Upstart Holdings, Inc. (NASDAQ:UPST) Q1 2025 Earnings Call Transcript

Upstart Holdings, Inc. (NASDAQ:UPST) Q1 2025 Earnings Call Transcript May 6, 2025

Upstart Holdings, Inc. beats earnings expectations. Reported EPS is $0.3, expectations were $0.19.

Operator: Good afternoon and welcome to the Upstart first quarter 2025 earnings call. At this time, all participants are in 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.

Sonya Banerjee: Thank you. Welcome to the Upstart earnings call for the first quarter of 2025. With me on today’s call are: Dave Girouard, our co-founder and CEO, and Sanjay Datta, our CFO. 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 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. And with that, Dave, over to you.

Dave Girouard: Thanks, Sonya. Good afternoon, everyone. Thank you for joining us today. The first quarter was a strong one for Upstart, despite being our seasonally slowest time of the year. Platform originations grew 89% year-on-year, with model wins and improved borrower health combining with more competitive capital to drive meaningfully higher conversion rates. Our revenue grew 67% year-on-year and our Adjusted EBITDA margin reached 20% for the first time in three years. With fees generating 87% of our revenue, we were also right on the doorstep of GAAP profitability in Q1. Just as importantly, Home and Auto continued their torrid growth pace, with originations growing 52% and 42%, respectively, on a sequential basis. From our perspective, consumer financial health, as represented by the Upstart Macro Index, has been largely improving for almost a year now.

Currently it remains elevated but stable. Our credit continues to perform well and, while we’re vigilant with respect to any disruptions that recent government trade policy might cause, we’re also confident that our ability to adapt to changing macroeconomic conditions is miles better than it was just a couple of years ago. In a time of trade disruption, we’re also happy that Upstart is a 100% U.S. business that’s 100% digital. Now I’ll take you through some of the progress we made in each of our product areas in Q1. With our core personal loan product, originations were flat sequentially and up 83% year-over-year. We continue to make rapid improvements to our models that facilitate underwriting and automated approvals. Additionally, we continue to strengthen and diversify the capital supply that is the fuel of our business.

These improvements have contributed to increasing our conversion rates from 14% a year ago to 19% in Q1. We also reached an all-time high of 92% of loans fully automated – meaning the entire process from rate request to loan closing is entirely driven by AI-powered software, with no human intervention by Upstart. All else being equal, we believe a faster automated process selects for better borrowers. Additionally, our “best rates, best process for all” mantra has really begun to pay dividends. In Q1, 32% of our originations were to super prime borrowers, which we – as well as the CFPB – define as borrowers with credit scores higher than 720. We measure progress against “best rates” not just by portfolio mix but also by win rates versus competitors across the credit spectrum.

In this vein, we’ve also made extraordinary strides in recent months. I’m excited to share more about this with you, which I expect to do at our AI Day event next week. We continued to stack up model wins, putting more distance between Upstart AI and the rest of the industry. Since last we spoke, we introduced embeddings to our core personal loan underwriting model. Embeddings are a machine-learning technique that convert complex, unstructured data into useful model inputs, or “features” in ML-speak. This is done by clustering data that have meaningful relationships, allowing seemingly random data to become valuable to predicting credit performance. For example, two consumers may have different credit cards – say, an Amex and a Chase Sapphire card.

But with embeddings, our model can learn that these cards might reflect similar consumer behaviors. What makes this approach so powerful is that embeddings help us uncover subtle patterns that would be difficult – or even impossible – to identify otherwise. This leads to better model generalization, improved accuracy and more informed credit decisions. While embeddings are widely used in other domains – like natural language processing – applying them to credit underwriting is entirely novel. We’re excited about what embeddings can do to drive our risk separation metrics forward, and we’re equally excited about the pipeline of modeling innovations in front of us in 2025. Last quarter I told you that our auto business finished 2024 by growing originations about 60% sequentially.

Well, in the first quarter of 2025 originations grew another 42% sequentially, despite Q1 being the seasonally softest time of the year. And Upstart auto lending grew almost 5X compared to a year ago. These increases were driven principally by model updates and pricing improvements. At the same time, our continued focus on cross-selling existing customers reduced acquisition costs for our auto refinance product by 57% quarter-over-quarter. This mega improvement to CAC was driven as usual by improved conversion rate, which more than doubled sequentially in Q1. In Q1, we also saw our first instant approval of an auto refinance loan, where the borrower completed the entire process in a single session of just 9 minutes. As far as we know, this could be the first instantly approved auto refinance loan in the world.

This is a modest beginning but sets us down the path of automation that has been so central to our success in personal loans. In the Home lending category, we’re thrilled with how quickly our HELOC product is maturing. In December, we ported our personal loan models for instantly verifying income and identity to our HELOC product. This increased instant income and identity verification from less than half of loans in Q4 to nearly two-thirds of HELOCs this past quarter. This is an experience borrowers love: Instantly approved applications convert at more than twice the rate of those requiring manual intervention. It’s also a strong demonstration of how our core technology can be generalized across credit categories. In Q1, we also finally launched the Upstart HELOC in California, bringing our footprint to 37 states plus Washington, D.C., now covering almost 75% of the U.S. population.

