Q2 2025 Upstart Holdings Inc Earnings Call

Sonya Banerjee: Please stand by. Good afternoon and welcome to the Upstart second quarter 2025 earnings call. At this time, all participants are in a listen-only mode to prevent any background noise. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sonya Banerjee, head of investor relations. Sonya, please go ahead. Thank you. Welcome to the Upstart earnings call for the second quarter of 2025. With me on today's call are Dave Girouard, our co-founder and CEO; Paul Gu, our co-founder and CTO; and Sanjay Datta, our CFO. During today's call, we will make forward-looking statements, which include statements about our outlook and business strategy.

Please stand by.

Good afternoon and welcome to the upstart second quarter 2025 earnings calls. At this time, all participants are in a listen-only mode to prevent any background noise. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to turn the call over to Sonia Banerjee head of investor relations Sonia. Please go ahead.

Thank you. Welcome to the Upstart Holdings, Inc. earnings call for the second quarter of 2025. With me on today's call are Dave Girouard, our co-founder and CEO; Paul Goo, our co-founder and CTO; and Sanjay Datta, our CFO.

Sonya Banerjee: These statements are based on our expectations and beliefs as of today, which are subject to a variety of risks, uncertainties, and assumptions, and should not be viewed as a guarantee of future performance. Actual results may differ materially as a result of various risk factors that have been described in our SEC filings. We assume no obligation to update any forward-looking statements as the result of new information or future events, except as required by law. Our discussion will include non-GAAP financial measures, which are not a substitute for our GAAP results. Reconciliations of our historical GAAP to non-GAAP results can be found in our earnings materials, which are available on our IR website. With that, Dave, over to you.

During today's call, we will make forward-looking statements, which include statements about our outlook and business strategy. These statements are based on our expectations and beliefs as of today, which are subject to a variety of risks, uncertainties, and assumptions, and should not be viewed as a guarantee of future performance.

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

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

Our discussion will include non-gaap Financial measures which are not a substitute for our Gap results.

Reconciliations of our historical. Gaap to non-gaap results can be found in our earnings materials which are available on our IR website.

Dave Girouard: Thanks, Sonya. Good afternoon, everyone. Thank you for joining us today. Before I begin, I want to welcome my co-founder, Paul, to the call today. As most of you know, in May, we hosted our first investor day, what we called AI Day. For many investors and analysts who cover Upstart, it was their first exposure to Paul. Unsurprisingly, AI Day generated a lot of interest in how he and his teams are creating the world's leading AI lending platform. After the event, many told us they'd like to see and hear more from Paul, so we asked them to join our quarterly earnings calls. You'll hear from Paul in just a bit. On to the update. On our call a year ago, we provided the first signs that Upstart was returning to growth mode, and today you can see it in full bloom.

With that Dave, over to you.

Thanks Sonia. Good afternoon, everyone. Thank you for joining us today.

Before I begin, I want to welcome my co-founder Paul to the call today as most of you know, in may we hosted our first investor day, what we called AI day for many investors and analysts who cover upstart, it was their first exposure to Paul. I'm surprisingly AI day. Generated a lot of interest in how? He and his teams are creating the world's leading AI lending platform after the event. Many told us they'd like to see and hear more from Paul. So we asked him to join our quarterly earnings calls. You'll hear from Paul in just a bit

Dave Girouard: The second quarter was exceptional for Upstart. In addition to achieving triple-digit revenue growth, we reached GAAP profitability a quarter sooner than expected. Additionally, our newer businesses, Home and Auto, actually accelerated off the amazing growth you all saw from them in the first quarter. Originations on the Upstart platform in Q2 were $2.8 billion, our highest volume in three years. Revenue in Q2 grew 102% year-on-year, helping us deliver positive GAAP net income for the first time since Q2 2022. Our auto business grew 87% sequentially, while our home business grew 67% sequentially. While this friendly sibling rivalry tends to go back and forth in terms of growth rate, I can happily say both businesses accelerated meaningfully from their Q1 growth. For the first time ever, more than 10% of our originations came from our newer businesses, including our small-dollar loans, which grew 40% sequentially.

On to the update on our call a year ago. We provided the first signs that upstart was returning to growth mode and today, you can see it in full bloom. The second quarter was exceptional for upstart in addition to achieving triple digit Revenue growth. We reached Gap profitability, a quarter sooner than expected. Additionally, our newer businesses home and auto actually accelerated off, the amazing growth, you all saw from them in the first quarter.

Originations on the upstart platform in Q2 were 2.8 billion. Our highest volume in 3 years, Revenue in Q2 grew 102% year on year, helping us deliver positive. Gaap, net income for the first time since Q2 2022.

Our auto business grew 87% sequentially, while our home business, grew 67% sequentially.

While this friendly sibling, rivalry tends to go back and forth in terms of growth rate that can happily say both businesses accelerated meaningfully from their q1 growth.

Dave Girouard: Our teams couldn't be happier. After a long period of super-focused execution, it all just seems to be working right now. Once again, our growth last quarter was not a result of dramatic macro improvements or Fed rate decreases. In fact, the Upstart macro index has been largely stable for several months now. Our growth was primarily on the back of model improvements, which helped to drive conversion rates from 19% in Q1 to 24% in Q2. These wins came first and foremost from Model 22, which we launched in early May. Paul will share more about our model advancements shortly. In addition to our ML team, our growth and operations teams continue to do amazing work to drive down the cost of acquisition and origination. These are technology-driven economic wins that result in a superior product for the consumer and a sustainable advantage for Upstart.

For the first time ever, more than 10% of our originations came from our newer businesses, including our small dollar loans which grew 40% sequentially.

Our teams couldn't be happier after a long period of super focused execution, it all just seems to be working right now.

Once again, our growth last quarter was not a result of dramatic macro improvements or Fed rate decreases. In fact, the upstart macro index has been largely stable for several months. Now, our growth was primarily on the back of model improvements, which helped to drive conversion rates from 19% in, q1 to 24% in Q2, these winds came, first, and foremost from model 22, which we launched in early May Paul will share more about our model of advancements shortly.

Dave Girouard: As I mentioned earlier, our emerging businesses are growing really quickly. Small-dollar loans and auto each crossed $100 million in quarterly originations in Q2, and we expect Home, the new kid on the block, to follow soon. Our newer products collectively drove almost 20% of new borrowers on the Upstart platform in Q2. For each of these emerging products, we're now reaching the point where credit history is sufficient and volumes are substantial enough for third-party funding. In fact, we have a goal to transition most of the funding for these products off our balance sheet by the end of 2025, though deal timing is always hard to predict. It's worth noting that our auto retail product, that is, our software installed at car dealerships, has really gained traction and momentum in the last couple of months.

In addition to our ML team, the growth and operations teams continue to do amazing work to drive down the cost of acquisition and origination. These technology-driven economic winds result in a superior product for the consumer and a sustainable advantage for Upstart.

As I mentioned earlier, our emerging businesses are growing really quickly. Small dollar loans and auto each crossed a hundred million dollars in quarterly originations in Q2 and we expect home the new kid on the Block to follow soon. Our newer products. Collectively drove almost 20% of new borrowers on the upstart platform in Q2.

Most of the funding for these products off our balance sheet by the end of 2025, they'll deal timing is always hard to predict.

Dave Girouard: This product has always presented unique challenges relative to our others, and it's clearly taken Upstart some time to get it right. Several months ago, we took the decision to narrow the focus of our software on an exceptional financing process, and this focus has paid off in spades. The dealership adoption right now is like nothing we've seen in the past, and the volume of loan requests and closed agreements from our dealer partners is on a steep climb. This is a recent phenomenon, and I expect we'll share more about it as it plays out. In our home business, we're increasingly confident we're on a path to building the best-in-class HELOC experience. Home is a massive and fragmented category with few players versed in AI and its amazing potential to power superior home lending products.

It's worth noting that our Auto retail product that is our software installed at car dealerships has really gained traction and momentum in the last couple of months, this product has always presented unique challenges relative to our others and it's clearly taken upstart some time to get it right. Several months ago we took the decision to narrow the focus of our software on an exceptional financing process and this Focus has paid off in Spades. The dealership adoption right now is like nothing we've seen in the past and the volume of loan requests and close agreements from our dealer Partners is on a steep climb.

This is a recent phenomenon and I expect, we'll share more about it as it plays out.

Dave Girouard: In Q2, we launched instant property verification, with the first applicant completing the entire verification process in under one minute. Our system automatically verified their identity and income, assessed the property's value and any existing liens, and confirmed ownership and vesting information, all the key steps needed to close the loan. I believe this speed and efficiency in what is normally a slow, handcrafted process is without precedent. We continue to strengthen the funding supply on Upstart's platform. Our funding partnerships have been both durable and scalable, allowing us to grow rapidly while delivering the target returns our partners expect. With respect to banks and credit unions, we expect to reach a new all-time high for monthly available funding in Q3, surpassing our prior peak from early 2022. The funding markets continue to improve as the year progresses, particularly since the Liberation Day fears in early April subsided.

In our home business, we're increasingly confident. We're on a path to building. The best-in-class HELOC experience home is a massive and fragmented category with few players versed in Ai and its amazing potential to power Superior. Home lending products.

In Q2, we launched. Instant property, verification with the first, applicant completing the entire verification process in under 1 minute.

Our system automatically verified their identity and income assessed, the property's value and any existing liens, and confirmed ownership investing information. All the key steps needed to close the loan. I believe this speed and efficiency and what is normally a slow hand-crafted process is without precedent.

We continue to strengthen the funding Supply on upstarts platform. Our funding Partnerships have been both durable and scalable allowing us to grow rapidly while delivering the target returns are Partners expect.

With respect to Banks and Credit Unions. We expect to reach a new all-time high for monthly available funding in, Q3 surpassing our prior Peak from early 2022.

Dave Girouard: In June, we priced and closed our second ABS deal of 2025, delivering significantly improved execution compared to our first, which closed in April. It's worth noting that the more recent transaction had nearly twice the number of investors as the first, including some new names. We feel increasingly confident that these committed funding partnerships can scale with our business as needed and will play an important role as we begin to commercialize our newer products. Before I turn the call over to Paul, I'll share a few final thoughts. Looking over the last couple of years, we've done a lot of work to run our business more efficiently and streamline our cost structure, but we had conviction that investing in much larger home and auto opportunities made sense. These categories are ripe for AI disruption, and they've expanded Upstart's TAM by more than 10x.

The funding markets continue to improve as the year progresses particularly since the Liberation day fears in early April subsided.

In June, we priced enclosed. Our second, ABS deal of 2025, delivering significantly, improved execution compared to our first, which closed in April. It's worth noting that the more recent transaction had nearly twice the number of investors as the first including some new names.

We feel increasingly confident that these committed funding Partnerships can scale with our business as needed and will play an important role as we begin to commercialize our newer products.

