Q1 2024 Upstart Holdings Inc Earnings Call

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Operator: You're holding for the Upstart Q1 2024 earnings. We still have many additional participants, and the call should begin shortly. We do thank you for your patience, and please continue to stand. Please stand by. Good day, and welcome to the Upstart First Quarter 2024 Earnings conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jason Schmidt. Please go ahead.

Jason Schmidt: Please standby.

Jason Schmidt: Good day and welcome to the upstart first quarter 2024 earnings today's conference is being recorded at this time I'd like to turn the conference over to Jason Smith. Please go ahead.

Jason Schmidt: Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's first quarter 2024 financial results. With us on today's call are Dave Girouard, 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 first quarter 2024 financial results and published an investor relations presentation. Both are available on our investor relations website, ir.upstart.com.

Jason Schmidt: Good afternoon, and thank you for joining us on today's conference call to discuss Upstarts first quarter 2024 financial results with US on today's call are Dave Gerard Upstart, Chief Executive Officer, and Sanjay Doctor, Our Chief Financial Officer.

Jason Schmidt: Before we begin I want to remind you that shortly after the market closed today I'll start issued a press release announcing its first quarter 2024 financial results and published an Investor relations presentation.

Jason Schmidt: They are available on our Investor Relations website, IR Dot started thought called.

Jason Schmidt: During the call, we will make forward-looking statements, such as guidance for the second quarter of 2024 and the second half of 2024, related to our business and our plans to expand our platform in the future. These payments 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.

Jason Schmidt: During the call we will make forward looking statements such as guidance for the second quarter of 2024, and the second half, particularly for related to our business and our plans to expand our platform in the future.

Jason Schmidt: Statements are based on our current expectations and information available as of today and are subject to a variety of risks uncertainties and assumptions.

Jason Schmidt: Actual results may differ materially as a result of various risk factors that have been described in our filings with the SEC.

Jason Schmidt: As a result, we caution you against placing undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information or future events, except as required by law. In addition, during today's call, unless otherwise stated, references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental table

Jason Schmidt: As a result, we caution you against placing undue reliance on these forward looking statements.

Jason Schmidt: Assume no obligation to update any forward looking statements as a result of new information or future events, except as required by law.

Jason Schmidt: In addition, during today's call unless otherwise stated references to our results are provided hasn't gone GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables.

Jason Schmidt: To ensure that we can address as many analyst questions as possible during the call, we request that you please limit yourself to one initial question and one follow-up. Later this quarter, Upstart will be participating in the Adiam Technology Media and Consumer Conference on May 14. Barclays Emerging Payments and FinTech Forum, May 15th; B. Reilly Securities Institutional Investor Conference, May 22nd; and Mizzou Technology Conference, June 12th. As well, we will host our annual shareholder meeting on May 29th. Now, I'd like to turn it over to Dave Girouard, CEO of Upstart.

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

Jason Schmidt: Later this quarter absorbed will be participating in the Needham technology and media and consumer conference may 14th.

Jason Schmidt: Barclays emerging payments and Fintech Forum may 15th.

Jason Schmidt: B Riley Securities Institutional Investor Conference May 22nd.

Jason Schmidt: And the Missoula Technology Conference June 12th as well, we will host our annual shareholder meeting on May 29, now I'd like to turn it over to Dave Girard CEO of upstart.

David J. Girouard: Good afternoon, everyone. I'm Dave Girouard, co-founder and CEO of Upstart. Thanks for joining us on our earnings call covering our first quarter 2024 results. I'd like to start by saying I'm quite proud of the work Upstarters around the country continue to do to build the world's leader in AI-enabled lending. With credit availability as constrained as it's been in more than a decade, we've never felt the urgency of our mission more than we do today.

David J. Girouard: Good afternoon, everyone I'm, Dave Gerard co founder and CEO above shark, thanks for joining us on our earnings call covering our first quarter 2024 results.

David J. Girouard: I can start by saying I'm quite proud of the work <unk> around the country continue to do to build the world's leader in AI enabled blending.

David J. Girouard: Availability is constrained as it spans more than a decade, we'd never company urgency of our mission, where do we do today.

David J. Girouard: We're off to a solid start this year and have made significant progress with our products and with funding. There are many reasons to believe our business will return to growth soon, but we're also prepared for the current macroeconomic conditions to persist. So we continue to focus on improving our efficiency and financial performance while investing responsibly for the long term. In pursuit of efficiency, we minimized hiring, reduced the size of some teams, flattened organizational structures, and reallocated resources to our highest priority. Since the beginning of 2024, we've cut fixed expenses from headcount by approximately $20 million on an annual basis. Our headcount today is as low as it was in Q3 of 2021.

David J. Girouard: We're off to a solid start this year.

David J. Girouard: You can progress with our products and with funding there are many reasons to believe our business will return to growth. Soon we're also prepared for the current macroeconomic conditions persist.

David J. Girouard: We continue to focus on improving our efficiency.

David J. Girouard: Performance, while investing responsibly for the long term.

David J. Girouard: I presume efficiency, we minimize hiring reduced the size some teams.

David J. Girouard: Structures.

David J. Girouard: And resources to our highest priorities.

David J. Girouard: At the beginning of 2024.

David J. Girouard: Fixed expenses from head count by approximately $20 million on an annual basis.

David J. Girouard: He kind of today is as low as it's been since Q3 of 2021.

David J. Girouard: We've also improved the efficiency of our cloud infrastructure and reduced our model training and development costs. Year over year, our compute and storage costs have been reduced by 23%, and we expect to generate additional savings in this area. We believe these actions set up Upstart to return to profitability sooner and to rebound more quickly toward the company we know we can beat. I'm happy to report that the funding situation on our platform is beginning to improve for banks and credit unions, as well as for credit investors. We're hopeful this trend will continue through 2024.

David J. Girouard: The efficiency of our cloud infrastructure and reduced our model training and development costs year over year compute and storage costs have been reduced by 23%.

David J. Girouard: Next generate additional savings in this area.

David J. Girouard: We believe these actions set up start to return to profitability sooner and should rebound more quickly through the company. We know we can be.

David J. Girouard: I'm happy to report that the funding situation on our platform is beginning to improve our banks and credit unions as well as for credit investors we.

David J. Girouard: Hopefully this trend will continue through 2024.

David J. Girouard: Unfortunately, consumer risk and interest remain at or near all-time highs, conspiring to constrain the volume of transactions on our platform. Given this combination, and assuming rates on Upstart remain at or near their current high levels, we expect to reduce the use of our balance sheet to fund loans that are not for R&D purposes. This will allow us to make better use of those funds elsewhere, so we will continue to be flexible and responsive in using our balance sheets to do the right thing. We will continue our work to make Upstart a platform that can thrive in any macro environment.

David J. Girouard: Fortunately consumer risk and interest remain at or near all time highs conspiring to constrain the volume of transactions on our platform.

David J. Girouard: Given this combination and assuming rates an upstart remain at or near their current high levels, we expect to reduce the use of our balance sheet.

David J. Girouard: Better not for R&D purposes.

David J. Girouard: This will allow us to make better use of those funds elsewhere.

David J. Girouard: We will continue to be flexible and responsive and using our balance sheet to do the right thing.

David J. Girouard: Yes.

David J. Girouard: We continue our work to make upstart platform that can thrive in any macro environment is where it comes in the form of improvements to our core personal loan product as well as progress in the newer products in our portfolio.

David J. Girouard: This work comes in the form of improvements to our core personal loan product as well as progress in the newer products in our portfolio. Last quarter, I mentioned an initiative to allow applicants to provide collateral to support their personal loan application with the goal of helping borrowers access credit at lower rates than would otherwise be possible. Today, I'm happy to report that we've successfully launched our auto-secured personal loan as a pilot in seven states.

David J. Girouard: Last quarter I mentioned, an initiative to allow applicants to provide collateral can support their personal loan applications with the goal of helping borrowers access credit at lower rates than would otherwise be possible.

David J. Girouard: Today I'm happy to report that we've successfully launched our auto secured personal loan as a pilot in seven states.

David J. Girouard: Our approach allows qualified applicants to make an informed choice between an unsecured or an auto-secured personal loan, which commonly offers a lower APR. Thus far, ASPL rates are on average 20% less than the rate on an unsecured loan.

David J. Girouard: Our approach allows qualified applicants.

David J. Girouard: Informed choice between an unsecured Werent Odyssey, Jordan personal loan, which currently offers a lower APR.

David J. Girouard: Our <unk> rates arent averaged 20% less than the rate on an unsecured note.

David J. Girouard: The ASPL also helps many applicants qualify for a loan who would otherwise be declined. Last quarter, I also shared that we were developing tools to help our lending partners strengthen relationships with their existing customers, which is often their priority in periods of reduced liquidity. To that end, two weeks ago, we announced recognized customer personalization, or RCP.

David J. Girouard: The SPL also helps many applicants qualify for a loan would otherwise be declined.

David J. Girouard: Last quarter I also shared that we were developing tools to help our lending partners strengthen relationships with their existing customer, which is often their priority and periods of reduced liquidity.

David J. Girouard: And two weeks ago, we announced recognized customer personalization RCP Peter.

David J. Girouard: With this new feature, lenders can identify when an existing customer is actively shopping for a loan on upstart.com and strengthen their relationship by making a compelling offer of credit. This is a capability many banks and credit unions have long requested, and we're pleased with the initial response. Thirty of our bank and credit union partners have already signed up for RCP. In Q1, 90% of unsecured loans on the Upshark platform were fully automated, an all-time high. For the borrower, this means no documents to upload, no phone call required, and a final approval in just seconds.

David J. Girouard: With this new feature vendors can identify when an existing customer is actively shopping for a loan and upstart dot com and strengthen our relationship by making a compelling offer of credit.

David J. Girouard: This is a capability many banks and credit unions have longer question.

David J. Girouard: Pleased with the initial response 30 of our bank and credit Union partners signed up for RCP already.

David J. Girouard: In Q1, 90% of unsecured bonds on the upshot platform fully automated and all time high for us.

David J. Girouard: Barbara This means no documents to upload no phone call required and a final approval in just seconds.

David J. Girouard: For Upstart and our lending partners, this means there's no human in the loop whatsoever to process and complete the loan application. Automation is a hallmark of AI-enabled lending, and Upstart aims to be the best at it. We continue to make progress in our auto business, with 103 dealer rooftops now live with Upstart Powered Lending versus 39 a year ago. In keeping with the times, we've tasked our auto team to move more quickly toward profitability.

David J. Girouard: I'll start in our lending partners. It means there's no human include whatsoever to process and complete the loan application.

David J. Girouard: Automation hallmark of AI enabled blending and upstart aims to be the best at.

David J. Girouard: We continue to make progress in our auto business with 103 dealer rooftops now live with upstart powered lending versus 39, a year ago.

David J. Girouard: Keeping with the times with task, our auto team more quickly towards profitability.

David J. Girouard: This means doubling down on credit quality, making improvements to our in-store platform, and focusing on overall dealership success, along with the goal of improving the unit economics of each dealership. We've somewhat reduced our go-to-market investment in auto retail for now and believe a more focused effort today will allow us to scale more quickly in the future.

David J. Girouard: We are doubling down on credit quality.

David J. Girouard: Improvements to our in store platform and focusing on overall dealership success, along with the goal of improving the unit economics of each dealership.

David J. Girouard: We've somewhat reduced our go to market investment in auto retail for now and believe in a more focused effort to date will allow us to scale more quickly in the future.

