UPST and recurring revenue (not SAAS?)

I have been thinking about recent comments to the effect that Upstart is ‘not really’ a SAAS company, and that it doesn’t have recurring revenue streams as do CRWD etc. Clearly it is a new animal, but I think the similarities between it and other SAAS companies are striking. It could be thought of as ‘decisions as a service delivered via software’, and in this sense is really no different from NET or CRWD. Moreover, while it appears that the revenue stream is per loan, in fact the financial institutions are the customers, and so long as they are in the business of loans (and their profits directly tied to volume and quality) then upstart has in fact a robust revenue stream. This is because upstart promises a broader pool of acceptable loans for the finance companies, and also that those loans will perform.

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“I have been thinking about recent comments to the effect that Upstart is ‘not really’ a SAAS company, and that it doesn’t have recurring revenue streams as do CRWD etc.”

Upstart itself is a lender, but 96% of its revenue came from the fees that banks and other lending institutions pay to use its AI-based platform
https://www.fool.com/investing/2021/05/14/reasons-upstart-ra…

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While several folks in this board argue from different angels that Upstart has a sort of recurring revenue, I don’t think any of the arguments are convincing.

Someone commented that Upstart has recurring revenue because they do promotions which attract a lot of repeating customers. Well, if this is correct, we can also argue that P&G has recurring revenue because customers buy toothpaste every month.

It could be thought of as ‘decisions as a service delivered via software’, and in this sense is really no different from NET or CRWD. Moreover, while it appears that the revenue stream is per loan, in fact the financial institutions are the customers, and so long as they are in the business of loans (and their profits directly tied to volume and quality) then upstart has in fact a robust revenue stream. This is because upstart promises a broader pool of acceptable loans for the finance companies, and also that those loans will perform.

I don’t think Upstart has a comparable revenue model to NET or CRWD. IMO, the guaranteed recurring revenue comes from subscription model which uses contracts to enforce the future revenue stream. And usually, the subscribed service should have a big switching cost. While Upstart does not have it, Cloudflare and Crowdstrike do. Although Upstart has bank customers, the model is still usage based, not subscription based, because Upstart only (or primarily) gets revenue from transactions.

Clearly, Upstart’s revenue next year will not automatically repeat that of this year. Upstart does need to have as many transactions as this year, in order to achieve the same revenue and either Upstart or Upstart’s bank partners need to acquire more transactions in order to grow its revenue. This is not a SaaS model. It is more similar to an e-commerce business, who need to sell more goods next year in order to grow revenue.

Luffy

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Per their S1, Upstart charges 0.5-1% of the loan amount to the loan holder as an ongoing Annualized Servicing Fee. This is in addition to the Referral Fee of 3-4% of the loan principle amount and the Platform Fee to bank partners of 2% of the principle amount of each loan.

I was thinking that auto loans tend to be longer term and of a higher average principle than unsecured loans used for debt consolidation or whatever. The move into auto loans should give Upstart more annualized servicing fee growth and hence a larger recurring revenue.

-HugoStocklitz

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Yes, it’s similar to ecommerce type of model, but why do u think P&G’s toothpaste is not a recurring business as everyone has to buy and use the paste? Brand draws people to buy from P&G. So, it’s a moat and it’s recurring.

Anyway, I think about Upstart like someone who is disrupting lending business (which is literally worth trillions of dollars) in a similar way Amazon did to retailers. Start with books (private loans), become leader in this niche and expand verticals (autolending in this case as next step).

I’m not saying that Upstart will be become the Amazon of lending (who knows), but it goes the same route. Yes, there is a lot of competition as the market is huge and fragmented, but TAM is just crazily enormous and potential for investment returns for shareholders like us is ginormous if the company will execute well.

As investors we will be following the numbers - as we all learned from Saul. At the moment those numbers are great :slight_smile:

Best,
V

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I want to add something to the conversation here that I found on the Upstarts careers page that might be seen as suggesting that although upstart itself might not be SaaS, their purchase of Prodigy actually might be.

During the conference call yesterday, I became interested in Paul’s discussion of a remote mainly workforce. I decided to head over to their careers page. As I was looking through postings, I came across positions specifically for the Prodigy division in which multiple listings such as this one:

https://www.upstart.com/careers/74678/apply?gh_jid=3352233

Multiple listings Mention looking for:
“ 1-3 years experience managing successful implementations for SaaS clients, ideally in a startup environment where you help to define processes for ongoing success.”

I have had a hard time drilling down on how prodigy makes its money, and that was not clarified yesterday on the conference call.

They state that the prodigy’s mission is to create the world’s best car buying experience with cutting-edge auto-retail software.

Prodigy seems to be where a SaaS opportunity is being developed and should be a solid contributor to growth in the future (past 2021, according to the call), especially when integrating Upstarts loan process into the software directly, creating a virtuous cycle.