Before I turn the call over to Paul. I'll share a few final thoughts.

Dave Girouard: Our considerable investments in home and auto are really paying off with fast growth, strong credit performance, rapidly improving separation, and commercial readiness, with nine lending partnership deals recently signed across one or more of our secured products already. To be clear, our goal is market share leadership in each one of these product categories in the future. As our CMO, Chantal, mentioned at AI Day, we're building the always-on everything store for credit, aiming to persistently underwrite 100% of Americans with the best credit products in the world just a click away, and we're off to a great start. Thanks, and now I'd like to turn it over to Paul, my co-founder and Upstart's Chief Technical Officer. Paul? Thanks, Dave. Our aim at Upstart is to win by having objectively the best rates and process for borrowers, and technology, specifically AI, is how we do that.

Looking over the last couple years, we've done a lot of work to run our business more efficiently and streamline our cost structure but we had conviction that investing in much larger home in Auto opportunities made sense. These categories are ripe for AI disruption and they've expanded upstarts Tam by more than 10x.

Our considerable investments in home and auto are really paying off with fast growth. Strong credit, performance rapidly improving separation and Commercial Readiness with 9 lending, partnership deals recently signed across 1 or more of our secured products already to be clear. Our goal is market share leadership in each 1 of these product categories in the future.

As our CMO, Chantal, mentioned at AI Day, we're building the always-on everything store for credit, aiming to persistently underwrite 100% of Americans, with the best credit products in the world just a click away. We're off to a great start.

Thanks and I would like to turn it over to Paul my co-founder and upstarts. Chief technical officer. Paul.

Dave Girouard: To that end, I want to highlight several areas of recent progress. First, we've continued investing in our core AI advantage. Model 22 made use of neural networks at every level of the model architecture, whereas prior models only made use of neural networks in the base layer. That may sound like a subtlety, but it increased our separation accuracy advantage over our benchmark textbook credit model by 17 percentage points to 171.2%. Equivalently, it decreased the inaccuracy remaining to be solved to 87.5%. This is a metric where the starting point is the benchmark textbook credit model I described back at AI Day, and 0% would be a model that gets every credit decision perfectly right. As you can see, there is a long way to go, but fortunately, we have a commensurately long roadmap of model improvement ideas to get there.

Thanks Dave. Our aim at upstart is to win by having objectively, the best rates and process for borrowers and Technology. Specifically AI is how we do that to that end. I want to highlight several areas of recent progress. First we've continued investing in our core AI Advantage. Model 22 made use of neural networks at every level of the model architecture, whereas prior models only made use of neural networks in the base layer.

That may sound like a subtlety, but it increased our separation accuracy advantage over our benchmark textbook credit model by 17 percentage points to 171.2%.

Equivalently it decreased the inaccuracy remaining to be solved to 87.5%.

This is a metric where the starting point is The Benchmark textbook. Credit model I described back at AI day and 0% would be a model that gets every credit decision perfectly right.

Dave Girouard: As of the end of Q2, core underwriting had 91 million borrower repayment events to train on, up from 86 million at the end of the prior quarter. To support the larger and more complex models, we invested in further parallelization and caching solutions that cut up to 17 seconds of latency off borrower pricing and saved on model costs. Those time and resource savings can now be reinvested in yet more powerful models. Second, servicing is the newest frontier for us, and realizing loss reductions via best-in-class servicing has been a major focus. Over the past year, including the most recent quarter, we launched numerous improvements and optimizations to how customers can pay, how much they pay, and when they pay. As a result, year-over-year, population-adjusted delinquency rates are down 20%, and raw delinquency rates are down 32%.

As you can see, there is a long way to go, but fortunately, we have a commensurately, long road map of model Improvement ideas to get there.

From 86 million. At the end of the prior quarter.

To support the larger and more complex models. We invested in further parallelization and caching solutions that cut up to 17 seconds of latency off borrower pricing and saved on model costs.

Those time and resource savings can now be reinvested in yet more powerful models.

Second servicing is the newest Frontier for us and realizing loss. Reductions via best-in-class servicing has been a major Focus.

Dave Girouard: Machine learning is already informing many of these optimizations and will soon allow us to determine the causal impact of servicing actions we take. This will include assignment of specific agents, hardship programs, or settlement offers to specific borrowers. We also plan to apply machine learning to the problem of individualized recovery prediction for the first time ever, replacing a fixed assumption about an economically significant portion of loans' cash flows with machine learning. Servicing wins directly improve loan loss rates on loans, which in turn improves the pricing and approvability of new loans. Third, we made strong progress in Q2 generalizing our AI technology across product verticals. I want to start by noting that even with accelerating growth in new products, our share of fully automated loans actually kept up this quarter.

Over the past year, including the most recent quarter, we launched numerous improvements in optimizations to how customers can pay how much they pay and when they pay as a result year-over-year, population adjusted delinquency rates are down, 20%, and raw delinquency rates are down 32%.

Machine learning is already informing many of these optimizations and will soon allow us to determine the causal impact of servicing actions. We take

This will include assignment of specific agents hardship, programs or settlement offers to specific Borrowers.

We also plan to apply machine learning to the problem of individualized recovery prediction. For the first time ever replacing a fixed assumption about an economically significant portion of loans cash flows with machine learning.

Servicing wins directly improve loan, loss rates on loans.

Which in turn improves, the pricing and approval of new loans.

Dave Girouard: That will be challenging to keep pace with, but we're encouraged by wins we had across new products. As Dave mentioned, HELOC had its first instant property verification, which involved solving for over a dozen facts or documents that previously required waiting for a manual verification. In auto refi, we launched full automation of the remote online notarization process. Both of these wins remove major procedural barriers to model-driven automation, which we've seen relentlessly drive the percentage of loans fully automated up in core personal loans over the past few years. Our growth in auto has been supported by and coincides with strong advances in generalization of our core underwriting technology. Auto is the first area where, instead of directly training an auto model, we start by training a foundational credit model on data from multiple credit categories and then apply fine-tuning to arrive at an auto-specific model.

Third. We made strong progress in Q2 generalizing our AI technology across product verticals. I want to start by noting that even with accelerating growth in new products, our share of fully automated loans. Actually kept up this quarter

That will be challenging to keep Pace with but we're encouraged by wins. We had across new products.

As Dave mentioned, HELOC had its first instant property verification, which involves solving for over a dozen facts or documents that previously required waiting for a manual verification.

An auto refinance. We launched full automation of the remote online notarization.

Dave Girouard: We are now working to add embeddings to the auto retail model, along with generalizing what we call APRs of feature and our macro framework from personal loans. This type of model generalization is powerful because it means all of our loan products can learn from repayment patterns observed across our platform, not just within their individual category. Lastly, I want to touch on generative AI and its applications to our business. I'll start with the table stakes. Like any good tech company, we've realized solid productivity wins from the application of large language models to our internal operations. 60% of our developers are weekly active users of LLM-powered developer tools, and teams all across the company have built over 700 custom GPTs to automate various internal workflows. More interesting are the applications to the end borrower.

Our growth in Auto has been supported by and coincides with strong advances. In generalization of our core underwriting technology. Otto is the first area where instead of directly training an auto model. We start by training a foundational, credit model on data from multiple credit categories and then apply fine-tuning to arrive at an auto specific model.

We are now working to add embeddings to the auto retail model, along with generalizing, what we call aprs, of feature, and our macro framework from personal loans.

This type of model, generalization, is powerful because it means all of our loan products can learn from repayment patterns observed across our platform, not just within their individual category.

Lastly, I want to touch on generative Ai and its applications to our business.

I'll start with the table Stakes.

Like, any good tech company, we've realized, solid productivity wins from application of large language models to our internal operations.

60% of our developers are weekly active users of LOM. Powered developer tools and teams all across the company have built over 700 custom GPTs to automate various internal workflows.

Dave Girouard: We've already launched early versions of borrower-impacting generative AI tools around model explainability and customer service. We will continue to build on these with an eye towards eventual agentic management of our consumers' credit needs. As Dave has discussed, one of our key priorities in 2025 is to 10x our leadership in AI. We continue to have a robust pipeline of modeling wins, and I'm incredibly proud of the team and what we've been able to accomplish so far. With that, I'll turn it over to Sanjay. Sanjay?

More interesting are the applications to the end borrower. We've already launched early versions of borrower, impacting generative AI Tools around model explanation and customer service. We will continue to build on these with an eye towards eventual. Agentic management of our consumer's credit needs.

As Dave has discussed 1 of our key priorities in 2025 is to 10x our leadership in AI.

We've continued to have a robust pipeline of modeling wins and I'm incredibly proud of the team and what we've been able to accomplish so far.

With that, I'll turn it over to Sanjay.

Sanjay Datta: Thanks, Paul, and thanks to all of our participants for sharing some of your time with us today. I'll now spend some time giving context on our numbers. With respect to its impact on financial performance, the credit environment we operate in was largely a non-story in Q2. The emergence from last quarter's tax seasonality played out roughly as expected, and the broader macro has been idling in regards to its impact on credit trends, registering as neither a significant headwind nor tailwind over the past months. As Dave alluded to, the strong sequential momentum we achieved in Q2 was largely due to the strength of our model launches during the quarter.

Sanjay.

Thanks, Paul. And thanks to all of our participants for sharing some of your time with us today.

I'll now spend some time giving context on our numbers.

with respect to its impact on financial performance, the credits environment we operate in was largely a non-story in Q2

The emergence from last quarter's tax seasonality played out roughly as expected.

The broader macro has been idling in regards to its impact on credit Trends registering as neither a significant headwind nor Tailwind over the past months.

Sanjay Datta: In addition, take rates and contribution margins increased in the core personal loan business, although in our aggregate numbers, these dynamics were partially offset by the continued rapid scaling of the newer home and auto products, which still have immature unit economics. The combination of these effects allowed us to beat our guidance across both top and bottom lines in Q2 and break through to GAAP profitability a quarter earlier than anticipated. We have been able to comfortably fund the ongoing growth in the core personal loan business through our existing lending relationships and capital structures. The main source of pressure on the balance sheet, as it currently stands, is from the continued scaling of the new products, and an increasing priority for us this year will be to finalize and implement our third-party capital plan for these new products.

As Dave alluded to the strong sequential momentum, we achieved in Q2 is largely due to the strength of our model launches during the quarter.

In addition, take rates and contribution margins increased in the core personal loan business. Although, in our aggregate numbers, these dynamics were partially offset by the continued rapid scaling of the newer home and auto products, which still have immature unit economics.

The combination of these effects allowed us to beat our guidance across both top and bottom lines in Q2 and break through to GAAP profitability a quarter earlier than anticipated.

Comfortably fund the ongoing growth in the core personal loan business through our existing lending relationships and capital structures.

