Q2 2024 Upstart Holdings Inc Earnings Call

Please standby.

Speaker Change: Good day, everyone and welcome to the upstart second quarter 'twenty 'twenty four earnings Conference call Today's conference is being recorded.

Operator: Please stand by. Good day, everyone, and welcome to the Upstart second quarter 2024 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Cindy Moon, Lead Corporate and Securities Counsel. Please go ahead.

Speaker Change: At this time I would like to turn the conference over to Cindy Moon lead corporate and Securities Counsel. Please go ahead.

Speaker Change: Good afternoon, and thank you for joining us on today's conference call to discuss upstart second quarter 'twenty 'twenty four financial results.

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

Speaker Change: With us on today's call are Dave Gerard Upstart, Chief Executive Officer, and Sanjay daughter, our Chief Financial Officer.

Speaker Change: Before we begin I want to remind you that shortly after the market close today.

Speaker Change: <unk> issued a press release announcing its second quarter 'twenty 'twenty four financial results and published an Investor Relations presentation.

Speaker Change: Both are available on our Investor Relations website, IR that helped start the clock.

Speaker Change: During the call we will make forward looking statements such as guidance for the third quarter of 'twenty 'twenty, four and second half of 'twenty 'twenty four related to our business and our plans to expand our platform in the future.

Cindy Moon: During the call, we will make four linking statements, such as guidance for the third quarter of 2024 and the second half of 2024 related to our business and our plans to expand our platform in the future. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties, and assumptions. Actual results may differ materially as a result of various risk factors that have been described in our filings with the SEC.

Speaker Change: These statements are based on our current expectations and information available as of today and are subject to a variety of risks uncertainties and assumptions.

Speaker Change: Actual results may differ materially.

Speaker Change: As a result of various risk factors that have been described in our filings with the SEC.

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

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

Speaker Change: We assume no obligation to update any forward looking statements as a result of new information or future events, except as required by law.

Speaker Change: In addition, during today's call unless otherwise stated.

Speaker Change: References to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables.

Cindy Moon: 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. Next week, on August 15th, Upstart will be participating in the Needham FinTech and Digital Transformation Conference. On September 12th, Upstart will participate in the B. Reilly Securities, Consumer, and TMT conference. Now, we'd like to turn it over to Dave Girouard, CEO of Up

Speaker Change: 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.

Next week on August 15th upstart will be participating in the Needham Fintech and digital transformation called friends.

Speaker Change: On September 12th upstart will participate and B Riley Securities consumer and TMT Conference.

Speaker Change: Now, we'd like to turn it over to Dave Gerard C E O of upstart.

Dave Girouard: Good afternoon, everyone. I'm Dave Girouard, co-founder and CEO of Upstart. Thanks for joining us on our earnings call covering our second quarter 2024 results. I've said many times over the last couple of years that I've never lost an ounce of faith or optimism in the future of Upstart, and today you can begin to see why. I'm proud and thankful for the incredible work done by Upstarters in the last two years to build a stronger and better company in so many ways.

Dave Gerard: Good afternoon, everyone I'm, Dave Gerard co founder and CEO of upstart. Thanks for joining us on our earnings call covering our second quarter 2024 results.

I've said many times over the last couple of years that Ive never lost an ounce of faith or optimism in the future of upstart and today you can begin to see why I'm proud and thankful for the incredible work done by ups starters in the last two years to build a stronger and better company on so many dimensions.

Dave Girouard: The numbers and guidance we released today demonstrate that we're turning a corner. We've made real progress toward returning to sequential growth and EBITDA profitability, and I believe we will resume our role once again as the FinTech known for high growth and healthy margins. We expect this trend of reduced loan funding from our balance sheet will continue through the remainder of 2024.

Dave Gerard: The numbers and guidance, we released today demonstrate that we're turning a corner we've made real progress toward returning to sequential growth in EBITDA profitability.

Dave Gerard: And I believe towards resuming our role once again as the Fintech known for high growth and healthy margins.

Dave Gerard: We've also rebuilt our funding was applied by locking in important long term funding partnerships and significantly reducing the use of our balance sheet to fund loans. We expect this trend of reduced loan funding from our balance sheet will continue through the remainder of 2024.

Dave Girouard: But this progress is not due to any dramatic improvements in macroeconomic factors or risk; any such macro wins remain in our future. Rather, our progress is the result of the dedicated efforts of more than 1200 upstarters. The improvements that are evident in our business today are coming from inside the house. First, a significant and even dramatic AI model. Second, a revamped and revitalized funding supply, and third, increased operating efficiency. These wins and more are providing the foundation for the Upstart comeback story that I expect we'll share with you in the quarters and years to come.

Speaker Change: But this progress is not due to any dramatic improvements and macroeconomic factors or risk any such macro wins remain in our future rather our progress is the result of the dedicated efforts of more than 1200 upstart or the improvements that are evident in our business today are coming from inside the house first significant and even dramatically.

Dave Gerard: AI model wins.

Dave Gerard: Our revamped and revitalized funding supply and third increased operating efficiency. These.

Dave Gerard: These wins and more are providing the foundation for the upstart comeback story that I expect we will share with you in the quarters and years to come.

Dave Girouard: Today I'll provide some insights into these major initiatives and how they're building on the progress we've made in recent months. We continue to focus the majority of our efforts on our core personal loan product, where the opportunity for leadership in a fast-growing category is clear. Our product today is far superior to what we offered two years ago in all the dimensions that matter.

Dave Gerard: Today I'll provide some insights to these major initiatives and how they're building on the progress we've made in recent months.

Dave Gerard: We continue to focus the majority of our efforts on our core personal loan product, where the opportunity for leadership in a fast growing category is clear.

Dave Gerard: Our product today is far superior to what we offer two years ago and all the dimensions that matter model accuracy fraud detection automation funding resiliency acquisition costs and revenue optimization are leaps and bounds better than they were in 2022.

Dave Girouard: Model accuracy, fraud detection, automation, funding resiliency, acquisition costs, and revenue optimization are leaps and bounds better than they were in 2022. Most importantly, I'm thrilled to share that we recently launched one of the largest and most impactful improvements to our core credit pricing model in our history. In fact, with this launch, 18% of all accuracy gains in this model since our inception have been delivered by our ML team in the last 12 months.

Dave Gerard: Most importantly, I'm thrilled to share that we very recently launched one of the largest and most impactful improvements to our core credit pricing model and our history. In fact with this launch 18% of all accuracy gains in this model since our inception have been delivered by our MLP team in the last 12 months.

Dave Girouard: To dive a bit further, Model 18, or M18, as we call it internally, is the first to incorporate APR as a feature or as an input to the model. It's, of course, common to think of APR as an output of a risk model, at least indirectly, but we know empirically that APR also affects the repayment risk of a loan.

Dave Gerard: Dive a bit further model 18, or <unk> as we call. It internally is the first to incorporate APR as a feature or as an input to the model.

Dave Gerard: It's of course common to think of APR as an output of our risk model at least indirectly, but we know empirically that the APR also affects the repayment risk of alone.

Dave Girouard: All else being equal, a higher APR will select for a riskier borrower, a notion known as adverse selection. Conversely, a lower APR will select for a less risky borrower. If you have a background in computer science or math, you quickly realize that having APR as both an input and output to the same model presents some challenges. Solving this problem requires running our risk models many times in parallel to arrive at the appropriate answer.

Dave Gerard: All else being equal higher APR will select for a riskier borrower a notion known as adverse selection. Conversely, a lower APR will select for a less risky borrower.

Dave Gerard: If you have a background in computer science or math, you quickly realize that having APR as both an input and output to the St model presents some challenges.

Dave Gerard: This problem requires running our risk models many times in parallel to arrive at the appropriate answer.

Dave Girouard: In fact, M18 generates approximately 1 million predictions for each applicant in order to converge to the correct APR, which is six times the number of predictions of the prior model. But we believe the improvement in accuracy is well worth it. Additionally, I'm very happy to report that we expect M18 to substantially improve our funnel conversion rate. From a competitive standpoint, I believe that significant technical obstacles, such as the one I've described here, are themselves a clear sign of progress. We're pushing the boundaries of computing and AI to build more accurate models.

Dave Gerard: In fact, 18 generates approximately $1 million predictions for each applicant in order to converge to the correct APR.

Dave Gerard: Which is six times the number of predictions of the prior model.

Dave Gerard: We believe the improvement in accuracy is well worth it.

Dave Gerard: Additionally, I'm very happy to report that we expect <unk> to substantially improve our funnel conversion rate.

Dave Gerard: From a competitive standpoint, I believe that significant technical obstacles such as the one I've described here are themselves a clear sign of progress, we're pushing the boundaries of computing and AI to build more accurate models.

Dave Girouard: And we've seen few signs that peers in the lending space are far enough along the path of AI-based modeling to even encounter these technical challenges. We also reached another all-time high on automation of our core unsecured loan product, with 91% of loans in Q2 fully automated. As a reminder, this means no documents, no phone calls, no waiting, and no human involvement whatsoever.

Dave Gerard: Seen few signs that peers in the lending space are far enough along the path of AI based modeling even encounter these technical challenges.

Speaker Change: We also reached another all time high on automation of our core unsecured loan product with 91% of loans in Q2 fully automated as a reminder, this means no documents no phone calls no waiting and no human involvement whatsoever. Two years ago. This number was 73% and we weren't sure reaching <unk>.

Dave Girouard: Two years ago, this number was 73%, and we weren't sure reaching 90% was even possible. Driving automated approvals up while keeping fraud to minimal levels is an obvious fit for AI, so we would expect Upstart to continue to lead on this front. And automation isn't just a win for cost and efficiency; it also provides the foundation of a fundamentally better product for the consumer.

Dave Gerard: 90% was even possible driving automated approvals up while keeping fried to minimal levels is an obvious fit for AI. So we would expect upstart to continue to lead on this front and automation isn't just a win for cost and efficiency. It also provides the foundation of a fundamentally better product for the consumer.