David J. Girouard: We're making fast progress with our home equity product, which continues to exceed our expectations. We knew it would be an attractive product in a high interest rate environment, and the team's progress thus far has been impressive. Just a year after launch, we're offering an Upstart Key Lock in 19 states plus Washington, D.C., covering 33% of the U.S. population. This is up from 11 states last quarter and now includes Florida, our largest state to date.

David J. Girouard: Making fast progress with our home equity product, which continues to exceed our expectations.

David J. Girouard: It would be an attractive product and a high interest rate environment and the team's progress thus far has been impressive.

David J. Girouard: And then a year after launch we're offering enough Jackie lock in 19 states.

David J. Girouard: Washington D C <unk>.

David J. Girouard: 33% of the U S population.

David J. Girouard: This is up from 11 States last quarter now includes Florida, our largest state to date.

David J. Girouard: I mentioned last time that we were beginning to automate verification of borrower information, and I'm happy to report that we're now able to instantly verify 36% of HELOC borrowing. This includes instant verification of identity and income without any tedious documents to upload.

David J. Girouard: I mentioned last time that we were beginning to automate verification a borrower information I'm happy to report that we're now able to instantly verify 36% of HELOC borrowers youre seeing.

David J. Girouard: And verification of identity and income.

David J. Girouard: <unk> TV is documents uploaded.

David J. Girouard: In another sign of progress, when we offer applicants a key lock as an alternative to a personal loan, we're seeing a lift in the percentage of applicants taking one of our offers. This validates our approach to integrating our personal loan and CELAC applications, creating a single unified funding form for multiple products. Lastly, but perhaps most importantly, we signed our first funding deal for the Upstart Key Lock and expect to begin selling loans on a forward-flow basis to this partner in the next few weeks. I'm excited to see this product scale through 2024 and beyond.

David J. Girouard: Another sign of progress when we offer applicants HELOC as an alternative to our personal loan received a lift in the percentage of applicants taking one of our offers.

David J. Girouard: Validates our approach to integrating our personal loan and HELOC applications.

David J. Girouard: A single unified funding for them for multiple products.

David J. Girouard: Lastly, but perhaps most importantly, we signed our first funding deal the upstart keylock and expect to begin selling loans on a forward flow basis to this partner in the next few weeks.

David J. Girouard: I'm excited to see this product scale through 2024 and beyond.

David J. Girouard: Our small dollar loan product continues to expand rapidly, with Q1 originations up 80% quarter to quarter. Consumers love these small relief loans because they're fast and simple and so much more affordable than the more expensive flavors of credit normally available. Today, about 60% of applicants who come to us for a small dollar loan and initially qualify actually get the loan, which is a super strong conversion rate at this stage.

David J. Girouard: Our small dollar loan product continues to expand rapidly with coupon originations up 80% quarter to quarter consumer.

David J. Girouard: Consumers love, the small relief loans because of their fast and simple and so.

David J. Girouard: How much more affordable than more expensive flavors of credit normally available to them.

David J. Girouard: About 60% of applicants who come to us for small dollar zone and initially qualify actually get too Bob.

David J. Girouard: As a super strong conversion rate at this stage.

David J. Girouard: From a What's in this for Upstart perspective, I'll say first that this product is core to our mission. We're meaningfully expanding the percent of Americans we invite into the world of bank-quality credit with a small but important first step. The beauty of this relief loan is that it's primarily offered to those who don't today qualify for our personal loans.

David J. Girouard: Let's move next for upstart perspective.

David J. Girouard: First that this product is core to our mission.

David J. Girouard: We're meaningfully expanding the percentage of Americans, we invite into the world of bank quality credit with a small but important first step.

David J. Girouard: <unk> of this relief loan.

David J. Girouard: Primarily offered to those who don't today qualify for our personnel.

David J. Girouard: So instead of declining them entirely, we give them the opportunity to repay a small loan and start them on a better financial path. And, of course, our risk models are learning rapidly by extending credit to someone who would otherwise be turned away. These small loans are rapidly expanding the frontier of understanding of our models and represent a long-term opportunity to serve Americans with fairly priced credit. We continue to invest in our ability to service these upstart loans and help those borrowers who have become delinquent return to financial health. For example, we made it simpler and easier for borrowers to adopt auto pay. Key Leading Determinant of Credit.

David J. Girouard: So instead of declining them entirely we give them the opportunity to perform on our small loan.

David J. Girouard: From a better natural path.

David J. Girouard: And of course, our risk models, our learning rapidly extending credit to someone who would otherwise be turned away.

David J. Girouard: All loans are rapidly expanding the frontier of understanding of our models represent a long term opportunity to serve Americans with fairly priced credit.

David J. Girouard: We continue to invest in our ability to service upstart months and help those borrowers become delinquent returned to financial health.

David J. Girouard: For example, we made it simpler and easier to borrowers to adopt auto play a key leading determining credit performance.

David J. Girouard: These efforts have led to an increasing number of borrowers enrolled in AutoPay for 24 straight weeks. In another example, we launched a new channel for contacting delinquent borrowers. In its initial deployment, this channel is projected to reduce gross losses by more than 3%. This is just the beginning.

David J. Girouard: These efforts have led to an increasing number of borrowers be rolled in autopay through 'twenty four straight weeks.

David J. Girouard: In another example, we launched a new channel to contacting delinquent borrowers.

David J. Girouard: Initial deployment your channel is projected to reduce gross losses more than 3%.

David J. Girouard: We see a wealth of opportunities to reduce roll rates, improve recoveries, all while helping borrowers get themselves on a better financial footing. As I mentioned earlier, we're also seeing improvements in the funding side of our business. These improvements are both in the bank and credit union segments, as well as on the institutional and credit fund side. Liquidity challenges many banks and credit unions experienced in 2023. Many lenders are now once again facing a shortage of assets. This new challenge is compounded by the fact that the cost of funding for many regional and community banks has risen. They're now paying more for deposits.

David J. Girouard: Just the beginning we see a wealth of opportunities to reduce room rates improved recoveries, all while helping borrowers get themselves on a better financial footing.

David J. Girouard: As I mentioned earlier, we're seeing improvements in the funding side of our business. These improvements are both in the bank and credit Union segments as well as on the institutional and credit funds side.

David J. Girouard: And liquidity challenges, many banks and credit unions experienced in 2023 seems to be waning.

David J. Girouard: Maybe one just now once again facing a shortage of assets there.

David J. Girouard: This new challenge is compounded by the fact that the cost of funding for many regional and community banks has risen now paying more for deposits.

David J. Girouard: While still cautious about the direction of the economy, many lenders are now looking for ways to generate healthy and appropriately risk-adjusted yields from their balance sheets. We saw eight new lenders join our platform in Q1, and a number of existing lenders increased their funding. The number of new vendors and the total available funding on Upstart from lending partners are both at their highest since prior to the 2023 bank failures a year ago.

David J. Girouard: We're still cautious about the direction of the economy. Many lenders are now looking for ways to generate healthy and appropriately risk adjusted yield from their balance sheet.

David J. Girouard: Eight new lenders join our platform in Q1, and a number of existing lenders increased their funding.

David J. Girouard: New vendors and the total available funding an upstart from lending partners are booked at your highest since prior to the 2023 bank failures a year ago.

David J. Girouard: We also continue to make progress with institutional capital, working to renew and extend existing partnerships and to bring investor partners who paused in the past back to the platform. And, as mentioned previously, we signed the first partnership to fund Upstart's home equity products. As a result of this progress, we expect to be borrower constrained as long as the rates on the Upstart platform remain as elevated as they are currently. Altogether, we're hopeful that we're headed into a period of stable funding in excess of our needs.

David J. Girouard: We also continued to make progress with institutional capital working to renew and extend existing partnerships and to bring investor partners, who paused in the past back to the platform.

David J. Girouard: And as mentioned previously we signed the first partnership to fund abstract home equity product.

David J. Girouard: As a result of this progress we expect to be borrower constrained as long as the rates on upstart platform remain as elevated as they are currently.

David J. Girouard: Altogether, we're hopeful that we're headed into a period of stable funding in excess of our needs. We expect this will allow us to reduce the use of our own balance sheet and redeploy that capital to other important goals.

David J. Girouard: We expect this will allow us to reduce the use of our own balance sheet and redeploy that capital to other important goals. To wrap things up, our lean organization is making rapid progress on building a product portfolio and a platform that will accelerate the financial industry's migration to AI-enabled lending. With the interest in AI soaring, just last week, we launched a first-of-its-kind AI certification program to help bank executives prepare for this brave new world.

David J. Girouard: To wrap things up our leaner organization is making rapid progress on building our product portfolio and our platform excels.

David J. Girouard: Accelerating international industries migration to AI enabled blending.

David J. Girouard: With the interest in AI, sorry, just last week, we launched a first of its kind AI certification program.

David J. Girouard: Bank executives prepayments in this brave new world.

David J. Girouard: Just in the first couple of days, several hundred individuals registered for the course, reflecting the broad demand for upskilling in this area. Some of you on today's call may also find the course to be of interest. I want to thank Upstarters for their resilience and perseverance through a clearly challenging period. We find strength and durability in our focus on the mission and the satisfaction we find in pursuing it together. I approach every day confident that the Upstart team is unmatched in both its capacity to execute as well as its unity of purpose. Thanks. I'd like now to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q1 2024 Financial Results and Guidance. Okay, Sanjay?

David J. Girouard: Yes. The first couple of days several hundred individuals registered for the cores, reflecting the broad demand to upscale in this area.

Sanjay: The view on today's call also may find the course to be of interest.

Sanjay: Why do you think thats started their resilience and perseverance through a clearly challenging period.

Sanjay: Find strength and durability and our focus on the mission and the satisfaction refined and pursuing it together.

Sanjay: Everyday confidence.

Sanjay: Teens unmatched revoked its capacity to execute.

Sanjay: Its unity of purpose.

David J. Girouard: Thanks, I'd like now to turn it over to Sanjay, our Chief Financial Officer, and walk through our Q1 2024 financial results and guidance Sanjay.

Sanjay Datta: Thanks, Dave, and thanks to all of you for joining us today. As was the case in 2023, the dominant influence on our business so far this year remains the macro environment, and the trends we highlighted last quarter have remained consistent. Real personal consumption in our economy continues to surge, more recently powered by the gathering momentum of the services economy and now increasingly compounded by the rapidly growing outflow of interest payments. However, despite healthy growth in wages, overall disposable income has, in fact, languished over the past year due to the combined headwinds of falling government transfer payments, sagging asset income, and, as of the new year, a significantly higher personal tax burden compared to 2023

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

Sanjay Datta: As was the case in 2023, the dominant influence on our business. So far this year remains the macro environment.

Sanjay Datta: And the trends, we highlighted last quarter have remained consistent.

Sanjay Datta: Real personal consumption and our economy continues to search more recently powered by the gathering momentum of the services economy.

Sanjay Datta: Now increasingly compounded by the rapidly growing outflow of interest payments.

Sanjay Datta: Despite healthy growth in wages overall disposable income has in fact languished over the past year due to the combined headwinds of following government transfer payments sagging asset income and is it the new year, a significantly higher personal tax rate compared to 2023.

Sanjay Datta: The consequence of continuing consumption growth against flat disposal income has been a downward trend in personal savings rates, which have fallen back towards the 3% level after peaking almost one year ago and have been matched by a continuously falling balance of real savings deposits.

Sanjay Datta: The consequence of continuing consumption growth against flat disposal income there has been a downward trend in the personal savings rates, which have fallen back towards the 3% level after peaking almost one year ago.