The main source of pressure on the balance sheet as it currently stands is from the continued scaling of the new products.

Sanjay Datta: With this as context, here are some of the financial highlights from Q2 of 2025. Total revenue for Q2 came in at approximately $257 million, up 102% year-on-year. This overall number included revenue from fees of approximately $241 million, which was up 84% year-on-year and 15% better than guidance. Within this, transactional revenue more than doubled year-on-year, largely reflecting the influence of the aforementioned Model 22. Separately, servicing fee revenue grew by nearly 20% year-on-year as the outstanding book of serviced loans continued to expand. Net interest income represented roughly $17 million of overall revenue, ahead of guidance by $2 million, reflecting the growing volume of new products being incubated on our balance sheet, and in particular, the auto book of loans, where our return on investment has meaningfully strengthened.

And an increasing priority for us, this year will be to finalize and Implement our third-party Capital plan for these new products.

With this is context, here are some of the financial highlights from Q2 of 2025.

Total revenue for Q2 came in at approximately 20057 million up 102% year-on-year.

Revenue from fees of approximately $241 million, which was up 84% year on year.

And 15% better than guidance.

Within this transactional, Revenue more than doubled, year on year, largely reflecting the influence of the aforementioned model 22.

separately servicing fee Revenue grew by nearly 20% year-on-year as the outstanding book of service loans continue to expand

Sanjay Datta: The volume of loan transactions across our platform was approximately $373,000, up 159% from the prior year and 55% sequentially, and representing just over 250,000 new borrowers. Average loan size of approximately $7,570 was 15% lower than the prior quarter, as model advancements drove higher approval rates in similar smaller loan amounts. 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, up three percentage points from the prior quarter and exceeding guidance. This improvement reflects a strengthening take rate in our core borrower segment, in addition to the acquisition and operational unit cost efficiencies driven in part by Model 22. GAAP operating expenses were roughly $252 million in Q2, up 16% sequentially from Q1.

Net interest income represented roughly $17 million of overall revenue, ahead of guidance by $2 million, reflecting the growing volume of new products being incubated on our balance sheet. In particular, the auto book of loans has seen a meaningful strengthening in our return on investment.

The volume of loan transactions across our platform was approximately 373,000 up 159%, from the prior year and 55% sequentially and representing just over 250,000 new Borrowers.

The average loan size of approximately $7,570 was 15% lower than the prior quarter. Advancements drove higher approval rates in similar smaller loan amounts. Our contribution margin, a non-GAAP metric which we define as revenue from fees minus variable costs for borrower acquisition verification and servicing, is expressed as a percentage of revenue from fees.

Came in at 58% in Q2.

Up 3 percentage points from the prior quarter and exceeding guidance.

This Improvement reflects the strengthening take rate in our core borrower segment. In addition to the acquisition and operational unit cost, efficiencies driven in part by model 22,

Sanjay Datta: Expenses that are considered variable relating to borrower acquisition, verification, and servicing were up 21% sequentially, relative to the 55% increase in volume of loan transactions, supporting the higher contribution margins previously referenced. Fixed expenses were up 13% quarter over quarter, largely reflecting a one-time catch-up in the compensation-related accruals, which on the current business trajectory we expect will normalize in the back half of the year. Q2 GAAP net income was approximately $6 million, well ahead of expectation and reflecting outperformance on fee revenue against our tightly managed fixed cost base. Returning to GAAP profitability has been an important objective of ours over the past year, and I am proud that our team has reached this milestone ahead of schedule and while subsisting in the persistently high default environment that still surrounds us today.

Gap. Operating expenses were roughly 252 million in Q2 up. 16% sequentially from q1.

Expenses that are considered variable relating to borrower acquisition verification and servicing, we're up 21% sequentially.

Relative to the 55% increase in volume of loan, transactions, supporting the higher contribution margins. Previously referenced,

Fixed expenses were up. 13% quarter over quarter.

Largely reflecting a 1-time catch-up in the compensation related approvals, which on the current business trajectory we expect will normalize in the back half of the year.

Q2 gaap, net income was approximately positive 6 million. Well, ahead of expectations and reflecting outperformance on fee Revenue against our tightly managed fixed cost base.

Sanjay Datta: Now that we are over the line, we will look forward to continuing the positive momentum of our bottom line and to improving our profitability profile as we scale. Adjusted EBITDA was $53 million, also scaling nicely in accordance with our operating leverage. Adjusted earnings per share was $0.36 based on a diluted weighted average share count of 118 million. We ended Q2 with approximately $1.02 billion of loans held directly on our balance sheet, up from $815 million in Q1. This sequential increase is mainly due to the continuing growth of our new products, which have all simultaneously entered the transitional period between R&D and commercialization, a period in which we must ramp deliberately in order to demonstrate credit performance and our ability to deliver meaningful volume before obtaining third-party funding commitments.

Returning to gaap. Profitability has been an important objective of ours over the past year and I am proud that our team has reached this Milestone ahead of schedule and while subsisting in the persistently, High default, environment, that still surrounds us today,

Now that we are over the line, we will look forward to continuing the positive momentum of our bottom line and to improving our profitability profile as we scale.

Adjusted Eva de was 53. Million. Also scaling nicely in accordance with our operating Leverage.

Adjusted earnings per share was 36 Cents based on a diluted weighted average share count of 118 million.

We ended Q2 with approximately 1.02 billion dollars of loans held directly on our balance sheet up from 8150 million in q1.

This sequential increase is mainly due to the continuing growth of our new products.

Which of all simultaneously entered, the transitional period between R&D and commercialization.

Sanjay Datta: In this regard, we are in a bridging period with these new products, which is precipitating what we expect to be a temporary expansion of the balance sheet usage that we intend to reverse as these products exit incubation. As Dave mentioned, we have already begun the process of securing external capital to support these initiatives, and we believe these efforts will allow us to transition away from direct balance sheet funding of these in the near term. As we plan for the back half of the year, our macro assumptions remain consistent with our prior view, which is to say a steady environment with a UMI continuing in the 1.4 to 1.5 range, steady interest rate levels, and a labor market that remains resilient in the face of unpredictable policy shifts. Inflation will remain a near-term risk.

A period in which we must ramp deliberately in order to demonstrate credit performance. And our ability to deliver meaningful volume before obtaining third-party funding commitments.

In this regard, we are in a bridging period with these new products, which is precipitating what we expect to be a temporary expansion of the balance sheet usage, that we intend to reverse as these products, exit incubation. As Dave mentioned, we have already begun the process of securing external Capital to support these initiatives. And we believe these efforts will allow us to transition away from direct balance sheet, funding of these in the near term.

4 to 1.5 range.

Betty interest rate levels and a labor market that remains resilient in the face of unpredictable policy shifts.

Sanjay Datta: In this environment, we expect to continue to launch model enhancements that will improve conversion rates. Our take rates and contribution margins will remain robust, and we will continue to scale and fund the newer products. In this scenario for Q3 of 2025, we would expect total revenues of approximately $280 million, consisting of revenue from fees of approximately $275 million and total net interest income of approximately positive $5 million, contribution margin of approximately 58%, GAAP net income of approximately positive $9 million, adjusted net income of approximately $44 million, adjusted EBITDA of approximately $56 million, with a basic weighted average share count of approximately 97 million shares and a diluted weighted average share count of approximately 105 million shares.

Inflation. Will remain a near-term risk.

In this environment we expect to continue to launch model. Enhancements that will improve conversion rates. Our take rates and contribution margins will remain robust and we will continue to scale and fund the newer products.

In this scenario for Q3 of 2025, we would expect.

total revenues of approximately 280 million consisting of revenue from fees of approximately 275 million and total net interest income of approximately positive 5 million,

Contribution margin of approximately 58%.

Gaap net income of approximately positive 9 million.

Adjusted net income of approximately $44 million.

Adjusted Eva de approximately 56 million.

Sanjay Datta: For the full year of 2025, we now expect total revenues of approximately $1.055 billion, consisting of revenue from fees of approximately $990 million and net interest income of approximately positive $65 million, an adjusted EBITDA margin of approximately 20%, and we expect GAAP net income of approximately positive $35 million. These numbers are, of course, the outcome of a lot of hard work and great execution by the various teams across Upstart. So I'll take this opportunity to both thank and congratulate all of those teams. And with that, Operator, over to you to kick off the Q&A.

With the basic weighted average share count of approximately 97 million shares and the diluted weighted average share count of approximately 105 million shares.

For the full year of 2025. We now expect total revenues of approximately 1.055 billion consisting of revenue, from fees of approximately 9990 million and net, interesting come of approximately positive, 65 million

An adjusted IBA margin of approximately 20%.

And we expect gaap net income of approximately positive, 35 million.

these numbers are of course the outcome of a lot of hard work and great execution by the various teams across upstart

So I'll take this opportunity to both thank and congratulate all of those teams.

Q&A Moderator: Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is to press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for a question. Our first question comes from Peter Christiansen with City.

And with that, operator over to you to kick off the Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad, if you're using a speaker-phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Again, that is to press star 1 to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for a question.

Our first question comes from Peter Christensen with City.

Analyst (various): Thank you. Good afternoon, and thanks for the question. Really great results. Dave, Sanjay, I'm just wondering if you could chat about the health of the ABS market. Are you seeing any appetite for equity tranche investments at all? And then I'm curious if you had any thoughts on more competitors coming into the more near prime space, also the prime from a loan platform perspective. Are you seeing any competitive pressure there? Thank you.

Thank you, uh, uh, good afternoon, and thanks for the question, really great results. Um, uh, Dave Sanjay just wondering if you could chat about, uh, ABS, uh, the health of the ABS Market are, are you seeing any appetite for Equity? Tranche Investments? Uh, at all. And then, uh, I'm curious if you, if, if you have any thoughts on more competitors coming into the into the um, to the more near Prime space. Also the Prime from a loan platform. Perspective are are are you seeing any competitive pressure there? Thank you.

Sanjay Datta: Indeed. Sanjay here. Great to hear your voice. The ABS markets, let's see, I think have returned to being a somewhat regular issuer now on the cadence that we would like. I think the bond market is very constructive. The residual or equity market that you asked about, I would call it an opportunistic market right now. There are buyers. I don't think it is an efficient market, and I think buyers sort of pick and choose deals, so I wouldn't call that market "back" in the way that I think the bond market is. But overall, it's a constructive market, and we're certainly happy to be a regular issuer again.

Hey, Pete, Sanjay here, um, great to hear your voice. Uh, the ABS markets.

Um let's see we uh I think have returned to be in uh somewhat regular issuer now.

On the cadence that we would like. Um, I think the bond market is very constructive, the residual or equity market that you asked about.