Dave Girouard: Ultimately, our strategy is to offer the best rates and the best process to all for every credit product that matters. This means continuing to expand our platform to include auto loans, small-dollar relief loans, and home equity lines of credit. And we're making great strides on each of these projects. In Q2, our auto team released new underwriting models for both our auto retail and refinance products, as well as a new fraud model for auto retail.

Speaker Change: Ultimately our strategy is to offer the best rates and the best process to all for every credit product that matters. This means continuing to expand our platform to auto loans small dollar relief loans and home equity lines of credit and we're making great strides in each of these products.

Dave Gerard: In Q2, our auto team released new underwriting models for both our auto retail and refinance products as well as the new fraud model for auto retail.

Dave Girouard: We've now seen multiple months of calibrated loan performance and are growing confident that our loans are performant and increasingly competitive in the market. In the interest of continuing to move our auto business to profitability, we increased the monthly fee we charge each dealership for the use of our software.

Dave Gerard: We've now seen multiple months of calibrated loan performance and our growing confidence that our loans are perform at an increasingly competitive in the market.

Dave Gerard: In the interest of continuing to move our auto business to profitability, we increased the monthly fee we charge each dealership for the use of our software. Despite this we believe we are still quite inexpensive relative to competitive offerings.

Dave Girouard: Despite this, we believe we're still quite inexpensive relative to competitive offers. We're also investing heavily in servicing and recovery for auto and saw a 33% improvement in roll rates and a 44% increase in recovery rates in the second quarter alone. And our small dollar relief product continues to grow rapidly, with 57% sequential growth in the number of loans in the second quarter. Our intention with this product is to expand access to bank-quality credit rather than to generate enormous profits. Nonetheless, I'm thrilled to say that in Q2, STL became our second product to reach breakeven economics.

Dave Gerard: Also investing heavily in servicing and recovery for auto and saw a 33% improvement in roll rates and a 44% increase in recovery rates in the second quarter alone.

Dave Gerard: And our small dollar relief product continues to grow rapidly with 57% sequential growth in the number of loans in the second quarter.

Dave Gerard: Our intention with this product is to expand access to bank quality credit rather than to generate enormous profits. Nonetheless, I'm thrilled to say that in Q2 S. T. L became our second product to reach breakeven economics.

Dave Girouard: We also signed our first warehouse for STL this past quarter. For the current quarter, we've identified opportunities to reduce the variable cost of these loans by more than 40 percent, which would represent another incredible win in an opportunity to increase approval rates further. Overall, this team continues to execute like pros and is helping Upstart expand its impact on the American consumer rapidly and responsibly. As of today, our home equity line of credit is available in 30 states, covering 51% of the U.S. population. We exited Q2 with an instant approval rate for HELOC applicants of 42%, up from 36% in Q1. This means we're able to instantly verify applicants' income and identity without the need for tedious document uploads.

Dave Gerard: We also signed our first warehouse for STL this past quarter for the current quarter, we've identified opportunities to reduce the variable cost of these loans by more than 40%, which would represent another incredible win and an opportunity to increase approval rates further overall.

Dave Gerard: Overall this team continues to execute like pros and is helping upstart expanded its impact on the American consumer rapidly and responsibly.

Dave Gerard: As of today, our home equity line of credit is available in 30 states covering 51% of the U S population.

Dave Gerard: In Q2, with an instant approval rate for HELOC applicants, a 42% up from 36% in Q1.

Dave Gerard: This means we're able to instantly verify applicant income and identity without the need for tedious document upload <unk>.

Dave Girouard: Consistent with our experience in personal loans, instantly approved applicants convert almost twice as often as other applicants. With respect to the credit performance of our HELOCs, things couldn't be better. With more than 300 HELOCs originated, we have zero defaults to date.

Speaker Change: System with our experienced and personal loans instantly approved applicants convert almost twice as often as other applicants with respect to credit performance of our helix things couldn't be better with more than 300 HELOC originated we have zero defaults to date.

Dave Girouard: Finally, we have seen significant interest from Upstart's bank and credit union partners in our HELOC product and hope to launch our first lending partnership before the end of the year. We continue to invest enormously in servicing and collections. To give you a sense of this, in the last two years, we have tripled the number of upstarters on our servicing product and engineering teams, and this investment is paying off. We've made it radically easier for borrowers to make payments in whatever way works for them. We've implemented new channels for reaching borrowers who are delinquent. These efforts and more have helped drive delinquency rates down by 16% year over year and have helped reduce support costs per current loan by 30%.

Dave Gerard: Finally, we have seen significant interest from Upstarts Bank and credit Union partners in our HELOC product and hope to launch our first lending partnership before the end of the year.

Dave Gerard: We continue to invest enormously in servicing and collections to give you a sense of this in the last two years, we've tripled the number of up starters on our servicing product and engineering teams and this investment is paying off.

Dave Gerard: Made it radically easier for borrowers to make payments in whatever way. It works for them, we've implemented new channels for reaching borrowers who are delinquent. These.

Dave Gerard: These efforts and more have helped drive delinquency rates down by 16% year over year and have helped to reduce support costs proof current loan by 30%.

Dave Gerard: We've also now increased the number of borrowers enrolled in Autopay for 36 consecutive weeks.

Dave Girouard: We've also now increased the number of borrowers enrolled in AutoPay for 36 consecutive weeks. Much of our team's efforts to date have prepared our servicing infrastructure for the deployment of AI models that we believe will enable us to build a significantly differentiated loan servicing capability. Two years ago, we told you that we would upgrade the funding supply on the Upstart platform. We aimed to move a significant portion of our funding from at-will monthly agreements to longer-term committed partnerships. Given the importance and complexity of these relationships, we cautioned that this would take some time.

Dave Gerard: Much of our team's efforts to date have prepare their servicing infrastructure for the deployment of AI models that we believe will enable us to build a significantly differentiated loan servicing capability.

Dave Gerard: Two years ago, we told you that we would upgrade the funding supply on the upstart platform, we aimed to move a significant portion of our funding from at World monthly agreements to longer term committed partnerships given the importance and complexity of these relationships. We cautioned that this would take some time.

Dave Girouard: I'm pleased to share that we've now accomplished this goal. We ended Q2 with well over half of the institutional funding on our platform coming from committed capital and other co-investment partners. We began with the announcement of our first partnership with Castle Lake 15 months ago.

Dave Gerard: I'm pleased to share that we've now accomplished this goal.

Dave Gerard: We ended Q2 with well over half of the institutional funding on our platform coming from committed capital and other co investment partnerships. We began with the announcement of our first partnership with Castle Lake 15 months ago. This partnership has since been renewed we've since added significant partnerships with Aries and Centerbridge other.

Dave Girouard: This partnership has since been renewed. We have since added significant partnerships with Aries and Centerbridge. Other institutional investors that have been with us for much longer have also returned to the platform. We continue to pursue additional opportunities to broaden and deepen our funding supply as Upstart returns to growth. We also said back then that we'd use our own balance sheet as a transitional bridge to this better state. You can see from the numbers we released today that we've begun to reduce the use of our balance sheet to fund loans. We're hopeful this will continue through the rest of the year, though I'd always like to reserve the option to use our balance sheet to do the right thing for our business.

Dave Gerard: Institutional investors that have been with us for much longer have also returned to the platform. We continue to pursue additional opportunities to broaden and deepen our funding supply is upstart returns to growth mode.

Dave Gerard: We also said back then that would use our own balance sheet as a transitional bridge to this better state you can see from the numbers. We released today that we've begun to reduce the use of our balance sheet to fund loans. We're hopeful. This will continue through the rest of the year, though I'd like to always reserve the option to use our balance sheet to do the right thing for our business.

Dave Girouard: I'm also pleased to report that banks and credit unions continue to return to the Upstart platform. We've signed eight new lenders since Q1. Performance and lender demand on the platform are creating a competitive environment which is beginning to reduce prices for Upstart Borrowers. In fact, lenders representing about half of the monthly available funding on Upstart from lenders have reduced their target returns recently as their liquidity has improved and their demand for loans has increased. This is the first time in two years that we've seen loan prices drop on Upstart.

Dave Gerard: I'm also pleased to report that banks and credit unions continue to return to the upstart platform. We signed eight new lenders since Q1 performance and lender demand on the platform are creating a competitive environment, which is beginning to reduce prices for upstart borrowers in fact lenders representing about half of the monthly available funding.

Dave Gerard: An upstart for lenders have reduced their target returns recently as the liquidity has improved and their demand for loans has increased.

Dave Gerard: This is the first time in two years that we've seen loan prices dropped an upstart.

Dave Gerard: For many reasons transforming credit with AI is complex and challenging tackling the world's most entrenched problems with AI is difficult and it doesn't happen overnight, but to those who ultimately solve these problems. There comes a tremendous reward today, we're tackling problems that we weren't even aware of a couple of years ago. My perspective is that.

Dave Girouard: For many reasons, transforming credit with AI is complex and challenging. Tackling the world's most entrenched problems with AI is difficult, and it doesn't happen overnight. But to those who ultimately solve these problems, there comes a tremendous reward. Today, we're tackling problems that we weren't even aware of a couple of years ago. My perspective is that, top to bottom, we've gone through a significant reinvention of the company, both from a technology and business model perspective.

Speaker Change: Top to bottom we've gone through a significant reinvention of the company both from a technology and business model perspective, we're confident we're on the right track and making rapid progress and this is just the beginning to show in our financials.

Dave Girouard: We're confident we're on the right track and making rapid progress, and this is just the beginning to show in our financials. Despite the fact that many trillions of dollars in credit are originated each year, our competition in AI is scarce. In generative AI, you have a significant number of well-funded and talented competitors, such as OpenAI, Google, Anthropic, and Meta, at the cutting edge of model building. In AI for lending, you have Upstart. Thanks, and now I'd like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q2 2024 financial results and guidance.

