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The Good, The Bad, The Ugly: Upstart $UPST Q4 2022 Earnings Recap
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Coming to you live from a cabin at Mammoth Mountain, CA, I'm with you here today to recap Upstart's Q4 2022 earnings. I believe that listening to the earnings call provided a number of novel insights that weren't captured in the press release or numbers, so I'll try to detail the good, the bad, and the ugly for you in my post below. I'll finish with answering the questions that were submitted last week in response to my solicitation post.

If you'd like to follow along with the earnings call, the transcript is available on The Motley Fool website and Quartr app, among other options.

The Good
  • The company is involved in late-stage discussions with multiple potential partners, in support of the goal to provide more reliable and persistent funding to the Upstart platform.
  • The Upstart Macro Index or UMI, a new metric that measures how changing economic conditions like inflation and unemployment are impacting credit performance, is expected to launch to the public later this quarter.
  • UMI nudged upwards from Q3 to Q4 but at a much slower rate than in prior quarters and has shown encouraging signs of stabilization in the early weeks of 2023. As UMI stabilizes, Upstart sees a corresponding reconvergence of loan return performance to target for the company's more recent vintages as they continue to season.
  • Talking more about UMI, Dave said UMI "...is going to be a very powerful new tool and one we think that lenders of all flavors will get excited about." He added on by saying "if they have either overperformance or underperformance in their credit programs, it's really hard to attribute that either to something about how you set your system up and the rules you have in your system or maybe the economy's deteriorated in some way, you don't have visibility. This is a really powerful way to say no, we can actually isolate the performance of the credit model from the impact of the macroeconomy."
  • The increase in model accuracy in the last seven months is more than what was delivered in the prior two and a half years. CEO Dave Girouard said about the improved model "...as capital markets and the overall economy normalizes, I expect this will become obvious to all of you."
  • For Auto Retail, Upstart finished the year with 778 total dealerships under contract, a 90% increase from a year ago.
  • Lending partners grew 130% YoY from 42 to 92.
  • Corporate liquidity remains in a "comfortable" position with $532 million of total cash on the balance sheet and approximately $674 million in net loan equity at fair value.
  • As a result of the workforce reduction, company expects to realize cash savings of approximately $57 million in operating expenses over the next 12 months, primarily related to employee cash compensation and benefits, in addition to $42 million of savings from reduced stock-based compensation expense over the next three years.
  • Speaking about the projected decline in revenue next quarter, Dave said "...right now, most of the decline in volume in our platform, the most fundamental reason really is because the rates are much, much higher, the approval rates are much, much lower."
  • Expanding on the soft Q1 guidance, CFO Sanjay Datta said "traditionally in Q1, as you get sort of close to the tax season, you do see a 10% to 15% trough, you know, depending on the year."
  • Responding to a question about ChatGPT and AI in the news, Dave said "...[ChatGPT] is an advertisement for the power of AI and the fact that AI is going to be very central in our economy for the decades to come. So, if you're a bank executive, you really want to think about how that fits in the future, how you start to get awareness of it. And it just makes Upstart, I think, a more attractive partner."

The Bad & The Ugly
  • Total revenue was $147 million, a decrease of 52% from the fourth quarter of 2021. Total fee revenue was $156 million, a decrease of 46% year-over-year.
  • GAAP net income (loss) was ($55.3) million, down from $58.9 million in the fourth quarter of 2021. Adjusted net income (loss) was ($20.9) million, down from $87.0 million in the same quarter of the prior year.
  • Consumer delinquencies remain elevated and the funding markets remain limited in their appetite for risk.
  • Small business lending is on pause.

Questions have been lightly edited for readability.

Q: How is the business in the long run, will it survive? What do you think about a long-term investment in this business? - @girigollapallem
A: As mentioned above, Upstart has $532 million of total cash on the balance sheet and approximately $674 million in net loan equity at fair value. With reduced expenses after the slashes to headcount and marketing budget, I believe that a fair assumption for quarterly cash burn is the adjusted $70 million net loss, which takes a relatively negative economic outlook into account and no increases in lending partners/banks/dealerships/etc. With this assumption, Upstart has a runway of seven quarters without selling their loan portfolio. If Upstart was forced to liquidate their loan portfolio, Upstart would have a runway of more than 16 quarters (4 years) to turn cash flow positive.

To answer the question about my thoughts on Upstart as a long-term investment, I'm personally bullish because I think that the risk of bankruptcy, considering the long runway to get back to profitability, is worth the reward of economic conditions improving and Upstart's AI technology continuing to win over lenders, partners, and borrowers. If conditions improve, Upstart's business model has proven that it can scale and generate profits rapidly.

Q: What are one or two things you'd want to see in the numbers or from management before you'd feel confident making an initial investment or adding to an existing position in $UPST? - @tomato
A: I think the first thing I'd look for is the company cutting expenses to adjust for economic conditions and lengthen the runway to return to profitability.

The second thing I'd look for is clarity from management on the path they see to return to said profitability. Personally, my confidence is not ironclad at this point, which is why Upstart is a small position for me, but I like what I'm hearing so far about ABS issuance trends, UMI stabilization, onboarding of new partners, lenders, and dealerships, and the critical improvement in model accuracy.

Final Thoughts
Hopefully I've relayed some takeaways in this post that weren't captured in Upstart's Q4 earnings press release. There's a lot to look forward to in the following quarters, both from an economic and company execution perspective. Let me know if you have questions about anything I touched on, and thanks for reading!
Jensen Butler's avatar
Great recap thank you. I’ve help a small position through the thick of it and is a good one to follow. I love the innovation and promise of the concept, just want immediate next few quarters to compound some optimism from this earnings..
Jared Watson's avatar
@jensen I’m with ya.
Giri G's avatar
Thank you so much, Jared
Hag's avatar
$UPST is my largest position and one I’ve worried about on and off for the last few months, I worry that it might fall into terminal decline when I see different versions of market news, I sometimes struggle to filter out the noise, then I remember that the market is due a rebound, more losses are of course possible, but @wjared's analysis gives me a clearer perspective, and I’m grateful that you @wjared and other investors on this wonderful forum share their analyses with novices like me👍
Jared Watson's avatar
@hag I’m glad it added value for you 😀
Hag's avatar
@wjared thanks, and sorry for the late response, just moved house this week!
Jared Watson's avatar
@hag no worries, hope it went well!
Hag's avatar
Went way better than hoped! And I derive great value from your posts. Thanks!
Samuel's avatar
@hag $UPST is also my largest position. Sometimes I think I'm a bit nuts. Glad to read your note, knowing that I'm not the only one :)
Jared Watson's avatar
@sazu I’m with you. $UPST has tested me on many levels over the years.
Hag's avatar
@sazu im not sure if that’s a good thing 🤔😂
Samuel's avatar
@hag 😅😂 time will tell lol



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