Dave Girouard: This is Dave. I'd just say on the competitors, to the extent the funding markets have improved and capital markets have improved somewhat through the year, I think that does tend to bring more competitors into the space. So unsurprisingly, it's a fairly competitive game these days. But again, we're very focused on having best offers both at super prime level and at our core business as well, and also very confident in our ability to grow our market share and keep our strength in those markets as well.

Um, I would call it, uh, an opportunistic market right now. Um, there are buyers, I don't think, uh, they, it is an efficient market and I think, you know, buyers sort of pick and choose deals. So I I wouldn't call that market, um, quote, unquote back in the way that I think the Bond Market is. Uh, but but overall, it's a constructive market and, uh, we certainly happy to be, uh, you know, a regular issuer again.

Pete. This is Dave, I just say on the, on the competitors. Um you know to the extent, the funding markets have improved and capital markets have improved somewhat through the year. I think that does.

Tend to bring more, uh, competitors into the space. So I'm surprisingly, you know, it's a fairly competitive, uh, game these days. But, you know, again, we've very focused on having best offers both at Super Prime level and at our Core Business, as well. And and um, also very confident in our ability to grow our market share and and uh, keep our strength in those markets as well.

Analyst (various): Very helpful, and thank you for the added disclosure this quarter. Thank you.

Very helpful and thank you for the added disclosure of this quarter. Thank you.

Q&A Moderator: If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We'll take our next question from Ramsey El-Athal with Barclays.

2.

Analyst (various): Hi. Thank you so much for taking my question this evening. I wanted to ask about the increase in the loans on the balance sheet. And Sanjay, you mentioned that you would start transitioning to external funding in the near term. I just want to kind of zero in on what that means exactly. Should we expect next quarter that amount to begin rolling down, decreasing, or is it going to take a little more time to line up the external funding categories? And I guess, what would be the pace of decline there that we should expect over the next few quarters?

We'll take our next question from Ramsey, LSL with Barkley.

Funding categories. And I guess what would be the pace of decline there that we should expect over the next few quarters?

Sanjay Datta: Yeah, Ramsey. Yeah, as I mentioned in the prepared remarks, a lot of the volume on the balance sheet today are from our new products. So our core business, I think, is well-funded. Categories like home and auto are growing quickly. So it's a bit of a good problem to have. Sort of the original use case for the balance sheet, which is R&D and incubation. In terms of time frame to get the flows moving to third-party capital, I think we're looking at a timeline of sort of roughly between now and the end of the year. And a lot of that is just about new originations and getting that flow to capital sources. I think as we make those deals, obviously, we will opportunistically use our balance sheet to seed those relationships.

Yeah, Ramsey. Um, yeah, as I mentioned, in the prepared remarks, uh, a lot of the volume on the balance sheet today are from our new products. So our Core Business, I think is, well funded, um, categories, like home and auto are growing quickly. So it's a bit of a good problem to have, uh, sort of the original. Um, uh,

Or use case for the balance sheet which is our R&D and incubation. Um in terms of time frame to uh get the flows moving to third party capital. I think we're looking at a timeline that's sort of roughly, you know, between now and the end of the year.

Sanjay Datta: So I think as we sort of transition the new flows, you should see our balance sheet start to release as well. But I would give sort of a couple of quarter timeline on that dynamic.

Um, and you know a lot of that is just about new originations and getting that flowed to capital sources. I think as we make those deals, obviously we will opportunistically use our balance sheet to see those relationships.

Um, so I think, you know, as as we sort of transition, the new flows, you should see our balance sheet, start to release as well. But, um, you know, I would give sort of a couple of quarter timeline.

Analyst (various): Okay. One quick follow-up. The super prime percentage of loans as a percentage of total declined a little bit quarter over quarter. I'm just curious, what is the driver there? Is it mix? Is it underwriting decisions? How is that trending right now?

On that uh, on that dynamic.

Okay, 1 quick follow up, the super Prime um percentage of loans. Uh as a percentage of total uh declined a little bit quarter of a quarter, I'm just curious. What is the driver there? Is it mixed is it underwriting decisions? How do you uh,

How is that trending right now?

Sanjay Datta: I don't think it's anything in particular because I think we have enormous room to grow in our core as well as in super prime, and both are growing very quickly. So it wouldn't surprise me that it kind of goes back and forth. We have enormous market share opportunity across those product segments. So to me, that's not surprising. We're also really just beginning to build in the depth of funding in the super prime segment. So we do have very competitive funding in super prime, but we need to build the depth there, and that'll allow us to scale while keeping prices in a very competitive place. So that's kind of the process going on there. I wouldn't read anything more into it than that.

Analyst (various): Perfect. Thank you very much.

Uh, I don't I don't think it's anything in particular because I think we have enormous room to grow in our core as well as in super Prime and and and both are growing very quickly so I I it wouldn't surprise me that it kind of goes back and forth. We we uh, have enormous market share opportunity, um, across those products. So so to me that's not a surprising. We're also really just beginning to build in the depth of funding, uh, in the super Prime segment. So we we do have very competitive funding and super Prime, um, but we need to build the depth there and that will allow us to scale, while you know, keeping, uh, prices in a very competitive place. So that's kind of the process going on there. Um, I wouldn't read anything more into it, than that.

Perfect, thank you very much.

Q&A Moderator: Our next question comes from Simon Clinch with Rothschild and Company, Redburn.

Our next question comes from Simon clinch with Rothschild and Company Redbarn.

Analyst (various): Hi, everyone. Thanks for taking my question. We appreciate it. Maybe I could just start with the pretty impressive step up in contribution margin versus guidance. And Sanjay, could you perhaps break that down? I mean, I presume some of that is due to sort of lesser mix of prime within the mix of loans that you've originated, but also the comment about take rates being higher. Could you just talk to that and elaborate a little bit more, please?

Hi everyone, thanks for taking my question. Um, we appreciate it. Uh, I maybe I could just start with, um, the pretty impressive Step Up in, uh, contribution margin versus guidance. And, uh, Sandra could you break that down? I mean I presume some of that is, is due to sort of lesser mix of crime within the within the, the mix of loans that you you've originated, but also um the the comment about take rates being higher, could you just talk to that and elaborate a little bit more? Please.

Sanjay Datta: Yeah, sure, Simon. Yeah, I guess the overall contribution margin improved. That is in the face of yet sort of growing new products, which have immature unit economics. So you may infer that the contribution margin of our core business grew by even more. And within that, there's both a mixed benefit from having slightly more core borrower segment loans versus super prime. Those loans obviously have a higher margin than very super prime loans. And then within that core borrower segment, therein of itself, our contribution margins and our take rates improved. And some of that is a result of the model launch we had. An improved model improves conversion rates that decreases acquisition cost like for like. And so there are sort of benefits to the unit cost side.

Yeah um sure Simon yeah the I guess the overall contribution margin improved that is in the face of you know, yet sort of growing new products which have immature unit economics. So you may infer that the contribution margin of our Core Business grew by even more. And within that um there's both a mixed benefit from having you know slightly more core bore where segments loans versus super prime those those

Those loans. Um, obviously have higher margin, uh,

Sanjay Datta: And then even our take rates within that core borrower segment in the personal loan business saw some improvement, I think largely a result of the ongoing cost or sort of take rate optimization that we're always doing, trying to understand the elasticities in the different bands and optimizing against them. So that gave us some opportunity to improve our take rates and our contribution margins overall.

Than than very super Prime loans. And then within that, you know, core borrower segment, um, they're in of itself are are are are contribution margins and our take rates, uh, improved. And some of that is a result of the model launched we had. Um, you know, uh an improved model uh, improves conversion rates, that decreases C acquisition costs, like for like, um, and so there's sort of benefits to the unit cost side. Um, and then even our cake rates within that core bar, where segments in the personal loan business, you know, saw some improvement. Um, I think largely a result of all, you know, the ongoing cost or sort of a take rate optimization that we're always doing, um, trying to understand a list of cities in the different bands and uh, just optimizing against them. So that gave us some opportunity to improve uh or take rates and and our contribution margins overall.

Analyst (various): Okay, that's great. Thanks. And just to follow up, just on the outlook you provided and your comments around the macro that we're seeing, perhaps you could just give us a sense of what assumptions you're making around that are sort of fed into your guidance, because I see like third quarter is a little bit above consensus, but the fourth quarter looks like it's kind of unchanged relative to consensus. And given the substantial beat this quarter, it feels like you're holding something in reserve. So I just want to get a sense of that.

Sanjay Datta: Well, let's see. One part of your question was about macro assumption. We're typically conservative with respect to the macro. We sort of roughly expect the status quo. So the main way that we measure that, of course, is in UMI, the macro index we have, which is hovering in the 1.5 range. And we sort of plan to a consistent UMI for the rest of the year. So remaining in a relatively high default rate, we plan for no real cuts in interest rates in the market. Obviously, there's a lot of speculation around what that might look like for the rest of the year, but we certainly don't bank on anything in that regard. And we're sort of continuing to rely on a relatively resilient labor market, notwithstanding the noise of the last week or so.

Well, let's see. Uh, 1 part of your question was about macro assumption. Um, we're typically conservative with respect to the macro we sort of, um, roughly expect the status quo. So, you know, that the main way that we measure that, of course, is in, uh, Umi that the macro index we have, which is hovering in the, you know, 1.5 range and we sort of plan to a consistent Umi for the rest of the year. So, you know, remaining in a relatively High, default rate. Um, we plan for no real, uh, Cuts in interest rate

Um, interest rates in the market, you know, obviously there's a lot of speculation around what that might look like for the rest of the year, but we certainly don't bank on anything in that regard.

Sanjay Datta: I think the labor market continues to be in relatively good shape in terms of how many open jobs there are out there versus how many people are seeking jobs. So that's sort of the totality of the macro assumptions that go into our planning, and I think it's a relatively conservative kind of a status quo, if you will. You also asked a little bit about the shape of the guidance. I would just say that we have a relatively direct line of sight into what things are going to drive our Q3 numbers. Those projects are very sort of near term and rounding the corner, and so we feel very confident in being able to guide against them.

Um and you know, we're we're sort of continuing to uh rely on a a relatively resilient labor market, notwithstanding the noise of the last you know, week or so. I think the labor market continues to be in relatively good shape in terms of how many open jobs there are out there

Um, versus how many people are seeking, uh, jobs. So, you know, that's sort of the

You know, the, the, the totality of the of the macro assumptions that go into our planning and I think it's a relatively conservative sort of, kind of a status quo, if you will.

Sanjay Datta: I think there's a lot of things we're excited about with respect to Q4 and how that's going to go, but I don't think we quite have the line of sight required to guide specifically against them. And so I think that a lot of the near-term uplift you see is just excitement over some of the projects and the dynamics that we can see much more in front of us.