Dave Gerard: Despite the fact that many trillions of dollars in credit originated each year our competition in AI is scarce and generative AI you have a significant number of well funded and talented competitors such as open AI, Google and Tropic and meta at the cutting edge of model building and AI for lending.

Dave Gerard: Upstart.

Sanjay: Thanks, and now I'd like to turn it over to Sanjay as our Chief Financial Officer to walk through our Q2 2024 financial results and guidance Sanjay.

Sanjay Datta: Thanks Dave, good afternoon to all, and thank you for joining us. A notable topic for us over the past few quarters has been the macro climate and its impact on both consumer spend and credit lines. The stimulus of 2020 and early 2021 left consumers flush with cash, and, in retrospect, unleashed a two-year-plus surge of consumption as consumers clung to new elevated spending habits well beyond the duration of the stimulus and, in our view, also beyond their collective means. These trends were, of course, exacerbated by punishing price inflation.

Sanjay: Thanks, Dave Good afternoon to all and thank you for joining us.

Sanjay: A notable topic for us over the past few quarters has been the macro climate and its impact on both consumer spend in credit loss.

Speaker Change: The stimuli as 2020, and early 2021, less consumers flushed with cash and in retrospect unleashed a two year plus surge of consumption as consumers clung to new elevated spending habits, well beyond the duration of the stimulus and then argue also beyond our collect it means.

Sanjay: These trends were of course exacerbated by punishing price inflation.

Dave Gerard: This inflation, which also had its roots in the post Covid monetary expansion appears to have mostly run its course as we had anticipated for much of the past year.

Sanjay Datta: This inflation, which also had its roots in the post-COVID monetary expansion, appears to have mostly run its course, as we had anticipated for much of the past year. We now also see signs that the venerable American consumer is reluctantly waving the white flag, acting to moderate outlays and rebalance budgets. Consumption of goods, both durable and nondurable, has actually been falling in real terms over the course of this year.

Sanjay: We now also see signs that the Venerable American consumer is reluctantly waving the white flag I think to moderate outlays and rebalanced budgets.

Sanjay: Consumption of goods, both durable and non durable has actually been falling in real terms over the course of this year.

Sanjay Datta: Spending on services has continued to rise, but half this increase over the past year is attributable to skyrocketing healthcare expenditures. Many other subcategories of service consumption growth in our economy have also started to abate. To be unambiguous, we believe this is a welcome development for the American economy, which has been on an unsustainable tear over this broader period of time. One product of improving fiscal health is that we are seeing credit default trends finally turn a corner, having peaked in aggregate sometime earlier this year and now inflecting back down towards prior lower levels.

Sanjay: Spending on services has continued to rise but have this increase over the past year is attributable to skyrocketing healthcare expenditures. Many other subcategories of services consumption growth in our economy have also started to abate.

Sanjay: To be unambiguous. We believe this is a welcome development for the American economy, which has been on an unsustainable tear or this broader period of time.

Speaker Change: One product is improving physical health is that we are seeing credit default trends finally turned the corner having peaked in aggregate sometime earlier this year and now in snapping back down towards prior lower levels.

Sanjay Datta: This dynamic is reflected in our declining Upstart Macro Index, which has now unambiguously fallen for three consecutive months and has reached its lowest level since January of 2023. This downward-traveling UMI is now a consistent pattern across all the borower segments that we can observe.

Sanjay Datta: While the modal U.S. borrower continues their rehabilitation, we also note ongoing improvement in the funding markets, both on the institutional side as well as in the banking and credit union sectors. For the second consecutive quarter, we've increased the number of lenders who are active on our platform and have observed reductions in required rates of return. On the institutional side, we have now renewed all of our committed capital deals from last year and are currently in the process of adding new partners to the program in anticipation of future borrower growth.

Sanjay Datta: One such recent example is the new agreement we've completed with Centerbridge, a leading global alternative investment firm, by which they acquired $400 million of our personal loans. We are seeing early signs of funding progress in some of our newer products as well. We have secured financing to continue scaling up our auto and small dollar loan offerings and expect to complete our first forward flow sale of HELOC loans in the coming days.

Sanjay: <unk> of HELOC loans in the coming days.

Speaker Change: These collective funding efforts have allowed us to reduce the overall size of our balance sheet and store up some dry powder in support of any future growth and new product development needs.

Sanjay Datta: These collective funding efforts have allowed us to reduce the overall size of our balance sheet and store up some dry powder in support of any future growth and new product development needs. With this macro environment as a backdrop, here are some financial highlights from the second quarter of 2024. Revenue from fees was $131 million in Q2, down 9% from the prior year, as higher pricing for prime loans created downward pressure on origination volume.

Speaker Change: With this macro environment as backdrop here are some financial highlights from the second quarter of 2024.

Speaker Change: Revenue from fees was $131 million in Q2 down 9% from the prior year as higher pricing for prime loans created downward pressure on origination volumes.

Sanjay Datta: Net interest income was negative $3 million, an improvement both year-on-year and sequentially, as the larger than typical core loan balance sheet we were carrying until late in the quarter produced income which helped to offset excess losses in our R&D portfolio. Taken together, net revenue for Q2 came in at $128 million, $3 million above our guidance, but down 6% year-on-year. The volume of loan transactions across our platform in Q2 was approximately 144,000 loans.

Speaker Change: Net interest income was negative $3 million.

Speaker Change: An improvement both year on year and sequentially.

Speaker Change: The larger than typical core loan balance sheet, we were carrying until late in the quarter produced income, which helped to offset excess loss in our R&D portfolio.

Speaker Change: Taken together net revenue for Q2 came in at 128 million $3 million above our guidance, but down 6% year on year.

Speaker Change: The volume of loan transactions across our platform in Q2 was approximately 144000 loans up.

Sanjay Datta: Up 31% from the prior year and up 21% sequentially, and representing over 89,000 new borrowers. The average loan size of $7,700 was down from $9,500 in the prior quarter, driven lower by continuing robust growth in small dollar loans, as well as by pressure from higher pricing on prime loans, which tend to run larger than average.

Speaker Change: Up 31% from the prior year and up 21% sequentially.

Speaker Change: And representing over 89000, new borrowers.

Sanjay: Average loan size of $7700 was down from $9500 in the prior quarter.

Sanjay: Driven lower by continuing robust growth in small dollar loans as well as by pressure from higher pricing on prime loans, which tend to run larger than average.

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 58% in Q2, flat sequentially, and two percentage points above our guidance for the quarter. We continue to benefit from very high levels of loan processing automation, with our eighth consecutive quarterly improvement in the percentage of loans fully automated, resulting in a new high of 91%.

Sanjay Datta: Operating expenses were $183 million in Q2, down 6% sequentially from Q1, as the workforce restructuring we underwent yielded lower payroll costs across all of our functions. However, these savings were somewhat offset by the impact that higher loan volumes and smaller loan sizes are having on our loan processing costs. Altogether, the Q2 gap net loss was $54 million, and adjusted EBITDA was negative $9 million, both comfortably ahead of guidance and encouraging proof points on our path back to profitability.

Sanjay Datta: Adjusted earnings per share was negative 17 cents, based on a diluted weighted average share count of $88 million. We ended the second quarter with loans on our balance sheet of $686 million before the consolidation of securitized loans, down from $924 million in the prior quarter. Of that balance, loans made for the purposes of R&D, principally auto loans, stood at $396 million.

Sanjay Datta: In addition to loans held directly, we have consolidated $135 million of loans from an ABS transaction completed in 2023, from which we retain a total net equity exposure of $21 million. We ended the quarter with $375 million of unrestricted cash in the balance sheet and approximately $449 million in net loan equity at fair value. We have long maintained that once the macro environment ceases to be a headwind, we will have the opportunity to generate conversion growth through improvements to our models and acquisition campaigns.

Speaker Change: Total net equity exposure of $21 million.

Sanjay: We ended the quarter with $375 million of unrestricted cash on the balance sheet and approximately $449 million in net loan equity at fair value.

Sanjay: We have long maintained that once the macro environment ceases to be a headwind we will have the opportunity to generate conversion growth through improvements to our models and acquisition campaigns.

Sanjay Datta: With loss rates that have now collectively appeared to plateau, this is precisely what we are expecting for the duration of this year. Last quarter, this nascent trend gave us the foundation to provide guidance for the back half of the year, which was based on an assumption that our model gains would deliver their historical pace of growth. Our model launches since that time have, in fact, produced enough uplift to put us ahead of schedule.

Sanjay: With loss rates that have now collectively appeared to plateau. This is precisely what we're expecting for the duration of this year.

Sanjay: Last quarter. This nascent trend gave us the foundation to provide guidance for the back half of the year, which was based on an assumption that our model gains would deliver their historical pace of growth.

Sanjay: Our model launches since that time have in fact produced enough uplift to put US ahead of schedule.

Sanjay Datta: Note that despite our relative optimism about the macro climate as it relates to credit performance, our guidance for the rest of the year in no way relies on either further improvements in the macro environment or falling interest rates. Either of those eventualities, should they occur, would likely show up as tailwinds to our forecast.

Sanjay: Note that despite our relative optimism on the macro climate as it relates to credit performance our guidance for the rest of the year in no way relies on either further improvements to the macro environment, nor on falling interest rates either of those eventualities should they occur would likely show up as tailwind to our forecast.

Sanjay: With that in mind for Q3 of 2024, we are currently expecting.

Sanjay Datta: With that in mind, for Q3 of 2024, we are currently expecting... Total revenues of approximately $150 million, consisting of revenue from fees of $155 million and net interest income of approximately negative $5 million. Contribution margin of approximately 57%. Net income of approximately negative $49 million dollars. Adjusted net income of approximately negative $14 million, adjusted EBITDA of approximately negative five million dollars, and the diluted weighted average share count of approximately 90 million shares.

Sanjay: Total revenues of approximately $150 million consisting.

