Upstart just reported Q1 earnings. I think the results were pretty solid, but somehow it was down 15% AH.
Quick Overview of the Results
Revenue
138.5 → 139.1 → 173 → 226.4 → 213.4 (6.7% beat)
The sequential drop is because of seasonality. Q1 is Upstart’s slowest quarter historically.
Adjusted EBITDA margin
-16% → -7% → 1% → 18% → 20%
Personal Loan Transactions (million)
1,111 → 1,084 → 1,539 → 2,038 → 2032
Auto Loan Transactions (million)
13 → 18 → 26 → 43 → 61
Home Equity Loan Transactions (million)
7 → 8 → 17 → 27 ->41
Contribution Margin
59% → 58% → 61% → 61% → 55%
The management explained on the earning call that the drop of contribution margin was because the super prime segment of personal loans outperformed and they had lower take rates. Management said the contribution margin was not their focus at the current moment.
They did reaffirmed that they target to achieve GAAP profitability in H2 2025 and on the entire year basis, so I’m not worried too much about the margin drop.
Q2 Guidance
◦ Revenue of approximately $225 million
◦ Revenue From Fees of approximately $210 million
◦ Net Interest Income (Loss) of approximately $15 million
• Contribution Margin of approximately 55%
• GAAP Net Income (Loss) of approximately ($10) million
• Adjusted Net Income (Loss) of approximately $25 million
• Adjusted EBITDA of approximately $37 million
• Basic Weighted-Average Share Count of approximately 96 million shares
• Diluted Weighted-Average Share Count of approximately 104 million shares
Full Year Guidance
• For full-year 2025, Upstart now expects:
• Revenue of approximately $1.01 billion
◦ Revenue From Fees of approximately $920 million
◦ Net Interest Income (Loss) of approximately $90 million
• GAAP Net Income to be positive in the second half of the year and positive for the full calendar year
• Adjusted EBITDA Margin of approximately 19%
They only slightly raised the full year revenue guidance ($1B → $1.01B) to address the Q1 beat.
Other Highlights
- 92% of loans were automated during the quarter, an all-time-high.
- Conversion rate improved significantly in the last several quarters
- Upstart also has its own index score to track the macro environment. Currently, the macro environment is much better than 2024 but is still at the 2022 level. So the growth in the last couple year was primarily driven by improvements of the conversion and automation metrics, which then were driven by improvements of their AI models.
Why I Plan to Add to my Upstarts Position
- The improvements on AI models have driven strong growth for Upstart. I feel this is similar moment to when AppLovin firstly enhanced its models.
- Topline growth and bottom line profitability are both on good track.
- Management mentioned during the call that they have been seeing a stable macro so far (without indication of recession) which is better than I anticipated.
- When giving guidance, management assumed a stable macro and NO rate-cut through out the year. As at least two rate-cuts are generally expected for 2025, any of those rate cuts will benefit Upstart so they could beat the guidance.
- Although being tiny in the revenue mix, the Auto Loan and Home Equity businesses are growing very very fast, which can be a future growth driver for Upstart.
Major Risks
- Management said that Upstart’s growth is constraint on demand (of borrowers) rather than supply (of fund). So it’s very vulnerable to the fluctuation of the macro environment. The macro environment could be worse than expected.
- If there’s inflation, it will hurt Upstart badly.
- Upstart had a bad record of missing guidance significantly in the past.
Luffy