better sort of how you're viewing the core target borrower base right now sort of how youre defining near prime.

David Sharp: Our next question is going to come from David Sharp from Citizens J&P Securities. Please go ahead. Yeah, good afternoon and thanks. Questions. Sanjay or David, I'm wondering, you know, in light of your commentary about... Delinquency Stabilizer.

Speaker Change: Hey, David Sanjay here.

David Scharf: So I think that historically.

David Scharf: And I think we continue to believe that.

David Scharf: FICO is not necessarily a great metric with which to understand our portfolio.

David Sharp: Among kind of the lower tier borrowers, we're seeing more deterioration. Prime. Can you remind us sort of what... borrower, FICO, targeting? Securitization docs very often had sort of an average FICO and sort of that five... I'm sorry, 670-690 range, but can you define for us a little better?

David Scharf: Because it tends to be pretty broadly distributed across our grade mix.

David Scharf: Now I think if you think about borrowers in general.

David Scharf: Okay.

David Scharf: Let's say, let's call it less affluent borrowers.

David Scharf: <unk> had become riskier over the last 18 months, we've certainly.

David Scharf: Increasingly our loss estimates kicked a lot of them out of the approval box and so theres a less so much lower incidents of them as there has been historically and then those bars are beginning to recover in their repayment trends announced the more affluent borrowers that I think we're describing is starting to maybe follow suit.

Sanjay Datta: how your borrower base, www.upstartholdings.com Hey, David, Sanjay here. So I think that, historically, we've said, and I think we continue to believe that FICO is not necessarily a great metric with which to understand our portfolio because it tends to be pretty broadly distributed across our grade mix. Now, I think if you think about borrowers in general as... let's call them less affluent borrowers, they have become riskier over the last 18 months. We've certainly, you know, in increasing their loss estimates, kicked a lot of them out of the approval box. And so there's a less, so much lower incidence of them as there has been historically.

David Scharf: And so I think that's the dynamic that youll see as we react to those trends for your pricing Youll see those mix shifts happen in our portfolio, but I think it's a bit hard to take a broad sort of FICA aggregate of our of our platform because they are pretty broadly distributed across grades and be there.

David Scharf: That the lawsuits themselves are pretty.

David Scharf: Different by funding channel, whether it's a bank or a credit union.

David Scharf: That's collateral that does not tend to show up in the securitization data, whereas if youre looking at the institutional world It tends to be sort of higher loss rate and higher returns. So I think all of that makes it a bit hard to describe our platform through a traditional lens, but hopefully if you just think about it.

Sanjay Datta: And those borrowers are beginning to recover in their repayment trends. And now it's the more affluent borrowers that I think we're describing as starting to maybe follow suit. And so I think that's a dynamic that you'll see, you know, as we react to those trends through pricing, you'll see those mixed shifts happen in our portfolio. But I think it's a bit hard to take a broad sort of FICA aggregate of our platform because, A, they're pretty broadly distributed across grades. And B, they're, you know, the loss rates themselves are pretty different by funding channel, whether it's a bank or a credit union. That's collateral that does not tend to show up in the securitization data.

David Scharf: Just sort of high level loss rates, you'll see.

David Scharf: Our loss rate borrowers begin to recover from prior trends and lower loss rate borrowers begin to deteriorate.

Speaker Change: Got it no that's helpful color and maybe just as a follow up.

Focusing more and more near term on the Q1 guide.

Speaker Change: Would you characterize the origination outlook and the fee revenue guidance.

Speaker Change: The normal season.

Speaker Change: Seasonality that we typically see in Q1 tax refund season, with with non prime borrowers usually paying down balances or.

Sanjay Datta: Whereas if you're looking at the institutional world, it tends to be sort of higher loss rates and higher returns. So I think all of that makes it a bit hard to describe our platform through a traditional lens. But, you know, hopefully, if you just think about just sort of high-level loss rates, you'll see higher loss rate borrowers begin to recover from prior trends, and lower loss rate borrowers begin to deteriorate. Tellful Color, and maybe just as a follow-up, focusing more near-term on the Q1 guide.

Is there any kind of further tightening of credit that we should read into that.

Speaker Change: Sure Yeah, David I think there's probably two components to call out and one of them certainly is what you're describing which is I think usually in Q1.

Speaker Change: Run into a bit of a.

Speaker Change: A slump in borrower demand as you get into tax refund season, and we're certainly anticipating that I think that you could probably assume as well.

Speaker Change: What we've seen on average in prior years and then the second one is what we described which is that in fact, we are reacting to rising loss or sort of default trends in the primary borrower base by increasing loss estimates and reducing conversion is a bit.

Sanjay Datta: Would you characterize the origination outlook? Revenue Guide, sort of the normal seasonality that we typically see in Q1 tax refund season with non-prime borrowers usually paying down balances or... is there any kind of further tightening of credit that we should expect? Sure. Yeah, David, I think there are probably two components to call out. And one of them certainly is what you're describing, which is that, I think, usually in Q1, you run into a bit of a slump in borrower demand as you get into tax refund season. And we're certainly anticipating that.

Speaker Change: Those two things combined probably makeup.

Speaker Change: The gap or that the bridge to two our Q1 guidance.

Speaker Change: Great very helpful. Thanks, so much.

Speaker Change: Thanks, David.

Speaker Change: And our next question is going to come from Ramsey El <unk> from Barclays. Please go ahead.

Ramsey El: Hi, gentlemen, thank you for taking my questions. This evening I was wondering if you could comment on the on balance sheet loans and that that amount and whether we should given.

Sanjay Datta: I think that you could probably assume is what we've seen on average in prior years. And then the second one is what we described, which is that, in fact, we are reacting to rising losses or sort of default trends in the primer borrower base by increasing loss estimates and reducing conversions a bit. But those two things combined probably make up the gap or the bridge to our Q1 guide. Very helpful, thanks.

Ramsey El: More committed capital that you're securing whether we should expect that maybe next year to to come down from from levels that we're seeing now or whether this is sort of where it's going to live for a while.

Sanjay: Yeah, Hey, Ramsey Sanjay again, yes.

Sanjay: Yes, I think there is maybe sort of.

Speaker Change: Two factors to call out with respect to our loan balance.

Ramsey: At the end of the year, one in which is true of the prior quarter as well as that we have as you know we've consolidated.

Ramsey Rossel: And our next question is going to come from Ramsey Rossel from Barclays. Please go ahead. Hi Joan, thank you for taking my question. I was wondering if you could comment on the unbalanced sheet loans and that amount and whether we should give an, or committed capital that you're securing, whether we should expect that maybe next year to come down to levels that we're seeing now or whether this is sort of where it's going to live for a while. Hey Ramzi, Sanjay again.

On a recent ABS deal is a deal from 2023 and that sort of sits as an additional component of our balance sheet. It's not really anything we have economic basis in or we have as much smaller economic basis, and then the full amount of the consolidation. So thats one ongoing factor the other one which we just alluded to is that we have.