Sanjay Datta: And matched by a continuously following balance of real savings deposits.

Sanjay Datta: In an economy with strong headline growth numbers and low unemployment, the anemic savings rates and declining real savings balances are the clear problem statement. Regarding credit performance, we spoke last quarter about the trend of deterioration at the prime end of the borrower base, which has continued. Our models have reacted to this trend over the past quarter with higher loss estimates and correspondingly higher APRs for more affluent borrowers in order to maintain the returns investors expect, which has further reduced loan volume on our platform. This had a partial adverse impact on our Q1 results, and its full impact is being felt in Q2.

Sanjay Datta: An economy with strong headline growth numbers and low unemployment.

Sanjay Datta: Savings rates and declining real estate in these balances are the clear problem statement.

Sanjay Datta: Regarding credit performance, we spoke last quarter about the trend of deterioration.

Sanjay Datta: Primary ended the borrower base, which has continued.

Sanjay Datta: Our models have reacted to this trend over the past quarter with higher loss estimates and correspondingly higher atr's for more affluent borrowers in order to maintain the returns investors expect which is further reduced loan volume on our platform.

Sanjay Datta: This had a partial adverse impact on our Q1 results and its full impact is being felt in Q2.

Sanjay Datta: On the funding side of the platform, liquidity amongst banks and credit unions is beginning to improve. We are seeing encouraging signals of funding capacity increases from existing lenders as well as new lenders joining the platform, including our first forward flow buyer of HELOC. In the institutional markets, we are in the process of extending and rolling over all of the committed capital relationships that are coming up on their one-year mark, as well as, in some cases, working on meaningful upsizing, which we are pleased to interpret as a positive endorsement of our program.

Sanjay Datta: On the funding side of the platform liquidity amongst banks and credit unions is beginning to improve we.

Sanjay Datta: We are seeing encouraging signals of funding capacity increases from existing lenders as well as new lenders joining the platform, including our first forward flow buyer of Helocs.

Sanjay Datta: In the institutional markets, we are in the process of extending enrolling over all of the committed capital relationships that are coming up on their one year mark as well as in some cases working on meaningful upsizing.

Sanjay Datta: We are please to interpret as a positive endorsement of our program.

Sanjay Datta: We currently expect that these efforts will result in approximately $2.7 billion of funding through committed capital and other co-investment arrangements over the next 12 months, with additional opportunities in the pipeline. Additionally, we are starting to see more signs of formerly active investors once again reengaging with the platform.

Sanjay Datta: We currently expect that these efforts will result in approximately $2 $7 billion of funding, we're committed capital and other co investment arrangements over the next 12 months with additional opportunities in the pipeline.

Sanjay Datta: Separately, we are starting to see more signs of formerly active investors once again re engaging with the platform.

Sanjay Datta: With this environment as context, here are some financial highlights from the first quarter of 2024. Revenue from fees was $138 million in Q1, up 18% from the prior year, but down 10% sequentially and in line with the decreased origination volumes resulting from the increased pricing of prime loans. Net interest income was negative $10 million, reflecting the impact of crime loan performance on our risk-sharing positions, as well as some realized fair value impact taken as part of a secondary sale transaction.

Sanjay Datta: With this environment as context here are some financial highlights from the first quarter of 2024.

Sanjay Datta: Revenue from <unk> was $138 million in Q1 up 18% from the prior year, but down 10% sequentially and in line with the decreased origination volumes, resulting from the increased pricing of planned levels.

Sanjay Datta: Net interest income was negative $10 million, reflecting the impact of prime loan performance on our risk sharing positions as well as some realize fair value impact taken as part of a secondary sale transaction.

Sanjay Datta: Taken together, net revenue for Q1 came in at $128 million, above our guidance and up 24% year-over-year. The volume of loan transactions across our platform in Q1 was approximately 119,000 loans, up 42% from the prior year, but down 8% sequentially, and representing over 68,000 new borrowers. Average loan size of $9,500 was down from $12,200 in the same period last year, driven by robust growth in small-dollar loans.

Sanjay Datta: Taken together net revenue for Q1 came in at $128 million above our guidance and up 24% year over year.

Sanjay Datta: The volume of loan transactions across our platform in Q1 was approximately 119000 loans up 42% from the prior year, but down 8% sequentially and representing over 68000, new borrowers.

Sanjay Datta: Average loan size of $9500 was down from 12200 in the same period last year driven by robust growth in small dollar loans.

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 from fees, came in at 59% in Q1, down four percentage points sequentially, primarily reflecting increased investments in servicing and collections capability. We continue to benefit from very high levels of loan processing automation, achieving another high in the percentage of loans fully automated at 90 percent and our seventh consecutive quarterly improvement.

Sanjay Datta: Our contribution margin, a 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 59% in Q1 down four percentage points sequentially, primarily reflecting increased investments in service.

Sanjay Datta: And collections capabilities.

Sanjay Datta: We continue to benefit from very high levels of loan processing automation.

Sanjay Datta: Another high and the percentage of loans fully automated at 90%.

Sanjay Datta: There are 7% sequential quarterly improvement.

Sanjay Datta: Operating expenses were $195 million in Q1, down 17% year over year but up 4% sequentially as our payroll coming into the new year gets reset with a new benefits cost basis and bonus accruals. As Dave mentioned, since the beginning of 2024, we've restructured some teams and reduced headcount in order to quicken our path back to profitability. Altogether, the Q1 gap net loss was $65 million, and adjusted EBITDA was negative $20 million, both ahead of Biden.

Sanjay Datta: Operating expenses were $195 million in Q1 down 17% year over year, but up 4% sequentially as our payroll coming into the new year gets reset with the new benefits cost basis and bonus accruals.

Sanjay Datta: As Dave mentioned since the beginning of 2024, we've restructured some teams and reduced head count in order to click in our path back to profitability.

Sanjay Datta: Altogether Q1, GAAP net loss was $65 million.

Sanjay Datta: EBITDA was negative $20 million both ahead of guidance.

Sanjay Datta: Adjusted earnings per share was negative 31 cents based on a diluted weighted average share count of 87 million. We ended the first quarter with loans on our balance sheet of $924 million before the consolidation of securitized loans, down from $982 million in the same quarter of the prior year. Of that balance, loans made for the purposes of R&D, principally auto loans, were $316 million. In addition to loans held directly, we consolidated $157 million of loans from an ABS transaction in Q3 of 2023, from which we retained a total net equity exposure of $28 million.

Sanjay Datta: Adjusted earnings per share was negative 31 based on a diluted weighted average share count of $87 million.

Sanjay Datta: We ended the first quarter with loans on our balance sheet is $924 million before the consolidation of securitized loans down from $982 million in the same quarter of the prior year.

Sanjay Datta: Of that balance loans made for the purposes of R&D, principally auto loans was $316 million.

Sanjay Datta: In addition to loans held directly we have consolidated $157 million of loans from an ABS transaction in Q3 of 2023 from which we retained a total net equity exposure of $28 million.

Sanjay Datta: We ended the quarter with $301 million of unrestricted cash on the balance sheet and approximately $572 million in net loan equity at fair value. With our models having largely adjusted to the increased delinquency rates of crime loans and the near prime universe of borrowers now toggling between stabilization and recovery, we believe that the wave of elevated defaults propagating from the abrupt stimulus and de-stimulus of the economy in 2021 is now at or very close to its peak.

Sanjay Datta: We ended the quarter with $301 million of unrestricted cash on the balance sheet and approximately $572 million in net loan equity at fair value.

Sanjay Datta: With our model as having largely adjusted to the increased delinquency rates of prime loans and the near Prime universe of borrowers now toggling between stabilization and recovery, we believe that the wave of elevated defaults propagating from the abrupt stimulus and the stimulus of the economy in 2021.

Sanjay Datta: Now at or very close to its peak.

Sanjay Datta: Assuming no new credit shocks lurking on the horizon, we are anticipating a return to sequential growth in the second half of this year and a return to positive EBITDA by the end of this year. With that in mind, for Q2 of 2024, we expect total revenues of approximately $125 million, consisting of revenue from fees of $135 million and net interest income of approximately negative $10 million. Contribution margin of approximately 56%. Net income of approximately negative $75 million.

Sanjay Datta: Assuming no new credit shocks lurking on the horizon, we are anticipating a return to sequential growth in the second half of this year and a return to positive EBITDA by the end of this year.

Sanjay Datta: With that in mind for Q2 of 2024, we expect total revenues of approximately $125 million.

Sanjay Datta: Consisting of revenue from fees of $135 million and net interest income of approximately negative $10 million.

Sanjay Datta: Contribution margin of approximately 56%.

Sanjay Datta: Net income of approximately negative $75 million.

Sanjay Datta: Adjusted net income of approximately negative $36 million.

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

Sanjay Datta: And the diluted weighted average share count of approximately $88 4 million shares.

Sanjay Datta: Adjusted net income of approximately negative $36 million, adjusted EBITDA of approximately negative $25 million, and a diluted weighted average share count of approximately 88.4 million shares. For the second half of 2024, we expect revenue from fees of approximately $300 million and positive EBITDA in Q4.

Sanjay Datta: For the second half of 2024, we expect revenue from fees of approximately $300 million and positive EBITDA in Q4.

Operator: Thanks once again to all for joining us today, and with that, Dave and I are happy to open up the call to any questions. Operator. Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today, use a. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Speaker Change: Thanks, once again to all for joining us today and with that David and I are happy to open up the call to any questions.

Operator: Operator.

Speaker Change: Thank you.

Operator: If you would like to signal with questions, please press star 1 on your touch tone telephone. If you're joining us today, use a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that will be star 1 if you would like to signal. And our first question comes from Ramsey L. Saul with Barkle. Hi, thank you very much. This is John Cofion.

Operator: If you would like to signal with questions. Please press star one on your Touchtone telephone. If you are joining us today using a speaker phone. Please make sure. Your mute function is turned off July your signal to reach our equipment.

Speaker Change: That will be star.

Speaker Change: If you would like to signal star one and our.

Speaker Change: Our first question will come from Ramsey El <unk> with Barclays.

John James Coffey: Hi, Thank you very much this is John coffee on for Ramsey.

Speaker Change: I just wanted to ask you Sanjay about your second half of 2024 outlook with the revenue from fees of approximately $300 million could you just give me a little bit of a better idea of what some of the underlying mechanics of this are that are going to drive it to that level or is it just that.

Speaker Change: That the you'll be able to make more attractive loans to consumers is it I'm just trying to think of what the different factors are that makes you a little bit more optimistic here.

David J. Girouard: Hey, John. Great question. Thanks. Some context on the second half of 2024. I would say, first of all, our assumptions on the macro are neutral. And in that environment, really, a lot of this growth is down to, you know, how we have historically grown, which is a roadmap of product execution resulting in, you know, model improvements and accuracy gains. And so maybe one of the important contextual points is that the main macro effect that we've been sort of contending with over the last two years is really a propagation of what came from the stimulus and the de-stimulus to the economy.

Speaker Change: Hey, John Great question. Thanks.

David J. Girouard: Some context on the second half of 2024.

David J. Girouard: I would say first of all our assumptions on the macro are neutral.

David J. Girouard: And in that environment really a lot of this growth is down to how we have historically grown which is our roadmap of product execution, resulting in model improvements in accuracy gains.

David J. Girouard: And so maybe one of the one of the important contextual points as well.

David J. Girouard: The.

David J. Girouard: The main macro.