Sanjay Datta: For the second half of 2024, we expect revenue from fees of approximately $320 million and positive adjusted EBITDA in Q4. Overall, we would like to say that we feel good about how we've managed financially through this challenging period. We emerged with expanded margins and a reduced cost base, underpinning the tangible progress we've made on the road back to profitability. And successfully reimagining our funding model has created a more resilient capital base and a shrinking balance.

Sanjay Datta: More importantly, we are optimistic about the strength and direction of the business as we look ahead. However, we are wary of prematurely sounding the alarm. The macro environment no longer appears to be a direct impediment to our business. An improving macroclimate is not contemplated in our forward numbers and is not something we need in order to thrive, but if and when that does materialize, it should be wind in our sails. I would like to conclude by acknowledging the entire Upstart team for persevering together through this long metaphorical winter, and also all of our departed teammates who have been a part of the cause, even if they are no longer able to. I'm looking forward to a time in the near future when we all will have to re-fascinate ourselves. With that, Dave and I are happy to open the call up to any, Operator.

Speaker Change: <unk> the call up to any questions operator.

Speaker Change: If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Operator: If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Operator: We ask that you please limit yourself to one question and one follow-up question. Again, press star 1 to ask a question. We'll pause for just a moment to assemble the questions. We will take our first question from Mahir Vachia with Bank of America. Please go ahead.

Speaker Change: We ask that you. Please limit yourself to one question and one follow up question again press Star one to ask a question, we'll pause for just a moment to assemble the queue.

Speaker Change: We will take our first question from Mihir Bhatia with Bank of America. Please go ahead.

Mahir Vachia: Thank you. Thank you. Thank you.

Mihir Bhatia: Hi, Thank you for taking my question I wanted to start by just asking if you could comment a little bit more about just the intra quarter trends and what you saw in July.

Mahir Vachia: Hi, thank you for taking my question. I wanted to start by just asking if you could comment a little bit more about just the intra-quarter trends and what you saw in July. It sounds like you're quite positive about the back half of the year, and maybe if you could just comment a little bit on what you saw, both in terms of loan demand and also just credit performance as you went, you know, through the months in the quarter and, to the extent you're willing to, about July.

Speaker Change: But we are quite positive on the back half of the year and maybe if you could just comment a little bit on what you saw both in terms of loan demand and also just credit performance.

Speaker Change: As you know.

Speaker Change: Through the months in the quarter.

Speaker Change: To the extent you are willing to about Tonight.

Speaker Change: Yeah, Hey, I'm here, great to hear from you so you're asking about.

Dave Girouard: Yeah, hey, Meagher, great to hear from you. So you're asking about credit trends and loan trends in July?

Speaker Change: Credit trends and loan trends in July.

Speaker Change: And through the quarter.

Mahir Vachia: And through the quarter, month by month in the quarter, like right, like we did, did loan demand accelerate? Did you see more demand in June than April?

Speaker Change: By month in the quarter like right like I mean, if loan demand accelerated did you see more demand in June than April.

Speaker Change: I see I mean at a high level.

Dave Girouard: I see. I mean, at a high level. I guess, to the extent you can hear optimism, both in our guide and in our comments, it's probably reflective of a quarter that, obviously, is leading into Q3 on a good footing and a positive trajectory. And to the extent that, you know, we are guiding Q3 on an upward trajectory, I would say that July is representative of that as well.

Mahir Vachia: Okay, and then maybe just switching a little bit to the expense structure a little bit more. What I'm really trying to understand is the fixed versus variable cost of the model.

Mahir Vachia: So as the top line expands, what kind of impact will that have on profitability? And how much should we expect to drop to the bottom line versus maybe reinvesting in growth? Or product expansion, or additional growth? How should we be thinking about that equation?

Mahir Vachia: Thanks.

Sanjay Datta: Sure. Thanks, Meher.

Sanjay Datta: In rough terms, as the business expands, I would expect our contribution margins, which really capture our variable cost base, to shrink somewhat, mainly due to reductions in take rates. As the business becomes more profitable, we will probably invest more in volume and in lifetime value. I think the cost components of our contribution margin should be fairly consistent because we essentially attempt to originate up to the point of, you know, marginal cost break even.

Sanjay Datta: I don't think those points will dramatically change as we scale. As for the fixed cost base, I think, well, the intention is that it will grow slower than the top line of this business, meaning we should achieve operating leverage as the business scales. And so between those two, I think that scale should drop pretty efficiently to the bottom line as we rescale.

Mahir Vachia: Thank you for taking my question.

Operator: We will take our next question from Ramsey El Assal with Barclays. Please go ahead.

Ramsey El Assal: Hi, thanks so much for taking my question. The conversion rate increased quarter over quarter and, obviously, a bit and a lot more year over year. I know you mentioned some pretty exciting model improvements. I guess, what should we expect on the conversion rate for the next couple of quarters? Are your model improvements driving, you know, maybe further conversion rate improvements, or should it plateau at a certain point? What should we be looking for?

Speaker Change: The conversion rate increased quarter over quarter, and obviously a lot more year over year I know you mentioned, some pretty exciting model improvements.

Speaker Change: I guess.

Speaker Change: What should we expect on conversion rate for the next couple of quarters are your model improvements driving.

Speaker Change: Maybe further conversion rate improvements or should it plateau at a certain point what should we be looking for.

Speaker Change: Okay.

Dave Girouard: Hey Ramsey, great to hear from you. I would say that, to the extent our, you know, our guidance is indicating an upward trajectory. Almost all of that is coming from conversion gain and the underlying model accuracy driving funnel improvement over time. And I would say for the foreseeable future, that will be the growth model. There is potentially a rate at which those conversion rates plateau, but I don't think we're close to those rates at this time. So there's still a lot of runway to improve those conversion rates and drive the growth of the top line.

Speaker Change: Hey, Ramsey great to hear from you.

Ramsey: I would say that the to the extent our you know our guidance.

Speaker Change: Is indicating upward trajectory almost all of that is coming from conversion gain.

Speaker Change: And the underlying model accuracy driving funnel improvement overtime.

Speaker Change: And I would say for the foreseeable future that will be the growth model there is potentially a rate at which those conversion rates plateau.

Speaker Change: Don't think we are close to those rates at this time, so there's still a lot of runway to improve those conversion rates and drive the growth of the top line.

Speaker Change: Okay.

Ramsey El Assal: A follow-up from me, on the smaller dollar relief loan. Can you talk about these loans in the context of being like an acquisition channel for larger, longer-term borrowers or loans? In other words, are you seeing any of these small dollar customers come back and apply for larger loans that you can now kind of underwrite, sort of like a training wheels type of a scenario in terms of being a channel into your core business? Hey, Ramsey, this...

Speaker Change: A follow up from me on the smaller dollar relief loans.

Dave Girouard: Hey, Ramsey, this is Dave. I think that's a pretty good description of how that product works and why we have it. It's really to push deeper, you know, with small amounts of money at risk to be able to approve somebody on a shorter-term loan. It's just an opportunity for the models to learn faster and go faster and acquire customers that are then eligible for other Upstart products later.

Dave Girouard: So, it is doing a really nice job of pushing the boundaries of our models, both in terms of the automation as well as in the selection and pricing. So, that's gone extremely well. We have seen quite a bit of return on other loans, so that's, you know, also proving well. And as we said on the call, it's, you know, it's become economically strong for us. It's not a drain on us in any way. So, it's been, frankly, all around a great win for us, and we would expect it to continue to be.

Operator: We will take our next question from Kyle Peterson with Needham. Please go ahead.

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

Kyle Peterson: I wanted to start off on the size of the balance sheet. Here, it was great to see some nice runoff, especially on the core personal side. I guess, how should we think about the pace of runoff over the next few quarters, especially now that you guys seem to continue to bolster your funding?

Sanjay Datta: Hey Kyle, great to hear from you. Um, the answer to that question is a bit, uh, sort of about the outcome of how fast the borrower side of the platform is scaling up, due to model improvements, and how quickly we're signing up new capital agreements. Obviously, the intention continues to be... Delivering those borrowers and that yield to our lending partners and to the institutional markets. But, you know, there's always going to be a bit of a mismatch in timing.

Sanjay Datta: We may get a model win and not have the capital available, or we may sign up for the capital, and, you know, the model win may come afterwards. And so I think in the give and take between those two sides of our platform, you know, that's where we've historically used our balance sheet to step in. And so all that to say, I do believe that the medium-term direction here will continue to be a reduction in our balance sheet, at least as far as core loans are concerned, but there may be some timing mismatch along the way such that there may be some sort of swings, up and down, as we do that. So it's a bit hard to really calculate every, accurate pacing, if you will, given the volatility of those two sides of the business.

Speaker Change: Step in and so all that to say I do believe that the medium term direction here will will continue to be a reduction in our in our balance sheet.

Speaker Change: At least as far as core loans are concerned, but there may be some timing mismatch along the way such that there may be some sort of swings.

Speaker Change: Up and down as we do that so it's a bit hard to to really calculate a very.

Speaker Change: Accurate pacing, if you will given the volatility of those two sides of the business.

Kyle Peterson: That's helpful. And then I guess just to follow up on expenses, particularly with the fixed cost base. I think you guys have said in the past that with the fixed cost base you guys have today, it can support a lot more volume than you guys have been doing. 4 to 6 quarters here. How much, you know, if we do get a better environment for originations, I guess, how much more volume can you guys support with the Fixed Cost Structure that you guys have today? I know the contribution margin quote you guys gave was helpful earlier; just trying to think about the fixed cost leverage.

Speaker Change: Okay.

Speaker Change: That's helpful and then I guess just to follow up on expenses.

Speaker Change: Clearly with the fixed cost base I think.

Speaker Change: You guys have said kind of in the past that the fixed cost base you guys have today can support a lot more volume than you guys have been doing call it over the past.

Speaker Change: Four to six quarters here.

Speaker Change: How much.

Speaker Change: If we do get a better environment for originations I guess, how much more volume can you guys support with.

Speaker Change: The fixed cost structure that you guys have.