Ramsey: Sort of announced that.

Sanjay Datta: Yeah, I think there's maybe sort of two factors to call out with respect to our loan balance at the end of the year, one which is true the prior quarter as well, is that we have, as you know, consolidated a recent ABS deal as a deal from 2023, and that sort of sits as an additional component of our balance sheet. It's not really anything we have an economic basis for, or I guess we have a much smaller economic basis for than the full amount of the consolidation, so that's one ongoing factor. The other one which we just alluded to is that prior to or sort of after the end of the quarter, subsequent to the end of the quarter, we completed a balance sheet transaction with an institutional funding partner that was on the order of $300 million, and during Q4 we were aggregating loans in anticipation of that deal closing, and so a lot of those loans are now off of our balance sheet.

Ramsey: Prior to or after the end of the quarter subsequent to the end of the quarter.

Ramsey: We've completed a balance sheet transaction.

Ramsey: With our institutional funding partner that was on the order of $300 million and during Q4, we were aggregating loans in anticipation of that deal closing and so a lot of those loans are now off of our balance sheet.

Ramsey: As far as how to think about the go forward I think you're right as we.

Ramsey: As we hopefully have more to announce with respect to committed capital deals.

Ramsey: Those will obviously.

Ramsey: Our balance sheet and take on more of the.

Ramsey: The volume and then separately, we're always interested in finding sources of liquidity for existing balance sheet.

Ramsey: That's just really just a function of where pricing.

Ramsey: And returns are in the market and so those two things combined.

Ramsey: We will determine to what extent, we are able to reduce our balance sheet over the coming quarters.

Sanjay Datta: As far as how to think about the go forward, I think you're right as we, you know, as we hopefully have more to announce with respect to committed capital deals, those will obviously supplant our balance sheet and take on more of the volume, and then separately, we're always interested in finding sources of liquidity for our existing balance sheet. That's really just a function of where pricing and returns are in the market, and so those, I think, two things combined will determine to what extent we are able to reduce our balance sheet over the coming quarters. I got it.

Speaker Change: Got it okay and a follow up for me I wanted to ask about auto loans on slide 23, it looks like the number there declined.

Speaker Change: Pretty significantly again, a quarter over quarter I guess two questions are when do you expect that to maybe bought them out.

Speaker Change: And begin growing again, and then secondarily is there a business risk that your auto customers get turned off because your approval rates are quite a bit lower than they were is there any kind of ancillary business risk of managing the credit side of the business at this point as you are trying to build the business. Thanks.

Dave Girard: Okay. And a follow-up from me. I wanted to ask about auto loans. On slide 23, it looks like the number there declined pretty significantly again, a quarter over a quarter. I guess two questions are, when do you expect that to maybe bottom out and begin growing again? And then, secondarily, is there a business risk that your auto customers get turned off because your approval rates are, you know, quite a bit lower than they were? Is there any kind of ancillary business risk in managing the credit side of the business?

Speaker Change: Sure Good question.

Speaker Change: Let's just say obviously rates have been very high.

In the auto lending world.

Speaker Change: Both because interest rates are high and because.

Speaker Change: The price of cars is very high so I think that's really contributed to an environment, where the volume is down.

Speaker Change: We are very careful working with fairly tight group of dealers that we work on lending with and we're very aware that we need a certain throughput with each of these dealers. So it's.

Speaker Change: Something we do manage carefully.

Speaker Change: We've done a lot with our software beyond lending so I think theres a lot of value we are delivering to these dealerships.

Peter Corwin Christiansen: trying to, Sure, good question. Let's just say, obviously, rates have been very high in the auto lending world, both because interest rates are high and because the price of cars is very high, so I think that's really contributed to an environment where volume is down. We are very careful working with a fairly tight group of dealers that we work on lending with, and we're very aware that we need a certain throughput with each of these dealers, so it's something we do manage carefully. We've done a lot with our software beyond lending, so I think there's a lot of value we are delivering to these dealerships, irrespective of the loan volume going through our part of the platform, managing their online Fantastic, thank you very much. And our next question is going to come from Peter Christiansen from Citi. Please go ahead. Good evening.

Speaker Change: Irrespective of the loan volume going through our part of the platform managing their online parts of their business as well as the in store process of selling cars. So there is a lot more to what we do for dealers than just alone. So we feel pretty good about that.

Speaker Change: Fantastic. Thank you very much.

Speaker Change: Okay.

Speaker Change: And our next question is going to come from Peter Christiansen from Citi. Please go ahead.

Peter Corwin Christiansen: Good evening, Thanks for taking my questions.

Peter Corwin Christiansen: Dave I just wanted to follow up on Randy's comment.

Peter Corwin Christiansen: I think is important.

Peter Corwin Christiansen: As we think about your forward flow agreements and the innovation that youre looking to unlock there.

Peter Corwin Christiansen: Does.

Peter Corwin Christiansen: Having an equity stake in some of these forward flow agreements is that should we think of that as is par for the course is that going to be a regular feature going forward or.

Peter Corwin Christiansen: Or is it the opposite of that over time, you just really want to reduce that balance sheet exposure altogether.

Peter Corwin Christiansen: Yes.

Speaker Change: Good question I think we generally think we're headed in the direction of having a number of large.

Speaker Change: Long term relationships, where there is risk sharing and alignments structured into the process.

Dave Girard: Thanks for taking my questions. Dave, I just want to follow up on Ramji's comment, which is important as we think about your forward flow agreement and the innovation that you're looking to unlock there. Does, you know, having an equity stake in some of these forward flow agreements, should we think of that as part of the course? Is that going to be a regular feature going forward? Or, or is it the opposite of that over time, you just really want to reduce that balance sheet exposure altogether? and other people who have been on the ground for a long time.

Speaker Change: And we think this is both necessary and important to having that type of relationship and having the capital committed over long periods of time. So we are exploring different structures to those.

Speaker Change: And some participation in those but I think this is the nature of what we believe will be important and necessary to have long term.

Speaker Change: Funding partnerships with the types of partners that can really help us.

Speaker Change: We scale this business and get to where we were and far beyond.

Sanjay Datta: It's a very difficult situation for us and the people who are on the ground. We are trying to do our best. I think we're headed in the direction of having a number of large, long-term relationships where there is risk sharing and alignment structured into the process. And we think this is both necessary and important to having that type of relationship and having the capital committed over long periods of time. So we are exploring different structures for those and some participation in those. But I think this is the nature of what we believe will be important and necessary to have long-term funding partnerships with the types of partners that can really help us rescale this business and get to where we were and far beyond. Thanks; I appreciate that color.

Speaker Change: Thanks, I appreciate that color and then just a follow up maybe this is for Sanjay.

Speaker Change: Sure.

Sanjay: Obviously, theres a lot of forecasts out there some of them predicting two three that cuts this year.

Sanjay: And that kind of level.

