Upstart Holdings Aktie

Good afternoon, everybody. My name is Pete Christiansen here with Equity Research covering digital assets and fintech services. For this next session here, we'll be covering Paul Gu, CEO, Co-Founder and CEO of Upstart. Before I get started, Upstart has asked me to read this disclaimer.

Today's discussion may contain forward-looking statements that may relate to future results and events, which are based on Upstart's information available as of today and subject to risks and uncertainties. Actual results may differ materially from these forward-looking statements. The discussion may also include non-GAAP financial measures, which are not a substitute for GAAP results. Please refer to the company's filings with the SEC and its IR website for additional information, including GAAP to non-GAAP reconciliations along with other disclosures. All right. Without that, now we're past that.

Let's really dive in here. So a week ago, Upstart reported record contribution profit, but lowered the full year revenue and EBITDA guide as worsening macro conditions pressured the balance sheet income somewhat. So that split screen, strong fundamentals, but modestly weaker macro-sensitive earnings is a central question for the next half hour. And to discuss it, I'm joined by the person who built the underwriting models and now runs the company. Paul, welcome. Great to have you here. Let's get right into it.

Great. Happy to be here.

Let's chat a little bit about alpha and beta. So on the call, you framed growth as alpha plus beta times macro. This quarter, contribution profit grew strongly, but the guidance cut came from balance sheet marks. Today, how much of Upstart's earnings volatility is company execution versus macro sensitivity? And then maybe what's the best metrics investors should watch to see that beta is shrinking?

Yes. The reality of the business today is it's a high alpha and it's high beta. So the execution in the business has been really strong. Really couldn't have asked for anything better. And the fundamentals, I think the alpha is the part that I think is most predictive of the long run of the business. It's the thing that we actually control. It's the thing that as a sort of system, as an engine, we can expect to continue doing quarter after quarter, whereas macro is kind of -- sometimes it's good, sometimes it's bad. We don't really predict it. We don't control it.

And there have been quarters -- just as many quarters where it's been helpful for us as quarters where it's been a headwind. And in the most recent quarter, it certainly was a headwind to the business. But to your earlier comment, in spite of that, we still did a really spectacular Q3. I think we'll still have a really strong year. Q3 record contribution profits for the second quarter in a row, 48% year-on-year. That was despite a 9-point average UMI headwind. And on a full year basis, if you just look at where we are today in the year versus where I think anybody thought we'd be at the beginning of this year just from an interest rate perspective or from a consumer perspective, I mean, it's just been a more challenging macro year.

And despite that, we're still going to do really good numbers, especially on the sort of core operating business where we raised guidance for fee revenue, we raised it sort of implicit guide for contribution profit. And that's -- that happened because of that really, really strong execution. But at the same time, the business does definitely have a very real beta component to the macro. That's true in the core operating business, but it's even more true on the balance sheet.

So following up with that per point of UMI, which is more sensitive fee revenue or some of the fair value marks. And do these marks, I guess, move immediately? Or is there some lag kind of that dynamic that we see on the fee revenue side?

The balance sheet side is more sensitive, especially the fair value component because if you just think about it conceptually, fair value is it's not just what's happened in the quarter. It's a sort of accountants expectation of everything that will happen in the future discounted to the present. And it ends up being a fairly complex calculation. Some of the timing of things of when loans are delinquent or charged off or even if they're current, like the way they get impacted is a little nonlinear to the way that UMI or our view of the underlying consumer moves. So it does end up being more sensitive and also a little bit of a complex calculation.

I would say it is mostly intended to try to capture everything in period, but because of the complexity of how it's accounted for, there might in practice be like a little bit of a lag to some parts of it, but maybe like most of it, most of it is quick.

We'll blame the FASB then. October originations slowed relative to Q3. How much of that do you believe reflects maybe a tick up in higher funding costs or the UMI changes in demanding/credit appetite?

Yes. Macro is definitely a challenge going from September to October with rates being the sort of single biggest and most obvious driver there, where most -- for the most part, our business reprices on rates pretty quickly. We do it about once a month. And most of our funding deals with partners. We're just sort of a true marketplace in the sense that if market traded interest rates go up, that passes through to our borrower within a month's time, and we tend to reprice based on once-a-month numbers. Think of this as 2-year treasury or 2-year SOFRs. And those rates went up a lot, especially at the tail end of September. And so that passed right through into the October pricing of how we did loans.

So roughly a month to pass through. Was that the case, I guess, when we had the -- after following COVID, we had a rapid rate increase following COVID, that was obviously a lot harder to digest for consumers and for everybody. Is there a different dynamic now, I guess, if we were to expect rate hikes would be, I guess, slower to implement, more gradual versus what we had in the last cycle, which was a lot more vertical exponential.

Well, one thing I always say that I think sometimes people get confused by is in our business, the primary interest rate that we care about are market-traded interest rates. So we're benchmarked against SOFR or Treasuries. It's not so much what the Fed is doing. And so obviously, those have a relationship, but things that are already expected by the market are generally already priced in. So it's not like there's a double whammy there.

But I mean, yes, ultimately, you look at the inflation numbers and the direction of travel there, like that's going to inform what the Fed has to do, which probably is going to inform where the market trades. And so they're all interconnected. And ultimately, I think our business and I think the entire sort of American consumer, I think the American electorate, I think everybody is just going to be happier if there's a lot less inflation for us too.

Fair enough. So for borrowers that, I guess, would near the 36% APR cap, should we think of like rising funding costs and sorry, rising funding costs and the UMI effectively capping volume growth. Should we think of that as part of the rationale also for expanding into some of the secured product areas that Upstart has been getting into?