Um, okay. You know, you also asked a little bit about the shape of the guidance. I would just say that, um, we have relatively direct line of sight into what things are going to drive our Q3 numbers. Those projects are very sort of near-term and rounding the corner. And so we feel very confident in being able to guide against them. Um, I think there's a lot of things we're excited about with respect to Q4, and how that's going to go. But I don't think we have quite have the, the line of sight required to, to guide specifically against them. Um, and so, I think that a lot of the, a lot of the near-term uplift. You see is just excitement over some of the, the sort of the projects and the, and the Dynamics that we, we can see, uh, you know, much more, uh, much more in much more in front of us.

Analyst (various): Great. Thank you very much.

Right, thank you very much.

Q&A Moderator: And our next question comes from Dan Dolev with Mizuho.

And our next question comes from Dan dolev, with mizuho.

Analyst (various): Hey, guys. Amazing results, as always. Very proud of you. My biggest question is, you know the UMI, what could make it go up or down as we move throughout the year? This is the key question. Thank you.

Hey guys.

Amazing results. As always.

I'm very proud of you. Um, my biggest question is, you know, the Umi, what could make it go up or down as we move throughout the year?

This is the key question. Thank you.

Sanjay Datta: Hey, Dan. Great to hear from you. Let's see. UMI, I mean, it is ultimately a reflection of the impact of the macro on credit trends. I think the things we think most about in terms of what could move it, you know what could make it go down, I think the main thing is improvement in savings rates, improvement in consumption patterns relative to income. I think we've been consistent in saying that the American consumer in aggregate is probably overspending relative to the income levels that we're earning, and that's been true for a while now. And if that balance improves, we would expect that credit trends would improve as well. In the opposite direction, you might imagine things like a reacceleration in inflation or significant unemployment.

Um, great to hear from you. Um, let's see. Um, I mean, it is ultimately a reflection of the impact of the macro on credit Trends. Um, I think the things we think most about in terms of what could move it. Um, you know, what could make it go down. I think the main thing is Improvement in savings rates Improvement in, you know, consumption patterns, relative to income. I think we've been consistent in saying that

the American Consumer in aggregate is probably overspending relative to the income levels that we're earning.

Uh, and that's been true for a while now. And if that, you know, balance improves, we would expect that credit Trends would improve as well.

Uh in the opposite direction. You might imagine things like um a re acceleration in inflation or, you know, significant unemployment

Analyst (various): Got it. Thanks, Sanjay. Great results.

Got it. Thanks Andre. Great results.

Q&A Moderator: And we'll take our next question from Kyle Peterson with Needham.

And we'll take our next question. From Kyle Peterson with nem.

Analyst (various): Great. Good afternoon. Thanks, guys. I want to start off on the average loan size and the take rate. It seems like that's been drifting down, at least in the core personal loan product. Should we continue to see that drift down? And I guess, is that a strategic shift, or is that like a broader response to the macro where that's where you guys are seeing the most favorable risk-reward here? I guess just trying to level set on kind of what's strategic versus what's a market conditions response here.

Great, uh, good afternoon. Thanks guys. Uh, I want to start off on like, you know, the average loan size and and the take rate, uh, it seems like that's been drifting down at least in the core personal loan product. Uh, should we continue to see that drift down and I guess like, is that a strategic

Just or is that like a broader?

uh, response to the macro where, um, that's where you guys are seeing like, the, the most favorable risk reward here, I guess so, just trying to

Uh, level set on kind of whether what strategic versus like. What's uh,

Yeah. Market conditions response here.

Dave Girouard: Hey, Kyle. This is Dave. I think you could, I guess, categorize it as strategic, meaning it's intentional because it really is reflecting the very rapid growth of the small dollar product, which for us is really, again, pushing the boundaries of the credit model, getting much more people onto the platform. It accounts for a lot of our new users. They can be upsold to other products like auto refinance, et cetera. So it is definitely that the fact that that product, which has much, much, much smaller loan sizes, is growing very rapidly. And again, our goal is to have every American persistently underwritten on the platform. So having more and more ways to get them in is, from our perspective, good, and having more products to cross-sell to them. So that's all part of the larger game plan.

Dave Girouard: And I don't know if you'll see it continue to go back down. Right now, products at the other end, like mortgage and home loans, are growing. But at some point, these will outweigh each other. There's no real change other than the product mix itself is getting more diverse.

So, having more and more ways to get them in, is from our perspective, good and having more products to cross out to them. So, that's all part of the larger game plan. Um, and I don't know if you'll see it continue to go back down, you know, right now products at the other end like mortgage and and and Home Loans are growing. But you know, uh, so so at some point, these will outweigh each other. There's no real change other than the product makes itself is, uh, is, is getting more diverse.

Analyst (various): Okay. Okay. That's really helpful. And then I guess on some of these new products, obviously, it seemed like a really good opportunity, especially in HELOC and auto. How would, I guess, you guys compare the competition there versus the core personal loan product? Is it equally as much of a knife fight, or is the sledding any easier or tougher? I guess just kind of how should we think about the economics of these products, especially as they shift to external funding and the ability to scale quickly? Any comment there would be really helpful.

Okay, okay, that's that's really helpful. And then I guess on some of these new products, obviously seemed like a really good opportunity especially in like key lock and Otto, um, how, how would you I guess like you guys compare the competition?

There versus, you know, the core personal loan product, is it equally as much of a knife fight or like is the sledding any easier or tougher? I guess, just kind of how, how should we think about

The economics of uh, these products especially as they shift the external funding and and the ability to to scale quickly. Um, any color that would be really helpful.

Dave Girouard: Yeah, I think, I mean, these products are different, and our ability to create a very differentiated product happens in a different way. I would say in the unsecured products, the underwriting itself is a big part of the advantage and the magic that we bring to the market, and that is what's built the company. In the newer products, particularly like home auto refi, they're actually quite low loss rates, prime-ish products. But the real opportunity for both home and auto is to create a very differentiated experience and process that costs a lot less to originate and also just creates a far better consumer experience. So the relative ability to price differentiate isn't as great as it is in unsecured, but the ability to create a very much differentiated experience for the consumer and also a lower cost origination is much larger for those products.

Yeah. I think I I mean these products are different and and our ability to create a very differentiated product happens in a different way. I would say in the unsecured products,

Dave Girouard: So overall, that's what we kind of keep pushing on and sharing. We mentioned automating a lot of the process of getting a home equity line of credit. That's a product that normally would take more than a month on average to get from your local bank or credit union, and we can do it just in a few days or even faster. So that, to me, is important. AI can bring not only pricing things properly, but also just eliminating the friction and reducing the risk in highly automated, very efficient ways.

The underwriting itself is a is a big part of the advantage and the magic that we bring to the market. And, and that is what's built the company and the newer products particularly like Home Auto reffi. They're actually quite low loss. Rates prime prime is products, um, but the real opportunity for, for both home and auto is to create a very differentiated experience in process that cost a lot less to originate. And also just creates a far better consumer experience. So the relative ability to price differentiate isn't as great as it is in unsecured, but the ability to create an a, a very much differentiated experience for the consumer and also a lower cost origination is much larger for those products. So so overall you know that's the that's the what we kind of keep, you know, pushing on and sharing. We mentioned, you know, automating a lot of the process of getting a home equity line of credit. You know, that's a product that normally would take more than a month on average to get from your local bank or credit union um and we can do it.

Just in a few days or even faster. So that that to me is is uh important, you know, AI can bring not only uh, pricing things properly, but also just eliminating the friction and, and reducing the risk and highly automated, uh, very efficient ways.

Analyst (various): Okay. Appreciate all the color. Thank you, guys, and nice results.

Okay. Uh, appreciate all the color. Uh thank you guys and message results.

Q&A Moderator: The next question comes from Mahir Bhatia with Bank of America.

The next question comes from the here Bhatia, with Bank of America.

Analyst (various): Hi. Thanks for taking my question. Maybe just starting with the newer products, particularly the home and auto, you mentioned you're working on additional funding partners or funding partners to get some of that off the balance sheet. Can you provide a little bit more color on that? Are those going to be more bank partners? Are you thinking securitizations? How are you thinking about that?

Hi. Uh, thanks for taking my question. Uh, maybe just talking with the newer products, uh, particularly the home and auto. Uh, you mentioned, you're working on additional funding Partners or funding Partners to get some of that off the balance sheet. Can you provide a little bit more color on that? Are those going to be more Bank partners that are you thinking security? How are you thinking about that?

Sanjay Datta: Here. Hi. This is Dave. I mean, it will be a combination of banks and credit unions. For both home and auto, they have a lot of history and familiarity with those products, particularly HELOCs are something that are extremely popular in the bank and credit union world. So I would say on a relative basis, they would probably have a larger play there relative to the institutional capital, private credit capital. Though as we go, we will always find the right most competitive combination of capital to have the best product in the market. And I think that's actually what's unique about our position, is we have both depository capital as well as private credit and other sources of institutional funding in effect competing with each other to make the best product for the consumer.

Uh here, hi, this is Dave. I mean it will be a combination of of Banks and Credit Unions. Um for both home and auto, they have a lot of history and familiarity with those products, you know, particularly um, he locks or something that are extremely popular in the bank and and Credit Union world. So I would say in a relative basis, they would probably have a, a larger uh play their relative to the institutional Capital private credit Capital though. You know, as we go, we will always find the right most competitive combination of capital to have the best product in the market. And I think,

Sanjay Datta: And I think these things, relative to the unsecured product, this will swing, but I think the other products will swing a bit more toward depository capital.

That's actually what's you know, unique about our position. As we have both depository Capital as well as private credit and and other sources of of institutional funding in effect competing with each other, to make the best product for the consumer. And I think these things relative to the unsecured product, this will swing but I think the other products will swing a bit more toward depository capital.

Analyst (various): Got it. No, that's helpful. And then just turning maybe, I think on the conversion rate improvement, you mentioned the biggest driver was the new product, the new model, which launched in early May, if I heard that correctly. So does that mean you only got the benefit for two months, so 3Q conversion rate should be even higher from there? And just if I could also just throw in there, if you could just talk a little bit about the Walmart partnership, any callouts there? Thanks.

Got it. So that's helpful. Um, and I just starting Maybe

The conversion rate Improvement.

In the biggest driver, was the new product or the new model which launched in early May, if I heard that correctly. So does that mean, you know, you only got the benefit for 2 months? So 3 Q conversion rate should be even higher from there and just if I could also just throw in there, if you could just talk a little bit about the Walmart partnership, any call outs there? Thanks.

Sanjay Datta: We aren't really forecasting anything about conversion rates for the current quarter. There's always puts and takes on conversion rates. When it goes up, we often end up spending more and pulling it back down intentionally, in other words, turning conversion rate into extra growth. So there's just not a straightforward kind of up and to the right on conversion rates. If you sort of see the chart that we provide in the investor deck, I think it's a great illustration of how conversion rate trades off with volume. And so I'd say that on Walmart, we continue with that partnership. It's been a great success for us thus far, but we don't have anything new we want to share about it today.