Sanjay: How should we think about.

Sanjay:

Sanjay: The conversion the conversion ratio conversion number of kind of.

Sanjay: <unk> impacted should we start seeing 25 basis points 50 basis points those kind of chunk type of cuts is there is there any way that rule of thumb that should we should think about.

Sanjay: Should that happen later this year.

Speaker Change: Hey, Pete.

Pete: The interest rate reductions would obviously be helpful to conversion.

Pete: And I think the the extent to which it improves conversion is a bit dependent.

Sanjay Datta: And then just a follow-up, maybe this is for Sanjay. How should we, obviously, there are a lot of forecasts out there, some of them predicting two, three Fed cuts this year, that kind of level. How should we think about the conversion, the conversion ratio, and the conversion number kind of being impacted should we start seeing 25 basis points, 50 basis points, those kind of chunky cuts. Is there any way that we can, you know, a rule of thumb that we should think about? you know, should that happen later this year. Hey, Pete.

Speaker Change: Let's call it the premise of the borrower.

Speaker Change: I think maybe a rough rule of thumb in aggregate could be for 100 basis point reduction something on the order of 10% to 15% relative conversion boost.

Speaker Change: But that will vary by borrower type.

Speaker Change: Sure sure. Thank you very much super helpful.

Speaker Change: Thank you Pete.

Speaker Change: And our next question is going to come from what Rob Wildcats from Autonomous Research. Please go ahead.

Hi, guys I wanted to ask about the $300 million loan sale to Ares could you comment on the terms associated with that sale what was the execution price and if theres any risk or loss sharing associated with that.

Peter Corwin Christiansen: I mean, the interest rate reductions would obviously be helpful to conversion, and I think the extent to which it improves conversion is a bit dependent on, let's call it, the primus of the borrower. I think maybe a rough rule of thumb in aggregate could be for a 100 basis point reduction, something on the order of 10 to 15% relative conversion boost, but that will vary by borrower type. Sure, sure. Thank you very much. It's super helpful.

Speaker Change: Yeah, Hey, Rob, Yes, we don't we don't have anything I think right to announce on the terms.

Rob Wildcats: Other than I think we're very excited about that partnership and where we can take it.

Rob Wildcats: It was a good deal for both sides I think it is a kind of a structure in which we will.

Rob Wildcats: Sure.

Rob Wildcats: Have an ongoing relationship in terms of the performance of the.

Rob Wildhack: Thank you, Peter. And our next question is going to come from Rob Wildhack from Autonomous Research. Please go ahead.

Rob Wildcats: The collateral and hopefully overtime, we can convert that into this is the first step into a much broader relationship.

Dave Girard: Hi Guys, I wanted to ask about the $300 million loan sale to Aries. Could you comment on the terms associated with that sale? What was the execution price?

Speaker Change: Okay and then.

Speaker Change: Jay maybe one for you or another one for you unrestricted cash was there was almost $400 million at the end of the period, but also finished yes, I think as long as it's been since March 2021. So how do you think about the cash needed for quote unquote run the business purposes, and then how should we think about cash generation going forward.

Dave Girard: And if there's any risk or loss sharing associated with that? Yeah, we don't. We don't have anything I think is right to announce about the terms. Other than that, I think we're very excited about that partnership and where we can take it. I think there's a good deal for both sides. I think it's kind of a structure in which we will, you know, have an ongoing relationship in terms of the performance of the collateral, and hopefully, over time, we can convert that into this is a first step into a much broader relationship. Okay, and then, Tanjay, maybe one for you, or another one for you.

Speaker Change: In the context of the new outlook for negative adjusted EBITDA and earnings in the first quarter.

Jay: Sure Yes, thanks for the question, Rob I guess.

Jay: First of all just in thinking about our balance of cash again, I think it was probably.

Jay: A little bit low end loans.

Jay: On our balance sheet, we're a little bit high compared to normal as a result of this transaction and subsequent to the close.

Jay: Of the of the year.

Jay: Excuse me the transaction.

Jay: Loans on our balance sheet are not lower in cash is higher and I think we're in a pretty good range right now.

Sanjay Datta: Unrestricted cash was, it was almost 400 million at the end of the period, but also finished, yeah, I think as low as it's been since March 2021. So how do you think about the cash needed for, you know, quote unquote, running the business purposes? And then how should we think about cash generation going forward in the context of the new outlook for negative adjusted EBITDA earnings in the first quarter? Sure, yeah, thanks for the question, Rob.

Jay: With respect to the cash we have on hand with respect to the operating sort of future of the business, we have guided a negative EBITDA.

For Q1, I think some of that.

Jay: <unk> with the guide itself some of that is seasonal we are in the seasonal trough of the year. So we expect some of that to rebound.

Jay: Beyond that.

There is also like the fair value is the one part of our EBITDA that is noncash, but it does impact EBITDA and so I think some of our some of our.

Sanjay Datta: I guess, first of all, just in thinking about our balance of cash, again, I think it was probably a little bit low, and loans on our balance sheet were a little bit high compared to normal as a result of this transaction. And subsequent to the close of the year, we executed the transaction, and, you know, loans on our balance sheet are now lower, and cash is higher. And I think we're in a pretty good range right now with respect to the cash we have on hand. With respect to the operating sort of future of the business, you know, we have guided for a negative EBITDA for Q1. I think some of that, you know, consistent with the guide itself, some of that is seasonal.

Jay: <unk> for for Q1 is impacted by the let's call it the.

Jay: The delinquency trends, we referred to in the primary segment of the borrower base, which is affecting our fair value marks and so some of the EBITDA.

Jay: Seasonal some of it is noncash and I guess I'd say more generally we are.

Jay: <unk> demonstrated a history of.

Jay: Being bottomline focused in running the business responsibly and our intention is to get back to EBITDA breakeven slash positive as quickly as possible. So I think if we can accomplish that then certainly the cash balances we have on hand.

Jay: Post the transaction that we announced with Ares.

Jay: Our.

Sanjay Datta: We are in the seasonal trough of the year, so we expect some of that to rebound. Beyond that, you know, fair value is the one part of our EBITDA that is non-cash, but it does impact EBITDA. And so I think some of our some of our guide for for Q1 is impacted by the, let's call it, the delinquency trends we referred to in the prime segment of the borrower base, which is affecting our fair value marks. And so some of the EBITDA is seasonal, and some of it is non-cash.

We are comfortable.

Speaker Change: Okay. Thank you.

Speaker Change: And our next question is going to come from Simon Collins with Redbird ran Redburn Atlantic. Please go ahead.

Speaker Change: Yeah.

Hi, guys. Thanks for taking my question.

Simon Collins: I wanted to follow up on the question about committed capital actually and just if we take a step back and think about would be the announcements you've made the relationships you build.

Simon Collins: How should we think about the the current and the potential I guess quarterly cadence of committed capital that you can build because I think the original case.