David J. Girouard: The fact that we've been contending with over the last two years really as a propagation of what came from the stimulus into the stimulus to the economy.

David J. Girouard: And as we said in our remarks, we really think that it's now in the process of fully running its course. And so we're really back to our old model of improving technology and accuracy and driving conversion gains from that. And we think that that's going to be the story in the back half of this year.

David J. Girouard: As I said in my remarks, we really think that now in the process of really running its course, and so we're really back to our old.

David J. Girouard: Model of improving technology, and accuracy and driving conversion gains from that and we think that that's the.

David J. Girouard: That's going to be the story in the back half of this year.

Speaker Change: Alright, thank you.

Speaker Change: Thank you John.

Operator: And our next question will come from Kyle Peterson with Needham.

David J. Girouard: And our next question will come from Kyle Peterson with Needham.

David J. Girouard: Great. Good afternoon. Thanks for taking the questions, guys. I wanted to start off on expenses, assuming that we're kind of in a little bit of a muted environment, macro-wise, at least for a little while. Are you guys comfortable with the expense structure where it is now on a cash basis, or do you think there's more wood to chop or more action to potentially take if volumes don't snap back?

Kyle David Peterson: Great. Good afternoon, Thanks for taking my questions guys.

David J. Girouard: Wanted to start off on expenses.

David J. Girouard: Assuming you know that we're kind of in a little bit muted environment macro wise at least for a little while are.

David J. Girouard: Are you guys comfortable with the expense structure, where it is now on a cash basis.

David J. Girouard: Or do you think there's more wood to chop or more action to potentially take if volumes don't snap back.

David J. Girouard: Yeah, hey, Kyle. As we said in our remarks, we have been doing a lot of that work since the end of the quarter. We've announced some more cost reductions, and I think as of where we are at the end of that series of cost reductions, we feel like we're in a good place for our current scale and for the plan we have for the rest of this year. I mean, obviously, if there is another downturn in the macro that affects the credit environment, we'll have to react further. That's all there is to it, but as for where we are, we think we've taken the appropriate action.

David J. Girouard: Yeah.

David J. Girouard: As we said in our remarks.

David J. Girouard: We have been doing a lot of that work.

David J. Girouard: And since the end of the quarter.

David J. Girouard: We've announced some more.

David J. Girouard: Cost reductions.

David J. Girouard: And I think as of where we are at the end of that series of cost reductions we feel like we're in a good place for our current scale and for the the primary have for the rest of this year.

David J. Girouard: I mean, obviously, if there is another downturn in the macro that affects the credit environment, we'll have to react further.

Speaker Change: That's all.

David J. Girouard: There is a possibility but as of where we are we think we've taken the appropriate actions.

David J. Girouard: Okay, that's helpful. And then, you know, just a follow-up on credit. I know you guys kind of mentioned it. Seems like some of the credit concerns with the affluent borrowers you guys mentioned last are kind of still the same, I guess, like are the loss assumptions still the same? And if so, like, are you comfortable with some of the pricing and origination or underwriting changes you guys have made so that, you know, you guys think the newer vintages in that cohort can be profitable and attractive for investors?

David J. Girouard: Okay.

Kyle: That's helpful and then.

David J. Girouard: Just a follow up on credit.

David J. Girouard: I know you guys kind of mentioned it.

David J. Girouard: Seems like some of the credit concerns with the affluent borrowers you guys mentioned last quarter is.

David J. Girouard: You know, it's kind of still in the same I guess like the loss assumption is still the same in.

David J. Girouard: If so like are you guys comfortable with some of the pricing and origination or underwriting changes you guys have made that.

David J. Girouard: You know you guys that the newer vintages in that cohort can be profitable and attractive for investors.

David J. Girouard: Yeah.

David J. Girouard: Hey Kyle, this is Dave. Yeah, we are comfortable that our models are caught up, and the current product is performing, and is calibrated. As we said, we see signs of recovery in the less prime, less affluent parts of the world, and the more affluent Prime part is what has deteriorated more recently. But we're hopeful also that we are, you know, kind of reaching toward the end of that. So, you know, it has been a cycle that we've been observing for a while.

David J. Girouard: Hey, Kyle this is Dave.

David J. Girouard: Yes, we are comfortable that our models are caught up in the current product is performing and is calibrated.

David J. Girouard: As we said the.

David J. Girouard: We see signs of recovery in the less prime less affluent parts of the world.

David J. Girouard: The more affluent primary partners what has deteriorated more recently, but we're hopeful also that we are.

David J. Girouard: Kind of reaching towards the end of that so.

David J. Girouard: It has been a cycle that we've been we've been observing for awhile, we did I think.

David J. Girouard: Accurately state that it was going to affect less affluent people first and then probably more affluent primer.

David J. Girouard: We did, I think accurately state that it was going to affect less affluent people first and then probably more affluent prime people later, which is exactly what's happened. And now, as Sanjay kind of alluded to, we're hopeful we're nearing the end of this. And then, for us, it's just kind of back to business of improving, you know, model accuracy, funnel throughput, etc. And that's what gives us some confidence for the rest of this year.

David J. Girouard: People later, which is exactly what's happened and now is essentially kind of alluded to we're hopeful we're nearing the end of this and then for US, it's just kind of back to business of improving model accuracy.

David J. Girouard: Anil throughput et cetera, and that's what gives us some.

David J. Girouard: Our confidence in the rest of this year.

Speaker Change: Alright Thats helpful. Thank you.

Operator: All right. That was helpful. Thank you.

Operator: And our next question will come from Pete Christiansen with Citigroup. Thank you. Good afternoon. Thanks for the question.

Operator: And our next question will come from Pete Christiansen with Citigroup.

David J. Girouard: Thank you, good afternoon, thanks for the question. Dave, Sanjay, I wonder if we could dig a little bit into the growth in the small dollar loan product there, what impact that's had on the conversion rate, perhaps, maybe, how should we think about the conversion rate at standard personal loan levels? And then on a second question, I'm just curious, on the auto side, it looks like you're kind of running around five loans per rooftop per quarter. Just curious about what the opportunity is to increase that share within each rooftop and maybe some of the steps that you're taking there to improve that. Thank you.

Peter Corwin Christiansen: Thank you good afternoon, and thanks for the question.

Speaker Change: Dave Sanjay.

David J. Girouard: Wonder if we could dig a little bit into the small growth in the small dollar loan product there what impact that's had on the conversion rate, perhaps maybe how should we think about the conversion rate and standard personal loan levels and then the second question I'm just curious.

David J. Girouard: On the auto side it looks like you kind of run rating around five five loans per rooftop per quarter, just curious on like what's the opportunity to increase that share within each.

David J. Girouard: Rooftop and maybe some of the steps that you're taking there to improve that thank you.

David J. Girouard: Because it is all right got.

Speaker Change: Got it.

David J. Girouard: Sorry Pete, this is Dave. On the small dollar loan product, there's definitely a heavy focus on automation there. I don't know if we have the numbers to separate the rate of automation for the small dollar loan from the personal loan, but they certainly contribute to that 90% that we put up. In auto, I think we definitely believe there is a lot of room for increasing market share on loans per dealership.

David J. Girouard: Sorry, Pete this is Dave on the small dollar loan product.

David J. Girouard: There is definitely a heavy focus on automation there I don't know if we have the numbers to separate.

David J. Girouard: <unk> of automation for the small dollar going from the personal loan, but they are certainly.

David J. Girouard: They contribute to that 90% that we.

David J. Girouard: We put up.

David J. Girouard: Yes.

David J. Girouard: In auto I think we definitely believe there is a lot of room for increasing market share on loans per dealership that's actually.

David J. Girouard: That's actually one of the very central focus of ours is how we do that. And part of that is the models getting smarter, better separation, which means we compete better, and also just the process of originating those loans in the dealership. And so those are, as I kind of highlighted earlier, very central to our focus there. We're a little less worried about exactly how many dealers are lending. We want to make sure the volume going through a dealer and the unit economics of a dealer are where we want them to be, and that's been a lot of focus of ours for the last few months.

David J. Girouard: One of our very central focus of ours is how we do that and part of that is the model's getting smarter better separation, which means we compete better and also just the process of originating those loans and the dealership and so those those are as I kind of highlighted earlier very central to our focus and there were a little less worried about exactly how much.

David J. Girouard: Dealers are lending, we want to make sure the volume going through a dealer in the unit economics of a dealer or where we want them to be and thats been a lot of focus of ours for the recent months.

Sanjay Datta: Thanks, thanks. But I guess the question about small dollar loans is really more about how that impacts that conversion ratio, which went to 14% this quarter. Just curious how, you know, the typical personal loan product is doing from a conversion ratio perspective, if you can piece it out.

Speaker Change: Thanks, but I guess the question on the small dollar loans is really more on how that impacts that conversion ratio.

Sanjay Datta: Which 1% to 14% this quarter just curious how.

Sanjay Datta: Typical a typical personal loan product is doing from a conversion ratio factors. If you can set out thank you.

Sanjay Datta: Yeah.

Sanjay Datta: Thank

Speaker Change: Yeah, Hey, Pete I think the answer to that is I don't think it has a huge impact, but it's probably marginally positive.

Sanjay Datta: Yeah, I think the answer to that is, I don't think it's a huge impact, but it's probably marginally positive. You could think of, with just the personal loan product, there's a certain approval rate, and then people who are outside of that approval box can usually get approved for a smaller loan, like a small dollar loan. So for a given marketing sort of cent size, we will have additional approvals due to that product, but I don't think it's really big enough to move the dial in a significant way at this point.

Sanjay Datta: Things like.

Sanjay Datta: With just the personal loan product Theres, a certain approval rate and then.

Sanjay Datta: People, who are outside of that approval docs can usually get approved.

Sanjay Datta: For a smaller loan like a small dollar loans, so for a given market and marketing sort of sense as well.

Sanjay Datta: We'll have additional approvals due to that product, but I don't think its really big enough to move the dial in a significant way at this point.

Sanjay Datta: Okay, that's helpful. Thanks, Sanjay. I appreciate it.

Speaker Change: Okay. That's helpful. Thanks, Sanjay I appreciate it.

Operator: And our next question will come from Dan Dollis with Mizzou.

Sanjay Datta: And our next question will come from Dan <unk> with Mizuho.

Operator: Hey, guys. Actually, really, you know, pretty good results.

Dan Dollis: Hey, guys.

Dan Dollis: So you really.

Dan Dollis: So pretty good results I mean, I'm, a little surprised by the initial kind of knee jerk stock reaction do you think is this I mean.

Operator: I mean, I'm a little surprised by the initial kind of knee-jerk stock reaction. Do you think, is this, I mean, if you had to guess, is this, and if you look at 2Q versus, you know, what people were expecting, has something kind of changed? Do you think there's been a bit of a mismodeling that just kind of a little bit of a misunderstanding in terms of 2Q? Because if I look at Trans overall, they seem to be more optimistic and pessimistic, especially if I look at the UMI, which is continuing to trend down, and your loan performance, which is in line with the expectation. I'm trying to sort of connect the dots here.

Operator: If you had to guess is when you look at if you look at <unk> versus what people were expecting is something.

Operator: Changed was do you think theres been a bit of a miss modeling.

Operator: Kind of little bit of a misunderstanding in terms of <unk>, because if I look at the <unk>.

Operator: Trends overall.

Operator: Seem to be.

Operator: More optimistic.

Operator: Pessimistic, especially if I looked at the <unk>, which is continuing to trend down in.

Operator: Your loan performance, which is in line with the expectation.