As I mentioned earlier, in Q1 our HELOC originations grew 52% quarter on quarter and more than 6X compared to a year ago. We now have agreements signed with three lending partners for our HELOC product and have begun the process of moving funding off of our balance sheet. We expect this will take considerable time as we bring both depository and institutional capital to this category. Our small-dollar product continues to perform well, with originations growing 7% sequentially and almost tripling year-on-year. Our SDL continues to be a critical customer acquisition tool, accounting for nearly 16 percent of new borrowers on Upstart in Q1. As I previewed back in February, in Q1 we moved to a single underwriting model for both of our unsecured products.

This means the small-dollar product is benefiting straight away from machine-learning innovations such as embeddings that I described earlier. In Q1 we continued work to modernize and scale our servicing operations. We’re rapidly automating routine tasks like processing payment failures and check handling so we can spend human time on more valuable tasks. In Q1, we automated 90% of hardship applications, making the process more seamless for borrowers and more efficient for Upstart. Beyond the technology, the work we’ve done to prioritize direct collections efforts for borrowers at risk of default have continued to have a meaningful impact. For example, in Q1 we realized a 50% increase in debt settlement acceptances by extending repayment terms for at-risk borrowers.

In our auto business, we doubled our recovery rates year-over-year in Q1. We’ve been improving our data collection and structuring in servicing for quite some time now, and expect to launch our first machine-learning model in this area very soon. We’re excited about the potential for ML in loan servicing to increase efficiency and reduce loss rates. This is a necessary step toward launching our servicing and collections as a highly differentiated standalone offering in the market, which we hope to do in the future. I’d like to quickly touch on Upstart’s 2025 priorities that I mentioned to you in February. We’re making great strides against this list, and I’m grateful for the many Upstarters who are putting their all into making this an incredible year for Upstart.

First, 10X our leadership in AI. Already this year we’ve made great leaps forward both in process and substance that reinforce that, when it comes to AI lending, Upstart is a category of one. Embeddings are a real breakthrough for our AI foundation model, and I’m convinced it will pay dividends across all of our products over time. Our pipeline of modeling wins is beyond robust, so I couldn’t be happier about our progress here. Second, prepare our funding supply for rapid growth. We continued to have well over 50% of our loan funding in committed partnership agreements. In early April we signed our first committed capital arrangement with Fortress who is an industry leader in private credit. Looking forward, we expect to add our newer products to these partnerships which will greatly expand on the value and efficiency they bring to Upstart.

Additionally, we added 15 new lending partners to our super prime offering, growing capital 38 percent quarter to quarter for that market segment. Third, return to GAAP net income profitability in the second half of the year. We’re on track for this right now and excited to demonstrate the leverage in our business as both our core and newer products expand rapidly through the year. And last but not least, giant leaps toward best rates, best process for all. Earlier this year, I challenged each of our product GMs to have the best rates against major market competitors for each borrower segment they serve by the end of 2025. Specifically, this means that our win rate should be higher than any other digital competitor in each of our products. This of course comes with the prerequisite of on-target or better credit performance as well as solid unit economics.

I’m pleased to share that we’re running well ahead of this target, particularly in our core personal loan product. You’ll hear more about this next week at AI Day. To wrap up my remarks today, I think much of the world has come down with a case of AI fatigue. There’s just so much discussion and so many predictions about what AI will do or what it might do to the world, to our lives, and to our children’s lives. I admit I roll my eyes at some of the debates and the discussions as well. But in Upstart’s case, AI and its unique capabilities are unquestionably aligned with a better future for all when it comes to financial wellness. Improvements to our risk models and expansion of our product line mean we are reducing the price of credit for the world more and more each day.

If you’re still unclear about the incredible opportunity for AI-enabled lending and Upstart’s leadership in this vital category, I hope you’ll join us next week for AI Day. I promise you won’t be disappointed. Thank you, and I’d now like to turn it over to Sanjay, our chief financial officer, to walk through our Q1 2025 financial results and guidance. Sanjay?

Sanjay Datta: Thanks, Dave. And thanks to all of our participants for sharing some of your time with us today. Financially, the first quarter of 2025 came in slightly ahead of expectation, with outperformance on the top and bottom line owing primarily to higher than anticipated net interest income. The impact of the typically soft tax seasonality in Q1 played out largely as expected, and despite recent turbulence in the financial markets, the effects of the macroenvironment on credit performance has in our estimation remained relatively stable throughout the quarter and roughly consistent with our prior assumptions. Total revenue for Q1 came in at approximately $213 million, up 67% year on year. This overall number included revenue from fees of $185 million, which was up 34% year over year.

This amount was in line with guidance, although from a mix perspective we outperformed our expectations in the Super Prime borrower segment, resulting in higher overall origination volumes than anticipated at lower take rates. Additionally, net interest income represented roughly $28 million of overall revenue, exceeding our outlook by $13 million. Approximately half of this amount came in the form of higher net interest spreads from our balance sheet as we passed peak chargeoffs from older vintages, and half came in the form of unrealized fair value gains as the recently declining UMI trend worked its way into our various fair value marks. The volume of loan transactions across our platform was approximately 241,000, up 102% from the prior year but down 2% sequentially and representing 163,000 new borrowers.