Sanjay Datta: And I guess I would say more generally that we've always demonstrated a history of being bottom line focused and running the business responsibly. And our intention is to get back to EBITDA break even slash positive as quickly as possible. So I think if we can accomplish that, then certainly the cash balances we have on hand, certainly post the transaction that we announced with Aries are comfortable. Okay, thank you.

Simon Collins: Case was that you were looking to build enough committed capital on a sort of run rate basis on a regular basis to allow you to be.

Simon Collins: Breakeven.

Simon Collins: This cycle. So I'm just wondering could you just update on <unk>.

Speaker Change: Right with some figures around that please.

Sanjay: Sure. Yes. This is sanjay.

Sanjay: I think we'll I'll reiterate what we said.

Sanjay: In prior cycles, which is I think.

Sanjay: A rough rule of thumb for run rate if half of our origination volume was supported by committed capital. We think Thats a good start and I think that's roughly where we are right now obviously, our or levels of originations over the past couple of quarters and guiding into next I have not grown substantially so that the cap.

Simon Quinch: And our next question is going to come from Simon Quinch with Redburn Atlantic. Please go ahead. Hi guys, thanks for taking my question. I wanted to follow up on the question about committed capital, actually, and just, if we take a step back and think about the announcements you've made and the relationships you've built, how should we think about the current and the potential, I guess, quarterly cadence of committed capital that you can build? Because I think the original case was that you were looking to build enough committed capital on a sort of run rate basis on a regular basis to allow So I just wonder, could you update on that with some figures around it, please? Sure, yeah. Hi Simon, this is Sanjay.

Sanjay: We have on hand is sufficient to create that to create that sort of foundation, obviously rescale the business as we would hope to this year, we're going to have to.

Sanjay: Scale, the committed capital base in accordance and I think that we're pretty optimistic we'll be able to do that.

Sanjay: I think that just in terms of the shape and texture of the deals.

Sanjay: As Dave said I'll, just reiterate I think we view this as having.

Sanjay: A relatively small number of large sort of committed.

Sanjay: Bilateral relationships that we can grow into and grow with.

Sanjay Datta: So yeah, I think I'll reiterate what we said in prior cycles, which is that I think a rough rule of thumb for run rate is that if half of our origination volume was supported by committed capital, we think that's a good start. And I think that's roughly where we are right now. Obviously, our levels of originations over the past couple of quarters and guiding into the next have not grown substantially so that the capital we have on hand is sufficient to create that sort of foundation.

Sanjay: As the business grows and I think that the kinds of names we've talked about with respect to the deals and transactions. We've done are the kinds of partners, we can grow into overtime as the models prove out and as the partnership's mature so.

Sanjay: I think some of this is doing additional deals but some of this will be growing the size of those deals as long term partnerships.

Sanjay: Overtime as the business.

Sanjay: And it's it's prior scale.

Dave Girard: Obviously, as we rescale the business, as we hope to do this year, we're going to have to scale the committed capital base in accordance, and I think that we're pretty optimistic that we'll be able to do that. I think that just in terms of the shape and texture of the deals, as Dave said, I'll just reiterate, I think we view this as having a relatively small number of large, sort of committed bilateral relationships that we can grow into and grow with as the business grows. And, you know, I think that the kinds of names we've talked about with respect to the deals and transactions we've done are the kinds of partners we can grow into over time as the models prove out and as the partnerships mature.

Speaker Change: Okay, that's great Thanks, and just as a.

Speaker Change: Follow up question.

Speaker Change: I was wondering if that is the scope and interest in developing we're leveraging your technology expertise and capabilities to develop new lines of business that are more recurring in nature and less transactional.

Speaker Change: Is that how big could something like that get for for up sell.

Speaker Change: It's a good question Simon we're certainly aware of that.

Speaker Change: Having a volatile sort of source of revenue hazards.

Simon Collins: It has its downsides for sure and so we are keenly interested in having.

Speaker Change: More predictable revenue and.

Speaker Change: And in fact, some of it not based on sort of lending volume per se I mean, the first step of course is to have our products that will tend to.

Dave Girard: So I think some of this is, you know, doing additional deals, but some of this will be growing the size of those deals as long-term partnerships over time as the business regains its prior scale. Okay, that's great. And just as a follow-up question, I was wondering if there is scope and interest in developing or leveraging your technology expertise and capabilities to develop new lines of business that are more recurring in nature and less transactional? and yeah, is that, how big could something like that get for? It's a good question, Simon.

Be countercyclical to each other and that's definitely something as we mentioned, we're very excited about our HELOC product that's being one that is actually very popular and high rate environments like we have today.

Speaker Change: So theres just a product mix question. There and then there is also we do believe there's opportunities where there's more straightforward.

Speaker Change: Fees for technology, such as we do we do make modest fees that we charge to car dealerships today.

Speaker Change: And we will certainly explore other ways to monetize our technology.

Dave Girard: We're certainly aware that, you know, having a volatile sort of source of revenue has its downsides, for sure. And so we are keenly interested in having more predictable revenue. And, in fact, some of it not based on sort of lending volume, per se. I mean, the first step, of course, is to have products that will tend to be counter-cyclical to each other.

Speaker Change: And I think the broader it gets more products that covers et cetera.

Speaker Change: Certainly possible and I would just also highlight.

We've shown I think some pretty amazing ability to automate our credit origination entirely separate from whose credit model is being used and that itself has a lot of value to it. So as we've done that in personal lending. We are beginning to do that both in auto and HELOC those sort of automation capabilities I do think at least have the potential to be.

Dave Girard: And that's definitely something, as we mentioned, we're very excited about our HELOC product. That is one that is actually very popular in high-rate environments like we have today. So there's just a product mix question there.

Dave Girard: And then there's also, we do believe there are opportunities where there are more straightforward fees for technology, such as we make modest fees that we charge to car dealerships today. And we will certainly, you know, explore other ways to monetize our technology. And I think the broader it gets, with more products it covers, et cetera, that's certainly possible. And I would also highlight, you know, we've shown some pretty amazing ability to automate credit origination entirely separate from whose credit model is being used. And that in itself has a lot of value. So as we've done that in personal lending, we're beginning to do that both in auto and HELOC. Those sort of automation capabilities, I do think, at least have the potential to be unbundled and made available because they create a much, much better user experience, regardless of whose pricing models or risk models are being used elsewhere.

Speaker Change: Unbundled and available because they create a much much better user experience, regardless of whose pricing models our risk models are being used elsewhere.

Speaker Change: Great. Thanks for that color. Thank you.

Speaker Change: Okay.

Speaker Change: And our next call.

Speaker Change: Next caller is gonna be John Hecht from Jefferies. Please go ahead.

John Hecht: Good afternoon, guys. Thanks for taking my questions first one is I guess just sort of the counting.

John Hecht: The securitization that you are consolidated on the balance sheet.

John Hecht: Do you guys just.