Operator: I'm trying to sort of connect the dots here.

Sanjay Datta: Yeah, hey, Dan. You know, basically, the Q2 guidance is as it is because rates have moved up during the first quarter. And that's a tightening due to observations of deterioration. And as we've mentioned previously in the primer segment, so that it's fully felt in the second quarter, we do have hope that these rates are as high as they'll be. And, you know, they'll come off these rates. But in any case, you know, we feel like this this sort of second half of the year.

Speaker Change: Yeah, Hey, Dan.

Sanjay Datta: The Q2 guidance is as it is because because rates have moved up during the first quarter and that's the tightening due to observation of deterioration and as we've mentioned previously in the primary segment. So that that's fully felt in the second quarter. We do have hope that these rates are as high as there'll be in.

Sanjay Datta: They'll come off these rates, but in any case.

Sanjay Datta: We feel like this is sort of.

Sanjay Datta: Pandemic and post pandemic stimulus effect is really running its course, so that gives us some comfort that we're kind of back to the world that we know which is we can make improvements to the funnel into the models and grow in a month to month basis really just based on advancements of the technology that you're not seeing that really in the Q2 guidance.

Sanjay Datta: We are just fully getting to this place where we think the models are reflecting.

Sanjay Datta: The risk out there, but we think there is.

Sanjay Datta: We feel pretty comfortable with the second half of the year.

Sanjay Datta: Got it, yeah, because if I look at the UMI, it seems to be going down, which is a positive signal, correct?

Dan: Got it yeah, because if I look at the <unk> it seems to be going down which is a positive signal correct.

Sanjay Datta: Yeah, UMI just recently took a dip, which, of course, is something we like to see. But it's really important to say that it moves a lot week to week; we do update the site every week. And you'll see it jump around a bit; it has taken a nice turn, and we would love to see that become a trend. But we don't bank on that by any stretch. There's certainly a lot of noise in that UMI number on a week to week basis. All right, well, fingers crossed.

Speaker Change: Yes, Youre my just very recently took a took a dip which.

Sanjay Datta: Of course, it's something we like to see but it's really important to say that it moves a lot week to week, we do update the site every week and Youll see a jump around a bit it has taken a nice turn and we would love to see.

Sanjay Datta: See that become a trend, but we don't bank on that by any stretch. There's certainly a lot of noise in that Youre my number on a week to week basis.

Sanjay Datta: Fingers crossed.

Speaker Change: Thanks, Dan.

Operator: And we'll take a question from David Scharf with Citizens JMC.

Sanjay Datta: And we'll take a question from David Scharf with citizens JMP.

Operator: Hey, good afternoon. And thanks for taking my question as well. Hey, Sanjay.

David Michael Scharf: Hey, good afternoon, and thanks for taking my question as well.

Operator: Sanjay.

Sanjay Datta: Kind of wondering, you had mentioned, I think you can be updated about $2.7 billion of committed capital and flow deals over the next 12 months. You know, as you think of, you know, notwithstanding, obviously, consumer demand and some of the macro uncertainties, you still can't predict, but as you think about your overall volume expectation, should we think about that as pretty much funding? [inaudible] of the existing retention.

David Michael Scharf: I'm kind of wondering you had mentioned I think it can the update about.

Sanjay Datta: So about $2 7 billion of committed capital.

Sanjay Datta: And flow deals over the next 12 months.

Sanjay Datta: As you think.

Sanjay Datta: Withstanding, obviously consumer demand in some of the macro uncertainties, you still can't predict but as you think about your overall volume expectations.

Sanjay Datta: Should we think about that is pretty much funding.

Sanjay Datta: Clearly new origination activity or is your guests 12 months from now we're going to see less balance sheet exposure to the core personal loan product, meaning if some of that $2 seven going to be.

Sanjay Datta: Focused on perhaps whole loan sales.

Sanjay Datta: Of the existing retention.

Sanjay Datta: Hey David, sure. Yeah, that figure, I would say is the number that we believe we have a pretty direct line of sight to as of right now, and the majority of it is forward funding. Um, I would say that as the platform scales and, certainly, as the credit environment and markets become more constructive, and we said that we have some signals or some reasons to believe that that's currently happening, we would hope to increase that number along with the scaling of the platform.

Speaker Change: Hey, David.

Speaker Change: Sure, Yes that figure I would say is the number that we believe we have pretty direct line of sight to as it right now and the majority of it is.

Sanjay Datta: Forward.

Sanjay Datta: Funding.

Sanjay Datta: I would say that as the platform scales and certainly as the credit environment and markets become more constructive and we said that.

Sanjay Datta: We have some signals or some reasons to believe that.

Sanjay Datta: Currently happening, we would hope to increase that number.

Sanjay Datta: With the scaling of the platform so.

Sanjay Datta: So there continues to be more opportunities beyond that $2 seven in the pipeline and I think we said before we want to keep it at some reasonable ratio of the overall platform size. So I guess the.

Sanjay Datta: So there continue to be more opportunities beyond that 2.7 in the pipeline. And I think we said before that we want to keep it at some reasonable ratio of the overall platform size. So I guess the implication of all of that is that as the platform grows, if we're doing our job right on the capital market side, we should be reducing, you know, balance sheet exposure to hold loans.

Sanjay Datta: The implication of all of that is that as the platform grows if we're doing our job right on the capital market side, we should be reducing.

Sanjay Datta: She'd exposure to whole loans.

Sanjay Datta: Got it, got it. And then, just as a follow up, maybe on the thing about those whole loans on the credit side. I guess the roughly 51 million of. Net Fair Value Adjustment in Earnings. I guess with fair value accounting, that's principally current period losses plus any mark-to-market. Is that 51 million comprised entirely of charge-offs, or did you take any kind of net write-ups or write-downs on the fair value of the loan?

Speaker Change: Got it got it and then just as a follow up maybe on the.

Sanjay Datta: Staying on those whole loans on the credit side.

Sanjay Datta: I guess, the roughly $51 million.

Sanjay Datta: Uh huh.

Sanjay Datta: Net fair value.

Sanjay Datta: Adjustments in earnings.

Sanjay Datta: Yes, Thats fair value accounting Thats, principally current period losses, plus any mark to market.

Sanjay Datta: Is that does that $51 million comprised entirely of.

Sanjay Datta: Charge offs or did you take any.

Sanjay Datta: The net write ups or write downs on the fair value of the <unk>.

Sanjay Datta: The loans you've retained.

Sanjay Datta: So yeah, certainly a large part of it is the ongoing sort of charge-offs from the whole loans that are on our balance sheet. But I think if you look into some of the materials in the NAC, you'll see that some amount of that was, you know, some writing down of our risk positions in some of these co-investment structures, largely flowing from what we've been talking about, which is this sort of degradation at the prime end of the lower spectrum now. You're starting to see that reflected in some of the markdown.

Sanjay Datta: So yes, it's certainly a large part of it are the ongoing sort of charge offs from the whole loans that are on our balance sheet.

Sanjay Datta: But I think if you look into some of the materials in the deck youll see that.

Sanjay Datta: Some amount of that was.

Sanjay Datta: Some writing down of our risk positions in some of these core investment structures largely flowing from what we've been talking about which is this sort of degradation at the prime end of the borrower spectrum now you're starting to see that reflected in some of the markdowns.

Sanjay Datta: Got it. Understandable. Thanks so much.

Speaker Change: Got it understood.

Sanjay Datta: So much.

Sanjay Datta: Okay.

Speaker Change: Thanks, Dave.

Operator: And our next question is from Rob Wildhack with Autonomous Research.

Sanjay Datta: And our next question is from Rob <unk> with Autonomous research.

Operator: Hi Guys, just wanted to clarify something you said earlier. Do you intend to reduce the absolute number of loans on the balance sheet, or just the core personal loans on the balance sheet, or just the R&D loans on the balance sheet?

Robert Henry Wildhack: Hey, guys just wanted to clarify something you said earlier are you do you intend to reduce the absolute number of loans on the balance sheet or just the core personal loans on the balance sheet or just the R&D loans on the balance sheet.

Sanjay Datta: Here it is. I mean, I think our intention would certainly be to reduce exposure to the core personal loan business. That, of course, is pending both the scaling of the platform and the level of engagement that we're getting from the capital markets. I think it's probably fair to say that, you know, compared to the amount of R&D loans we have on the balance sheet today, which is principally comprised of auto, we could imagine, in a perfect world, that being reduced as well. But you know, both of those intentions are contingent on certain external things.

Robert Henry Wildhack: Hey, Rob.

Operator: <unk>.

Sanjay Datta: I mean, I think our intention would certainly be to reduce exposure to the core personal loan business that of course is.

Sanjay Datta: Pending both the scaling of the platform, but also the the level of engagement that we're getting from the capital markets.

Sanjay Datta: It's probably fair to say that.

Sanjay Datta: Compared to the.

Sanjay Datta: The amount of R&D loans, we have in the balance sheet today, which is principally comprised of auto.

Sanjay Datta: We can imagine in a in a perfect world.

Sanjay Datta: Being reduced as well.

Sanjay Datta: But both of those I think intentions are.

Sanjay Datta: Continuing on <unk>.

Sanjay Datta: Certain external things.

David J. Girouard: Okay, got it. Can you give some color on just how low you'd like to go from the $530 million in core personal or the billion cap that you've discussed in the past? And then I'm curious, why make this change right now? You've spoken in the past about the attractive return profile of the loans. And I think today you sound pretty positive about the macro outlook or the return profile going forward. So, why the decision to hold fewer loans now?

Speaker Change: Okay got it.

Sanjay Datta: Can you give some color on just how low you'd you'd like to go from the $530 million in core personal or the $1 billion cash.

David J. Girouard: Cap that you've discussed in the past and then I am curious why make this change right now you've spoken in the past about the attractive return profile of the loans and I think today, you sound pretty positive on the macro outlook or the return profile going forward. So so why the decision to hold fewer loans now.

David J. Girouard: This is Dave. Let me just maybe take a first crack at that. I mean, basically, holding whole loans on a balance sheet isn't super efficient. So while we are creating structures with long-term partners to be invested alongside them, holding whole loans on the balance sheet, even if they're warehoused or leveraged, isn't particularly efficient. So that's not something we necessarily want to do more than necessary. For some of the R&D processes, as we've said, that's exactly what we have to do.

David J. Girouard: This is Dave let me just maybe take a first.

Dave: First crack at that.

David J. Girouard: Basically holding whole loans on our balance sheet isn't isn't super efficient. So while we do we are trading structures with long term partners too to be invested alongside them.

David J. Girouard: Holding a whole loans on the balance sheet, even if they are warehoused.

David J. Girouard: Leverage isn't particularly efficient so that's not something we necessarily want to do more than more than necessary for some of the R&D processes. As we've told that's exactly what we have to do in the personal loan product. We would certainly rather have anything on our balance sheet being some form of risk sharing a partnership with a long term capital provider as opposed.

David J. Girouard: In the personal loan product, we would certainly rather have anything on our balance sheet be in some form of risk-sharing or partnership with a long-term capital provider as opposed to just holding loans. So our goal would be to have, ultimately, no personal loans other than those for some reason in an R&D structure or some kind of risk-sharing agreement we have with a long-term partner.

David J. Girouard: To just holding loans. So our goal would be is to have.

David J. Girouard: Ultimately no personal loans other than.

David J. Girouard: For some reason and an R&D structure or some kind of risk sharing agreement, we have with a long term partner.