I wouldn't call it a cap on volume growth. I would really call it a headwind. And the difference is we don't really ultimately care about the level of the macro, whether that's UMI or rates or anything else. What we care about is the first derivative. We care about the change. And so if conditions in the world stayed exactly as they are today for the rest of time, we would be thrilled about that. That would be just fine for us because ultimately, what we're doing is we're just generating alpha. Every month, every quarter, our job is -- we think about our job is like let's turn out technology and marketing wins that will generate a certain rate of growth.

And let's just keep doing that quarter after quarter. And if you keep doing that against a stable macro environment, inevitably you build a much bigger business. The challenge comes when you're doing that and at the same time, either interest rates are getting higher or the consumer is getting less healthy. And obviously, then those effects start canceling each other out and you can get less results than you were hoping to get. But as long as it's the case that the sort of U.S. economy, the U.S. consumer is not in some kind of structural decline where the real wages just keep going down or inflation keeps going up or interest rates somehow just keep on going up over and over again, then the business is in a perfectly good place.

And the dynamics you described are the right ones. It is true that when you have a higher UMI or you have higher interest rates, some people that you could have approved at the APR limit go over the APR limit and can no longer be approved. But then all the work that we do every month, every quarter, those technology and marketing advances that we always talk about, those things tend to bring people back in. If you can cut out some of the risk that comes from not understanding who's likely to default, if you can reduce some of the uncertainty that lets you access sort of lower target returns, that brings people back under the limit. So that's the work we're always doing. We're always pulling people back down. And so we just -- in our business, we just need there to not be too strong of a force pulling the other way.

We'll get into secured products later. I didn't suppose that or imply that the rate cap is a reason why you got into secured products, you obviously got there from technical know-how, building out the platform and the brand. But maybe in that context, you could talk a little bit about revenue diversification when we do get into a less favorable rate environment.

Yes. It definitely is helpful to be in more segments and more products. I think to some extent, they're all exposed to directionally similar thing, like I don't think there's any kind of lending where it's better for interest rates to be higher. It just isn't better. But it is certainly true that relative to having just the core personal loans business, I think the entire portfolio of products tends to be more diversified. You don't have as easy of an effect where people get pushed off the approval cliff. HELOCs is an interesting business because while people don't prefer to borrow at higher HELOC rates, it is -- there's sort of this offsetting effect where higher interest rates maybe makes people have different kinds of issues with their home equity and not being able to sort of move and get a new mortgage or do -- certainly do any kind of refi.

And so HELOCs might become, relatively speaking, more attractive than they were in another environment. Some of the less prime products like auto-secured personal loans or Cash Line end up being really good products for people who are getting pushed off the approval cliff in personal loans. So there's definitely some good sort of ecosystem forces. But having said that, all loan products are directionally subject to higher interest rates is worse, less healthy, borrowers worse.

Fair enough. Now this is one of, I think, the more interesting conversation lines that you've been talking about more recently. You were saying that the model is 2.77x more accurate. than a traditional benchmark, yet 80% of the improvement opportunity still lies ahead. What exactly is the denominator behind that 87%? And in your view, what does perfect underwriting model realistically look like?

Yes. So if you had 100% of the remaining error, that basically means like if you were to just make completely random predictions about who's going to pay back each month and who's not going to pay back each month, that would be the amount of error you would get at 100%. 0% would mean if you got all of the cash flow predictions right, so both the default and prepayments in every month of the loan's life, you've got all of those predictions right, you'd be at 0, and that's the number against which we're at like 87%.

So I guess as AI models become more and more sophisticated, the compute cost per loan. Is that rising? Or is that falling? And does compute ever become a constraint on the model complexity?

Yes. Compute is actually a pretty big issue for us. The combination of compute, cost and latency have been sort of -- it's a real sort of major frontier of work for the company. And I think in some ways, it's actually a testament to how real is the kind of -- everybody likes to talk about using AI in credit, but really like I don't think there's actually nearly as much action as there is talk. And one of the places you know it is whether you have to invest a lot of time and effort into managing your latency and your compute cost.

And for us, for better and worse, it is an area that we spend a lot of time in. The practical answer to your question is it goes up and down because the natural forces -- our models get more complex. The amount of compute they eat up is grows somewhat quickly, and that gets both very expensive and very slow for the customer. And then we have to pour more effort into the R&D side of managing that compute cost and latency. And then we -- with some optimizations, we bring it back down and then the cycle begins anew.

I guess are you still seeing that, I guess, as token prices are declining to some degree, you're still seeing these increases?

Well, the types of computations we do are just totally different than sort of LLM tokens. I mean they kind of maybe have similar dynamics. But yes, in our -- we're kind of just off in our own world there where it's not like anybody else's advances reducing token costs are going to help fundamentally our compute cost issues, like they're very proprietary algorithms that we've developed and we're using specifically for this consumer lending use case. And so again, for better and worse, it just is like it's our own battle to fight where we have to do fairly low-level optimizations to make the stuff more efficient.

And we just constantly do that. And as soon as we make the cost more efficient, the latency fast enough for the user experience, then we unleash the model developers to give us the next generation of models that will bring the cost and the latency right back up and then we start over.

Version '26, '27? Or what are we up to? I forgot. Maybe it was...

No, we're in the 30s now.

In the 30s. Okay. I got to update that one. So at the Investor Day, Upstart said that a 1% improvement in accuracy drove roughly 13% better conversion. This was 1.5 years ago, roughly. So now that conversion rate disclosure is going away, like what single metric do you believe best captures whether model improvements are creating value for borrowers and/or funding partners?