Analyst (various): Okay. Thank you. Thanks for taking my questions.

Rates, uh, when it goes up, we often end up spending more and pulling it back down intentionally. Uh, in other words, turning conversion rate into extra growth. So, um, there there's just not a straightforward, um, kind of up and to the right on conversion rates if you sort of see the chart that we provide in the investor deck. I think it's a great illustration of of how conversion rate trades off with volume. Um, and, uh, so I'd say that on Walmart, you know, we continue with that partnership. It's been a great success for us thus far, but we don't have anything. Um, anything, anything new we want to share about it today.

Okay, thank you. Thanks for taking my questions.

Q&A Moderator: And our next question comes from Reggie Smith with JPMorgan.

And our next question, kept for Reggie Smith with JP Morgan.

Analyst (various): Hey, good evening. Congrats on the quarter. Really, really strong quarter. I had a follow-up on the conversion rate. I'm not sure if you guys have shared this in the past or if you're comfortable sharing it, but I'd love to hear about, I guess, the two elements of conversion rate, the approval rate, and then kind of the acceptance rate is how I've been thinking about it. I guess, one, am I thinking about that right? And then two, can you talk about how those ratios have maybe changed versus the prior year? And then as we think about the new model, maybe anecdotally talk a little bit about the types of people or the profiles of people that may have been rejected before that they're being approved today.

Hey, good evening. Uh, congrats on the court. I really, really strong quarter. Um, I had a follow-up on the uh, on the conversion rate. I'm not sure if you guys have shared this in the past or if you're comfortable sharing it. But I'd love to hear about, I guess, the 2 elements of conversion rate, the approval rate and then kind of the acceptance rate. Um, is how I've been thinking about it. Uh, I guess 1 am I thinking about that, right? And then 2 can you talk about how those ratios have maybe changed versus the prior year? Uh and then as we think about the new model um maybe anecdotally talk a little bit about the types of people or the profiles of people that may have been rejected before that. Um,

Analyst (various): Obviously, I don't want you to give away your secret sauce, but just any color you can give there, and I have one follow-up. Thank you.

You know, there being approved today. Uh, obviously I want you to give away your secret sauce, but just any color you can give there and I have 1 follow up. Thank you.

Sanjay Datta: Yeah, hey, Reggie. Your sort of decomposition of conversion rates is correct. It's sort of a product of our approval rates and the subsequent acceptance rates of the loan. We've never really decomposed it in how we analyze externally, and I don't think we have any off-the-cuff narratives around the relative subtrends there. It may be something that, if it's interesting, we can sort of look at exposing over time or in the future, but I don't think that's anything that we have any great sound bites for you as of right now. Hey there. This is Paul speaking.

Yeah. Hey Reggie. Um, your to the decomposition of of conversion rates is correct. It's sort of a

Uh, a product of our approval rates and, you know, the subsequent exception rates of the loan. Um, you know, we've never really decomposed it in how we analyze externally, and I don't think we have any.

Off the cuff, narratives around the you know, the relative sub Trends there. Um, it may be something that if it's interesting, we can sort of look at exposing uh, you know, over time or in the future. But I don't think that's anything that we have any um any great sound bites for you, uh, as of right now.

Sanjay Datta: Just on the second part of the question about specific types of borrower characteristics that we may be weighting more, getting more of, I think the short answer is that, like we've said a number of times at AI Day and other instances, the real power of our model comes from its ability to find many, many small, subtle relationships in the data, and that's happening at multiple levels of the model architecture, as we described with Model 22. And the unfortunate result of that is that it's not like there is one, well, unfortunate for answering the question, is that there's not really one simple answer of like, we have suddenly got more high credit score borrowers or more low-income borrowers or anything like that.

Hey, there. This is. This is Paul speaking, just on the second part of the question about, uh, specific types of borrower characteristics that, um, we may be waiting more getting more of, I think the short answer is that, um, like we've we've said a number of times that AI day and and other instances, the real power of our model comes from its ability to find many many small uh subtle relationships in the data and that's happening. Um that's happening at multiple levels of the the model architecture as we described with model 22 and the the unfortunate result of that is that um you know it's it's not like there is 1. Well unfortunately for answering the question is that there's not really 1 simple answer of like

Sanjay Datta: It really is just picking a couple of borrowers from many different sort of parts of the credit fabric, if you will, and then finding borrowers who are more likely to repay than their sort of conventional credit characteristics would suggest.

You know, we have suddenly got more High credit score borrowers or more low-income borrowers or or anything like that. It really is just um you know picking a couple of borrowers from uh many different uh sort of parts of the uh of the credit fabric if you will and then finding borrowers who are more likely to repay than their sort of um conventional credit characteristics would suggest.

Analyst (various): That makes sense. Okay. And then if I could, slide 23 in the deck, you guys give this every quarter. We see, obviously, the numbers are increasing. Looks like the assessed value is greater than the co-invested value up until this point. Maybe help us understand, how should we interpret this slide and what should we take from it? And then as far as outperformance or underperformance relative to expectations for this piece of your portfolio, where does it show up and how do we see that flow through? Because it looks like maybe things are better than you even thought when you put these loans on the books. I'm just curious where that shows up. Thank you.

That makes sense. Okay. Um and then if I could um slide 23 in the deck. Uh, you guys give this every every quarter, uh, and we see obviously, the numbers are increasing. Uh, it looks like the assessed value is greater than the co the co-invested value up until this point, maybe help us understand like how should we interpret this slide and what should we take from it? And then, as far as outperformance or underperformance relative to expectations for this piece of your portfolio, where does it show up? Um, and how, how do we see that flow through because it looks like

Maybe things are better than you even thought. When you put these loans on the books, I'm just curious where that shows up. Uh, so thank you.

Sanjay Datta: Hey, Reggie. Well, as far as what to take away from this slide, I mean, it does pull together, I think, all the various ways in which we're co-investing in risk capital deals. So it hopefully gives you a holistic perspective of what that investment level is at any point. I think in terms of thinking about how to model it, we're sort of in the ramping phase. To the extent that these deals start paying back a couple of years into the deal, you should expect this to sort of ramp probably for a few more quarters, and then it will start to level off as the amounts we're investing in new quarters are roughly offset by the amounts coming back in from prior deals. And so there's sort of a ramp up and then a sort of a platforming of this amount.

Hey Reggie. Um,

Well, as far as what to take away from this slide, I mean, it does pull together, I think, all the various ways in which we are co-investing in Risk and Capital deals. So, it hopefully gives you a holistic perspective of what that investment level is at any point. I think in terms of thinking about how to model it, we're sort of in the, you know, in the ramping phase.

Um to the extent that these deals start paying back you know a couple of years into the deal. Um you should expect this to sort of ramp

probably for a few more quarters and then it will start to level off as the amounts were investing in new quarters. Um are roughly offset by the amounts, coming back in from prior deals.

Sanjay Datta: And then, of course, this tells you how we're doing on those investments.Us,

Sonya Banerjee: I think, you know, early on, you know, the early sort of instances of these deals, our goal was to make sure we were preserving capital. And so you want to make sure that the way that we're valuing what these positions are is at least, you know, on par with what we invested. I think more recently, we have an intention to start earning returns on these investments. And so you'd expect or hope that the, you know, that the assessed value of these positions starts to grow in relation to the invested capital. but, you know, I think that the idea of this slide is to just give you a picture of how this investment is trending and how the returns are looking.

Um and then of course this tells you how we're doing on those Investments. Um, I think, you know, early on, in the early sort of instances of these deals, our goal was to make sure we were preserving capital. And so you want to make sure that the way that there were valuing what these positions are is, at least

Um, you know, on par with what we invested. Um, I think more recently, we have an intention to start earning Returns on these, on these Investments. And so you'd expect or hope that the, you know, that the assessed value of these positions, starts to grow in relation to the invested capital.

Sonya Banerjee: in terms of how it shows up in the P&L, there's probably a much more complicated answer to your question because the reality is it hits on various line items depending on the structure of the deal. And there's a lot of different structures at play here. But I think at a very high level, you can expect that the amounts that we're assessing as current value, if they were to hold, they will make their way back into the P&L largely in the form of fair value improvements or net interest income, really. And so, you know, while there's a couple of different paths back into our financials, I think that's probably like, if you were to just really crudely simplify it, that's how it will show up.

Um, but, you know, I think that the idea of this slide is to just give you a picture of how this investment is trending and and and how the how the returns are looking. Um, in terms of how it shows up in the p&l. Um, I mean there's probably a much more complicated answer to to your question because the reality is it hits on various line items depending on the structure of the deal. And there's a lot of different structures at play here. But I think, in a at a very high level, you can expect that. Um,

The.

The amounts that we are assessing as current value. If they were to hold, they will make their way back into the p&l, um, largely in the form of, you know, fair value improvements, uh, or net interest income, really

Um, and so, you know, while there are a couple of different paths.

Back into our financials. I think that's, that's probably like if you were to just to really crudely simplify it. That's, that's how it will show up.

Event Specialist: Okay. Thank you. That's super helpful. Appreciate it.

Okay, thank you. That's, that's super helpful. Appreciate it.

Conference Operator: And we'll take our next question from James Posset with Morgan Stanley.

Thanks. And we'll take our next question from James faucet with Morgan Stanley.

Dave Girouard: Great. Thanks very much, everybody. Wanted to just talk about really quickly you mentioned your CAC and some benefits you're getting there. But you've also always been really CAC efficient during even lean periods. And you know, whether it be your organic or your own CRM-minded leads. As you expand, though, how should we be thinking about how much is purely organic traffic to Upstart.com? How much has originated via direct mail? And how much is sourced via third-party marketplaces? And how should we think about the evolution of those types of channels?

Great, thanks. Thanks very much, everybody wanted to. Um, just talk about really quickly mentioned, um, your Tack and and some beneficiary getting there. But you've also always been really tack efficient during even lean periods. Um, and you know, whether it be your organic or or your own uh, CRM mind leads, as, as you expand though, how should we be thinking about how much is purely organic traffic to to upstart.com? How much is originated via direct mail and and how much is Source via third-party marketplaces and and how should we think about the evolution of of those types of channels?

Sonya Banerjee: Hey, James. This is Dave. I mean, I think the long-term trend has been more repeat borrowers, both in the core products we started with, the unsecured products, and increasingly cross-sold into other products. So, you know, those can be, as you might describe it, mined from our database or just people that have a relationship with us. And that's largely, you know, close to zero CAC and an increasing fraction of our loans. The offset will always be how fast are we growing and acquiring new borrowers. So, you know, it's not necessarily bad, of course, if new borrowers are suddenly coming on board much more quickly. And most of those are paid for one way or another.