John Hecht: From an asset liability perspective show kind of a net residual value in the assets or how do we think about it from an asset liability perspective on an accounting basis, and then does the interest income and interest expense flow through the P&L.

John Hecht: Related to that securitization as well.

John Hecht: Yeah, Hey, John this is sanjay so on the balance sheet.

Sanjay: The securitization is not shown on a net basis, it's shown on a gross basis. So the full amount of the assets of the securitization are and are asset line and the full amount of the liabilities are in our liability lines.

Dave Girard: Great. Thanks for that, Carlos. Thank you for on our next call. The caller is going to be John Hecht from Jeffries. Please go ahead.

Speaker Change: With respect to the P&L I think ultimately it is the net impact that shows up.

John Hecht: Afternoon guys, thanks for taking my questions. The first one's, I guess, just sort of accounting. I mean the securitization that you're consolidating on the balance sheet. Do you guys just, from an asset liability perspective, show kind of the net residual value in the assets? Or how should we think about it from an asset liability perspective on an accounting basis? And then does the interest income and interest expense flow through the P&L related to that securitization as well? Hey, John, this is Sanjay.

Speaker Change: Because you are getting interest revenue and interest expense both hitting that is net interest income.

Speaker Change: And so on the face of the P&L Youre, just going to see the net of that in the net interest income line I think if you were to look in the note.

Speaker Change: Net for net interest income and look at the specific revenue and expense line items within interest income you would see the gross numbers, but they are not on the face of the P&L.

Speaker Change: Okay, and then Dave I think you mentioned.

Dave: It's starting to.

Get collateral and the installment loans.

Dave: Wondering from a contractual and then just a physical basis. If you can give us some more information about how that might look.

Sanjay Datta: So on the balance sheet, the securitization is not shown on a net basis; it's shown on a gross basis. So the full amount of the assets of the securitization are in our asset line, and the full amount of the liabilities are in our liability line. With respect to the P&L, I think ultimately it is the net impact that shows up because you're getting interest revenue and interest expense both hitting net interest income. And so on the face of the P&L, you're just going to see the net of that in the net interest income line. I think if you were to look in the note..., of net, for net interest income and look at the specific revenue and expense line items within interest income, you would see the gross numbers, but they're not on the face of the P&L.

Dave: Yes, generally speaking one of the things we're moving toward is is really a single application for credit.

Dave: Where the resulting loan that might be the best one for the borrower could be an unsecured loan it could be one are secured by some asset maybe in auto or something else. It could also be.

Dave: Home equity loan and depending on who the person is the use case, how much cash they're looking for.

Dave: But doing that.

Dave: Through one product I think it was really helpful. Because it allows borrowers to kind of see different choices also collateralized loans generally speaking you're going to get lower rates. So that there is there's a tradeoff there you might have.

Dave: A better product at a better rate or be able to borrow more if it makes sense for home.

Dave: Renovation or something like that so I think that's pretty unique I. Most most of what we see in the market or products that you apply individually for different types of loans and.

Dave Girard: Okay. And then, Dave, I think you mentioned starting to get collateral for installment loans. I'm wondering, from a contractual and then just a physical basis, if you can give us some more information about how that might look. Yeah, generally speaking, one of the things we're moving toward is really a single application for credit where the resulting loan that might be the best one for the borrower could be an unsecured loan. It could be one secured by some asset, maybe an automobile or something else. It could also be a home equity loan. And depending on who the person is, the use case, and how much cash they're looking for.

Dave: This is really aimed at being able to give the best product to the person with all the right trade offs.

Dave: And one really fast efficient experience.

Dave: So you would be in other words should we be getting collateral and then you could make.

<unk> alone of a dip.

Dave: <unk> type.

Dave: Just having that collateral as a backstop.

Speaker Change: It's really yes.

Speaker Change: The application process would be somewhat neutral to what type of loan you may get and then you may get two or even three different offers an unsecured loan our loan secured by your car maybe a home equity loan of course secured by your home so.

Dave Girard: But doing that through one product is really helpful because it allows borrowers to kind of see different choices. Also, collateralized loans, generally speaking, you're going to get lower rates. So there's a tradeoff there.

Dave Girard: You might have a better product at a better rate or be able to borrow more if it makes sense for a home renovation or something like that. So I think that's pretty unique. Most of what we see in the market are products that you apply for individually for different types of loans.

So there may be some tradeoffs in choices between those and that would be presented hopefully as clearly as possible to the applicant and that just means we think we can make our funnel conversion higher by having better choices available through one simple process and that's something we're just starting to on their own. If we mentioned in the remarks earlier that are <unk>.

Dave Girard: And this is really aimed at being able to give the best product to the person with all the right trade-offs in one really fast, efficient experience. So you'd be, in other words, you'd be getting collateral, and then you could make a loan of a different type, just having that collateral as a backstop. It's really, yeah, the application process would be somewhat neutral as to what type of loan you may get, and then you may get two or even three different offers, an unsecured loan or a loan secured by your car, maybe a home equity loan, of course, secured by your home.

<unk> product is now being surfaced within what we've thought of as our personal loan application.

Speaker Change: And that's kind of the sort of direction. We're headed is being kind of borrower centric in terms of their choices and trade offs as opposed to being product centric and we think there is just a lot of opportunity for improvement in that area.

Speaker Change: I got it thanks very much.

Speaker Change: You bet.

Speaker Change: Okay.

Dave Girard: So, there may be some trade-offs and choices between those, and that would be presented hopefully as clearly as possible to the applicant, and that just, you know, means we think we can make our funnel conversion higher by having better choices available through one simple process. And that's something we're just starting down the road to. We mentioned in the remarks earlier that our HELOC product is now being surfaced within what we've thought of as our personal loan application, and that's kind of the sort of direction we're headed in terms of being kind of borrower-centric in terms of their choices and trade-offs as opposed to being product-centric, and we think there is just a lot of opportunity for improvement in that area. I finally got it. Thanks very much.

Speaker Change: And our next question is going to come from our bond right.

Bonnie.

Bonnie: From Piper Sandler. Please go ahead.

Bonnie: Hi, Thanks for taking my questions.

Bonnie: First question really is kind.

Bonnie: You know relative to two start ups.

Speaker Change: What are we expecting towards towards the edge.

End of last year towards versus how things are shaping up for the beginning of the year.

Speaker Change:

Speaker Change: Did I hear correctly on the call you said that.

Speaker Change: And if things kind of deteriorated or kind of in line with how you have been thinking about things.

Speaker Change: Hi, Irvin this is Dave.

Dave: I think things have gone to the large extent the way we kind of suggested even a year ago and that was that less prime lower income folks were being hit earlier.

Dave Girard: You bet. And our next question is going to come from Arvon Ramanan, from Piper Sandler. Please go ahead.

Arvind Anil Ramnani: Hi, thanks for taking my questions. You know, the first question really is kind of, you know, relative to sort of like, you know, what we were expecting towards the end of last year versus how things are shaping out for the beginning of the year. Did I hear correctly on the call that you said that things have kind of deteriorated or kind of in line with how you've been thinking about things? Hi Arvind, this is Dave.