Yes. We manage the business to contribution profit, and I think everything kind of rolls into contribution profit. And I think what we found is we tried to disaggregate that into these component metrics, they will always get like confused by mix effects or sort of refilling the funnel with more borrowers that you can now economically source. And so ultimately, it's just -- everything flows into contribution profit. When we get smarter models, we're going to -- all else equal, we're going to convert more people. We might refill that bucket, but the way you're going to end up seeing it show up is more contribution profit. That's the number that every trade-off gets weighed against in operating our business and our models and everything else. And that number that number, I think, ultimately is the one that you got to watch.

Fair enough. I think the sell side is starting to change their thinking there as we get off of a 5-year, 6-year metric. I really like this question right here. So you just mentioned this briefly before, every lender out there now claims to have and use AI to some degree. In your view, like what's the strongest argument that Upstart's underwriting advantage compounds rather than commoditizes. And if you're wrong, like where would investors see that?

Yes. Well, coming back to contribution profits, I mean that is -- there's a reason that's a metric we manage the business to, and I think the one that's worth looking at because in some ways, it is the best single metric that encapsulates how much you're growing and also like how much you're growing in a way that's actually creating value and capturing value. And obviously, you can only do that if your product is differentiated, if your underwriting is differentiated. If it's not, if you're competing in a commodity business offering the same thing as ten other players who are able to underwrite the same way, then yes, you're not going to be able to get the margins that you're looking for.

And so contribution profit kind of captures it. And I mean, to me, like the proof is ultimately in the pudding of like how's our contribution profit growth compared to anybody else in the market. And I think -- and if you want to talk about underwriting specifically, ultimately, you should look at segments of the market where underwriting matters, which tends to be consumers where there's some risk and if you look at the sort of consumers where there's some risk, I think you'd just be pretty hard-pressed to find anybody that has contribution profit growth rates anywhere in our neighborhood. And I think if somebody could sustainably do the kinds of numbers that we think we're going to be able to do there, then I would admit that maybe they're doing something interesting on the underwriting side. But to date, I haven't seen it.

Interesting. So this has been a hot topic throughout the whole conference. I think we just had a session about not too long ago about it, but the use of AI agents in financial services more broadly. And I guess you've argued that AI agents that may become the primary interface for shopping for financial products. In that world, what is -- how would you define Upstart's moat? Is it still some degree of distribution? Is it really the data and the underwriting? Or is there something else?

Yes. We think that agents push the world towards a place where the best product wins. I think as compared to a world where maybe in a sort of human-operated world, it's much more the case that we have very, very finite limits to our time and attention and our willingness to go and check all the options to find the very best one to sort of consider new ideas, change.

And so you end up with a lot more walled gardens, which I think, frankly, is what a lot of players, both incumbents and even fintechs tend to rely on is the strategy is about like how do I sort of get the customer to sign up for one thing and then not check other things so that when they next need a thing, maybe my product isn't the best product, but they'll stick with me. And that's proven to be a pretty good strategy for a lot of players and obviously many, many really valuable brands franchises have been built on that strategy.

And I think that comes really under question in a world where suddenly the cost of checking all your options to make sure you get the very best one approaches 0. And if agents make that cost 0, then the best product just wins. And that's a world we would be really, really excited by. And we'll see how long it takes to come to fruition, but it's definitely something we'd be a big supporter of.

You don't need a distribution deal, just the truth, right?

That's right.

Super interesting. I'm going to -- I'm using Investor Day as a nice comparison time frame again here. Auto refi was a major focus at that point, but then it was later paused. And now it's back to some really exceptional growth just in the last few quarters. Like what did that experience teach you about where Upstart does and maybe it doesn't have an edge. I know you've rejiggered that product area quite a bit. Take us through that process that you went through.

Yes. So today, we're really happy with the progress of our new loan bets. And I would say all of our new bets are ones we've scrutinized really carefully, make sure that they're clearing a really high hurdle rate for investments in new areas. And so to your point, we used to have an auto refi product that we're not doing anymore, but the remaining set of auto products, all the secured products and Cash Line are all things we're really excited about. The secured products just got -- had a massive, massive improvement in their contribution margins this year, flipped positive. So really good wins there.

I think the auto refi experience specifically, I think what I took away from that is like today, we don't have the scale to try to educate the market on things that are already big things in the market. And so auto refi was a product that wasn't -- frankly, it wasn't a big established market. There weren't a lot of people out there looking for an auto refinance loan.

And so in order to win, you not only needed to have like a better rate, you needed to have a better rate by enough that somebody who wasn't looking could be convinced to care about this. And that's just a high bar. And I think there could be some world where we have the customer ecosystem and the sort of relationship with customers that you can do things that maybe they weren't already thinking about. But today, I think it just makes much more sense for us to focus on products where there is no question that the demand and the appetite is out there and what is missing from the market is the technical ability to serve that demand. And so that's what we want to focus on today.

Some of the operational things that two that needed to be ironed out.

For sure.

Right. Yes. The secured contribution margin this quarter improved from roughly down negative 35% to positive 17% in just one quarter, well ahead of your target. How much of that came from structural improvements like automation versus, I guess, better loan sale execution and monetization?

All of the above. Really, yes, I mean, we've been so happy with progress on secured products this year. We made it a major priority for us. We said our #1 goal in secured products this year was going to be getting them to contribution positive by the end of the year. We did that a quarter early, and it was exactly all those things you listed, which is in order to do that, you have to sell most of these loans to third-party buyers in order to even be able to mechanically recognize some of the revenue there. You have to make sure that those deals are actually good enough deals that you're generating -- you're capturing enough value on the deals that the math makes sense. And then your cost side of the ledger has to be good enough that the amount of revenue you're recognizing is bigger, and we're working on all those areas, and I think it's a big win.