Average loan size of approximately $8,865 nudged up from $8,580 in the prior quarter as the proportion of loans made to Super Prime borrowers increased. 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 55% in Q1, down 6 percentage points from the prior quarter and 2 points below guidance, largely due to the lower takes rates realized in the primer borrower segments where we exceeded expectations. GAAP operating expenses were roughly $218 million in Q1, down 3% sequentially from Q4. Expenses that are considered variable, relating to borrower acquisition, verification and servicing, were up 7% sequentially relative to a 2% decline in transaction volume, which is reflective of the lower contribution margins previously referenced.

Fixed expenses were down 8% quarter over quarter, as some of the temporary catchup accruals from Q4 rolled off in the new year. Taken together, Q1 GAAP net loss was $2 million, well ahead of expectation and reflecting the outperformance on net interest income against our tightly managed fixed cost base. Adjusted EBITDA was $43 million, also scaling nicely in accordance with our operating leverage. Adjusted earnings per share was $0.30 based on a diluted weighted average share count of 104 million. We ended Q1 with $726 million of loans held directly on the balance sheet, which is down 21% from the prior year but up sequentially from $703 million in Q4, as our newer R&D products continued to scale. Additionally, we recognized $89 million in loans from the consolidation of a securitization deal in which we retain minimal economic exposure.

We ended Q1 with unrestricted cash of approximately $600 million, down from $788 million in the prior quarter, with the delta primarily going towards R&D loan funding for new products, third-party risk capital partnerships, and a reduction in working capital from beginning-of-year corporate bonus payouts. In Q1, we put in place a universal shelf and a $500 million “At the Market” program, which gives us additional balance sheet flexibility. We remain extremely pleased with our network of third-party capital relationships, and are excited to welcome the Fortress Investment Group as a new committed capital provider on our platform. Overall these relationships now comprise well north of 50% of the funding on our platform, and they are demonstrating their intended resilience in the current market climate of uncertainty.

As we look to Q2 and the remainder of 2025, much of the discussion has shifted to potential impacts from the macroenvironment. As mentioned, we’ve seen little discernible impact of the macro on credit performance so far. Uncertainty has increased, and we see the potential for both upside and downside scenarios that are credible in the near to medium term. The main near-term risk in our estimation is reinflation, as any persistent tariffs placed on a significant share of our import economy will make things less affordable for consumers, a clear negative influence on credit. On the other hand, in the context of an already high-default environment with razor-thin savings rates, our continuing stance is that any dynamic which tempers current high levels of consumption back into line with underlying income would represent a positive effect on credit.

We remain sanguine about the prospective risks in the labor market, where we observe as many job openings in the economy as there are unemployed workers, and continue to perceive a structural shortage of labor supply that is under continuing pressure from demographic trends. Given this context, our macro assumptions for the duration of this year remain consistent with the prior quarter, namely, we factor in no explicit expectation of any rate cuts and are planning for a steady macroenvironment in which the Upstart Macro Index remains in a range of 1.4 to 1.5. With this as background, for Q2, we are expecting: Total revenues of approximately $225 million, consisting of Revenue from Fees of approximately $210 million, and total net interest income of approximately positive $15 million.

Contribution Margin of approximately 55%. Net income of approximately negative $10 million. Adjusted net income of approximately positive $25 million. Adjusted EBITDA of approximately $37 million with a. Basic weighted average share count of approximately 96 million shares and a diluted weighted average share count of approximately 104 million shares For the full year of 2025 we now exect total Revenues of approximately $1.01 billion, consisting of Revenue from Fees of approximately $920 million, and net interest income of approximately positive $90 million . Adjusted EBITDA margin of approximately 19%. And we expect GAAP net Income to be positive in the second half of the year and positive for the full calendar year Beyond the numbers, I would just like to reiterate our gratitude to all of the hard-working teams at Upstart who make these results achievable.

And with that, operator, over to you for Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Dan Dolev with Mizuho. Please go ahead.

Dan Dolev: Hey, guys. Really nice results here, congrats. I have one question and one follow-up. I was really excited to see the Walmart partnership. Can you talk a little bit more about that? And then I have a follow-up as well. Thank you.

Dave Girouard: Hi, Dan. This is Dave. Thanks for the question. Yes, [indiscernible] much we can really say there, but we did sign a one year agreement with Walmart’s majority-owned fintech called OnePay to basically make our products available Walmart customers. And that’s actually already been launched, which is kind of how it got out into the public sphere. But I will just say, generally, I think with our move to have the best rates and best process for everybody, which I know you keep hearing from us. Walmart is the kind of partner that we’re really excited about because they’ve been really focused on delivering value for American consumers for a very long time, like more than 60 years. So it’s exactly the kind of partnership we like where can deliver the best value when it comes to a credit product. And hopefully, this will be a great win for both companies over time.

Dan Dolev: Got it. Thank you. And just as a quick follow-up, and I apologize if this has been addressed. Can you maybe give us a little bit of a sense of sort of trends in April and maybe early May, if there’s anything you can provide, that would be great.

Sanjay Datta: Hi, Dan. How are you doing. It’s Sanjay here. I think anything we can say with respect to this quarter, it’s probably apply captured in our guidance. I think that’s about as much color that we can give.