Hey James. This is Dave uh I mean, I think the long-term trend has been uh more repeat borrowers, uh, both in the core products, we started with the unsecured product and increasingly cross, hold into other products.

So, uh, you know, those can be, as you might describe it, mine from our database or just people that have a relationship with us.

Sonya Banerjee: So, you know, I just think we're moving toward a place where, you know, reliance on aggregators or other forms of sort of people that represent our brand is kind of sort of slowly declining over time. And we have much more sort of direct relationship with the consumer and more things to offer them. I would think the thing that is really of note in the last few quarters is we are beginning to really get much better at how to properly cross-sell. And through lots of testing and things, you know, somebody that might have gotten a personal loan or a small loan, and we are able to like refinance their auto loan at a lower price. That's something that works much better as a cross-sell than it does at a first-time acquisition.

Um and that's largely you know, close to zero CAC and and an increasing fraction of our loans. Um the offset will always be how fast are we growing and acquiring new borrowers so you know, it's not necessarily bad. Of course, if new borrowers are suddenly, uh, coming on board much more quickly and, and in in most of most of those are are paid for 1 way or another. So, you know, I I just think we're moving toward a place where, uh, uh, uh, you know, Reliance on aggregators or other forms of sort of people that represent our brand is is, is kind of sort of slowly declining over time. And uh, we have much more sort of direct relationship with the consumer and more things to offer them. I, I would think that thing that is really of note in the last few quarters is we are beginning to really

Sonya Banerjee: So I think as you see the auto and home categories grow, you're seeing a lot of cross-selling to them. And that's just the road that we're on, which is, I think, more repeat longer-term relationships with consumers. And also, by the way, I mean, you know, it also sort of, you know, I think we're proving the long-term value of a customer that we serve. And that allows us to invest a bit more upfront with the confidence that it's going to generate more margin downstream through cross-sell to other products or second loans, third loans, etc. So I think that whole model, of course, is something we've worked on for a long time. And it's how we've been able to grow and have kind of acquisition cost per loan actually, you know, for years has kind of generally gone down.

Uh, get much better at how we how to properly cross sell and and through lots of testing and things, you know, somebody that might have gotten a personal loan or a small loan and uh we are able to like refinance their auto loan at a lower price. That's something that works much better as a cross sell than it does at a first-time acquisition. So I think as you see the auto and home categories, grow you're seeing a lot of cross-selling to them and and, and that's just the the road that we're on, which is I think more repeat longer term relationships with consumers.

that's and also, by the way, I mean, you know,

it also sort of pro, you know, I think we're proving the long-term value of of, of a customer that we serve. And that allows us to invest a bit more upfront with the confidence that it's going to generate more, uh, margin Downstream to cross sell to other products or second loans, third, loans, Etc. So so I think that whole model of course, is something we've worked on for a long time and it's it's how we've been able to grow and and have kind of acquisition cost per loan. Actually, you know, for years has has kind of generally gone down.

Dave Girouard: Got it. And then I wanted to ask, you guys often give updates on what portion of the loans are being handled completely automatically. And I don't know, I may have missed that this time, but just, you know, it was interesting that you called out within some of the new products like HELOC and Auto that you're looking at taking advantage of your improved automation, basically that becoming part of your brand. And I've got to imagine that's really helpful in this cross-sell. Where are you at in terms of the automation levels now? And where do you think you can get to ultimately?

About, um, within some of the new products like HELOC and and auto that uh you're looking at taking advantage of your improved automation. Basically, that becoming part of your brand and it's got to imagine that's really helpful in this process. So where are you at in terms of the, the automation levels. Um, now for and and where do you think you can get to ultimately?

Sonya Banerjee: Yeah, thanks. Great question. So we obviously haven't broken out the exact fully automated percentages for the new products at this point. But I think it's safe to say that, you know, they're a fair bit less mature than they are in the core personal loan product. And, you know, that's not surprising. I think they're both newer products, but also, you know, they start out with more challenges. I think ultimately we believe that those challenges can all be overcome. And I think we shared in the pre-prepared remarks that we made quite a lot of progress in both auto and the home categories in this quarter. And in particular, we had our first instances of fully automating several new parts of the home loan process for our HELOC product.

Sonya Banerjee: And there's still quite a bit more work to be done before those numbers will reach the personal loans level. But I think they're on a very good trajectory toward that. And I think in the long run, that would be our expectation.

Yeah, thanks. Great question. Um, so we obviously haven't broken out the exact, uh, fully automated percentages for the new products at this point, um, but I think it's safe to say that, you know, they're they're Fair bit less mature than they are in the core personal loan, uh product. And you know, that's that's not surprising. I think they're both newer products. But also, um, you know, they, they start out with more challenges. I think, ultimately, we believe that those challenges can all be overcome and, um, I we think we shared in the pre-prepared remarks that we made quite a lot of progress in both Auto and, uh, the home categories in this quarter. Um, and in particular, we had our first um, instances of fully automating. Uh several new parts of the uh of the home uh of the home loan process uh for our HELOC product and um there's still quite a bit more work to be done before those numbers will reach the personal loans level. But I think there are on a very good trajectory towards that and I think in the long run, that would be our expectation.

Dave Girouard: Great. Thanks for all the time today, guys. Have a good day.

Great. Thanks for all the time today, guys. Have a good day.

Sonya Banerjee: Thanks, James.

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

Sanjay Datta: Hey, guys. On the fair value adjustment in the quarter, I noticed that was higher or more than a negative than it's been in the past. Can you speak to the drivers there? And then I think along the same line, the aggregate NII guide is down for the rest of the year despite the increase in balance sheet loans. So how are you thinking about fair value marks for the rest of the year?

Hey guys, uh, on the fair value adjustment in the quarter, I noticed that was higher, more negative than it's been in the past. Uh, can you speak to the drivers there? And then, I think along the same line, the aggregate knee guide is down for the rest of the year, despite the increase in balance sheet loans. So, how are you thinking about fair value marks for the rest of the year?

Sonya Banerjee: Yeah, Rob. Yeah, I mean, fair value has some volatility to it. I would say the rough contour is, you know, UMI, our macro index, sort of fell by a lot in the second half of 2024. So we took some of those gains as fair value marks as it persisted into the year. So in Q1 and partially in Q2, you saw some of the benefits of that declining UI. Now UMI has drifted up a little bit, you know, in the first quarter or two of this year. So that's starting to reflect itself in Q3. In Q4, I think you're starting to see some of the benefits of the risk capital deals, some of the earlier vintages of risk capital deals that are starting to repay. So there's sort of some benefit happening there.

Yeah, um, yeah. I mean, fair, fair value has some volatility to it. Um, I would say the rough Contour is, you know, you me our macro index sort of fell by a lot in the second half of 2024. So we took some of those gains, as fair value Marx, as it persisted into the year. So, in q1 and partially in Q2 you saw some of the benefits of that declining UI. Um, now UI Umi has has drifted up a little bit, um, you know, in the first quarter or 2 of this year. So that's starting to reflect itself in Q3. Um, in Q4, I think you're starting to see some of the

Sonya Banerjee: And you sort of have a bit of a dead period in Q3 where, you know, the UMI has drifted up. So there's a bit of pressure there. The risk capital deals are not quite yet starting to materialize as benefit. And then you have this sort of phenomena that, you know, depending on the seasoning of your loan book, you know, if I could describe the fair value of a one loan in isolation, it would be really high at the beginning of the loan because there's a lot of interest and no charge-offs. And then at some point around month 12, you hit the peak charge-offs. So the fair value of that loan at that time tends to drop. And then at the end of the loan, the charge-offs, the curve is sort of run off and you get pure interest again and it's high again.

The benefits of the risk Capital deals. Some of the earlier, vintages of risk, Capital deals that are starting to repay. So there there's sort of a there's sort of some benefit happening there and you sort of have a bit of a dead period in Q3 um where you know the Umi stripped it up. Um, so there's a bit of pressure there. The risk Capital deals are not quite yet. Um starting to materialize as benefit um and then you have this

Sort of phenomena that, you know, depending on the seasoning of your loan book. You know, if I could describe the fair value of a a 1 Loan in isolation.

um it would be really high at the beginning of the loan because there's really there's a lot of interest and no charge offs

Sonya Banerjee: So you have this sort of natural phasing of the value of a loan where it sort of goes from high to low to high. And when you project that over an entire portfolio, you can sometimes get these effects where the value, even though it sort of averages out to zero over time, has a bit of, you know, seasoning volatility, if you will. And some of that is playing in Q3 as well. So I know that's like a large recipe of a lot of ingredients, but the reality is fair value is quite a complex sort of topic. But I think those are the main things that are impacting the trends over the quarters.

And then at some point around month 12, you hit the peak charge offs. So the fair value of that loan at that time tends to drop. And then at the end of the loan, uh, the charge offs, the curve is sort of run off and you get pure interest again and it's high again. So you have this sort of natural phasing of the value of a loan where it sort of goes from high to low to high. And when you project that over an entire portfolio, you can sometimes get these these effects where the, you know, the value even though it's sort of averages out to zero over time has a bit of uh you know, seasoning volatility if you will and some of that is playing in Q3 as well. So I know that's like a that's a large, you know, recipe of a lot of ingredients but the reality is fair value is a quite a complex

For a topic but I think those are those are the main things that are impacting the the trends in over the course.

Sanjay Datta: Good, thanks. And then a bigger picture, you know, competitively, it seems like all the personal loan originators are growing very quickly lately. Even someone like SoFi is loud and clear that they're drifting into near prime with their loan platform, which is kind of your space. You grew quite a bit in core loans too. I'm wondering how you guys think about doing adverse selection in a competitive environment like this one.

Okay, thanks and then uh bigger picture, you know, competitively it seems like all the personal loan origination or excuse me, Originators are growing very quickly lately. Even someone like Sophie is is loud and clear that they're drifting into near Prime with their loan platform, which is kind of your space. You grew uh, quite a bit in 4 loans, too. I'm wondering how you guys think about

Adverse selection in it, in a competitive environment, like this 1.

Sonya Banerjee: We certainly think about it. I would say, first of all, you know, it's one of the reasons we really focus on making sure our cost of capital is competitive across the spectrum or anywhere we want to participate, or else you are at risk of adverse selection. So at the, you know, conceptual level, we just have to make sure that the fuel, the dollars funding the loans are as good or close to as good as anywhere. And then you have much less concern about that. Also, I mean, the nature of our models that have gotten sophisticated enough to handle issues of like, how does the price of the loan affect the performance of the loan?

Sonya Banerjee: You know, if you recall back last fall, we introduced what we called APR as a feature, which was quite an innovation on our side, which helps us make sure the price of the loan is considered when you're measuring the risk in the loan. And that was a giant leap forward back in Model 18. So we kind of feel from a technical perspective and also from a business perspective, we are both aware of and responding to potential for adverse selection. So, you know, a very competitive market is not new to us and something we feel pretty good about.