Dave: And then during 2023 really begin to improve and re emerge and there was a belief that people at higher incomes higher FICO is we're going to be affected later and thats really what what we've seen more recently.

Dave: So in the Grand scheme of things, it's really gone the way, we expected and I think we communicated our expectations there and you can see that in the fed numbers that were released I think just last week.

Dave: So it is an unusual situation to have default rates of credit cards and auto loans at their highest since the great financial crisis, you had unemployment remains quite low so it's not a typical scenario that anybody has seen out there, but having said that our models are doing the right things they are tightening and recalibrating.

Dave Girard: I think things have gone to a large extent the way we kind of suggested even a year ago, and that was that, you know, less prime lower income folks were being hit earlier, and then during 2023, things really began to improve and reemerge. And there was a belief that people with higher incomes, higher FICOs were going to be affected later. And that's really what we've seen more recently. So, in the grand scheme of things, it's really gone the way we expected, and I think we communicated our expectations there. And you can see that in the Fed numbers that were released, I think, just last week. So this is an unusual situation to have default rates on credit cards and auto loans at their highest since the great financial crisis, yet unemployment remains quite low. So it's not a typical scenario that anybody has seen out there. But having said that, you know, our models are doing the right things. They're tightening and recalibrating constantly.

Dave: <unk>.

And we're very hopeful that this will be the year, where this whole get put behind us and.

Dave: You know I think there is good reason to believe it's a faster trip to a correction for prime borrowers who are employed et cetera, and all of that to us.

Dave: Pretty solid.

Speaker Change: Great and then as you.

Speaker Change: Look out for rest of the year.

Speaker Change: And he said.

Speaker Change: The Yogurts behind you is it are you talking about 24 or 23.

Speaker Change:

Speaker Change: I'm sure you're referring to 2023 I think we're up.

Speaker Change: I think we expect the near term.

Speaker Change: Noise I think we're all very optimistic about 2024 and the year.

Speaker Change: Okay, Yeah, that's what I thought I just wanted to clarify and then.

Dave Girard: And we're very hopeful that this will be the year where this will, you know, get put behind us. And, you know, I think there's good reason to believe it's a faster trip to a correction for prime borrowers who are employed, etc. And all that, to us, looks pretty solid.

Speaker Change: Where do you think there'll be in a better position to reinstate annual guidance or you know you had kind of.

Speaker Change: You are in a position to really talk about that.

Dave Girard: Great. And then, as you look out for the rest of the year, you said you hope the year gets behind you. Are you talking about 2024 or 2023? Um, I'm sure we were referring to 2023. I think we're up. I think, despite the near-term noise, I think we're all very optimistic about 2024 as a year. Okay, yeah, yeah, that's what I thought.

I think when Theres a lot of things that are outside of our hands.

Speaker Change: The fed's moves in interest rates and weather inflation is in fact tamed or is going to reemerge et cetera.

Speaker Change: The sort of precarious situation, we think a lot of American consumers are in financially, where they're still spending more than they probably should given their income. So there's a bunch of things out there that we don't control and they are pretty important to our business as it exists today, we are certainly working towards being less dependent on those but the reality of today is those matter.

Dave Girard: And then, you know, when do you think you'll be in a better position to kind of reinstate, like, you know, annual guidance or, you know, you're kind of, you just, you're not in a position to really talk about that? I think there are a lot of things that are outside our hands, you know, the Feds moving interest rates and whether inflation is in fact tamed or is going to re-emerge, etc. The sort of precarious situation we think a lot of American consumers are in financially, where they're still spending more than they probably should given their income.

Speaker Change: A lot to us.

Speaker Change: So we would really want to be in a more of a steady state.

Speaker Change: Place economically and we're just not there yet.

Speaker Change: Terrific. Thank you so much.

Speaker Change: Thanks Sarah.

Speaker Change: Our next question is going to come from James Faucette from Morgan Stanley. Please go ahead.

James Faucette: Hi, Thanks, I wanted to just touch really quickly on opex levels.

James Faucette: You know it sounds like you feel.

James Faucette: The environment and the potential quick rebound and more plan are tight borrowers to rebound pretty quickly.

Dave Girard: So there's a bunch of things out there that we don't control, and they're pretty important to our business as it exists today. We're certainly working toward being less dependent on those, but the reality of today is that those matter a lot to us. And so we would really want to be in more of a steady state place economically, and we're just not there yet. Perfect. Thank you so much.

So as of now it doesn't sound like you are anticipating any opex trimming sorry, I just want to make sure I understand that correctly.

James Faucette: When you talked about getting back to EBITDA breakeven etcetera is that something that you are as a result, anticipating should happen. This year roughly or are we thinking more into next year. Once we've had the ability for stabilizing environment to really take hold.

Dave Girard: Thanks everyone. Our next question is going to come from James Fawcett from Morgan Stanley. Please go ahead. Hi, thanks. I wanted to just touch really quickly on OPEX levels.

Speaker Change: Hey, James Sanjay.

James Fawcett: It sounds like you feel that the environment and the potential quick rebound of more prime or tight borrowers could rebound pretty quickly. And so, as of now, it doesn't sound like you're anticipating any OPEX trimming. I just want to make sure I understand that correctly. When you talk about getting back to EBITDA breakeven, et cetera, is that something that, as a result, you're anticipating should happen this year, roughly, or are we thinking more into next year once we've had the ability for a stabilizing environment to really take hold? Yeah, hey, James, and Sanjay.

James Sanjay: Yes. Thanks for the question I think as I said I think there's maybe a couple of.

Factors weighing on our Q1 EBITDA guide what are the seasonality itself.

Which is just.

James: Headwind to volumes for a quarter or so one of them is the fact that there is this fair value component to EBITDA, which is noncash but.

That in turn has impacted by some of the default trends, we're seeing out there in particular on the primary side. So.

James: Hopefully those things are transitory.

Speaker Change: I guess the answer to your broader question is we would absolutely help to make our way back.

Speaker Change: EBITDA breakeven this year, it's an important priority for us.

Sanjay Datta: Yeah, thanks for the question. I think, as I said, there's maybe a couple of factors weighing on our Q1 EBITDA guide. One of them is seasonality itself, which is just, you know, a headwind to volumes for a quarter or so.

Speaker Change: Steve said, there are certain things out of our control, but as long as some of these things subside.

Speaker Change: And we can see a clear path to where.

Speaker Change: We're covering from them then I think that that will provide a clear path back to breakeven.

Sanjay Datta: One of them is the fact that there is this fair value component, which is non-cash, but, you know, that in turn is impacted by some of the default trends we're seeing out there, in particular on the prime side. So, you know, hopefully those things are transitory. I guess the answer to your broader question is that we absolutely hope to make our way back to EVADA break-even this year.