Dan Dolev: Okay. Fair enough. Really appreciate it. Congrats again.

Sanjay Datta: Thanks, Dan.

Operator: And our next question comes from Ramsey Assal with Barclays.

John Coffey: Hi. This is John Coffey on for Ramsey. Thanks for taking my question. I just had two short questions. I was wondering, now that you’ve been updating your models, and it seems like that’s been a process that been ongoing. Is there a good way to think about your conversion rates for the remainder of the year or the next two quarters? We expect that those rates could start to touch that 20% level? So that’s that first question I had. And also, I noticed that it used to be your MI had a slide kind of like I think last quarter is maybe around Page 10, and there was quite a few data points attached to it. When I look at this quarter, your kind of push back to the back of the deck on Slide 20, and I don’t see any numbers really tied to. Is there any reason for that? Are you deemphasizing this as something you’re reporting to the Street?

Dave Girouard: Hey, John. Just quickly on conversion rates, I mean, the conversion rates, which really are a very principal driver of growth. They did grow nicely from I think, 14% a year ago to 19% in the most recent quarter. And all else being equal, we would expect to drive them up with better models improved automation, et cetera. And things like lower the Fed lower rates, those are things that can also be helpful. So there’s a bunch of things that go into conversion. Generally, we would like to drive it up and some of that is macro dependent and some of it is just technology that we could deliver. But we are definitely. We kind of showed it in our investor deck a little bit new way to look at the conversion rate in terms of how many unfulfilled requests there were there. And we just think there’s a lot of ways that we can begin to fill in those bar graphs and convert more people.

Sanjay Datta: Hey, John, it’s Sanjay. Just quickly touching on your question about the macro index First of all, I think it’s moved back in the deck, hopefully, because we put some more stuff in the front for you. So it wasn’t meant to be personal with respect to the index. And look, some of the numbers we had on there previously. It was all Fed reported data. It was things like the personal savings rate, some inflation indicators and some unemployment indicators. I think it was causing a bit of confusion because I think people thought that we were deriving our index from those numbers when in fact, we just view those to be correlative. And so we just clean up the page a little bit. I think if those Fed data points are useful, we can certainly point you to them. They’re publicly printed.

John Coffey: All right. Thank you.

Operator: Our next question comes from Simon Clinch with Redburn Atlantic.

Simon Clinch: Hi, guys. Thanks for taking my question. I was wondering if you could just touch on the contribution margin and the mix impacts we’ve had on that? And just how to think about that through the year, ultimately, what’s embedded in your guidance is my first question.

Sanjay Datta: Hi, Simon. I’m in the contribution margin. I guess I would point out a couple of dynamics in our sort of core sort of personal loan product, I think in our sort of historic choice of the borrowing base, we have a relatively consistent margin. I would point to two dynamics. One, we are increasingly adding to our mix, maybe on the primary side of the borrower segment. It’s obviously more competed market. And so I think the margins in that segment would not sort of touch the level that we have in some of the more historic segments that we play in. And so that will sort of act to decrease the margin numbers as we talked about in some of the prepared remarks. And then, of course, as the newer product scale, whether it’s HELOC or auto lending or even some of our small dollar efforts as those scale and gain traction, those because they’re earlier in their life cycle, don’t have sort of mature margins yet either.

And so those two things are going to act to bring down the average number on the P&L and some of what we pointed out with respect to our earlier remarks.

Simon Clinch: Okay. Thanks. And just as a follow-up, just in terms of the environment we’re in, we’re hearing from some other players in the industry that there’s very strong demand for personal loans feeding off the desire to consolidate debt from very large credit card balances. I was wondering if you could just talk to that demand trend and any sort of fluctuations you might be seeing in that? Or [indiscernible]. Thanks.

Dave Girouard: Hey, Simon, I think credit demand continues to be strong. In fact, I would just say on a seasonal basis, it tends to strengthen at this time of the year as you come out of Q1. So we are definitely kind of experiencing the end of the seasonality, the sort of tax season seasonality and whether there’s anything special to this year is a little unclear. But I guess from our perspective, gross demand, sort of the amount of just gross demand for credit out there doesn’t vary a ton. It always tends to be quite strong. And for sure, right now, we’re seeing a lot of demand out there.

Simon Clinch: Okay. Great. Thanks.

Operator: Our next question comes from Kyle Peterson with Needham & Company.

Unidentified Analyst: Great. Thanks. Hey, guys, it’s Sam [indiscernible] on for Kyle today. Nice results and thanks for taking the question. Good to see the agreement with Fortress today I was wondering if you guys could talk a bit more about how you’re thinking about funding and the funding mix kind of given the more noisy macro climate we’re in today.

Sanjay Datta: Sam, yes, just maybe as a refresher on contextually, there’s maybe three sort of general sources of funding we think about there is the originations that happen by other lenders who are using our technology, they tend to be banks and credit unions originating for their own balance sheet. We’ve got a number of large-scale partnerships. You referenced the latest 1 we announced, which is the fortress — and then there’s what you might think of as the sort of at will or securitization market. And we like a balance between all three of those. I think they have a place in our ecosystem obviously, with the added uncertainty in today’s market, securitization markets and sort of at will funding is a little bit less reliable.