Sanjay Datta: Sorry, if I could just speak one more way on that, Dave. How do you compete with deposit funding from somebody like SoFi or Lending Club in terms of cost of capital?

Make sure that the fuel, the the dollars, funding, the loans, uh, are, are as good or close to as good as anywhere, and then you have much less concern about that. Also, I mean, the nature of our models that have gotten sophisticated enough to handle issues of like, how does the price of the loan affect the performance of the loan? You know, if you recall back last fall, we introduced a what we called. APR as a feature, uh, which was a, a a quite an innovation on our side, which helps us, make sure the price of the loan is considered, when you're measuring the risk in the loan and and and that was a a giant leap forward back in model 18. So we kind of feel from a technical perspective and also from a business perspective we are we are both aware of and um uh responding to potential for adverse selections. So you know a very competitive market is is not new to us and something. We feel uh, pretty good about

Sorry if I could just speak 1 more in on that. Dave, um, how do you compete with deposit funding from somebody like so far or Lending Club in terms of cost of capital?

Sonya Banerjee: Well, about, I would say, 25-ish percent of our loans are funded by deposits. So it's just that they're not our deposits. They're from credit unions or bank partners. So that's an important way. And that's, of course, for the primest of our loans. So that's deposit compared to deposit. We're just doing it in a distributed manner as opposed to it being, you know, Upstart Bank or something. The other thing I think is important, which is happening quickly, is I think non-depository capital is getting more competitive at the primer end of the spectrum just because there are sources of funding that have all sorts of different blends of risk and reward appetite. And, you know, through the worlds of private credit, insurance, etc., there is non-depository capital that may not be exactly as inexpensive as depository capital, but getting closer and closer.

Well about I would say 25% of our loans are funded by deposits. Um, so it's it's just that they're not our deposits. They're from credit unions or Bank Partners. Um, so so that's uh, an important way uh, and that's of course, for the prime minister of our loans. So that's deposited compared to deposit. Um, we're just doing it in a distributed manner as opposed to it being are, you know, upstart bank or something.

Sonya Banerjee: So I think that difference, which historically was quite large, is actually beginning to blend much more these days.

Something the other thing I think it's important which is happening quickly is I think non-depository capital is getting more competitive at the primer end of the spectrum. Just because there are sources of funding that have all sorts of different, blends of risk, and reward appetite. And um you know, through the worlds of private credit, uh, Insurance Etc. There is non-depository capital that may not be exactly as inexpensive as depository Capital, but but getting closer and closer. So I think that difference which historically was quite large is actually beginning to blend much more these days.

Sanjay Datta: Oh, thank you.

Well, thank you.

Conference Operator: And our next question comes from Kyle Joseph with Stevens.

And our next question comes from Kyle. Joseph with Stevens.

Q&A Moderator: Hey, good afternoon. Thanks for taking my questions. A lot of them have been addressed, but just thinking about the product mix. Obviously, you guys talked about the benefits of AI to the personal loans. And then, you know, obviously you're seeing good growth in home and auto, but in, you know, factoring in the law of large numbers, just kind of how you see the mix going forward and any implications in terms of margins and/or customer acquisition cost.

Hey uh, good afternoon. Thanks for taking my questions. Uh, a lot of them have been addressed but just uh thinking about the product mix. Obviously, you guys talked about the the benefits of AI to the to the personal loans. And then, you know, obviously you're seeing good growth in in in home and auto but and you know factoring in the the law of large numbers just kind of how you see the mix.

Going forward and any implications in terms of margins and or customer acquisition costs.

Sonya Banerjee: Well, let me just speak to the mix to the extent we can, and maybe Sanjay can comment on, you know, what it might mean for margins. Look, we of course feel like there is enormous growth potential in all our product areas, including in our core personal loan product where we have very, very well-established margins and automation, etc. And then these newer categories are generally much larger categories, but we're much earlier into penetrating them. So, you know, we think we have a very attractive, like very large addressable market. We're very early into it. And almost inevitably over time, I think the secured products, meaning home and auto, are going to grow as a fraction. And, you know, could they become much larger than unsecured over time? It's quite possible. I don't know that we know that.

Sonya Banerjee: I think unsecured as a category, even though it's smaller, is growing. It's quite popular with consumers. So I guess that's a long-winded way of saying, look, we're in like single-digit market share in unsecured, which we have enormous advantages and strengths in. And just at the cusp of really beginning to move in home and auto. So the potential for, you know, very, very rapid growth over a long period of time in all those categories is pretty significant.

Well, let me just uh speak to the to the mix, to the extent, we can and maybe Sanjay can comment on, you know what? It might mean for margins look, look we've of course, feel like there is enormous growth potential in all our product areas. Including, including in our core personal loan product, where, uh, we have very, very well established uh, margins and and, um, automation Etc. And then these newer categories are generally much larger categories, but we're much earlier into penetrating them. Um, so, you know, we we think we have a very attractive like very large addressable Market, uh, we're very early into it and almost inevitably over time I think the secured products, meaning, home and auto are going to grow as a fraction. Um, and, you know, could they become much larger than unsecured over time? It's quite possible that I don't, I don't know that, we, we know that I think unsecured as a category even though it's smaller is growing, it's quite popular with consumers, so I guess that's a long-winded way of saying, look, we're in like single digit market share.

Q&A Moderator: Yeah, I would just add with respect to margins, I mean, the margin profile of these new businesses is still materializing to some extent. But, you know, both all these markets have the same rough shape as the core market we exist in today, which is the unsecured market. And that's that there are, you know, there are some segments of very well-served borrowers where prices are competitive and margins are thin, and you largely compete on process and distribution. And then you also have a part of the market which does not have access or is underserved. And there's a lot of, you know, opportunity to create volume and margin. And I think that's no different in the auto space or even in the HELOC space, frankly.

In unsecured which we have an enormous advantages and strengths and and and just at the cusp of of of really beginning to move in home and auto. So the potential for you know very very rapid growth over a long period of time and all those categories is is pretty significant.

Yeah, I would just add with respect to margins. I mean, the margin profile of these new businesses is uh, still materializing to some extent. Um, but you know, both all these markets have the same rough shape as the core Market. We exist in today, which is the unsecured market and that's that there are, you know, there are some segments of very well, served borrowers where prices are competitive and margins are thin and you largely compete on process and distribution and then you always have a part of the market which does not have access or is underserved. And there's a lot of you know opportunity um to create volume and margin and I I think that's there that's no different.

Q&A Moderator: I think these loans that are secured will have, you know, larger loan sizes, maybe smaller percentage take rates, and just a similar dollar revenue and/or profit per loan that we have in our unsecured business. But, you know, we don't know the exact precision of that yet. We're still, that's still materializing as these categories are growing for us.

Percentage take rates and just a similar dollar revenue and or profit per loan.

Um, that we have in our unsecured business, but we, you know, we don't, we don't know the exact, uh,

Precision of that yet. We're we're still uh,

We're still that's still materializing as these categories are growing for us.

Sonya Banerjee: Got it. Thanks for taking my question.

Thanks for taking my question.

Conference Operator: And we'll take our next question from John Heck with Jeffries.

Thank you. And we'll take our next question. From John. Heck, with Jeffries?

Analyst (various): Afternoon, guys. Thanks for taking my questions. And like Kyle's, most of my questions have been asked. I guess I'm curious as to kind of your sense of what interest rate reductions would do. I, you know, I assume the auto refi business would pick up, right? And the HELOC business, I imagine, as well. But, you know, in the core products, you know, do you pass on rate changes to the customers? Do your, some of your partnership agreements with the private credit, do those contemplate changes in interest rates? Just to kind of get a sense, if we go into your rate cycle, what to think.

I guess I'm curious as to, um, kind of your sense of, um, what interest rate reductions would do. I, you know, I assume they're Auto refi business would pick up right and the HELOC business. I imagine as well. Um, but you know, in the core products, um, you know, do you pass on rate changes to the customers. Uh, do your some of your partnership agreements with the private credit. Do those contemplate changes in interest rates just to kind of get a sense. If we go into your right cycle, what to think,

Sonya Banerjee: Hey, John. Yeah, a reduction in rates would telegraph itself into our core business, you know, virtually one for one, not immediately with some lag. But if rates in the economy go down, that means, you know, financing rates go down. And that means that, you know, the sort of ROA of your unlevered loan can go down commensurately. And so, you know, it would result in lower rates to our borrowers and conversion improvement. And yeah, the sort of the types of structures we have in place with our committed partners contemplate, you know, this and would sort of act in this fashion. So, you know, it would be unambiguously good if rates were being reduced, at least in a direct sense, because it would mean that, you know, rates for borrowers over time would sort of reduce commensurately.

Hey, John. Um,

Yeah, a a reduction in rates.

Would.

Telegraph itself into our Core Business. Um, you know, virtually 1 for 1 not not immediately with some lag.

Um, but if rates in the economy, go down that means you know financing.

Uh, rates go down. Um, and that means that, you know, your the sort of ROA of your unlevered loan can go down commensurately. Um, and so, you know, it would result in lower rates to our borrowers and conversion improvement.

um,

Analyst (various): Perfect. Thanks very much.

and yeah, the the the, the sort of the types of structures we have in place with our committed Partners contemplate, you know, this and and would sort of act in this fashion. So, you know, it would be unambiguously good. Uh, if rates were being reduced at least in the direct sense because it would mean that, you know, rates for borrowers, uh, over time would would sort of reduce commensurately

perfect. Thanks very much.

Sonya Banerjee: Thanks, John.

Conference Operator: It appears so there are no further questions at this time. I'd like to turn the conference back to Dave Girouard for any additional or closing remarks.

Thank you, John.

It appears so that there are no further questions at this time. I'd like to turn the conference back to Dave, Gerard for any additional or closing remarks.

Sonya Banerjee: All right. Thanks, everybody, for joining. Q2 was a great quarter for Upstart, no doubt. For those of us on the inside who saw kind of the radical makeover we've been going through in the last couple of years, it wasn't a surprise, but it was very rewarding. So thanks again. We're very excited for what we'll do the rest of this year, and we'll see you all in November. Thanks.

All right, thanks everybody for joining. Um, Q2 is a great quarter for upstart. No Doubt. Uh, for those of us in the inside who saw kind of the radical makeover we've been going through in the last couple of years. It wasn't a surprise but it was uh, very rewarding. So, thanks again. We're very excited for what we'll do the rest of this year and we'll see you all in November. Thanks.

Conference Operator: And ladies and gentlemen, this concludes today's call. Thank you for your participation. Goodbye disconnect.

And ladies and gentlemen, this concludes today's call, thank you for your participation. May I disconnect