Sanjay Datta: I'll just add to that briefly, Rob. Dave spoke to sort of the more long-term intention or strategy for how we wanted to manage our balance sheet. In the shorter term, your question of why we are signaling or aspiring to a reduction in holdings in the balance sheet really has to do with what we expressed as some positive signals from the institutional markets and the capital markets in their demand for loans.

Speaker Change: I'll just I'll just add to that briefly Rob So Dave spoke to the.

Sanjay Datta: Long term intention our strategy for how we wanted to play our balance sheet in the shorter term to your question.

Sanjay Datta: While we are.

Sanjay Datta: Signaling.

Sanjay Datta: You know, we're aspiring to a reduction on all lines in the balance sheet really has to do with what.

Sanjay Datta: What we expressed as a as some some positive signals from the institutional markets and the capital markets and their demand of loans and of course.

Sanjay Datta: And of course, if that third-party capital has healthy demand for loans, we would always prefer to deliver it to them than to hold it on our own balance sheet just because that's more central to how our business model works.

Sanjay Datta: If that third party capital has healthy demand for loans, we would always prefer to deliver it to them than to hold it on our own balance sheet, just because thats you know thats.

Sanjay Datta: It's more central to our business model works.

Sanjay Datta: Yeah.

Sanjay Datta: Okay, that's helpful. Thank you.

Speaker Change: Okay. That's helpful. Thank you.

Speaker Change: Thank you Rob.

Operator: And we'll take a question from John Hecht with Jeff.

Sanjay Datta: And we'll take a question from John Hecht with Jefferies.

Operator: Afternoon, guys. Thanks for taking my questions.

John Hecht: Afternoon, guys. Thanks for taking my questions.

Sanjay Datta: Um, first question is, I mean, it looks like about 70 million of increment a little more north of 70 million incremental capital co-invested in the quarter. How you know, I know you guys did a deal with Aries in the quarter. I'm just wondering, can you tell us how much of that co-investment was tied to that deal versus, I guess, upping some of the flow agreements that you've already announced prior.

John Hecht: First question is I mean, it looks like about $70 million of incremental little more north of $70 million incremental capital co invested in the quarter.

Sanjay Datta: I know you guys didn't deal with Aries in the quarter I was just wondering can you tell us.

Sanjay Datta: How much of that co investment was tied to that deal versus.

Sanjay Datta: I think some of the flow agreements a party you announced prior to this quarter.

Sanjay Datta: Hey John, we don't have an exact breakdown, but Aries was certainly a meaningful portion of the overall amount. I mean, if I had to ballpark it, I think something around the order of half is probably in the ballpark, but we don't have a specific breakdown for you.

Sanjay Datta: We don't have an exact breakdown, but areas of certainly a meaningful portion.

Sanjay Datta: <unk>.

Speaker Change: Of the overall amount I mean, if I had to ballpark it I think something around the order of.

Speaker Change: The math is probably in the ballpark, but we don't have a specific breakdown for you.

Sanjay Datta: Okay, that's helpful, in any case. And then the second half, well, the second half, the growth in the second half, you know, you mentioned a HELOC, and I think you mentioned a HELOC, a flow agreement on HELOC, maybe I misheard that, but how do we think about the contribution of some of the newer products to, you know, the enhanced growth in the second half versus the first half versus the more traditional products?

Speaker Change: Okay. That's helpful.

Sanjay Datta: And then the.

Sanjay Datta: <unk>.

Sanjay Datta: Second half well with the second half the growth in the second half.

Sanjay Datta: You mentioned, the HELOC and I think you mentioned HELOC.

Sanjay Datta: Our flow agreement on HELOC, maybe I misheard that but how do we think about the contribution of some of the newer products.

Sanjay Datta: The enhanced growth in the second half versus the first half versus the more traditional products.

Sanjay Datta: Hey, John. So yeah, but you heard it right.

Speaker Change: Hey, John.

Sanjay Datta: So yes, you heard it right we've got our first sort of forward flow.

Sanjay Datta: Capital partner and HELOC.

John: We're hoping to bring some more on shortly.

Sanjay Datta: We've got our first sort of forward flow capital partner in HELOC and, you know, hoping to bring some more on shortly. I would say, look, we're very excited for some of the newer products, particularly HELOC is a great product in this environment. We talked about how fast small-dollar loans were growing, and I think they're showing the kind of conversion strength where we believe we might be able to start to extract some good economics from them.

John: I would say look we're very excited for some of the newer products, particularly <unk> is a great product in this environment.

Sanjay Datta: We talked about how fast small dollar loans were growing and I think there is showing the kind of conversion strength, where we believe we might be able to extract some some good economics there.

Sanjay Datta: But I think in the in the relatively near term I E for the rest of this year I think that our economics and our guide really do depend on the core business I don't think the new products are quite yet going to move the dial in a meaningful way, but we're very excited for them for 2025.

Sanjay Datta: But I think in the relatively near term, i.e., for the rest of this year, our economics and our guidance really do depend on the core business. I don't think the new products are quite yet going to move the dial in a meaningful way, but we're very excited about them for 2025.

Speaker Change: Thank you.

Operator: And our next question will come from Nate Richam with Bank of America.

Sanjay Datta: And our next question will come from Richard <unk> with Bank of America.

Operator: Good afternoon. Thank you for taking my question.

Nate Richam: Hi, good afternoon penetration of my question.

Nate Richam: I understand you're being conservative on the underwriting, but can you talk a little bit about the demand environment, who else you're producing.

David J. Girouard: I understand you're being conservative on the underwriting, but can you talk a little bit about the demand environment for the loans you're producing? I know you said the partner banks are trying to offset some of this deposit pressure with the higher yields. I'm just curious if demand has increased with this higher rate for a longer term.

Nate Richam: I know you said like the partner banks are kind of like offsets whether its deposit.

David J. Girouard: Pressure will stay at the higher yields I'm just curious if what the demand is kind of increased with this higher rate for a longer environment.

David J. Girouard: By demand, you're referring to the lending partners, which we think of as supply, but that having been said, yeah, I think the bank and credit union sector has changed from what we would have told you, you know, three or six months ago. There were definitely liquidity challenges. Nobody was really wanting to do all that much lending and focused only on their own customers, et cetera. However, the situation has definitely begun to move in the other direction.

David J. Girouard: But demand youre, referring to the lending partners, which we think the supply but that having been said.

David J. Girouard: Yes, I think the banking credit Union sector has changed from.

David J. Girouard: From what we would've told you three or six months ago, there was definitely liquidity challenges.

David J. Girouard: Nobody was really wanting to do all that much lending.

David J. Girouard: And focused only on their own customers et cetera that situation is definitely.

David J. Girouard: <unk> begun to move the other direction, so liquidity seems to be a problem that.

David J. Girouard: So liquidity seems to be a problem that's kind of going away, and bank executives are generally feeling better about their balance sheets and their position, but suddenly, their ratios aren't right in terms of having sufficient assets. So there seems to be an increasing appetite for loans, the right types of loans, et cetera, for banks and credit unions. And that's something we're seeing. So we're now at a place where in that part of our lending, we definitely have excess capital because rates are still super high, and that constrains demand from borrowers. But having said that, the demand for loans as a group from, you know, banks and credit unions has definitely strengthened.

David J. Girouard: Kind of going away and exact bank executives generally feeling better about their balance sheet and their position, but there are suddenly the ratios arent right in terms of having sufficient asset. So there seems to be an increasing appetite for loans.

Operator: Awesome. Thank you.

Operator: The right types of loans et cetera for banks and credit unions and that's been something we're seeing so we're now at a place where in that part of our.

Operator: That part of our lending, we definitely have excess capital and because because rates still are super high and that constrains demand from borrowers, but having said that the demand for loans.

Operator: As a group from from banks and credit unions has definitely strengthened.

David J. Girouard: And then just curious if there's anything to call out from a tax refund season. I mean, we heard a few conflicting things about, you know, how seasonal trends played out in the quarter. And I'm just curious, like for the loans that you were servicing, do you see anything like just different from a repayment or delinquency standpoint, or maybe also not in demand? So is there anything different to call out?

Speaker Change: Awesome. Thank you and then just curious if there's anything to call out from a tax refund season. I mean, we've heard if you go with putting things about how seasonal trends played out in the quarter, but I'm just curious like for the ones that you're servicing.

David J. Girouard: Did you see anything like just different from a repayment or delinquency standpoint, or maybe also loan demand. So if there is there anything different to call out.

David J. Girouard: Yeah, seasonality in our business is fairly consistent. We did exactly what we would have expected this year where, you know, this sort of loan demand trough and credit performance improves a lot during the season when people are receiving tax refunds from the government. And that has played out, you know, every year, and we saw it again this year. So, you know, that's, you know, we were sort of planning on that. We've begun to model that into our credit, et cetera, and expect it. And so it seems to have gone the usual path.

Speaker Change: Yes seasonality in our businesses.

David J. Girouard: Consistent with exactly what we would've expected this year were.

David J. Girouard: This sort of loan demand trough.

David J. Girouard: And also credit performance improves a lot during the season when people are receiving tax refunds from the government and that has played out every year and we saw it again this year so.

David J. Girouard: Thats.

David J. Girouard: We were sort of planning on that we've begun to model that into our our credit et cetera, and expect it and so.

David J. Girouard: So it seems to have gone the usual path.

Speaker Change: Got it thank you.

David J. Girouard: Yeah.

Operator: And our next question will come from Giuliano Bologna on Compass.

David J. Girouard: And our next question will come from Giuliano Bologna with Compass point.

Operator: Good afternoon. One thing I'd be curious about, kind of picking your brain about, and I realize you made some commentary about, you know, some model improvements, but it seems like a lot of your loans were being priced around 36%. I'm curious if there's any incremental sense of, you know, what portion of the funnel you think you could, you know, push below 36%, you know, over the next few months and quarters, and how that could flow into, you know, incremental origination volumes.

Giuliano Jude Anderes Bologna: Good afternoon, one thing I'd be curious about kind of wrap up and I.

Operator: Realizing that some commentary about.

Operator: Some model improvements, but it seems like a lot of your loans were being price of about 36% I'm curious if there's any incremental sense of.

Operator: Portion of the funnel, where you think you could of course below 36% over the next few months and quarters.

Operator: And how that could flow into thinking about the origination volume.

David J. Girouard: Yeah, Giuliano, it's a good question. Yeah, because we have a limit, there are no loans above 36% on our platform. That means when underlying rates or return demands go up, as well as when loss assumptions go up, a lot of people will no longer be approved. And that's one of the, you know, fundamental challenges of having that limit at 36%. But having said that, it also works the opposite way.

Operator: Yes.

Speaker Change: It's a good question, yes, because we have a limit there's no loans above 36% on our platform that means when underlying rates or return demands go up as well as win loss assumptions go up a lot of people will no longer be approved and Thats one of the.

David J. Girouard: Fundamental challenges of having that that limit at 36%, having said that it also works the opposite way so as rates come down <unk> risk comes down, which we measure as <unk>.

David J. Girouard: So as rates come down and or risk comes down, which we measure as UMI, a lot of those people will come back into the approval fold. So it's one of the things we deal with. We've also mentioned several initiatives, you know, to actually bring more people into the approval bucket, things like the auto-secured personal loan and small dollar loan. So we're tackling it on many fronts, because we like to stay in that sort of 36% envelope because it sort of reflects, you know, where nationally chartered banks can go. And so it feels like a good place for us to be.

David J. Girouard: A lot of those people will come back into the approval fold.

David J. Girouard: So.