And I think that the things that were behind our strategy for creating a large — a number of large sort of committed partnerships it’s kind of playing out right now and really shining. And so in the current market, maybe there’s a bit more sort of reliance placed on those agreements given that they’re sort of designed for this market in particular?

Unidentified Analyst: Got it. Okay. That makes sense. And then I just — you guys called out some take rate pressure from higher subprime borrowers. Could you talk about how you guys are thinking about take rates as you kind of update your models throughout the remainder of the year?

Sanjay Datta: Yes. Sam, just to clarify, that sort of take rate, I wouldn’t call it pressure, we’re sort of increasingly successful in the super prime segment, not the subprime and very prime borrowers have a lot of competitive alternatives and take rates and margins are necessarily lower in that segment. So as we gain share or increase mix from maybe the prime and the super prime segments of borrowers, you’ll see the average take rates come down.

Dave Girouard: I think it’s also important to say that our contribution margin and take rates are well above what they were back in 2021. So we have a lot of room. It’s not really our goal to maximize our contribution margin at this point. So diversifying into super vine loans has such value to us that I think taking down our contribution margin back towards where it was in our earlier days is actually a very good thing.

Unidentified Analyst: Okay. Got you. Okay, thanks guys.

Operator: Our next question comes from Mihir Bhatia with Bank of America.

Mihir Bhatia: Hi. Good afternoon. Thank you taking our questions. The first question I wanted to ask was about just how have funding partners reacted to the volatility? Did you see any pullback from either your forward flow partners or even from, I guess, the third-party partners, the more opportunistic capital in early April from the volatility we saw in the fixed income markets.

Sanjay Datta: Hi, Mihir. I think that these committed partnerships are frankly behaving exactly as designed. The basis of those partnerships was that we essentially committed to navigating the different parts of the macro cycle together. And the structure of these deals helped to even out the different phases of that cycle. And those things are going exactly the way we expect them to. We believe we have the tools to read and react to shifts in the credit risk environment very quickly on behalf of the partners. And a lot of these partnerships, frankly, have now accumulated some overperformance in these structures that are there for a rainy day. So I think that they are behaving exactly as intended. More broadly, the sort of securitization markets and the [indiscernible] markets are still functioning.

I think that spreads are a little bit higher and. Advance rates are not as low — as high as they were before. But the beautiful thing about the large committed partnerships we have is that we don’t have to rely as much on the [indiscernible] markets. And so as a result, our funding retails are as resilient as ever, and we haven’t had any pullbacks.

Dave Girouard: Let me just add to that, Mihir. I mean just for clarity, we’ve had no pullbacks from our private credit kind of committed capital partners, and we likewise had no pullbacks from banks or credit unions. So I think our credit continues to perform. And I think the confidence they have an Upstart is quite strong.

Mihir Bhatia: No, that is helpful. Thank you. And then I did one other question. On a similar topic really in terms of the macro volatility. Dave, you mentioned you’ll have more tools to react to it. I guess the question really is, how has Upstart reacted so far to — like how have you changed to the rising uncertainty around macro — have you changed any underwriting any of your — the product mix, maybe where you’re trying to commit more marketing dollars. Has there been any changes so far to how you’re operating the business to the way the macro uncertainty has changed over the last four months? Thank you.

Dave Girouard: Well, I’ll say, first of all, I mean, we’re definitely a conservative business who is very careful about fixed costs and hiring and things of that nature. So we have been forever, but I think for years now, I think we’re extremely cautious about how we plan our own business. Just by way of example, all of our guidance and all does not assume any reduction in Fed rates this year. So that would just be a sample of that. With respect to credit, which I’m — you seem like maybe you’re asking that as well. Generally, we rely on our models being very, very quick and adept at adapting to macroeconomic changes, and we also build some conservatism in there so that we don’t assume the future will be as good as the past was.

So that combination, we think, is as good as you get in the market. I don’t think there’s anyone else that has models that are adaptive and quick to hone in on any changes in the macro, and we have some conservatism built in, and it’s serving us really well as well as, of course, our lending partners and our private capital partners.

Mihir Bhatia: Thank you for taking my question.

Operator: And we’ll move to our next question from Pete Christiansen with Citi.

Peter Christiansen: Thank you. Good evening. Nice trends here. Do you want to talk — can you give some good color on the consumer credit side, seems still pretty healthy, also your partners in the at-will side still fairly healthy. I wanted to dig a little deeper on to the ABS side. I know you had a $320 million transaction. Was it two weeks ago. Just curious if you had any feedback on the health of what you’re seeing in the ABS market for more consumer loans? Do you think there’s opportunity to do more there this year? And then if you could comment on some of your risk retention and how do you believe that, that’s going to trend in the next few quarters. Thank you.

Sanjay Datta: Pete, yes, we were really pleased with the way that the latest ABS deal printed, frankly. It was a very healthily oversubscribed book on the bonds. The spreads were a little bit wider than they were earlier in the year. That’s sort of natural. But overall, I think we’re really happy with the way it worked. And in particular, we use that market opportunistically. We don’t rely on it. Our committed capital departments don’t rely on it. When it’s available and we can print deals like that, it’s great. But if it’s not, it’s not sort of a cog in the wheel that is — that we’ve got a lot of reliance on. So all in all, it is a good story. I guess that’s part of your question is where the ABS markets go from here. I don’t know that we have a strong view on that. They’re famously hard to predict. But I guess the fact that they are just an opportunistic channel for us makes it less acutely important.