Speaker Change: Okay.

Speaker Change: The contribution margin color you guys gave was it was helpful earlier, just trying to think about the fixed cost leverage.

Sanjay Datta: Well, I guess I'll say that through the end of this year and with the growth plans we have, we feel pretty good at where our cost base is, you know, if the business were to start to really take off beyond that. I think there are some areas on the margin that we would like to reinforce. But, you know, nothing on the level of what we anticipate the growth of the business itself could be. So, I guess the main takeaway is there will be improving operating leverage as the top line grows.

Kyle Peterson: Okay, that's a good color. Thank you. Nice quarter.

Operator: We will take our next question from Peter Christiansen with Citigroup. Please go ahead.

Peter Christiansen: Good evening Dave, Sanjay. Thanks for the question. I want to dig into your comment about some of the at-will supplies of funding coming back. Just wondering if you could give us a barometer where we are perhaps compared to maybe I don't know 21 part of 2022 in terms of some of those those levels, for at least indication of funding level that we saw back then and then. I guess, well, back then we also had 40% of your funding volume was was through the ABS market. Would you expect to be returning to the ABS market for for issuance? in the near future.

Sanjay Datta: Hey Pete, thanks for the question. I would say that the recovery of what we think of as the at-will funding markets, you know, writ large, that is, the world of credit funds and hedge funds that, you know, predominantly depend on ABS as a liquidity channel. It's early days for the recovery. I don't think we're near the scale that we were at a couple of years ago, and that's, of course, reflective of the fact that the ABS markets are certainly not at the level of volume and liquidity that they were back then.

Sanjay Datta: But I do think that those markets are rapidly improving, and we have plans to be back in the ABS market, certainly before the end of the year. I think those things continue to be on a good trajectory.

Peter Christiansen: That's Susie here, and I recognize that this period is not a fair comparison. Unique Era.

Peter Christiansen: But secondly, in terms of the co-investment, how should we think about that level progressing over the next, I don't know, one or two quarters? Is that still, do you think, going to be apportioned or tied to your funded principal?

Dave Girouard: Hey, Pete, this is Dave. I think co-investment partnerships are definitely a key to our future. I mean, it's something we've been working on for some time to go from, you know, almost entirely at will funding a couple of years ago to having longer-term committed partnerships. So that is very important to us. We view, you know, the at will funding can be useful in a lot of ways, but over dependence on ABS, particularly when those markets can ebb and flow quite a bit, isn't healthy for us.

Dave Girouard: So, as we said, we have well over half our funding at the end of Q2 in these longer-term partnerships, and we think we would like to maintain that percentage. So I think we're where we want to be with more long-term committed capital, less reliance on ABS and that sort of structure as we grow back. We would like to sort of keep things as they are now.

Peter Christiansen: That's really helpful. Thank you both.

Operator: We will take our next question from James Faucette with Morgan Stanley. Please go ahead.

James Faucette: Thanks so much. On committed capital, how should we be thinking about, you know, what that looks like in terms of unit economics or accounting treatment and those partnerships versus, you know, kind of at will generally?

Sanjay Datta: Yeah, hey, James. In terms of unit economics, the loans that are being funded through that channel look very similar to the broader institutional. They differ from the lending partner channel in that the risk aperture is a little wider, and the returns are a little higher. But in terms of our unit economics, there is really very little difference between our two accounts, between that channel and maybe what you might think of as more of the at-will institutional channel.

Speaker Change: Economics.

Speaker Change: The loans that are being funded through that channel look very similar to the broader institutional.

Speaker Change: Loans there.

Speaker Change: They differ from the lending partner channel and that the risk aperture a little broader and the returns are a little you know commensurately higher.

Speaker Change: But in terms of our unit economics that the there's really very little difference between.

Speaker Change: Between that channel and maybe what you might think of as more of the Atwood institutional channel.

Sanjay Datta: In terms of accounting, these deals, I would say, are still becoming more and more standardized or templated as we do more of them. Historically, they've shown up in a couple of different places on our balance sheet, but increasingly, we're going to love to sort of standardize the structure of the deal of the deals that we do, and we do pull the holistic view of it together on our investor earnings deck, which gives you a glimpse of the total exposure.

Speaker Change: In terms of the accounting.

Speaker Change: These deals I would say are still be coming.

Speaker Change: More and more standardized for <unk> as we do more of them.

Speaker Change: Historically, they have shown up at a couple a couple of different places on our balance sheet, but.

Speaker Change: Increasingly we're going to look to sort of standardize the structure of the deal.

Speaker Change: The deals that we do and we're going to we do pull.

Speaker Change: The holistic view of it together on her on.

Speaker Change: Investor our earnings deck, which gives you a glimpse of the total exposure.

Speaker Change: Yeah.

James Faucette: Got it. And then, um, quickly, last quarter, you alluded to the fact that you were seeing some, you were indexed more to prime than you historically had. And, you know, given some of the prior actions you took, I'm just wondering if you can give us an update in terms of what you're seeing in prime versus subprime this quarter and what you anticipate going forward, getting back to a more normalized mix.

Speaker Change: Got it and then quickly last quarter you alluded to the fact that you were seeing.

Speaker Change: Index more defined than you've historically had.

Speaker Change: And given.

Speaker Change: Given some of the prior actions you took.

Speaker Change: Just wondering if you can give us an update in terms of what you're seeing in prime versus sub prime this quarter and what you anticipate going getting back to more normalized mix.

Scott: Thank you Scott.

Dave Girouard: Hey, James, this is Dave. Our next test. Good, thank you.

Speaker Change: Hey, James This is Dave.

Speaker Change: Yes.

Dave Girouard: Our mix has swung toward prime, and I think, generally, that we would see As we regrow, we would like to be very balanced across the credit spectrum, and we think that's best for our brand, it's best for the stability of the business, etc. So one thing we would anticipate in the coming quarters is a stronger position at the prime end of the credit spectrum than we've had traditionally, where we really have not had funding appropriate to compete in that part of the market, but we think that's changing. So I think you'll see us be more balanced in the future than we have been in the past with regard to the credit spectrum.

Dave Gerard: Good. Thank you our mix has swung toward prime and I think.

Dave Gerard: I think generally that we would see.

James Faucette: Good, that's good to hear. Thank you. Thanks, James. We'll take our next question from Dan Dolev with Mizuho, please go ahead. Hey guys, thanks for taking my question. Great quarter, great results; very happy to see that.

Operator: We'll take our next question from Dan Dolev with Mizuho. Please go ahead.

Dan Dolev: Hey guys, thanks for taking my question. Great quarter, great results. Very happy.

Dan Dolev: Thank you, Dan. Great to hear from you, as always.

Sanjay Datta: Look, reducing rates, benchmark rates, and market rates are unambiguously good for the business. They haven't obviously been the main headwind to our business. It's, you know, default rates have been much more punitive in how they've evolved over the last two years or so. But you know, definitely having the benchmark rates go up from, you know, zero to five ish percent has been a headwind as well. And if that reverses, it'll be, and it would presumably be a tailwind.

Sanjay Datta: It's a bit hard to quantify the exact nature of the tailwind as rates reduce, and it obviously depends on how far back down they go, but each quarter point will result in lower financing costs for institutional investors, and that creates lower hurdle rates, which will result in lower rates for our borrowers. I guess I'll just say that I think each cut would be a noticeable benefit in terms of its impact on our conversion rates.

Operator: We will take our next question from Giuliano Bologna with Compass Point. Please go ahead.

Giuliano Bologna: Well, good afternoon, and congratulations on the results and some of the new funding announcements. One thing I'd be curious about, digging into it a little bit, is your marketing sense. It looks like you got some improvement in, you know, your marketing efficiencies this quarter. And, you know, in the past, what you've kind of said is that, you know, there were some challenges with, um... Yeah, some loans being priced about 36% you couldn't necessarily Convert.

Giuliano Bologna: And I'm curious, you know, when you think about the improvement in your marketing efficiency this quarter, how much of it was driven by being able to, you know, approve or underwrite more loans under 36%. And I'm curious kind of how that could evolve over the next few quarters and how that's kind of factored into your outlook at this point.

Sanjay Datta: Sure. So, you know, marketing efficiency is a function of our funnel conversion, most generally. So, when the funnel converts better, our marketing tends to get more efficient, etc. So, that's a dynamic that's always in play. The 36% kind of rate cap on Upstart means that, you know, as base rates go up and as risk goes up, more and more fewer and fewer people are approved. And we've seen that in spades in the last couple of years.

Dave Girouard: We went through a two-year period where rates almost constantly were going up. And every time that happened, a bunch more people would not be approved because, effectively, the rate the system requires of them goes over 36%. So, that's a little bit unwinding going the other way now, which is a good thing. Partially, or most of it is actually due to model accuracy in the newest versions of the models.

Dave Girouard: We're able to sort of identify more people who fit under that envelope of 36%, and the result of that is that you see marketing efficiency improving. So, that's a dynamic we would expect to continue in the coming months and quarters.

Sanjay Datta: Hey, Giuliano, I would think of this as an ongoing journey. I think that model accuracy has systematically improved since the beginning of our company. And each improvement has, you know, a commensurate improvement on our conversion rates. Those can obviously be temporary setbacks by the macro, but as the macro normalizes, so will our conversion rates. And you know, the question of how much better they can get It's sort of the same answer to the question of how much more accurate your models can get at approving good borrowers and avoiding bad ones, and we've talked about the fact that we think we've really just kind of scratched the surface.

Sanjay Datta: In terms of our models' ability to improve, you know, explainability and in credit in credit, Credit Default. And so we believe that, you know, the longer-term roadmap of this company continues to be improving models and improving conversion rates over the years. So, we don't think of it as sort of normalizing right now. We think we're back on the journey of improving models and improving conversion rates now that the macro is no longer a direct headwind.

Dave Gerard: of Improving Models and Improving Conversion Rates now that the macro is no longer a direct headwind.