So in the secured world, which is a fascinating growth aspect of the company right now, if you think about reinvestment, where does that next dollar go in the secured credit opportunity for Upstart?

Yes. So each of the secured products is in a kind of different place. I would say the auto secured personal loan product is the one that is probably the most similar, the most tied into the ecosystem that we already have with our core personal loan product. It's a pretty adjacent customer. They similarly find us through upstart.com. So that one, I would say, is sort of has the fastest path to being like a mature product in the sense it fits right into the rest of what we do.

The auto purchase product like is, in many ways, dramatically more complicated of a product, but it's the one we've been doing the longest. And we spent a lot of time, I think, longer than probably we would have expected when we first got into the business, but now we've put in the hours and we've really put in the effort and put in all the iterations, and we've kind of figured out how to work with car dealerships to distribute to the customers. So that product is -- despite being quite difficult, we've put enough into it that I think we're pretty much there.

And so I think that product, I don't view as one that's going to need to take a lot more investment. The HELOC product is the least sort of mature of the group. And the HELOC product obviously has a large market. I think it's something that's really interesting for a bunch of reasons. But when you look at the HELOC product, its ultimate distribution channels, a lot of those are very likely to be distributed through home adjacent partnerships. And those are partnerships that we don't have today or things that we haven't historically done. And so that's kind of a whole new area for us. And I think building that up is probably going to take some incremental investment dollars.

So you also have an existing borrower base over the years. I would imagine there's some awareness campaign that needs to happen here so that people understand Upstart is more than just a personal loan company. How do you believe that awareness is tracking right now?

We have -- I think there's a funny dynamic in our business where, on the one hand, we've talked about how more than 25 million unique Americans have applied for a loan with Upstart. I mean that's more than 10% of the relevant adult population. It's a huge number. And at the same time, somehow despite there being 25 million people who've done this, probably awareness outside those 25 million is almost none at all, like people just don't know about Upstart.

And I think actually that is, in many ways, kind of a reflection of a remarkable amount of upside and also a remarkable amount of discipline in how we've marketed is like we have been very focused on marketing to people who need this product, need it at that moment in time. And it's been a remarkably effective strategy for reaching those people. But we haven't done any kind of like broad-based marketing awareness campaigns or anything like that.

And I think our belief is that the sort of natural bridge between those 2 is that eventually, like everybody needs credit, some kind of credit at some time. And I think there's a path where you kind of just can organically get from the first thing to the second thing by just economically reaching people at the moment they need to and not having to invest so many dollars into reaching people when they don't actually get the product.

Fair enough. That's a really good point. I want to skip around here. So first of all, from marketplace to bank, it's a big topic right now. At Investor Day, there was this view, we never want to be a bank, right? And now Upstart Bank is the largest strategic initiative. What did you come to believe about the business that maybe you didn't believe a year ago?

Whenever we said we don't want to be a bank, really...

It's also the semantics...

The spirit of that is still -- the spirit of the statement was really like what -- when people think about a bank, they think of a business where you have to fund your own originations with your own balance sheet, and that means that your kind of rate of growth is capped by the amount of equity capital that you've got. And we never want that to be true about our business. We don't intend that to be true even hopefully, after we have our bank charter. We still very much intend to work through third-party capital partnerships, have the vast majority of our originations funded by third parties.

And that's really so that the rate of growth in the business is determined by how many of these technology and marketing wins we can turn out and not by the amount of equity capital that we've got. We want to be super efficient with equity capital, and we also want the business to grow as fast as it reasonably can on the borrower side. And so that's the combination that works. Tactically, we wanted to pursue the bank charter because it helps us operate efficiently in all 50 states with direct regulatory relationships. And that's going to be a real nice tactical win for the business, but it doesn't really change the underlying strategy that we want to be able to grow untethered to our equity capital.

I would imagine it's a structural margin driver, of course, especially from the origination operations side is -- I know you haven't sized it yet for us, and there's a long way before we get to that point. But I guess, generally, does this change the dynamics of the P&L significantly? Or any sense there?

I mean I think in an accounting sense, it will certainly like move some of the way that things are represented around. In a true economic sense, of course, it actually does improve the monetization of our loans because there's sort of less third parties in the middle that are taking some of the economics. And so that's a real win. But I wouldn't call it like a fundamental change to the P&L. I would say this is -- this is one of many things we could do that would drive more revenue and profitability in the business. But that's kind of what we're always doing.

And I think we always get this question like there's some confusion like, well, you used to have this long-term outlook for growth that didn't have the bank in it. Now you have the bank, why isn't it additive? And I think like the answer to this question really is just like because the bank takes work and other stuff we would do take work.

And for better or worse, the thing in our business is like we put in work, we get out growth. And I only have so many like units of work to put in from a fixed team. And so if I'm putting that work towards the bank, which is a lot of work. It's a lot of work to set up a bank. It has great benefits. But also if I wasn't doing the bank, it's not like I would be doing nothing with those units of work, it would be producing other kinds of wins that would also be generating growth and profits in the business. And so that's the way in which I think there's sort of a more, in my mind, almost more predictable relationship between input and output in our business, and the bank is just one way of doing input and there's others.

The next logical step, that kind of...

Yes. That's right.

I got you. I do want to tap on capital and credit to some degree here. So recent vintages have been generating attractive spreads, yet the beneficial interest marks have been negative for two quarters here. Why are those signals diverging? And maybe how should investors think about reconciling that?