Speaker Change: Got it got it and then in terms of like the particularly on the primary and how do you guys have reacted I think the the call.

Speaker Change: Comments on <unk>.

Speaker Change: The seasonality or quicker, but can you give us a sense of.

How recently U.

Started to make your adjustments on what Youre doing from a primer perspective.

Speaker Change: And.

Speaker Change: The way that its impact is that reset here and maybe February or does this really start even at the end of last year.

Sanjay Datta: It's an important priority for us. Steve said there are certain things out of our control, but as long as some of these things subside and we can see a clear path to recovering from them, then I think that will provide a clear path back to break-even. Got it. Got it.

Speaker Change: Yeah, James I would say that in rough terms I think we noticed this starting to happen at the end of last year.

Speaker Change: And by this year early they were sort of persistent enough that we reacted.

Speaker Change: Okay. So so it was early on in the quarter not just something in the last couple of weeks I guess.

Speaker Change: I mean, we're only six weeks into the quarter.

James Fawcett: And then, you know, in terms of the particulars about the primer and how you guys have reacted, I think the comments about seasonality are clear, but can you give us a sense of how recently you started to make your adjustments on what you're doing from a primer perspective and the way that it's impacted you? Is that recent here in maybe February or did this really start even at the end of last year? Hey James, I would say that, in rough terms, I think we noticed this starting to happen at the end of last year, and by early this year, they were sort of persistent enough that we reacted. Okay, so it was early in the quarter, not just something in the last couple of weeks, I guess.

So yes.

Speaker Change: Alright.

It wasn't January the first cut.

Speaker Change: Going after new year's.

Speaker Change: Party, but.

Speaker Change: I think we were widely been watching this say last year and I think that it takes a few weeks for it to bake in for for us to react to it.

Speaker Change: Okay. That's great. Thank you so much.

Speaker Change: Thanks, guys.

Speaker Change: Our next question is going to come from Michael <unk> from Goldman Sachs. Please go ahead.

Michael: Hey, good afternoon. Thanks for the question I had a follow up to some of the quest.

Michael: Questions about the outlook for the rest of the year, but perhaps you could just talk a little bit about the visibility that you might have in.

Origination volume in recovery.

Michael: Throughout the rest of 2024.

James Fawcett: I mean, we're only six weeks into the course, so yeah, it wasn't January the first coming off the New Year's Eve party, but I think we were we've been watching this say, last year, and I think that, you know, it takes a few weeks for it to bake and for us to react to it. Okay, that's great. Thank you so much.

Michael: Should one Q be the low watermark because of the seasonality piece.

Michael: Is there anything.

Michael: You saw as it relates to the stabilization and the lower prime borrowers that.

Michael Ng: Thank you. And our next question is going to come from Michael Ng of Goldman Sachs. Please go ahead. Hey, good afternoon.

Michael: It might be helpful framework to think about.

Michael: When we should see more stabilization and potential recovery on the primary side. Thank you very much.

Dave Girard: Thanks for the question. I had a follow-up to some of the questions about the outlook for the rest of the year, but perhaps you could just talk a little bit about the visibility that you might have in Origination, Volume, and Recovery throughout the rest of 2024. Should 1Q be the low watermark because of the seasonality piece? And is there anything that you saw as it relates to the stabilization and the lower prime borrowers that might be a helpful framework to think about when we should see more stabilization and potential recovery on the prime side? Thank you very much.

Speaker Change: And Mike I think.

Mike: It's a good question.

Mike: I would just say Ed.

Mike: Pandemics, the strange pandemic effects of stimulus and subsequent D stimulus.

We're fairly profound and they hit first and hardest to lesser prime lower income people.

Mike: And we did see that improve so that that sort of suggests there's a bit of a mania or some form of mania, maybe when someone has too much cash and inability to spend it.

Reginald Lawrence Smith: Mike, I think it's a good question. I would just say, you know, the pandemics, the strange pandemic effects of stimulus and subsequent de-stimulus were fairly profound, and they hit first and hardest on lesser-prime, lower-income people. And we did see that improve. So that sort of suggests, you know, there's a bit of a mania or some form of mania, maybe, when someone has too much cash and an inability to spend it, that they develop some habits that don't make sense long term, and then they recover from them. But the effect was just delayed on higher income, higher FICO people. And I would think, you know, there's reason to believe it just won't last as long or be as destructive as it can be for lower income people.

Mike: Develop some habits that don't make sense long term.

Mike: And then they recover from them, but the effect was just delayed on higher income higher FICO people and.

Mike: I would think.

Mike: Reason to believe it just won't last as long.

Mike: As destructive as it can be for lower income people. So we do believe there has to be a time, where things begin to revert to the mean just in terms of consumer.

Mike: Consumer consumer behavior savings rates.

Mike: Things of that nature, and we're very hopeful that 2024 is the year that will begin to happen also of course in.

Mike: Inflation waning it doesn't just just even if we have great inflation prints things are still a lot more expensive today than they were in 2019, regardless. So that's still just takes a bit of time for people's incomes to catch up with their expenses and I think thats kind of whats going.

Dave Girard: So, you know, we do believe there has to be a time when things begin to revert to the mean, just in terms of consumer, consumer behavior, savings rates, things of that nature. And we're very hopeful that 2024 is the year that will begin to happen. Also, of course, inflation waning, it doesn't just, you know, even if we have great inflation prints, things are still a lot more expensive today than they were in 2019, regardless. So that still just takes a bit of time for people's incomes to catch up with their expenses. And I think that's kind of what's going on right now. Thank you, Dave. Our next question is going to come from Reggie Smith from J.P. Morgan. Please go ahead.

Mike: Going on right now.

Speaker Change: Great. Thank you Dave.

Speaker Change: Yeah.

Speaker Change: And our next question is going to come from Reggie Smith from Jpmorgan. Please go ahead.

Reginald Lawrence Smith: Hey, guys. Thanks for taking the question.

Reginald Lawrence Smith: Most of mine have been hit but it did.

Reginald Lawrence Smith: Yes.

A question about you talked about I guess, how you can come in prime consumers are feeling it kind of tightening our credit box there.

Reginald Lawrence Smith: My question is that who argue approving.

Reginald Lawrence Smith: What's the profile of <unk>.

Reginald Lawrence Smith: The successful applicant.

Reginald Lawrence Smith: Today.

Reginald Lawrence Smith: We're already we're not sort of like radically changing who's approved as.

Reginald Lawrence Smith: Hey guys, thanks for the question. Most of mine have been hit, but it did, gets me to ask you about, I guess, high income and prime consumers feeling it and kind of tightening your credit box there. And the question is, like, who are you approving these days? Like, what's the profile of a successful applicant today?

Reginald Lawrence Smith: Any loss assumptions go up.

Reginald Lawrence Smith: Then certain people that might have been improved before wouldn't be.

Reginald Lawrence Smith: But when we say that the credit box is tightening which it has for primary people.