David J. Girouard: It's one of the things we deal with we've also mentioned.

David J. Girouard: Several initiatives to actually bring more people into the approval bucket things like.

David J. Girouard: The auto secured personal loans things like the small dollar alone. So we're tackling it on many fronts, because we'd like to stay in that sort of 36% envelope because it sort of reflects.

David J. Girouard: Nationally chartered banks can can go and so it feels like a good place for us to be.

Sanjay Datta: That's helpful. And then I realized you provided some commentary about the co-investments. It looks like the fair value is down, you know, $10 million in the first quarter. But when we think about the kind of bucket of loans that that's associated with, there's obviously multiple vintages there. And I'm curious, you know, what vintages are driving, you know, that are driving kind of the deterioration in the pool. Is it coming from, you know, you know, four-quarter old vintages, three-quarter old, you know? I'm just curious what vintages are driving that and if you're seeing any changes in the trends across the vintages that are covered by

Speaker Change: That's helpful. And then earlier you provided some commentary about the co investments it looks like the fair value is down $10 million linked quarter.

Sanjay Datta: When we think about that.

Sanjay Datta: Bucket of loans.

Sanjay Datta: Yes.

Sanjay Datta: Obviously multiple vintages, there and I'm curious.

Sanjay Datta: Vintages are driving that.

Sanjay Datta: Driving the deterioration in the core is it coming from.

Sanjay Datta: Four quarter old vintages streak world.

Sanjay Datta: I'm curious what vintages are driving that and if youre seeing any changes I mean, the trends across the vintages that are covered by co investment.

Sanjay Datta: Hey, Giuliano, this is Sanjay. Yeah, I would say this is the dynamic here really is more about a move, or maybe you would call it a deterioration at the prime end of the borrower base. And it has happened pretty consistently across vintages. I mean, the more seasoned the vintage is, the less loss it has left in its life, so the less impactful it is. But I would say, all else equal, prime borrowers, whether they took out their loan a year ago or a month ago, have all performed a little bit worse this year than they were performing six months ago.

Sanjay Datta: Hey, Julien this is Sanjay yeah, I would say.

Sanjay Datta: This is the dynamic here really is more about.

Sanjay Datta: A move or maybe call it the deterioration at the prime end of the borrower base.

Sanjay Datta: And it has happened pretty consistently across vintages, I mean, the more seasoned vintages the less loss. It has lessened slice of less impactful it is but.

Sanjay Datta: Say all else equal prime borrowers, whether they took out their loan a year ago or a month ago have all performed a little bit worse. This year than they were performing six months ago and Thats the thing Thats being reflected in the lower volume guide that we have for Q2.

Sanjay Datta: And that's the thing that's being reflected in the lower volume guide that we have for Q2, as well as some of the fair value changes that have really been reflected in our risk-sharing position. I wouldn't call it a vintage specific.

Sanjay Datta: As well as some of the the fair value.

Sanjay Datta: Changes that have really been reflected in our in a risk sharing positions.

Sanjay Datta: I wouldn't call it a vintage specific thing.

Sanjay Datta: That's very helpful. I appreciate it, and I will jump back in again.

Giuliano: Got it that's very helpful. I appreciate it and I will jump back in again.

Sanjay Datta: Thanks.

Operator: And we'll take a question from Simon Clinch with Redburn Atlantic.

Sanjay Datta: And we'll take a question from Simon clinch with Redburn Atlantic.

Operator: Hi, everyone. Thanks for taking my question. I want to follow up on the questions around the second half. I mean, it's the first time in a while that we've had you give that kind of visibility.

Operator: Alright.

Simon Alistair Vaughan Clinch: For taking my question.

Simon Alistair Vaughan Clinch: To follow up on the questions around the second half is the first time for a while.

Simon Alistair Vaughan Clinch: Uh huh.

Sanjay Datta: And I was wondering if you could perhaps give a little bit more color around what you're actually anticipating in terms of the conversion rate, if the borrower constraints ease, what you're truly assuming in that guidance. And then, to that last point about the prime in the market, are you assuming continued deterioration in that part following the current trends within that?

Simon Alistair Vaughan Clinch: This ability.

Simon Alistair Vaughan Clinch: I was wondering if you could could we move.

Sanjay Datta: You actually anticipating teams to completion.

Sanjay Datta: Easy you're.

Sanjay Datta: Are you assuming in that.

Sanjay Datta: And then when you do.

Sanjay Datta: Hum.

Sanjay Datta: Are you assuming continued deterioration.

Sanjay Datta: Charles.

Sanjay Datta: Sure.

Sanjay Datta: Hey, Simon. Well, I'll start with the first part of your question, which is really the second half of this year. And again, let me just kind of reiterate some points. Because, as you mentioned, we are going back to the longer-term perspective somewhat here, and it's important to remember the reason we went away from that in the recent past is because we were grappling with a very specific thing in the macro. And that thing, as we said, is that when the economy received a large influx of cash in the form of stimulus, that then abruptly stopped.

Speaker Change: Hey, Scott.

Speaker Change: Well al.

Speaker Change: I'll take a crack at the first part of your question, which is really the second half.

Sanjay Datta: This year and let me just kind of reiterate some points.

Sanjay Datta: Because as you mentioned, we are going back to longer term.

Sanjay Datta: Ah.

Sanjay Datta: Perspective, somewhat here and it's important to remember the reason we went away from that.

Sanjay Datta: Over the recent past is because we were grappling with a very specific thing in the macro.

Sanjay Datta: That thing we said is that.

Sanjay Datta: When the economy received a large influx of cash.

Sanjay Datta: It created and propagated a massive wave of elevated defaults, and that thing worked its way through the borrower base, starting with the subprime folks and working its way to the more and more affluent folks. The folks who it was who were impacted first. The borrowers that were at the subprime or end of the spectrum are now well on their way to recovery. The prime end of that spectrum, I think we've said, is sort of like, is more recently crested in terms of their default patterns.

Sanjay Datta: From a stimulus that then abruptly stopped it created a propagated a massive wave of elevated defaults and that thing worked its way through the borrower base, starting with the subprime risk folks and working its way to the more and more affluent folks.

Sanjay Datta: The folks who it was.

Sanjay Datta: We're impacted earliest.

Sanjay Datta: The borrowers that we're at the primary end of the spectrum are now well on their way to recovery.

Sanjay Datta: The prime must end of that spectrum I think we said it's sort of like is more recently crested in terms of there in terms of their default patterns and because we've now seen that essentially play itself out. We are now back in the environment, where there is just sort of in our view regular macro macro risk and in execution.

Sanjay Datta: And because we've now seen that essentially play itself out, we're now back in an environment where, in our view, regular macro risk and execution against the product roadmap in order to create model gains. So I believe we are, in some sense, back in the environment we were in before the stimulus and, frankly, the pandemic. And in that world, most of our growth was directly reflected in conversion gain.

Sanjay Datta: Against the product roadmap in order to create model gains. So I believe we are in some sense back in the environment we were in.

Sanjay Datta: Before that before the stimulus and frankly the pandemic.

Sanjay Datta: And in that World most of our growth was directly reflected in conversion gains and most of that conversion gains came directly from improved model accuracy. So I think you can roughly intuit that sequential growth that.

Sanjay Datta: And most of that conversion gain came directly from improved model accuracy. So I think you can roughly intuit that the sequential growth that we're telegraphing for the back half of this year, we expect most of that, if not all of it, to show up directly in the form of conversion. Now, in that long explanation, I've forgotten what the second part of your question was. Would you mind repeating it? Now, if it's just a second...

Sanjay Datta: That we're telegraphing for the back half of this year, we expect most of that if not all of it to show up directly in the form of conversion.

Sanjay Datta: Now in that long explanation I've forgotten what the second part of your question was would you mind repeating it.

Sanjay Datta: Now the second part of that question was just around the primer, and if you're actually assuming that it will deteriorate, but you've said it's crested, and sounds like you're assuming just that you're back at a normal level, is that fair?

Speaker Change: The second part of that question was just around the prime that if you're actually assuming that to deteriorate, but you've said your.

Speaker Change: Question on it sounds like Youre seeing or you just kind of normal levels.

Sanjay Datta: Well, to be clear, we're not, defaults now are very high. We're not expecting them or assuming that they'll go back down. We will just assume that they won't further deteriorate. Right? I think we're sort of assuming a constant macro environment today, not an improving one. An improving one would, we believe, be a tailwind to what we're working against.

Sanjay Datta: Well to be clear, we're not defaults now are very high we're not expecting them or assuming that they will go back down.

Sanjay Datta: We will just assume that they won't further deteriorate.

Speaker Change: I think we are.

Sanjay Datta: Are we sort of.

Sanjay Datta: Assuming a constant macro to today not an improving one improving one would we believe be a tailwind too to what we're working against.

Sanjay Datta: Great. And just as a follow-up, on the $2.7 billion of capital that you have visibility on for the next 12 months, could you give us a sense of what level of upscaling you've seen that gives you that number? And I think you said as well that most of that is actually forward flow rather than that kind of long-term committed capital. So just clarify something. Yeah, that is correct.

Speaker Change: Okay, Great and just as a follow up on the on the $2 $7 billion.

Sanjay Datta: Of capital that you have.

Sanjay Datta: Visibility for the next 12 months could you give us a sense of what level of upscaling you've seen.

Sanjay Datta: That gives you that number.

Sanjay Datta: And I think you said as well that most of that is actually for it so well.

Sanjay Datta: On committed capital.

Sanjay Datta: Just clarify some of those pieces.

Sanjay Datta: Yeah, that is correct. I would say that the 2.7 number really is an expression or a result of the sort of continuation or elongation of existing relationships, as well as some new ones. It doesn't really contemplate any significant upsizing in the existing relationships. Although, as we mentioned, I do think some of that is in play, and we're working on it. But we're not including that in the numbers that we currently have line of sight on. Great, thanks so much.

Speaker Change: Yes that is correct I would say that the $2 seven number really is.

Sanjay Datta: And expression are a result of that sort.

Sanjay Datta: The continuation of elongation of existing relationships as well as some new ones it doesn't really contemplate.

Sanjay Datta: Any significant upsizing.

Sanjay Datta: And the existing relationships, although as we mentioned I do think some of that is in play and we're working on it but we're not including that in our in.

Sanjay Datta: And the numbers that we currently have line of sight too.

Speaker Change: Great. Thanks, so much.

Speaker Change: And you can take it.

Operator: And we'll take a question from Reggie Smith with J.P. And again, Reggie Smith, your line is open. Please go ahead with your questions. Again, your line is open. Yeah, we can. Thank you.

Sanjay Datta: And we'll take a question from Reggie Smith with Jpmorgan.

Operator: And again Reggie Smith. Your line is open. Please go ahead with your questions.

Reginald Lawrence Smith: Your line is open yes, we can.

Operator: I'm sorry. I must have been on mute.

Reginald Lawrence Smith: Thank you.

Reginald Lawrence Smith: I'm sorry.

Reginald Lawrence Smith: I must have been on mute.

Operator: I wanted to follow up on the last question, or it might have been two questions ago, where you were talking about, I guess, your prime exposure. I know last quarter you talked about Prime kind of deteriorating, and it sounds like, I just want to make sure I'm hearing you right. When you speak of prime, you're not talking about Prime in the traditional sense, but you're talking about more Prime, like Prime

Reginald Lawrence Smith: I wanted to follow up on the <unk>.

Speaker Change: Last question I might've been two questions ago, where you were talking about.

Operator: I guess, you're applying exposure and I.