Pretty simple. I mean, in a better macro climate, the spreads would be even better. I mean that's -- I think the spreads are good now and they're attractive and they're good spreads relative to benchmark. But I think in a better environment, the spreads would have been even bigger. And the beneficial interest are ultimately, they move relative to the previous numbers. And so any time macro gets worse, it's going to tend to make -- put pressure on the fair value marks.

It's also, I would imagine, though, the actual underlying securities themselves, which are -- have different characteristics. Does the -- I guess, if we think about what the balance sheet looks like Upstart's balance sheet right now, does that change the types of co-investments that you make after you do become a bank?

I don't think becoming a bank will necessarily change our strategy with respect to the co-investments. But separate from the bank, we definitely have an intention to continue improving the efficiency of our co-investments program and of how we do loan funding in general. We talked a lot this quarter about wanting to bring down the equity usage percentage in supporting our loan funding. So that's a pretty major priority of mine. And specifically with respect to co-investments, the same thing is true. We want the amount of capital that we have to contribute to the co-investments as a percentage of all the loan funding. That number is one that we want to bring down over time. So that's definitely very important, and it would be important with or without the bank.

So wrapping up here to think about 2027, key milestones that you're looking to achieve. Obviously, the bank is one of them. Maybe discuss some other major priorities that you're seeing for the upcoming year.

Yes. I mean we -- I think we've talked a lot about our priorities. In some sense, 2027 is just a year where I expect continuation of the core strategy. Honestly, I think the core strategy is working. It's working really well. You see it in that 48% year-over-year contribution number, that contribution profit growth number, it would be even higher without the macro headwinds we've been seeing recently. And those are phenomenal numbers. We'd be really, really happy to keep doing things like that. And that's coming from this continued focus on core personal loans. It comes from -- we talked about 2026 was the year that we really wanted secured products to get profitable and '27 will be a year to return to growing on those products. And so that's sort of a big focus for us.

And then ultimately, I think there's this piece about operating leverage, which is it's just time. It's time. Like we've been around for 14 years. I think it's time to start making a meaningful amount of profit in the business. And so 2027, I would like to be judged on whether we're producing records that are better than that macro supported 2021 year on every line of the P&L.

And that starts with originations and contribution profit and goes down to adjusted EBITDA and ultimately, like GAAP net income is like we should be doing record numbers across all of those lines of the P&L. And I think we did that in 2027, a year that probably is going to have far, far, far more challenging macro conditions than we faced back in 2021. I think that will be a pretty strong statement of the amount of progress we've made at that time.

Sounds fascinating. We're certainly behind that story and would love to see that come to fruition. So best of luck with that. Paul, thank you again for appearing today. Great conversation. We covered a lot of ground. Thank you.

Great. Thanks, Pete.

Good morning, and welcome to the Upstart Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. Sonya, please go ahead.

Thank you. Welcome to the Upstart Earnings Call for the Third Quarter of 2026. Joining me today are Paul Gu, our Co-Founder and CEO; and Andrea Blankmeyer, our CFO.

During today's discussion, 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 a 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.

With that, Paul, over to you.

Thanks, Sonya. Thank you, everyone, for joining us today. I'd like to use the expression that the growth of our business is equal to alpha plus beta time macro. The idea in this classic formula is relevant to every business, but especially important for understanding our results and outlook today. Since laying out our 2026 focus areas earlier this year, I couldn't have asked for better execution. .

The team has delivered durable, compounding growth from technology and marketing advances at an exceptional rate. At the same time, our business is sensitive to macro conditions, particularly borrower health and interest rates. Those became a sizable headwind in Q3 and have gotten worse to start Q4.

Looking back over the past few months, I planned on 3 conclusions I want to share with you today. First, I'm proud of the team in our delivery in Q3. Results were strong by just about any measure, and exceptional when accounting for macro. Second, we expect a mix finish to the full year relative to our original guidance. We see fee revenue and contribution profit finishing higher, but total revenue and adjusted EBITDA finishing lower. That's because macro has an outsized impact on revenue derived from our balance sheet.

Third, I am more confident than ever in upstart's long-term trajectory. That's not just obligatory CEO optimism. Macro comes and goes, the alpha comes and our results are proving we can deliver it. Let's talk about each conclusion, starting with Q3 results. Contribution profit, our best single measure of profitable growth in new originations reached $218 million in Q3. That's up 48% year-on-year, a new record, breaking the 1 we set just last quarter.

This result is strong, but it understates the underlying progress in the business. That's because our Q3 numbers, starting with origination volumes and cascading down the P&L were held back by a sizable macroeconomic headwind. The Upstart Macro Index or UMI is our estimate of how macroeconomic conditions affect defaults on our personal loans. It averaged 1.5% in Q3, up from 1.41% in Q2, and we underwrote proportionately more conservatively. The explanation is likely pretty simple.

Annual inflation reaccelerated to 3.7% with prices rising twice as fast as wages over the past quarter. Not surprisingly, consumer delinquencies have risen across a range of third-party measures. The share of all Americans at least 30 days late on and credit obligation jumped to over 19% in September, the highest level in years. Without that 9-point increase in UMI, we estimate Q3 originations would have been at least $370 million higher.

In that scenario, year-on-year origination growth would have been 57% and contribution profit grew 61%. We earn that alpha in 2 places. In core personal loans, we improved the models, user experience and borrower ecosystem. In secured, we improved automation, conversion and monetization in pursuit of profitability. In Q3, we added over 140 new features to our core underwriting model, including numerous proprietary signals of how consumers engage with our platform before they take a load.