Reginald Lawrence Smith: In recent times.

Reginald Lawrence Smith: It's really just saying on average, they're probably going to have a bit higher rate than they would've otherwise it doesn't necessarily mean, they are not approved and that does affect conversion. So.

Dave Girard: Well, Reggie, we're not sort of radically changing who's approved; as any loss assumptions go up, then certain people that might have been approved before wouldn't be. But when we say that the credit box is tightening, which it has for prime people in recent times, that's really just saying, on average, they're probably going to have a bit higher rate than they would otherwise. It doesn't necessarily mean they're not approved, but that does affect conversion. So for the basic people, it means a bit higher rates. Maybe the loan size they're approved for might not be exactly what they asked for, but generally, they're still going to get approved for something.

Reginald Lawrence Smith: For the primary people it means a bit higher rates, maybe the loan size or a proof for it might not be exactly what they asked for but generally theres still going to get approved for something when it happens at the less prime and a lot of them fall end up going above effectively going up above the 36% rate in a.

Reginald Lawrence Smith: For that reason our declined but that's the dynamic that plays out whenever.

Reginald Lawrence Smith: Rates go up or when the credit models tightened.

Reginald Lawrence Smith: Understood.

Reginald Lawrence Smith: <unk>.

That's helpful.

Reginald Lawrence Smith:

Reginald Lawrence Smith: And about.

Reginald Lawrence Smith: That was real quick I'm sorry.

There was a I guess, it's slide towards the back in your presentation and I. Thank you.

Reginald Lawrence Smith: Recalibrated.

Dave Girard: When it happens at the less prime end, a lot of them end up effectively going up above the 36% rate, and they, for that reason, are declined. But that's the dynamic that plays out whenever rates go up or when the credit model is tightened. I understood myself. Thinking about, There was, I guess, a slide toward the back of your presentation, and I think you.., you recalibrated the returns. Can you talk a little bit about what that is, the Upstart Loan Performance Chart, page 36 in the back? Yeah, a little bit about kind of what's going on there. I guess. It doesn't sound like you didn't package your cash flows, but, um... You know, what would you tell people that kind of question? your ability to kind of underwrite and the thoroughness of your models with the error. Yeah, sure.

Reginald Lawrence Smith: I guess the return and then can you talk a little bit about about what that is that the upstart loan performance chart page 36 in the back.

Reginald Lawrence Smith: <unk>.

Reginald Lawrence Smith: Whether that yeah, a little bit about like kind of what.

Reginald Lawrence Smith: What's going on there.

Reginald Lawrence Smith: I guess it does.

Reginald Lawrence Smith: Does it sound like it impacted your cash flow, but.

Reginald Lawrence Smith: What would you tell people that you know.

Reginald Lawrence Smith: And a question.

Reginald Lawrence Smith: Your ability to kind of underwrite.

Reginald Lawrence Smith: Mr That'd be a model's working with a mistake like this.

Reginald Lawrence Smith: Thanks.

Speaker Change: Yes, sure. Thanks, Rajeev Sanjay so.

Speaker Change: This chart.

Speaker Change: I'll say, it's a bit of a specific artifact. The point of this chart was really to try and aggregate loan performance across our entire platform of funding channels.

Speaker Change: Which obviously in a single investor or lender is.

Speaker Change: But really it's just meant to show the impact of the macro conditions on the overall business and how we've reacted to them.

Sanjay Datta: Thanks, Rajiv Sanjay. So yeah, this chart, I'll say so, it's a bit of a specific artifact. The point of this chart was really to try and aggregate loan performance across our entire platform of funding channels, which obviously no single investor or lender is. But really, it was just meant to show the impact of macro conditions on the overall business and how we've reacted to them. The specific thing we're calling out on this chart is that in updating the forecast methodology of this chart, we realized we were making a calculation error in the old way that we've been using that resulted in us overestimating the forecast of the expected returns on this chart. So, first of all, importantly, this is just an error that's isolated to this particular PowerPoint slide. It's got nothing to do with underwriting. It does not impact in any way any of the numbers we report or present.

Speaker Change: The specific thing we're calling out on this chart is that in updating the forecast methodology of this chart.

Speaker Change: Realized we're making a calculation error in the old way that we've been using.

Speaker Change: That resulted in us overestimating the forecast of the expected returns on this chart. So first of all importantly, this is just an error that's isolated to this particular Powerpoint slide it's got nothing to do with underwriting it's gotten it does not impact in any way any of the numbers. We report are present, it really doesn't impact our conversations.

With individual parties because those are on a specific basis not platform wide.

Speaker Change: And I don't really think it even necessarily changes the shape of the trends that we've been describing which is that you know at a high level. We've historically over performed.

Speaker Change: Prior to Covid, we were impacted by macro trends, which peaked in our case I think sometime in early 2022, and we've since been re converging to target and so I think in updating the methodology, we've refined that and I think we're just calling out maybe some of the differences in the fine print but.

Sanjay Datta: It really doesn't impact our conversations with individual parties because those are, you know, on a specific basis, not platform-wide. And I don't really think it even necessarily changes the shape of the trends that we've been describing, which is that, you know, at a high level, we've historically overperformed. Prior to COVID, we were impacted by macro trends, which peaked, in our case, I think, sometime And we've since been reconverging on the target. And so I think in updating the methodology, we've refined that. And I think we're just calling out maybe some of the differences in the fine print. But, but that's what we're trying to lay out for you here. That makes sense.

Speaker Change: But that's what we're trying to lay out for you here.

Speaker Change: Okay that makes sense. Thank you.

Thank you rich.

And Thats all the time, we have for questions. At this time I would like to turn the conference over back to you for additional or closing remarks.

Speaker Change: Alrighty to wrap up 2023 was a pivotal year for upstart, we made strides in personal lending and in our auto business, We launched a home equity product and released two tools that are proving to be invaluable for improving model calibration and we accomplish these goals, while running and operationally in fiscal tight ship.

Sanjay Datta: Thank you. Thank you, Rich. And that's all the time we have for questions.

Speaker Change: That focus will continue in 2024, regardless of when the economy normalizes and the advantages of our leadership in AI lending become clear to all so thanks to all for participating today, we look forward to speaking with you again next quarter.

Dave Girard: At this time, I'd like to turn the conference over back to you for additional or closing remarks. All right, to wrap up, 2023 was a pivotal year for Upstart. We made strides in personal lending and in our auto business. We launched a home equity product and released two tools that are proving to be invaluable for improving model calibration. And we accomplished these goals while running an operationally and fiscally tight ship. That focus will continue in 2024, regardless of when the economy normalizes and the advantages of our leadership and AI lending become clear to all.

Speaker Change: Okay.

Speaker Change: And this concludes today's call. Thank you for your participation you may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Okay.

Operator: So thanks to all for participating today. We look forward to speaking with you again next quarter. And this concludes today's call. Thank you for your participation.

Speaker Change: [music].