UPST My Notes From Analyst Q/A Q1 2022 Earnings Results
May 9, 2022 3:30 Central Time
David Girouard, CEO
Sanjay Datta, CFO
Just listened to the earnings call. Here is the analyst Q/A portion of the call:
Q Conversion rate was lower than their model. What to expect going forward?
A Interest rates and interest rates has resulted in lower conversions. They view the delinquency rates to be stable since the last 60 days. These two things can present further threats to the conversion rates.
Q ABS side of the business, talk about the demand environment for their loans today and do they forsee future issues/costs?
A Loan demand and bank/credit union balance sheets is more insulated and the buyers who are buying with investment market is more susceptible to ups and downs. The amount going to ABS markets in 2022 is less than it was in 2021.
Q Credit trends seem to be stable in the last 60 days. Is there a concern at some point and could this impact the ability of UPST to attract funding? Also, you’ve upped the balance sheet of UPST as a part of R&D and testing loans for new markets. Please comment on this.
A Triggers on ABS loans, and what will breach delinquencies, not something that rises to the level of concern, rather UPST sees it as a temporary/short term issue. RE: R&D, and using UPST’s balance sheet to help test new markets, the higher interest rates has impacted this. This was planned and is necessary in developing the mechanisms to offer new verticals.
Q UPST’s guidance is building in a recession at the end of this year.
A Dave expects less volume, based on pricing in the market being higher aka interest rates, so the risk premium is higher, which lessens their volume with 300 basis points or higher in interest rates. In no way is UPST predicting a recession.
Q Surprised to hear UPST is using their balance sheet to finance loans.
A Price discovery happens when our bank partners can make it happen. When the risk premium changed so rapidly, it was necessary, and it is not something they foresee doing on a regular basis in the future. Doing so gave UPST the fluidity and flexibility they needed to react to interest rates raising so quickly.
Q With interest rates going up, how do you see this? Spread? How are you looking at the auto refi interest in the future.
A It’s as simple as when the consumer rates go up, there are a bunch of people who are no longer approved for a loan, and for those who are approved for a loan, the interest rates go up. It’s as simple as when rates go up, their volume at UPST will go down.
It’s a little hard to judge auto re-fi, it’s an interest rate-sensitive product, hard to predict how that will shake out in the future.
Q Not having the origination volume you did previously. The balance sheet piece of $600M is so much larger than just the R&D piece you had originally discussed.
A Don’t have a specific $ in mind for R&D vs. managing interest rate shocks. This is a bit fluid. Certainly in Q1, with all the volatility they saw, most of their work was of the R&D flavor.
Had a phenomenal quarter signing-up new customers and the pipeline has never been stronger. They’re adding about one lender per week.
Q Revenue outlook change lower due to increased rates?
A No, there’s not any significant change, on the banks and credit union side there’s been very little change, they’ve mainly changed in terms of return targets on the investor side of the equation.
Q Loans on the balance sheet, do you plan to sell them into the market or when they mature, or when?
A Being held as for sale loans. This will be a function based on what the market looks like, but the goal would be to sell the loans.
Q Making it easier to change to delinquent borrowers in the forbearance program.
A On loan modifications, UPST has a lot of data, you’re better off creating flexibility when borrowers are having problems. The current macro environment accelerated the need to expedite the forbearance program.
Q How should we think about EBITDA and the rising interest rate environment?
A It’s a function of scale of their balance sheet, which is bigger than it was last year. Depends on what happens to interest rates and what happens to treasury notes. If it continues to go up, there will be further de-valuations.
Q Putting loans on your balance sheet. Some for R&D and some for flexibility. How much %? Will this go from the single digits to the double digits?
A In Q1 approx ¾ was for R&D phase of auto loans. Potential future scenarios depends on their ability to react to create stability. Goal is to create more of an automated platform that can react quickly.
Q Follow-up on Auto, is there a timeline change or can you stick with the original timeline?
A No change for the auto re-fi, and auto lending will be to bring them on more next year.
Q Do you think you can approach the ___ number any time soon?
A We don’t expect the ___ number to go back to 13,000. Don’t see loan size being driven up significantly any time soon. Looking across the whole platform, it’s hard to imagine loan sizes going back to what they were in the past.
Q $600M loans on your balance sheet. Is that the high water mark?
A No, don’t think we can say that’s the high water mark. They need to keep putting $ into the R&D market and the banks are going to want to see some curves before they put their own $ into these loans.
Q How have the usery limits impacted them in terms of rate capping what would be known as APR and how does that impact trajectory?
A State and/or national rate caps will come into play, for which UPST does not have any control. A lot of people who would have been approved previously, are no longer able to be approved as APR rate goes above 36%.
Q In a tighter market re: take rates, will it get tougher?
A Yes. They will likely get more conservative as the market gets tougher.
Q You out-performed during pandemic and now loans are showing signs of under-performing during these difficult macro-economic times. What does this mean for loans that are Q4 2022 since they’re
A Your statements aren’t entirely accurate. There were marginal differences between lowest and highest risk loans. It has nothing to do with FICO, rather it’s only by their own risk separation and UPST is very happy with how their system is performing, which is very stable. None of their banks or Credit Unions are seeing under-performance.
The real relationship with Coert performance is
Late 1919 to early 2021 were 2X the return target. Per investor deck most recent Q3-Q1 loans have under-performed.
Q If student loan forbearance ends, will it negatively impact UPST?
A Yes, it may be a continuation of the trend that’s been taking place, but UPST sees that most of the stimulus impact has drained out of the economy.
Q How big of an impact on UPST will ____ be?
A As the biggest platform in this space, trends will be roughly proportional to the performance of UPST.
Upstart Q122 Earnings Release
https://ir.upstart.com/static-files/fe23d04a-1502-43c8-9d47-…
Upstart Q122 Earnings Deck
https://ir.upstart.com/static-files/abb1aa09-a5a1-48f2-8880-…
It is my hope that fellow board members find this information helpful until the Q/A session is posted at a later time.
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