Combined with improvements to our algorithms and training process, our models accuracy lead over a traditional credit scoring benchmark widened to get. Our model is now 2.77x as accurate and 87.27% of the inaccuracy GAAP is still ahead of us. That's our runway. We also used better models to reach more people. Our marketing programs and user experiences drove more than 1 million people to apply for an Upstart loan for the first time this quarter. Bringing the cumulative number of unique Americans who have applied for an Upstart loan to more than $25 million, all while lowering our cost of customer acquisition.

More than 555,000 unique Americans took out loans in Q3, a new record, and they are more likely than ever to come back. Over 250,000 of them were returning customers who had already borrowed with us before. Now to Secure box. We told you we wanted to be contribution margin positive by the end of the year. The team went all in and got it done in Q3.

We Secured contribution margin was a positive 17%, an improvement of more than 50 percentage points sequentially. I'll give a few examples of how we got there. First, we sold more of our secured loans to third-party capital partners and at better terms. Second, we increased the level of automation across our secured products.

In home, nearly 40% of funded loans were fully automated with no human intervention by Upstart, up from less than 5% a year ago. In auto secured personal loans, we significantly increased the fully automated rate over the last year from 4% to 21%. Third, in auto retail, we began optimizing dealer compensation around where we create the most differentiated value, and we rebuild our credit application, increasing end-to-end conversion by 31%. These are young products in enormous markets.

After locking in our margin gains this year, we'll gradually shift our focus back to growth in 2027. As we do that, we intend to hold secured contribution margin consistently positive. Between breakeven and 25% quarter-to-quarter as we refine our approach to growth in each category. Longer term, we expect those margins to resume their march upward as we create increasing differentiation and value for our customers. just as they did historically in core personal lens.

Our other major focus this year has been capital efficiency. Loans held directly on our balance sheet declined to 4.8% of total loans outstanding in Q3. More than 95% of all Upstart powered loans outstanding are now third-party funded with the bulk coming from committed partnerships. In exchange for commitments of up to 2 years, we co-invest and share in the performance of those loan cohorts. Those partnerships are designed to make our funding base resilient through market cycles. Our priority now is reducing the share of equity capital our loan funding requires from us.

Over the past year, we grew outstanding loans across the platform by 38%, while increasing equity used only 7%. That's a good start, and we intend to keep going. Another project relevant to our capital efficiency is Upstart Bank. We are on track to open Upstart Bank in early 2027, subject to the remaining regulatory approvals. When that happens, we plan for most of the loans on upstarts balance sheet today to move to the bank and become deposit funded, which will unlock net cash rather than consume it.

As such, we expect capitalizing the bank will require no incremental equity capital. Once open Upstart Bank will provide the many benefits we've previously shared, expanding our market reach, reducing operational complexity and providing more efficient financing for certain loans. As we've said before, it will not change our strategy of funding the vast majority of loans via third-party capital.

Now let's turn to our outlook for the full year. In February, we guided to total revenue of $1.4 billion and adjusted EBITDA of $294 million. This assumed UMI went no higher than 1.5 and interest rates were flat or down. Since then, UMI has climbed 14 points from 1.39 to 1.53, while the 2-year treasury yield has jumped by more than 115 basis points as of the end of October, with around half of that increase happening in September alone. Those are large moves, and I want to put them into context.

We have previously shared our estimate that a 5-point increase in UMI, for example, from 1.4 to 1.45, reduces our daily originations by roughly 5% to 10%. Higher funding costs have a similar effect. Put simply, for each 1 point increase in UMI or 10 basis point increase in funding costs, we'd expect daily originations to fall by roughly 1% to 2%. This heuristic applies to our primary business model of earnings fee revenue from New York originations.

But there is an additional way that Macro impacts our P&L, and that is via the loans and co-investments on our balance sheet. Because these positions were accumulated over many quarters, they are relatively large. As a result, an increase in UMI causes a significant reduction in fair values of net interest income. The impact to total revenue and profit from this is actually larger than the impact from reducing new originations. Higher interest rates also lower fair values elevate to a much lesser extent.

Combined, these effects have created a substantial macro headwind for us. Without that pressure, we believe the full year will be trending well ahead of our original guidance on every line. As it stands, we've outrun the macro on the metrics tied to new originations and now expect full year fee revenue and contribution profit to modestly exceed our original guidance.

However, income from the balance sheet is tracking well below our initial outlook. In addition to being more sensitive from macro, as I just explained, this line item, unlike fee revenue, does not benefit from most of our advances in technology and marketing. As a result, we now expect full year total revenue of approximately $1.35 billion and adjusted EBITDA of approximately $260 million. This updated outlook assumes UMI does not exceed 1.55 through year-end and no material change to 2-year treasury yields from current levels.

Finally, I said I'm more optimistic than ever about the long term. It may sound like an odd conclusion to draw when macro is worsening, and we're missing on profit, but it's the truth. I'll say it again, growth equals alpha plus beta times macro. Mathematically, alpha is the difference between actual results and the results you'd expect from macro alone.

Our nominal contribution profit accelerated to 48% year-over-year in Q3, well above what is implied in our multiyear guide. Without the increase in UMI we estimate it would have been at least 61%. On a full year basis, it is remarkable, frankly, that despite the 14-point increase in UMI and over 115 basis point increase in interest rates we still expect to generate more fee revenue and profits from new originations than we expected at the start of this year.

Beta. Beta is the sensitivity of our balance sheet derived income to macroeconomic conditions, and it is high today. Fortunately, we're already bringing it down as we reduced the ratio of up star equity dollars required to total loans funded. We expect that will continue. Macro bounces around. Sometimes it's a plus, sometimes it's a minus. UMI has gone down in exactly 15 of the last 30 quarters. Same for interest rates.