Giuliano Bologna: Maybe one very quick question, you know, you're obviously going around 50 or about 50% forward committed capital, that's kind of a percentage of your funding. Yeah, I think, you know, in the past, I've referred to that as, you know, kind of where you'd want it to be close to the higher end of the range. Yeah, I'm curious, you know, would you look to kind of overshoot that and then grow kind of the spot or, you know, uncommitted business to catch up with that? Is there any structural limitation in the near term to, you know, what percentage of volume or funding you'd want to have come from forward committed capital sources at this point?

Sanjay Datta: Yeah, I think that given that we are feeling increasingly optimistic about, you know, the roadmap of model improvements and the lack of macro headwinds, it's in our interest to put some more capital deals in place now, and, in your words, to try and overshoot a little bit in anticipation of that growth materializing over the coming quarters, just given that these deals are, you know, relatively small. You know, they're heavily negotiated, and they take some time to put in place, so I think we want to err on the side of having those partnerships in place in anticipation of where we see the borrower side of the platform growing.

Giuliano Bologna: It's very helpful. I appreciate it, and I will jump back into it.

Operator: We will take our next question from Rob Wildhack with Autonomous Research. Please go ahead.

Rob Wildhack: Hey guys, question on the outlook. Updated guidance suggests a better trend on originations. You guys sound pretty positive overall. Could you maybe break down how much of the improved outlook is coming from maybe mechanically from lower interest rates versus a better model versus maybe better funding? How would you quantify each of those or any additional drivers into the better outlook?

Dave Girouard: Hey, Rob, this is Dave. I think that there is no assumption of improving interest rates or reduction and some kind of macro risk built into that. So the guidance is based on really what we're seeing based on improvements we've made internally. And maybe the way to think of that is that better models mean better conversion rates. The other important input is that we have to, of course, have a sufficient funding supply to keep up with that growth.

Dave Girouard: But the gating item, in terms of like what's really gating where our guidance sits today, it really is just about economic funnel conversion. And it's improved a lot, really, through model improvements primarily. And at this point, we feel comfortable that we, you know, on the funding side, can make things match well. So, you know, that's a long winded way of saying it's really through things we do ourselves.

Rob Wildhack: It is not based on any assumptions about improvement in rates or risk in the environment.

Dave Girouard: Okay, thanks. And then a question on the small dollar loans. Could you give some color on how much the growth in small dollar loans may or may not have impacted the conversion rate quarter over quarter? And the same question going forward, you know, as you grow in small dollar loans, does that drive the conversion rate a lot higher? Uh, yeah, hey Rob, the...

Dave Girouard: Yeah, hey Rob, the STL product is having an impact on overall conversion rates. I think it's on the order of, you know, maybe a two or three percent impact. You know, at the scale that it's at, so it's not insignificant, but it's also relatively minor.

Operator: We will take our next question from Simon Clinch with Redburn Atlantic. Please go ahead.

Simon Clinch: Hi everyone, thanks for taking my question. I was wondering what it takes or what factors you, what levers you can pull, and what macro tailwinds you might need to see the sort of gross inquiries that come into the Upstart network before conversion. How do you drive that higher over time because that is down quite materially from where it's been in the past, and I'm just wondering if that was just overstated previously and whether there's actually quite a lot of upsides in this coming cycle for that.

Simon Clinch: I'm just to clarify, you talking about the top of the funnel increase, that sort of Yeah, before conversion, yeah.

Dave Girouard: I know we've not published any sort of traffic or conversion, you know, to the site. So that's not something that we've discussed publicly or try to track. And that means, is there something different you mean by that?

Simon Clinch: So I'll just take your volumes and then kind of back out from the conversion rates of what it was before you converted, and I'll just use that as a means to sort of track, approximately what the volumes would be.

Dave Girouard: Yeah, it's not exactly the same thing, but it's directionally correct. Generally speaking, a lot of times we are controlling that by how much we're spending on various marketing channels and also just generally how competitive our rates are. So, that's part of it, whether we're doing direct mail or some sort of digital acquisition, or whether we're kind of remarketing to our own customer base or through partner channels that are responsive and can vary how much traffic they send us based on the quality of our rates, et cetera. So, those are things that are a function of the market in some sense, or how strong our product is, or how much we're So, I hope that it fills in some of the blanks for you.

Simon Clinch: Okay, thanks. And maybe you could talk a bit more about the Model 18, M18, and just... I guess, can you give us a sense, you know, for those of us who aren't, you know, educated in machine learning and stuff like that, but just really how unique something like that is and, ultimately, how quickly a model like that really starts to have an impact on your business.

Dave Girouard: Well, you know, we're in a sort of never-ending quest to accurately price each and every loan offer that's made on our system. And one of the things we've known, and I think most lenders of some sort know, is that the quality of the offer you make to the market, meaning the level of the APR, has an impact on who accepts it and, therefore, how that loan performs. So the APR, which most people would think of as the output of the model, actually affects the performance of the loan.

Dave Girouard: So, you know, this is something, again, most people would tell you they have an intuitive sense of, but mechanically answering it and having models that are sophisticated enough to handle that is very important, particularly in the modern world where consumers have lots of choices; they compare rates all over the place. You know, this is something that even 10, 15 years ago hardly existed.

Dave Girouard: But today, consumers have a lot of ways to compare and find the best rates. So having a lot of savvy around that notion of adverse selection and positive selection is really important. And solving it, you know, from a technical perspective, really comes down to trying to converge to the appropriate APR. And what that amounts to technically for us is running our risk models many, many times in parallel in order to converge to the right number.

Dave Gerard: But today consumers have a lot of ways. They can compare and find the best rates. So having a lot of savvy around that notion of adverse selection and I'm positive.

Dave Gerard: Positive selection is really important in solving it you know from a technical perspective really comes down to trying to converge to the appropriate APR and what that amounts to technology for us is running our risk models.

Dave Gerard: Many many times in parallel in order to converge to the right number and it's it's a it's a significant challenge that we've gotten over and I think we're just beginning to reap the benefits of it in the guidance that you are seeing for the second half of the year, a significant fraction of what youre seeing in terms of our optimism for the second half of the year comes.

Dave Girouard: And it's a, you know, significant challenge that we've gotten over, and I think we're just beginning to reap the benefits of it. The guidance that you're seeing for the second half of the year, a significant fraction of what you're seeing in terms of our optimism for the second half of the year comes directly from the improvements in that model. And also, we see a lot of, you know, continued opportunity in that domain, in that area to improve the models. And that's what, again, that's what we're in business to do. It's generally where all the advantages of Upstart are when we can build better risk models, and we're having some really good success with that.

Dave Gerard: Directly to the improvements in that model and also we see a lot of.

Dave Gerard: A continued opportunity in that domain in that area to improve the models.

Dave Gerard: That's why again, that's what we're in business to do it's generally where all of the advantages of upstart Ara is when we can build a better risk models and we're having some really good success in that area right now.

Simon Clinch: Great. That's great, Kyle. Thank you.

Speaker Change: Great that's great color. Thank you.

Dave Gerard: Okay.

Dave Gerard: Simon.

Operator: We will take our next question from Vincent Caintic of BTIG. Please go ahead.

Vincent <unk>: We will take our next question from Vincent <unk> with <unk>. Please go ahead.

Vincent Caintic: Good afternoon. Thanks for taking my question. First, I just wanted to follow up on the funding partnership discussion. It's good to see that credit investor demand is increasing. Just if you could maybe talk about some of the discussions you're having, what those credit investors are focused on, what's changed, where you're now getting more sign-ups, you know, how it is, if you can give a sense for how pricing has changed or improved, and maybe how much of your annual origination volume is now covered by all these new sign-ups. Thank you.

Vincent: Hey, good afternoon, Thanks for taking my question.

Vincent: First just wanted to follow up on the funding partnership discussion.

Speaker Change: Good to see that the credit investor demand is increasing.

Vincent: Just if you could maybe talk about some of the discussions you're having what are those credit investors focus on what's changed.

Speaker Change: Where you are now getting more sign ups.

Speaker Change: If you could give a sense for how pricing has changed or improved and maybe how much of your.

Speaker Change: Our annual origination volume is now covered by all means.

Speaker Change: Thank you.

Sanjay Datta: Hey Vincent, welcome back. On the funding partnerships that we are engaging in, I mean, there's sort of two general vectors. One is increasing comfort or confidence with, you know, credit trends in general and maybe sort of macro risk. Um... And then second, we're sort of being innovative in some of the financial structures that we're coming up with and discussing with some of these partners and prospective partners. And, you know, it's sort of a learning curve for all of us in terms of how to get these partnerships implemented and put in place and managed.

Speaker Change: Hey, Vincent will come back.

Vincent: On the funding partnerships that we are engaging in.

Speaker Change: I mean, there's sort of two general.

Vincent: General vectors, one is increasing comfort or confidence with credit trends in general and maybe sort of macro risk.

Vincent:

Speaker Change: And then second.

Speaker Change: Sort of being innovative and some of the financial structure is that we're coming up with and discussing with some of these partners and prospective partners and.

Speaker Change: It's sort of a learning mode.

Speaker Change: L. A learning curve for all of us in terms of how to get these.

Speaker Change: These partnerships implemented and put in place and managed and so a lot of the journey with our prospective partners just about understanding the model and the structure and how it all works.

Sanjay Datta: And so a lot of the journey with a prospective partner is just about understanding the model and the structure and how it all works. And then the recognition that there are definitely ways of creating win-win partnerships here for us as the issuer and for these counterparties who are interested in yield. And so I wouldn't say beyond that there have been dramatic changes in preferences over rates and sort of supply and demand dynamics.

Speaker Change: And then the recognition that there is definitely ways of creating win win partnerships here for us is the as the issuer and for.

Speaker Change: And for these kind of parties who are.

Speaker Change: I'm interested in yield and so I wouldn't say beyond that theres been dramatic changes in preferences over rates.

Speaker Change: And so sort of supply and demand dynamics, it's mostly been just an ongoing education.