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Hi there regarding recent posts on Upstart SAAS via Prodigy and recurring revenue, usually I feel there is nothing for me to add to the conversation, as you all are so analytical and on top of things (I am so grateful for this board!), but here are a few points that may be of interest and I haven’t seen them posted yet:

  1. 31.5% of people who pay off a personal loan wind up taking out another one within two months. 68% of those do it with the same lender. SO… the increase in personal loans to repeat customers that the CEO referred to are very likely coming off the OLD base, ie 3 years ago. We can expect a big increase in this as the loans they underwrite increase, with about a 3-5 year lag, as I believe those are their payoff times. Things will get even better if Upstart can increase this 68% to a higher rate. Why not? So this is not recurring revenue, but it is…sort of… lagging additional revenue, recurring….

2)My take on Prodigy. The CEO made it clear they were not expecting big contributions from Prodigy. I don’t think that was sandbagging and I don’t think SAAS revenues from Prodigy are the goal. The goal is to get more auto loans and they see prodigy as a way to do it. 61% of auto loans are taken at the dealer, so if they want to play at the dealer, they need to be at the dealer. A smart move imo would be to just cover the cost of the software and almost give the stuff away, as long as they’ve done the research with a few pilot tests to prove that this will get them the loans at the dealer. Razors and blades.

Prodigy is a small fry right now. While they have increased from $800M to $1B, which is great for one quarter, you have to remember that this is DOLLAR sales. With an average cost of a car around 41K, divide $1B and you get about 24,000 cars plus or minus. But 17M cars and light trucks were sold in the US in 2019 (forget 2020 because it was an outlier year). Puny, puny percentage coming through prodigy, say 100K a year it’s like .01 percent if I did my math right.

I look at prodigy as an experiment. The team at Upstart seems brilliant to me, and if anybody can pull it off, they will, but imo the way to do it would be to just get greater acceptance of this product so they can underwrite more loans. It will in no way affect my belief in Upstart if Prodigy does not make a meaningful contribution, ever, in SAAS revenue, as long as the loans come through it, or even as long as auto loans come to Upstart somehow.

Speaking of which, I imagine,too, that since 39% of the auto loans come from banks and credit unions, that Upstart will be putting at least as much effort into getting those loans underwritten at the bank level or the platform level. I’ll be looking for auto loan numbers in 2022, regardless of where they are coming from.

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Yes, it’s similar to ecommerce type of model, but why do u think P&G’s toothpaste is not a recurring business as everyone has to buy and use the paste? Brand draws people to buy from P&G. So, it’s a moat and it’s recurring.

Toothpaste is not recurring revenue. Toothpaste and many consumer products are high frequency recurring purchase items. Recurring revenue is not the same as recurring purchasing.

If P&G spend nothing on brand A&M for the next 6 months their market share and revenue is going to drop.

Recurring revenue in a SaaS world means:

  1. Revenue recurs without any ongoing promotion
  2. Service is consumed with hardly any cost of goods

The cost of brand advertising and marketing for consumer products is massive as brand loyalty is not the same as recurring revenue.

Ant

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As we observed through the start of Covid, one of Upstart’s largest risks is its cyclical revenue nature. Upstart generates revenue primarily from fees paid by banks at the time of loan origination, which include a referral fee for loans sourced from Upstart.com (3-4% of loan value, or $400-$500 per loan) and a platform fee (~2% of loan value, or $200-$300 per loan) regardless of source. Upstart additionally charges the holder of the loan, either the originating bank or the institutional buyer, an ongoing servicing fee on the outstanding principal of the loan (0.5-1% annualized).

One potential mitigant to this cyclical revenue stream would be through a SaaS revenue stream.

I was browsing the job postings on Upstart.com today and noticed Senior Product Manager, Saas https://www.upstart.com/careers/10392/apply?gh_jid=3104436.

It got me digging in more to the idea of Saas and Upstart and I found this article on the website https://www.upstart.com/blog/first-saas-lending-platform .

From the article:
“Those that know my history at Google will understand why I’m excited to tell you about “Powered by Upstart”, a Software-as-a-Service offering derived from Upstart’s top-rated consumer lending platform. From rate requests through servicing and collections, this SaaS service brings modern technology and data science to the entire lending lifecycle.”

Based on how the article is written, it seems as though it’s from 2017.

From another article on the Upstart website https://www.upstart.com/blog/powered-by-upstart-launch-bankm… , it later shows Upstart landing its first Saas partner, BankMobile, which based on my research the partnership with Upstart began in late 2017.

I am curious on why this revenue stream hasn’t expanded over the years for Upstart and perhaps there is renewed focus or opportunity for Upstart Saas revenue, as evidenced by the job posting.

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