Operator: I know last quarter, you talked about prime kind of deteriorating.

Operator: And it sounds like and just want make sure I'm hearing you right.

Operator: When you speak of Prime.

Operator: Youre not talking about prime in the traditional sense, but you're talking about.

Operator: More like primer, but still not quite frankly, because Ukraine, who is.

Sanjay Datta: Who is the prime customer you're talking about? And I know you don't use FICO scores, but how would that customer translate to FICO? Just so that we're all speaking the same language, I'm going to have a few follow-ups. Thank you.

Operator: The prime customer you're talking about.

Sanjay Datta: I know you don't use FICO scores, but like how would that customer translate the FICO just say that we're all speaking.

Sanjay Datta: The same language you're going to have a few follow ups. Thank you.

Sanjay Datta: Hey, Reggie. Thanks for the question. As you know, there are a lot of different dimensions or ways to define prime, but for the sake of being reductive, I think you could think of the current stress as being somewhere north of 700 FICO score. And I think if you're well below sort of 660, you're probably currently on the path to improvement.

Sanjay Datta: Hey, Randy Thanks for the question as you know Theres, a lot of different dimensions or ways to define prime but for the sake of being reductive I think do you think you could think of the current stress as being somewhere north of 700 FICO score.

Sanjay Datta: And I think if youre well below sort of 660, you are probably <unk>.

Sanjay Datta: On the path to improvement.

Sanjay Datta: So thinking about that prime customer, is there a way to articulate, or how should we think about what the current life of loan laws rate is for that borrower, maybe how that has changed in the last, you know, call it six months, as you've seen that kind of deteriorate? I'm just kind of curious, like, you know, what are you talking about there? And then thinking about, you know, that 36% cap. I think last quarter, he talked about being able to raise prices.

Speaker Change: Understood and then I guess, so thinking about that prime cuts.

Sanjay Datta: Customer.

Sanjay Datta: Is there a way to articulate or how should we think about what the I guess current lifestyle law life of loan loss rate is for that borrower, maybe how how that has changed in the last call. It six months that you've seen that deteriorate.

Speaker Change: Just kind of curious.

Sanjay Datta: And so I'm assuming that they're not that high, that there's room to kind of price them. So maybe talk about that, the dynamics there, like how much you've been able to raise APRs versus what the loss increase has kind of been there.

Sanjay Datta: What are you talking about there and then thinking about 36% cap I think last quarter, you talked about being able to raise price and so I'm assuming that they are not that high and if there's room to kind of price. So maybe talk about that did that the dynamics there like how much you've been able to reign apr's versus what the loss increase is kind of been.

Sanjay Datta: there.

Sanjay Datta: Yeah.

Sanjay Datta: Let's see. I mean, I think you're asking a little bit about the sort of nature of loss rates at the primer end. Obviously, they're much lower. I think that you could probably think of them in the sort of low to mid single digits as an expected loss target, and they're probably coming in high, you know, to the tune of, I don't know, 50% plus or so. So that adds a couple of hundred basis points to the APR.

Speaker Change: Let's see.

Sanjay Datta: I think youre, asking a little bit about the sort of nature of loss rates in the primer and obviously, they're much lower I think that you could probably think of them in the sort of low to mid single digits.

Sanjay Datta: As an expected loss target and they're probably coming in high.

Sanjay Datta: To the tune of I don't know, 50% plus or so so that adds a couple of hundred basis points to the APR. It certainly does not push them out of or even anywhere near the 36% approval box, but when you get higher APR as you get lower acceptance rates just due to elasticity and so conversions are down volumes are.

Sanjay Datta: It certainly does not push them out of or even anywhere near the 36% approval box. But when you get higher APRs, you get lower acceptance rates just due to elasticity. And so, you know, conversions are down, volumes are down, et cetera.

Sanjay Datta: Et cetera.

Sanjay Datta: Okay. And then I wanted to ask about – I really appreciate the guidance for the back half of the year. And I guess when you do the simple average, you get to about $150 million on average in fees, and that's about flat to what you did in the fourth quarter of 2023. My guess is that there's probably some cadence there and that you probably won't be running it flat as you get to the fourth quarter, and there may be some growth there. Can you talk a little bit about if there's anything you can provide in terms of how 3Q and 4Q are – should we assume kind of flat, or is it more 4Q loaded?

Sanjay Datta: Okay.

Sanjay Datta: And then I wanted to ask about so I appreciate the guidance for the back half of the year and I guess when you do a simple average to get to about $150 million on average.

Sanjay Datta: And fees and Thats about flat to what you did in the fourth quarter of 'twenty. Three my guess is it's probably some some cadence there.

Sanjay Datta: And that.

Sanjay Datta: We won't be running it flat as you get to the fourth quarter and there may be some growth. There can you talk a little bit about anything you can provide in terms of how.

Sanjay Datta: <unk> should we assume kind of flat or is it more <unk> loaded.

Sanjay Datta: Yeah.

Sanjay Datta: Sure, yeah, I would say that it's safe to assume they won't be flat. We're going to have to regrow into that level by getting some conversion gains over time. So I think you could think of that as, hopefully, a steadyish stream of conversion gains that will regrow us to that scale consistently.

Speaker Change: Sure Yes.

Sanjay Datta: I would say that I don't I think it's safe to assume they won't be flat I mean, we're going to have to re growth into that level by getting getting some conversion gains over time. So I think you could think of that as hopefully a steady ish stream of conversion gain that will regress to that scale.

Sanjay Datta: It consistently.

Operator: Perfect. Thank you. I'll hop back into the queue. I appreciate it.

Speaker Change: Perfect. Thank you I'll hop back into queue I appreciate it.

David J. Girouard: And we'll take a question from James Faucette with Morgan Stanley.

Operator: And we'll take a question from James Fawcett with Morgan Stanley.

Operator: Thanks for just a few quick follow-ups for me on the assumption of. What macro does that assume? And if we continue to see a bit of the deterioration and prime borrowers that you've seen, would that be a headwind? Or are you expecting to be able to offset that with max? I guess that's my first question.

James Eugene Faucette: Thanks Robert.

James Eugene Faucette: A few quick follow ups for me.

Operator: The assumption of.

Operator: Oh.

Operator: What the macro does that assume then if we continue to see a bit the deterioration in prime or borrowers that you've seen that that would be a headwind or are you expecting to be able to offset that with I guess, that's my first question.

Sanjay Datta: Hey, James. No, I think that I would maybe say you have sort of flat in aggregate. So if you see mild deterioration at the prime end and mild recovery at maybe the less prime end, that would sort of result in a relatively aggregate neutral macro, under which we could sort of achieve, I think, the numbers that we have described.

Speaker Change: Hey, Jim.

Speaker Change: No I think that.

Sanjay Datta: I would maybe say sort of flat in aggregate. So if you see mild deterioration at the brand and mild recovery at the maybe the less prime and that would sort of results in a relatively aggregate neutral macro and under which we can sort of achieve the numbers that we have described.

Sanjay Datta: Yep, got it. And then just a quick couple of clarifications, is that as you're looking to renew some of your long-term capital agreements that were entered into about a year ago, how should we be anticipating changes in terms there? And then I'll just tag, as you're adjusting your OPEX space, is there a level at which you think that you should be breakeven and where you keep OPEX relatively flat from there, or can't you? Or how do we think about how you think, how you feel about OPEX if and as you get back to breakeven and profitability? Thank you. Sure, let's see.

James: Yep got it and then just a quick couple of clarification is that.

Speaker Change: As youre looking to reduce some of your long term capital agreements that were entered into about a year ago.

Sanjay Datta: How should we be anticipating change in the terms there.

Speaker Change: I'll just tag.

Sanjay Datta: As you're adjusting your opex space.

Sanjay Datta: Is there a level at which you're thinking that you should be at breakeven or whether you keep opex relatively flat from our Kenya or how do we think about.

Sanjay Datta: How you're thinking how you're feeling about opex, if you if and as we get back to breakeven and profitability.

Sanjay Datta: Yes.

Speaker Change: Sure, let's see.

Sanjay Datta: I'll just take the second question first on OpEx. So, as we sort of said in our remarks, we've taken some cost actions since the end of the quarter. And, you know, those will get factored in to the back half of the year. I think that's one component of our return to EBITDA breakeven, but it won't get us there alone.

Speaker Change: Yeah I'll take the second question first on Opex.

Sanjay Datta: So as we as we sort of said in our remarks, we've taken some cost actions since.

Sanjay Datta: We ended the quarter and those will get factored in.

Sanjay Datta: To the back half of the year I think thats, one component of our return to EBITDA breakeven it won't get us there alone. So we are I.

Sanjay Datta: So we are expecting some growth as well. But if that growth doesn't materialize and it leaves us short of our EBITDA target, then, you know, we will sort of reconsider it at that time. And I think your first, your initial question, or the first part of your question was about the renewal of the committed agreements and to what extent terms are changing. Look, any time you do, these are sort of renewals of existing relationships.

Sanjay Datta: <unk>, some some growth as well.

Sanjay Datta: If that growth doesn't materialize and it leaves us short of our EBITDA target then we will sort of reconsidered at that time.

Sanjay Datta: And I think your first your initial question. The first part of your question was about the renewal of the committed agreement and.

Sanjay Datta: To what.

Sanjay Datta: Terms are changing.

Sanjay Datta: Look anytime you. These are sort of renewals of existing relationships I think that each anytime you.

Sanjay Datta: I think that any time you spend something like a year in an initial relationship, you have learned on both sides of what works well and what doesn't, and so it's natural to sort of revisit some of that when you re-up, but I think that, you know, in the grand scheme of things, I don't think those are, they're not major changes. I think you can largely think of these as surviving sorts of persistent relationships with some fine-tuning around the edges. I don't think there's anything that will dramatically change the economic picture for our business model.

Sanjay Datta: Spend.

Sanjay Datta: Something like a year.

Sanjay Datta: Yes.

Sanjay Datta: And an initial relationship you have learnings on both sides of what works well and what doesn't and so it's natural to.

Sanjay Datta: To sort of revisit some of that when you re up but I think that.

Sanjay Datta: In the largest in the Grand scheme of things I don't think those are theyre not major changes I think I think you can largely think of these as.

Sanjay Datta: Sure surviving sort of persistent relationships with some fine tuning around the edge I don't think theres anything that will dramatically change the economic picture for our business model.

Speaker Change: Alright, thank you so much.

Speaker Change: Thank you James.

Operator: Thank you, and that does conclude the question and answer session. I'll now turn the conference back over to you for any additional or closed questions.

Speaker Change: Thank you and that does conclude the question and answer session. I will now turn the conference back over to you for any additional or closing remarks.

David J. Girouard: Alright. Well, thanks to all of you for joining us today. To close, I just want to assure you that we are taking the necessary steps to return to growth and get back to EBITDA profitability, all while continuing to invest in our future with a very fast pace of innovation. We look forward to showing you our progress through 2024 and beyond. Thanks for joining us today.

Speaker Change: Alright, well, thanks to all of you for joining us today.

David J. Girouard: Close I just want to assure you that we are taking the necessary steps to return to growth and get back to EBITDA profitability.

David J. Girouard: All while continuing to invest in our future with a very fast pace of innovation, we look forward to showing you our progress through 2024 and beyond thanks for joining today.

Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Speaker Change: Thank you.

Speaker Change: Does conclude today's conference we do thank you for your participation.

Speaker Change: Excellent day.

Operator: Okay.

Operator: [music].

Operator: Okay.

Operator: Yeah.

Operator: [music].