Upstart (UPST -3.02%), operator of an AI-enhanced lending platform, released its third-quarter earnings results on Nov. 7. The earnings revealed a notable revenue increase to $162.1 million, surpassing management's expectations of $150 million. This 8% outperformance was driven by a 27% sequential rise in revenues, signaling the company's return to growth. Fee revenue also exceeded forecasts, hitting $167.6 million versus the expected $155 million. A key highlight was its net interest loss of $5.5 million, closely aligning with the expected $5 million loss. The contribution margin came in higher at 61%, indicating improved cost efficiencies. Despite a GAAP net loss of $6.8 million, the result was significantly better than the $49 million loss management anticipated. Adjusted EBITDA stood at $1.4 million compared to an anticipated $5 million loss.
| Metric | Q3 2024 | Q3 2024 Management Guidance | Q3 2023 | % Change YoY |
|---|---|---|---|---|
| Total revenue | $162.1 million | $150 million | $134.6 million | 20.5% |
| Fee revenue | $167.6 million | $155 million | $146.8 million | 14.2% |
| Net income | ($6.8 million) | ($49 million) | ($40.3 million) | N/A |
| Adjusted EBITDA | $1.4 million | ($5 million) | $2.3 million | (37.3%) |
Source: Management's guidance from the second-quarter report published Aug. 6.
Business Overview and Focus Areas
Upstart leverages its artificial intelligence-powered platform to enhance the consumer lending process, improving approval rates and reducing interest rates. Central to its approach is its platform, which automates credit decisions through the use of sophisticated credit-risk models. Notably, the recent introduction of its Model 18 has improved accuracy and loan pricing, enhancing conversion efficiency. The AI system incorporates 1,600 variables about each would-be borrower and analyzes over 58 million events. In Q2, 87% of its loans were processed with no human intervention.
Upstart has built up a robust ecosystem of more than 100 lending partners that provide crucial capital and loan funding. Despite this diversity, its reliance on a concentrated segment of top partners represents a risk. The partnership network includes various banks, credit unions, and institutional investors. The company is also expanding its product range to include personal loans, auto loans, and HELOCs.
Quarterly Highlights and Developments
The third quarter saw Upstart achieving significant revenue growth, crossing the $150 million guidance target to reach $162.1 million. This 20% year-over-year jump from $134.6 million a year ago highlights a key turnaround, and also represents a sequential revenue increase from $128 million in Q2. The pivotal driver behind this growth was the 30% year-over-year spike in loan originations to $1.6 billion -- a 43% lift from the second quarter.
Upstart witnessed a marked contraction in its net loss to $6.8 million, a dramatic improvement from the $40.3 million it lost in the prior-year period. It also delivered adjusted EBITDA of $1.4 million, better than its projected loss of $5 million. However, its operating loss of $45.2 million was slightly deeper than the previous year's loss of $43.8.
Upstart's technological innovations remain a cornerstone of its operations, with recent enhancements in AI models boosting efficiency and conversion rates, as shown by an improved conversion rate to 16.3% from 9.5% in the prior-year quarter. Its product diversification strategy should maintain growth momentum, but the large portion of loans -- 80% -- stemming from its top three lending partners reflects the concentration risk in its ecosystem.
On the regulatory front, compliance continues to be a crucial focus, as evidenced by Upstart's investments in secure processing and strategic partnerships for regulatory adherence, including collaborations with entities such as the NAACP.
Upstart's Outlook
Management is optimistic about the fintech company's trajectory, forecasting fourth-quarter revenues of around $180 million and adjusted EBITDA of $5 million, buoyed by ongoing product expansion and partnership developments. Expectations for a 59% contribution margin further reinforce this positive view.
With income from operations remaining under pressure, the company's focus on operational efficiency enhancements and diversifying its base of lending partners will be key drivers for success in future quarters.