My own view on macro reminds me a little of Warren Buffett's New York Times piece in 2008 called by American. I am. American borrowers are hurting this year because inflation flipped real wage growth negative. But this is the United States. People get down on their feet. Real wages rise over time. The macro will take care of itself.

Most importantly, we're proving the Upstart engine, execution against our years deep technology and marketing road map delivers Alpha at an exceptional rate. Keep compounding that, and I believe no matter what, start becomes an extremely large and profitable company.

With that, I'll turn the call over to Andrea.

Thanks, Paul, and good morning, everyone. In Q3, our focus on core personal loans improving secured unit economics drove record contribution profit. Combined with expense discipline, we delivered higher GAAP net income and improved capital efficiency against a harder macro backdrop.

I'll walk through the quarter then discuss our revised full year outlook. Total originations were $4.1 billion, up 44% year-over-year. Within that, unsecured originations were $3.5 billion, up 33% versus last year, including core at approximately $2.45 billion.

Secured originations were $587 million, up 194% with auto loan volume roughly tripling and home roughly doubling relative to Q3 of last year. Total revenue was approximately $371 million, up 34% year-over-year. Revenue from fees was a record $364 million, up 41% year-over-year. Unsecured lending contributed $330 million in revenue from fees, up 30% year-over-year.

Secured products contributed $34 million, up 538% year-over-year. Take rate, which we define as revenue from fees as a percentage of total originations was 8.8%, up about 60 basis points from 8.2% in Q2. We with both product categories improving sequentially. Net interest income and fair value investments totaled approximately $6 million, down $1 million or 65% year-over-year. Two main things drive this line.

The average balance of loans we hold and the expected credit performance of those loans and the loans underlying our beneficial interest. Sequentially, this line declined about $10 million. Roughly half of that decline was fair value write-downs and charge-offs at average UMI increased from 1.41% in Q2 to 1.5% in Q3. The other half reflected the debt sale in Q2 that did not repeat. Rising benchmark rates had a minimal impact on our fair value position in Q3.

Next, contribution profit. which is our non-GAAP metric defined as revenue from fees minus variable costs for borrower acquisition, verification and servicing. Contribution profit reached a record $218 million in Q3 and up 48% year-over-year. Contribution margin was 60% versus 57% in Q3 2025 and 55% in Q2 2026. The 5 percentage point sequential increase was driven by margin improvement in both our unsecured and secured categories.

Unsecured contribution margin was 64%, up 2 percentage points from 62% in Q2, reflecting a higher take rate, along with lower borrower acquisition cost as a percentage of originations. Secured contribution margin was a positive 17% compared with a negative 35% in Q2 and roughly 200 percentage points better than Q3 of last year. higher take rate and lower borrower acquisition costs helped us reach a positive contribution margin quarter ahead of our target.

As Paul mentioned, we expect more quarter-to-quarter variability in this margin than in unsecured as we scale these businesses, and we intend to hold to a band of breakeven to 25%. GAAP operating expenses were appropriately $335 million in Q3, up 32% year-over-year and down 4% sequentially.

Within that, variable expenses borrower acquisition, verification and servicing costs declined 6% sequentially, with more acquisition costs alone at 11% to $91 million. Fixed expenses defined as total operating expenses minus or acquisition, verification and servicing costs declined 3% sequentially to approximately $188 million. Better than the low single-digit growth we guided to in August.

Within that, op based compensation was $41 million, down from $46 million in Q2, reflecting seasonality in how we recognize this expense. Excluding stock-based compensation, fixed expenses were roughly flat sequentially. Net income was approximately $37 million, up 15% year-over-year with a 10% margin.

Diluted EPS was $0.33 based on a weighted average diluted share count of $125 million and reflects the assumed conversion of dilutive convertible senior notes, consistent with GAAP requirements. Adjusted EBITDA was approximately $89 million, up 26% year-over-year with a 24% margin. Turning to funding and capital efficiency.

As Paul discussed, we're focused on supporting platform growth with proportionately less equity capital, bringing down the beta in his equation. To measure our overall equity capital use, we combined the equity supporting, one, the loans on our balance sheet; two, our co-investment exposure alongside committed capital partners; and three, our retained interest in securitizations, all net of related financing. Taken together, the overall efficient equity efficiency of our platform has been improving.

Total equity capital used represented 9% of our total platform loan balance outstanding in Q3. We down from 11.6% a year ago. That improvement reflects the declining share of loans held directly on our balance sheet, even as we increased our co-investments alongside committed capital partners. Capital ultimately flows the assets with the best risk-adjusted returns.

We have been able to grow our capital partnerships on better terms over time because of our strong credit performance. The average return of our last 12 quarterly loan vintages exceeds U.S. treasuries by approximately 660 basis points.

Next, Upstart Bank. I'll explain how we expect to fund this launch and transition loans from the parent company, subject to the remaining approvals. First, we'll capitalize the bank with approximately $404.1 million in cash and servicing assets. Second, Upstart Bank will raise broker deposits through deposit partners. We have agreements with 2 major partners, giving us the ability to raise ample deposits shortly after the bank launches.

Using deposit funding, Upstart Bank will buy most of the existing loan book and begin funding new originations on our networks. Third, the equity funding underlying existing loan book will be released as cash and we'll take orderly steps to take out the related warehouse facilities. We expect our co-investments and committed capital partnerships will remain outside of the bank.