Peter Christiansen: That’s helpful. And then I guess on the Fortress plan and also, I guess, you added 15 new partners as well. Just curious if there’s any trend changes in risk retention, co-investment and how that’s been going?

Sanjay Datta: Not really. I think the structure of these deals is very consistent now. So no trend, particularly in other direction in terms of how they work or how they’re structured or what the terms are.

Peter Christiansen: Okay. Thank you. Nice report.

Operator: And our next question comes from James Faucette with Morgan Stanley. James, now your line is open.

Michael Infante: Yes. Hey, guys. It’s Mike on for James. Thanks for taking our question. I just wanted to sort of dig in on how you’re thinking about the TAM opportunity today. So if I just think about the overall unsecured personal lending market, like is there any rough segmentation you can provide just on how that TAM opportunity of, call it, $150 billion sort of segment by FICO score. I’m just trying to contextualize your relative penetration with a more traditional Upstart borrower versus a newer prime borrower? Thanks.

Dave Girouard: I would say we have some sort of like back of the envelope like notion of that. We don’t try to measure that too particularly. But I would say roughly that consumers in the U.S. split somewhat evenly between what you would call a Prime — even Super Prime borrower, 720 plus or more of the people that we have typically served low 600s to 720. And if you just want to — I think the — at least my take is the — from a personal loan perspective, the size of those markets are relatively similar. So I think from that perspective, as we began to really open up to the super prime part of the market, we’ve kind of doubled the TAM, particularly in personal loans. And then, of course, that’s all quite small relative to the TAM in Home and Auto put together. So — but that’s how we would think about that.

Michael Infante: That’s helpful. Maybe just on customer acquisition. Anything you would call out just in terms of how your mix is evolving between pure organic traffic to upstart.com, how much is originated via direct mail and what you’re sourcing via third-party marketplaces. Thanks.

Sanjay Datta: Yes, Mike. nothing really to call out in terms of channel trends from last quarter to this been pretty steady.

Operator: And we’ll move to our next question from James Hecht, Jefferies.

John Hecht: Hi, guys. It’s actually it’s John Hecht from Jefferies. Hope you are good. Thanks for taking my question. Real quick, Sanjay, maybe a little bit more just kind of on I guess, thinking about the fluctuations in the take rate, obviously, we know there’s a difference between core and super prime or the prime customer, but maybe what does — what are you guys thinking about in terms of mix over the quarter over this year? What will prime continue to be a growing part of the mix. And then at maturity, what is the take rate of like HELOC and auto I mean I know those are different markets with different sets of factors. So what are the kind of mature take rates of those versus the current take rate?

Sanjay Datta: John, sorry about the name slip there. I don’t think we have an explicit split between maybe sort of like super prime and near-prime segments within our guidance. I will say that — as we said in our remarks, I think we did disproportionately well in the primer segments, and we hope for that to continue. So it’s an area we’re bullish on. We’re earlier on, obviously, and we’re sort of maybe the more beginning stages, so we maybe hope to grow that disproportionately. With respect to take rates on the newer products, it’s still a little bit early to tell, I think. But I think in general, I would say both home and auto would have the profile of being larger loans, maybe with more modest, at least initially more modest take rates until our models can create the type of separation we have in personal lending, which allows us to sort of increase take rates over time.

But there’ll be larger loans with initially lower take rates and maybe sort of similar. Maybe sort of similar dollar contributions per loan. And then in the case of some products such as maybe, for example, auto is a good one. That contribution will be more ratable by the life of the loan in the form of servicing economics and less about upfront transaction take as we have almost exclusively on our core PL business.

John Hecht: Okay. That’s super helpful. And then a follow-up. Clearly, the private credit markets, they can structure I guess, mutually favorable deals with you guys. And as a result, and they have a lot of liquidity in that market as a result it’s pretty active. How would you define kind of the banks? I know like there was — earlier on, they were fairly active and obviously, just given economic uncertainty and inflation and just sort of the last few years, I think they’ve been less active. How would you characterize that? And then what are you looking for in terms of ability to kind of reengage more aggressively with that group?

Dave Girouard: Well, I think the thing that you can say about banks is they love secured products, much more than unsecured products. So Personal loans, a lot of the funding at the primary end comes from credit unions and increasingly, institutional capital, private credit blended in certain ways, we think we’ll compete quite well in the super prime part of our business. But with respect to banks, they really prefer secured products. And right now, there is certainly more demand from them for our HELOC product. And I believe, soon enough, our auto products that we would be struggling to fill that demand for a very long time. So I think that’s okay. I think it’s a good balance where personal loans are mostly credit unions plus institutional funding combined in interesting ways and then secured products really a lot of interest from banks. And honestly, we — it will take us some time to grow those businesses large enough to really begin to fill that demand.

John Hecht: Okay. Perfect. Thanks very much for the color.

Dave Girouard: Thank you.