Sanjay Datta: It's mostly been just an ongoing education for all of us about how these structures work, and I think it's going in a very good direction. In terms of capacity, as Dave said, we're sort of a bit north of 50% of all the institutional money that's going to fund the loans on our platform in the past quarter came from these types of arrangements, and we'll aim to maintain that kind of coverage or that kind of capacity over the long term or the medium term will maybe overbuild a little bit in anticipation of some growth that may happen in the coming quarters.

Speaker Change: For all of us around how these structures work in it and I think it's going in a very good direction in terms of our capacity is as Dave said, where.

Dave Gerard: Sort of a bit north of 50%.

Dave Gerard: Of all the institutional money that's going to to.

Dave Gerard: To the to the to fund the loans on our platform in the past quarter came from these types of arrangements and we will aim to maintain.

Dave Gerard: That kind of coverage or that kind of capacity over the long term and the medium term where may be overbuilt, a little bit in anticipation of some growth that that may happen in the coming quarters.

Vincent Caintic: Okay, that's great. Thank you.

Speaker Change: Okay. That's great color. Thank you and my second question, just if you could talk about the competitive environment for consumer.

Speaker Change: Financing.

Speaker Change: It seems like others in this environment might be pulling back when you hear about some of the traditional banks on their earnings calls were talking about some stress on the low end and the middle consumer.

Speaker Change: So it seems like a lot of competition pulling back, but I just wanted to get that sense from you what you're seeing with that competitive environment. Thank you.

Speaker Change: Yeah.

Dave Girouard: And my second question is, just if you could talk about the competitive environment for consumer financing. You know, it seems like others in this environment might be pulling back when you hear from traditional banks on their earnings calls about seeing stress in the low end and the middle consumer. So it seems like a lot of competition is pulling back. But I just wanted to get that sense from you about what you're seeing in that competitive environment. Thank you.

Speaker Change: Well I think our position on the consumer.

Speaker Change: I like to think we've we've been ahead of the crowd a bit in the sense that you know it was clear there was deterioration of credit.

Dave Girouard: Well, I think our position on consumers, I like to think we've been ahead of the crowd a bit in the sense that, you know, it was clear there was deterioration of credit in the sort of less affluent part last year and then later last year into the more affluent part. But as Sanjay said in his remarks earlier, we're seeing sort of uniform improvement now across the board. So we sort of feel like we've been kind of signaling for some time that we're nearing the end of the cycle.

Speaker Change: The the sort of less affluent part last year and then later last year into the more affluent part.

Speaker Change: But as Sanjay said in his remarks earlier, we're seeing sort of uniform improvement in our across the board. So we sort of feel like we've been kind of signaling. This for some time that we're nearing the end of the cycle and I think we just have clear indications that credit is actually in a normalization period not in a deterioration period now.

Dave Girouard: And I think we just have clear indications that credit is actually in a normalization period, not in a deterioration period. Now what others are seeing or saying and where their data is coming from, I obviously can't speak to. But I think we feel pretty good about that.

Speaker Change: Now how what others are seeing are saying and where their data is coming from I, obviously can't speak to.

Speaker Change: But I think we feel pretty good about that with regard to.

Dave Girouard: With regard to, you know, banks and lenders can either be partners of ours or they can be a competitor of ours. But I know the ones that are partners of ours are tending to see increasing liquidity and have sort of swung to the place where they're needing, you know, they're needing more assets, they're needing more loans. And we talked a bit about that. So they are coming in a little bit more competitively, you know, lowering their return targets and really, you know, wanting to sort of swing the dial a little bit.

Speaker Change: Banks and lenders can either be a partner of ours that they can be a competitor of ours.

Speaker Change: But I know the ones that are partners of ours are you tending to see increasing liquidity.

Speaker Change: And I'm sort of swung to the place where they're they're meeting.

Speaker Change: We're needing more assets, so needing more loans and we talked a bit about that so they are coming in a little bit more competitively lowering their return targets and really wanting to sort of swing the dial a little bit.

Dave Girouard: So I don't think it's any sort of caution to the wind environment. But I do think the sort of lack of liquidity that was really serious a year ago and that it probably carried on through the end of 2023 has really improved a lot. And for us, that means the lending partners, the banks, and the credit unions have definitely returned, and that's been very helpful for us.

Speaker Change: So I don't think its any sort of caution to the wind like environment, but I do think.

Speaker Change: The sort of lack of liquidity that was that was really serious a year ago and it's probably carried on through the end of 2023 is really improved a lot and for us that means even lower.

Speaker Change: Lending partners with banks and credit unions have definitely returned and that's been very helpful for us.

Vincent Caintic: Okay, great. That's a very helpful caller. Thank you.

Speaker Change: Okay, Great. That's very helpful color. Thank you.

Speaker Change: Okay.

Operator: We will take our next question from Reggie Smith with J.P. Morgan. Please go ahead.

Speaker Change: We will take our next question from Reggie Smith with Jpmorgan. Please go ahead.

Reggie Smith: Hey, good evening. Thanks for taking the questions. I've got two quick ones.

Reggie Smith: Hey, good evening, thanks for taking the question.

Reggie Smith: Two quick ones.

Reggie Smith: So I guess you guys called out model improvements and a better U of I, which is great to hear and see. My question is, how should we think about those two things in the context? of the returns in the core investment portfolio, and I guess specifically what I'm trying to figure out, I mean, should that manifest in better performance there? If not, like, where do these gains in model efficiency accrue? Obviously, consumers are getting approval from the loans, but how do we think about how that flows through to your business? and I got a follow-up.

Reggie Smith: You guys called out modeling tool that.

Reggie Smith: Better your bi which is great to hear and see a question is how should we think about that.

Speaker Change: Some things into context.

Speaker Change: The charge is a core investment portfolio, alright, and I guess, specifically I'm trying to figure out.

Speaker Change: Should that manifest and better performance there not like where do these gains and mommy efficiency, obviously consumers are getting approved more loans how.

Speaker Change: How do we think about.

Speaker Change: How that flows through to your business.

Speaker Change: Thank you.

Speaker Change: Yeah, Hey, Reggie it's a great question.

Sanjay Datta: Hey, Reggie. It's a great question. In general, model gains or model accuracy improvements, such as the one that we highlighted, generally improve our ability to accurately separate risk, and that generally shows up mainly in our improved conversion funnel. So it would create business expansion, but it wouldn't necessarily improve the calibration of the model in how it assesses an average pool of loans. So it wouldn't necessarily be expected to have a huge impact on the performance of the co-investment positions we have.

Speaker Change: In general model gains or model accuracy improvements such as the one that we highlighted.

Reggie Smith: Generally improve our ability to accurately separate risk.

Reggie Smith: And that generally shows up mainly in our improved conversion funnel. So it would create business expansion it wouldn't necessarily improve the calibration of the model and how it assesses and average pool of loans. So it wouldn't necessarily be expected to have a huge impact on the.

Reggie Smith: On the performance of the co investment positions we have.

Sanjay Datta: The UMI, to the extent it continues to fall, would have a direct impact on the performance of loan pools such as the ones that are co-investment partnerships have invested in because it essentially means that credit trends are improving in real time. And as they do, the performance of those loans, any loans that are outstanding would be expected to improve and potentially overperform. And that would result in higher returns on our investment positions, so I think that would have a pretty direct impact.

Reggie Smith: The <unk> to the extent it continues to fall would have a direct impact on the on the performance of loan pools, such as the ones that are our core investment partnerships.

Speaker Change: Uh huh.

Speaker Change: <unk> has invested in.

Reggie Smith: Because it essentially means that credit trends are improving in real time and as they do with the performance of those loans.

Reggie Smith: Any loans that are outstanding would be expected to improve in <unk>.

Reggie Smith: Potentially over perform and that would result in a.

Reggie Smith: Higher returns to our investment position. So I think that would have a pretty direct impact.

Reggie Smith: Alright.

Reggie Smith: And then, I guess, just to follow up on human economics. I'm not sure how much you guys can share here, but the curious... with some of these committed structures. I assume you're selling these loans maybe at a slight discount to par, or maybe at par. Where are you in terms of that, and is it thinking that over time you could get to a place where you do sell them at a premium to par, or is kind of par the aspirational goal there, or am I completely off, and maybe you're selling them at a gain right now? I'm not sure.

Speaker Change: And then I guess, a follow up on the unit economics I'm not sure how.

Speaker Change: How much you guys can share here.

Speaker Change: Curious.

Speaker Change: With some of these committed structures I assume youre selling these loans, maybe at a slight discount to Paul or maybe part of that where are you in that.

Speaker Change: Where are you in terms of that and is it taking more overtime.

Speaker Change: It took place when you do something about a premium to par on par.

Speaker Change: Aspirational goal, there or am I can pull off and maybe selling them at a gain right now I'm not I'm not sure.

Sanjay Datta: Yeah, the committed partnerships we are in, as with all of the at-will capital, the traffic, and the institutional markets, all of those loans are traded at par. And I think that's our goal. We're not necessarily looking to create a business model from gain from sale. I think our goal is to provide loans at par that are correctly priced for the borrowers. And, you know, to the extent we're co-invested, we'll participate in the yield.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: Committed partnerships, we are in as with all of the outflow of capital to traffic in the institutional markets all of those loans are trafficked at par.

Speaker Change: And I think that's that's our goal we're not necessarily looking to.

Speaker Change: To create a business model from gain from sale.

Speaker Change: Our goal is to traffic loans at par that are correctly priced to the borrowers and to the extent we're co invested will participate in.

Speaker Change: In the yield.

Speaker Change: Yeah.

Reggie Smith: And that would be one last one. Okay, I'd like to speak one last question, and I want to give you guys your flowers for returning to Evadar Positivity in the fourth quarter.

Speaker Change: That would be one last one.

Speaker Change: Okay. If I can sneak one other question and I wanted to dig it out.

Speaker Change: With flowers for return.

Speaker Change: The EBITDA positivity on the fourth quarter was curious how youre thinking about stock compensation expense longer time.

Reggie Smith: It's curious how you think about stock compensation expense in the longer term. I notice that it's been up, and it's well above where it was when you guys were much more profitable.

Speaker Change: I noticed that its been up.

Speaker Change: Well above where it wasn't you guys were much more profitable. So curious like what's included in there.

Sanjay Datta: So just curious, like, what's the click on there? Thank you.

Speaker Change: Okay.

Operator: Well, we're happy to take our flowers for the return to profitability. I appreciate that.

Speaker Change: Well, we'll have to take our flowers for the return to profitability appreciate that how we're thinking about stock compensation.

Dave Girouard: How we're thinking about stock compensation, I don't, I don't think it's dramatically different from how we've thought of it in the past. You know, as a tech company that's headquartered in the valley, it's important to us for our employees to have a stake in the mission and the outcomes of the business. And I think we're at a pretty comfortable balance between cash compensation and equity compensation, depending on the roll-on level. So I don't necessarily see a dramatic departure from how we've managed it to date.

Speaker Change: I don't think it's dramatically different than how he thought of it in the past.

Speaker Change: As a tech company.

Speaker Change: Headquartered in the valley, it's important to us.

Speaker Change: For our employees to have a stake in the mission and the outcomes of the business and I think we're at a pretty comfortable balance between.

Speaker Change: Cash compensation in equity compensation, depending on.

Speaker Change: On a roll and level, so I don't necessarily see a dramatic departure from.

Speaker Change: We have managed it to date.

Operator: We will take our next question from Arvind Ramnani with Piper Sandler. Please go ahead.

Speaker Change: We will take our next question from Arvind <unk> from Mani <unk> with Piper Sandler. Please go ahead.

Arvind Ramnani: Thanks for taking my question. I wanted to ask, on this call and in previous calls, you talked about some of the big investments you have made in kind of improving your model and sort of like capabilities. And, you know, as we get into a better, like, operating environment or lending environment, and now that you have like a kind of a better model, I mean, how do you expect the business to kind of perform, you know, in a more conducive environment, you know, just given the backdrop of kind of a better, kind of a better model, and a better offer?

Arvind: Thanks for taking.

Arvind: My question I wanted to ask and I know.

Speaker Change: On this call and in the prior calls.

Speaker Change: You talked about some of the big investments we have made.

Speaker Change: In kind of improving your.

Speaker Change: Your model N.

Speaker Change: Sort of like capabilities, and you know as we get into a better like kind of operating environment or lending environment.

Speaker Change: Uh huh.

Speaker Change: And now that you have like a kind of a better model.

Speaker Change: I mean, how do you expect the business to the kind of pro farm.

Speaker Change: And in a more conducive environment, just given the backdrop of all.

Speaker Change: From kind of a or better.

Speaker Change: Kind of a better model better.

Speaker Change: Offering.

Speaker Change: Yeah.

Dave Girouard: Well, I think, as I kind of said in my remarks, I think we've gone through a pretty significant transformation of the business over the last couple of years, both from a technology perspective and from a business model perspective. We feel much, much better about the quality of the models, how quickly they can react to changes in the environment, the amount of separation we're getting. So it's the normal trajectory of an AI model where it's getting more and more data, more and more variables.

Speaker Change: Well.

Speaker Change: Think as I've kind of said in my remarks, I think we've gone through a pretty significant transformation of the business over the last couple of years, both from a technology perspective and from a business model perspective on the technology side.

Speaker Change: We feel much much better at the quality of the models there or how quickly they can react to changes in the environment the amount of separation we're getting.

Speaker Change: No.

Speaker Change: Is this the normal trajectory of an AI model, where it's getting more and more data more and more variables.

Dave Girouard: We're putting more sophisticated software in, as we talked about Model 18. So higher degrees of automation, as we talked, we have a record high on that front. So the technology side has really improved a lot and just made us more efficient. And I think on the business model side, one of the things we clearly identified is that we needed to have a funding structure that had permanence to it, so that when we grow, and even if there's bumps in the road along the way, which there inevitably will be, we can grow through them.

Speaker Change: We're putting more sophisticated software and as we talked about model 18th so higher degrees of automation as we talked we have a record high on that front. So the technology side is just really improved a lot and just made us more efficient and I think.

Speaker Change: On the business model side, one of the things, we clearly identified as we needed to have funding structure that had permanence to it so that when we grow.

Speaker Change: And even if theres bumps in the road, along the way, which there inevitably will be we can we can.

Speaker Change: Grow through them and that's kind of what we've done on the business model side has really changed the nature of funding from completely out will two dedicated partnerships and we have some skin in the game in these partnerships is as co investors, which we think given our role in our in our aims and the market is a structure that makes sense.

Dave Girouard: And that's kind of what we've done on the business model side, which has really changed the nature of funding from completely at will to dedicated partnerships. And we have some skin in the game in these partnerships as co-investors, which we think, given our role and our aims in the market, is a structure that makes sense. So, you know, of course, in the good times when rates are dropping and the consumer is getting financially healthier, that's all very easy.

Speaker Change: So you know of course are in the in the good times when rates are dropping and the consumers getting financially healthier that's all very easy and and we're hopeful that that's what we're headed into but of course. The test is when the market is not so easy, but that's what we're designing for designing for a future with less volatility and more ability.

Dave Girouard: And we're hopeful that's what we're headed into. But of course, the test is when the market is not so easy. But that's what we're designing for. We're designing for a future with less volatility and more ability to thrive through whatever economic climate we find ourselves in.

Speaker Change: To thrive through whatever economic climate, we find ourselves in.

Arvind Ramnani: Yeah, that's really helpful. And, and I know, like, I'm willing to give you the benefit of the doubt that, you know, our models are better. But I want to ask, like, have they been validated by, you know, some client feedback, some banking partner feedback? Or, like, what is your sort of comfort level with saying that, hey, we have a better model?

Speaker Change: Yeah.

Speaker Change: That's really helpful and I know like I mean, you know willing to give it the benefit of doubt.

Speaker Change: Do you like.

Speaker Change: Is that better but.

Speaker Change: Okay.

Speaker Change: They've been validated by.

Speaker Change: Some clients feedback some banking partner feedback or like I mean, what is what is your sort of comfort level and saying that hey, do you have a better model.

Arvind Ramnani: I mean, is it that you're looking at internal data and coming to this conclusion, or are you getting that from external validation? And what really gives you some sort of comfort that you have proof that you have a better model?

Speaker Change: I mean is it that you're looking at internal data and coming to a conclusion or are you getting there from external validation.

Speaker Change: What really gives you sort of answered that he is proof that that you'll have a better model.

Dave Girouard: Yeah, I mean, there are very, very well understood statistical techniques to actually, you know, describe and quantify the accuracy of a model. And there are several different ones, and we use, you know, generally all of them.

Speaker Change: Yeah, I mean, there's very very well understood statistical techniques to actually describe and quantify accuracy of a model and there are several different ones and we use you know generally all of them. So.

Dave Girouard: So it's not, it's not hard for us to assess ourselves whether our model is getting more accurate or not, relative to prior versions of our model. So that's not, you know, it's not hypothetical in any sense. It's very straightforward in terms of building more accuracy into a model. Certainly, every lending partner and credit investor on our platform sees all the data that is coming out in terms of all, you know, month by month performance data, etc.

Speaker Change: It's not hard for us to assess ourselves whether our model is getting more accurate or not relative to prior versions of our model. So that's not.

Speaker Change: No.

Speaker Change: Not hypothetical in any sense, it's it's something very straightforward in terms of building more accuracy into our model.

Speaker Change: Certainly every lending partner and credit investor on our platform six all of the data that is coming out in terms of all.

Speaker Change: Month by month performance data et cetera, they have their own means of evaluating whether they think.

Dave Girouard: They have their own means of evaluating whether they think the credit's performing well or not, etc., but they're not looking at, you know, the software, if you will, trying to assess our model, but they care about the results, of course. But there's no, there's no, I don't think there's any reason to question that, that we can accurately identify the level of improvement and accuracy that we see in each subsequent version of our model. It's kind of the nature of the system to do so.

Speaker Change: The credit is performing well or not and what have you, but they're not looking at.

Speaker Change: The software if you will trying to assess our model, but they care about the results of course, but there's no. There's no I don't think there's any reason to question that.

Speaker Change: We can.

Speaker Change: Accurately identify the level of improvement in accuracy that we see in each subsequent version of our model, it's kind of the nature of the system to do so.

Arvind Ramnani: All right. Yeah, that's really helpful. Thank you very much. And I'm looking forward to working with you soon. Thanks, Arvind. Event.

Speaker Change: Alright, yeah.

Speaker Change: That's really helpful. Thank you very much and I'm looking forward to circling up with you soon.

Kevin: Thanks, Kevin Thanks, Kevin.

Operator: There are no further questions at this time. Mr. Girouard, I will turn the conference back to you for any additional or closing remarks. All right, thanks to everybody.

Kevin: There are no further questions at this time, Mr. Gerard I will turn the conference back to you for any additional or additional or closing remarks, Sir.

Dave Girouard: Alright, thanks to everybody for joining us today. As we discussed, the actions we've taken over the last few years are beginning to pay off, and we believe we're well set up for the remainder of 2024 and into next year. So, we hope you all enjoy the rest of your summer. We look forward to speaking with you all in the fall.

Mr. Gerard: Alrighty, thanks to everybody for joining us today as we discuss the actions we've taken over the last few years are beginning to pay off.

Speaker Change: We believe we're well set up for the remainder of 2024 and into next year. So I hope you all enjoy the rest of your summer we look forward to speaking with you all in the fall.

Operator: This concludes today's call. Thank you for your participation. You may now disconnect.

Speaker Change: This concludes today's call. Thank you for your partner.

Speaker Change: <unk> you may now disconnect.

Kevin: Goodbye.

Kevin: [music].