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

Rob Wildhack: Hi, guys. A question on, I guess, both funding and the outlook. The Fortress agreement obviously comes with a big headline number. But the full year guidance kind of up only a little bit. I mean given that you’re not seeing any pullback in funding and you’ve added sort of $1.2 billion in incremental funding from Fortress. I guess I’m just curious why the 2025 outlook isn’t up even more.

Dave Girouard: Hey, Rob. The short answer is that we were never short of per se. So we’re not funding gated in 2025, having more funding is good and allows us to handle upside scenarios and have more diversification in the funding really, the gating item really is kind of economic acquisition of the right borrowers. And that’s almost always in our history, been what gates our growth. And so it’s great to have more funding and we hope to add more partners, but it doesn’t translate directly into growth.

Rob Wildhack: Okay. And if I could just ask one more on OnePay. Can you comment at all on the underwriting or credit box there? Is that Upstart’s decision? And then are there like any minimum volume commitments or approval rates embedded in the agreement?

Dave Girouard: It is our underwriting in our models that drive these things to a joint venture structure with them that we have — we sit alongside them and bear some of the risk, which is the nature of these co-investment partnerships, but it is purely our technology and our models that drive the originations.

Rob Wildhack: Got it. Thank you.

Operator: And our next question comes from Reggie Smith with JPMorgan.

Reggie Smith: Hi, guys. Congrats on the quarter. I’m not sure if this was covered, but I was curious, it was nice to see the increase in super prime borrowers over the last couple of quarters. I guess my question is, how do you drive that payers. Does that require different marketing messages or are you marketing in different channels? Like how are you kind of controlling that? And what’s driven the shift there? And I have a follow-up if you have to have.

Dave Girouard: Hey, Reggie, this is Dave. Great question. I mean, this is a transition that is in process, but it started first with having a competitive product. And that means competitive rates for very high FICO, high credit borrowers and that really came through working with our lending partners to realize that we had to have a lower take rate ourselves and then they had to have lower expectations but also have corresponding lower loss rates. And that’s what we announced as our T-Prime program a while back, and we’ve really been focused on that since mid-2024. So if you sort of fast forward to today, we have very competitive products across the credit spectrum, including for the finest borrowers out there. And now as you suggest, there’s more to the puzzle in terms of becoming the leader in all segments, which is our goal.

And that really is to adjust our messaging and our marketing targets. But if most people perceive Upstart as really good for people who are treated poorly by traditional lenders then that’s, of course, a dated message. And we have a lot of work going on to update our story to the market, particularly to consumers to realize that Upstart is always going to be a great first place to start if you want the best rate and the fastest process.

Reggie Smith: Got it. Okay. That sounds good. And then just you have a slide toward the back of your deck that shows you kind of return bands and it compares it to the two year treasury yield and clearly, that spread has widened the last couple of quarters, which is great. I guess sense you could, how do your investor partners kind of think about that dynamic? And what type of spread is reasonable? Or are they satisfied with over the two year yield? Like how do you think about that? I would imagine the volatility of returns plays in that as well. But like that the interplay between those two variables? Like how was that received thought about by your investment partners?

Sanjay Datta: Hey, Reggie, let’s see. On the institutional side, it’s very much a function or a reference with respect to how the market is in credit. And when — obviously, when uncertainty is higher is now spreads are wider, and we would then reflect that in our product that we deliver to investors. If you rewind many years before this chart, if you were a wine pre-COVID and sort of like the 2018, 2019 time frame, base rates were low and spreads were also very tight, and you would have seen a much tighter spread. So I think that spread there is just a reflection of the risk environment, the environment of uncertainty. And that’s exactly how it functions in the underlying credit markets as well.

Reggie Smith: Got it. And I guess to drill in on that, at where it is today, is that kind of perceived as excess spreads to those guys? Like is there alpha in there for them? Or is that about kind of where your expectations are?

Sanjay Datta: I mean, their expectations ultimately are around return on equity. The spread is a component of the return on equity. And the spread itself, you think of as — I mean, I guess, from premium above what you might think of as a risk-free rate or a government rate. In this case, it’s the treasury. So the way that this builds is there is some requirement of spread given the uncertainty of the environment and that results in a certain target ROE. And ultimately, what we talk about with our counterparties as the ROE.

Reggie Smith: Okay. It sounds good. Thank you for taking the questions. Congrats on the quarter.

Sanjay Datta: Thank you, Reggie.

Dave Girouard: Thanks, Reggie.

Operator: An our next question comes from Giuliano Bologna from Compass Point.

Giuliano Bologna: All right. Good afternoon and congrats on the quarter. One thing I’m curious about kind of digging into a little bit is the first thing is that obviously, you mixed a bit more towards prime and that’s putting pressure on take rate. I’m curious if there’s any — there’s been any real change in the take rate for subprime or if it’s entirely mix driven? And then related to that, if I think about sales and marketing as a percentage of origination volume, that stayed roughly flat, and I think completely flat at 263 basis points the last few quarters. I would think that if you’re mixing more words prime, that would come down to reflect the lower take rate for prime, but I’m curious how we should think about the interplay of those two dynamics.

Sanjay Datta: Hi, Giuliano. I guess the first question is what’s going on with the take rates and maybe the sort of the core or the near-prime segments I would say they’re largely stable. We are doing some, what we call revenue signs, some origination fee experimentation. And so I guess on the different parts of the curve, we’re maybe going through optimizations and that may have some final impacts, but I think large, these are relatively stable take rates. And then your second question had to do with acquisition costs, I believe, and whether they’re very different in the prime space. I don’t think they’re dramatically different. Our margins are consequently slimmer, which we called out. And as Dave said, I think our distribution programs and our marketing are still at a relatively nascent stage in this sort of relatively new segment for ours so that they’re not yet at a place where they’re mature.

But I think when they are, you’ll see something like maybe similar acquisition costs, lower take rates and consequently, more modest margins in a more competed space. But also, I guess, important to point out that this is all dollar accretive, right? This is all additional dollars to the bottom line, which is ultimately what we care about.

Giuliano Bologna: That makes sense. And so you changed the slide around in the presentation at loan performance and the tracking over time. It looks like the 4Q 2024 mentions is coming down a little bit versus Q2. I’m curious if that’s because there’s a higher mix of primary loans in there? Or if that’s just representative of kind of the core subprime or lower credit tier loans?

Sanjay Datta: Yes. That’s the main thing going on, which is as you get a higher mix of primary loans, you’ll get lower spreads and lower returns. There may be some — also some normalization. I think that in the Q2 to Q3 vintages, we were probably overperforming our targets and the models will act to recalibrate that over time. But I think the main dynamic is the one you called out.

Giuliano Bologna: That’s very helpful. I appreciate the time and I’ll jump back in the queue.

Dave Girouard: I just want to add a comment. I had gotten a question — this is Dave. I got a question earlier from Rob about the OnePay Walmart partnership. I misheard him and was my answer was referencing the Fortress partnership. So just so it’s clear, I don’t want any confusion there. I was actually referencing Fortress and if Rob wants to hop in again and re-ask about OnePay Walmart. We’re happy to talk about it.

Operator: [Operator Instructions] We’ll move right now to Matt O’Neill with FT Partners.

Matt O’Neill: Hi. Thanks so much. I think most of the questions were asked and answered. So I’ll follow up on Rob’s on One Finance Walmart. And in addition, could you just make it clear, is that being accounted for in any of the guidance changes? Or did that deal have any effect on the guide? Or any other moving pieces to the guide beyond the 1Q results, obviously?

Dave Girouard: Matt, this is Dave. The — I think we said that this OnePay Walmart agreement, we didn’t expect to be materially financial this year. It doesn’t mean it can’t be. It just means we unable to know that right now because it’s very early stage, just launched in the last few weeks. So I certainly think there’s upside to it. We’re hopeful there’s more things we can do beyond the initial phase with them. But it is not today sort of influencing our 2025 guidance.

Matt O’Neill: Got it. And as far as any other sort of underlying changes, whether it’s macro or otherwise? Any other moving pieces to the guide beyond the results being incorporated?

Dave Girouard: I think what we said is we assume the macro doesn’t change dramatically one way or the other. We also assume no reduction in Fed rates or no reduction in the underlying rates that tend to fuel the platform. So there’s upside and downside in those, but we take what we feel is fairly conservative stance. And we always have confidence that our pipeline of model improvements and technology improvements will lead to growth, and we try to account for them conservatively as well. So I think we feel pretty good to reaffirm and at least modestly raise the guidance that we shared.

Matt O’Neill: Understood. Thank you.

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

Rob Wildhack: Hi, guys. Thank for that Dave and thanks for let me back on. I was just curious with respect to OnePay who controls the underwriting and credit box there, if that’s Upstart decision? And if there were any minimum volume commitments or approval rates in the OnePay agreement Thanks again.

Dave Girouard: Rob. No, it’s entirely our business, our model, all the 100-plus banks, credit unions, private credit have exposure to that or can benefit from that borrower flow. So it’s fairly perfect. I mean there are people who will get from Walmart that could be 800 FICO and wealthy. There’s certainly people that are Middle America. So that’s the beauty of our platform. And I think one of the reasons we have that agreement is that we can serve a very, very broad swept of America with the products and the diversity of the marketplace structure that we have. And so I think the timing is — works out perfectly with this whole notion of best rate for everybody.

Rob Wildhack: Got it. Thanks. And just quick, do you share any economics back with OnePay, maybe like take rate or anything like that?

Dave Girouard: Well, for sure. They have a financial interest in it. I mean they’re kind of bringing a customer to us. So there is some share, but we feel very good about the economics and the agreement. I think it is definitely a win-win for them for us for their customers. So very excited about the partnership.

Rob Wildhack: Okay. Thanks a lot.

Operator: And ladies and gentlemen, that was the end of our question-and-answer session. I’ll now turn the conference back to Dave for closing remarks.

Dave Girouard: Thanks, everybody, for joining. We’re actually really pleased with the progress that we’ve had so far in 2025. And I think the rest of the year might be even more exciting. So we’ll see many of you at AI Day next week in New York, and I hope that many others will be joining us via streaming if you can find the time in your day to do that. If you really want to really understand what we’re building in Upstart, I think AI day will be super fun and an informative event. Thanks again for joining us.

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