The net effect of these transactions expected to be an increase in our consolidated cash balance. We expect these transactions to take place over several weeks following the initial bank capitalization. Illustratively, using our Apple Q3 balance sheet, these transactions would result in pro forma consolidated unrestricted cash of over $1 billion, and the bank would have a Tier 1 leverage ratio and a total risk-based capital to well in excess of our required minimums.

Turning October and our full year outlook. October originations were approximately $1.25 billion, with daily volume down 9% versus September and up 26% year-over-year. The sequential decline reflects 2 macro headwinds. UMI rising over the course of the month, benchmark-driven increases in funding costs in September flowing through to borrowers in pricing in October. Those tractors weighed on volume even as our math continue to improve.

October is a useful starting point for our outlook as benchmark driven increases in funding costs are already reflected in October's pricing and volume. For the full year, we now expect approximately revenue from fees of $1.32 billion and total revenue of $1.35 billion, contribution profit of $750 million, up roughly 41% year-over-year; adjusted EBITDA of $260 million, representing a 19% margin.

Relative to our original outlook, we now expect higher fee revenue and contribution profit but lower total revenue and adjusted EBITDA. Our execution has more than offset macro pressure on the metrics tied to new originations.

A reduction in our outlook reflects lower net interest income and fair value adjustments, primarily driven by higher UMI. Our latest UMI reading is 1.53, above the average we saw in October.

Our updated guidance assumes UMI remains at or below 1.55 through year-end and no material change in 2-year treasury yields. With October originations known only 2 months remaining, we have greater visibility into full year fee revenue. Fair value adjustments remain more sensitive to changes in macroeconomic conditions across our existing loan portfolio. [indiscernible]. We entered final month of the year with record contribution profit. positive secured contribution margin and improved capital efficiency. Our focus remains on building on that product while maintaining events discipline.

With that, operator, we're ready for Q&A.

[Operator Instructions] We'll go first to Dan Dolev with Mizuho.

Can we ask you a little bit about the Gulf home loans -- we thought this was like a really nice thing. There is a lot of strength in the home loan growth. How do you feel about selling those versus some of the other loans and how you feel about this market overall?

Dan, thanks for the question. Yes, we're really excited about our home loans business. As we are really about, at this point, every product that we're in, every business line that we've got is one we have a lot of conviction in, so we're really, really focused as a company.

And in this quarter, we were -- we were hyper-focused on getting the secured products to profitability what we shared over the last couple of quarters is that, that was our real #1 priority for the secured product teams. And I'm really proud of what those teams pulled off is they did a really hard pivot to just focus on margin getting above breakeven.

And you can see in this quarter, we did it a whole quarter early before the end of the year, we're at I did a 17% secured contribution margin. And yes, we absolutely expect a lot more growth out of these products. But to me, the sort of first order of business was getting to profitable. We have a little bit more work to finish up some of the efforts there that will really be what we do this year. And then as I said, in 2027, our attention is going to turn back to growth, and we certainly expect this to be a really big part of our future.

We will go next to Kyle Peterson with Needham.

I guess I wanted to start out on interest rates and kind of the moving pieces kind of impact on the model. So Paul heard your comment that, obviously, I think there's a bit of kind of volume and approval choke off with the higher rates. But I guess, is that the full impact that you guys expect? Or are there any kind of knock-on impacts from funding partners?

I'm assuming their cost of capital probably ticked up a little bit in October as well. So I just want to see if there are any other kind of second derivative impacts we should be mindful of with regards to rates.

Thanks for the question, Kyle. Yes, for everything we sort of know as of today, the impact of rate increase that we saw in September and where rates were in October, is fully reflected in the pricing on our platform in October. So our October originations are reflective of the pass-through of that cost of capital to our platform and our pricing. Just kind of stepping back maybe to say a little bit more about how rates kind of show up on our platform and in our funding costs.

At a high level, you can think about most of our institutional capital as kind of being most levered to your treasuries on average and our depository and bank capital kind of being benchmarked to Fed funds. That's kind of the mix of benchmarks kind of on average underlying our platform. And as a marketplace, what we're typically doing is updating pricing on the marketplace on about a monthly lag.

So to the extent that we see rising rates in the month of September as we did, for the most part, that is flowing through into pricing on our platform and funding costs in the month of October. The final thing I'll just maybe comment on is that while we've seen treasuries up 120 basis points over the course of this year, that hasn't necessarily been the effective funding cost pass through to our platform.

Over the course of this year, we have seen across our cost of capital improved spreads and improved cost of funding that has partially though not fully offset increase in rates.

Okay. That's helpful. And then I guess just as a follow-up, I really appreciate all the color you just gave on set bank, but that was great. But I wanted to see if you guys could provide any color on where take rates should go for loans originated by the bank once it's up and running, I guess, I would assume it's directionally better if you can originate directly. But any color there on kind of what the unit economics would look like for a loan originated through the bank -- through a conduit bank would be very helpful.

Yes, that's a great question. And so one of the benefits of the bank charter will be improved economics for Upstart in that we will no longer need to pay the fees and accrued interest to our bank partners that are originating loans today. So we will retain those economics.

And so an expectation we would expect to see modest improvement in take rates as we transition to Upstart Bank as we will be retaining fees that we currently pay to our originate partners today. as well as a modest improvement in net interest income as some of the economics to those parties are flowing through interest income line.

We'll go next to Peter Christiansen with Citi.

Paul, I guess, how should we think about UMI staying around these kind of levels, 155, 153 ish throughout next year? And I'm curious how do you think about Upstart grow fee revenue, contribution profit at attractive rates? Or does the longer-term framework requires some improvement in consumer credit conditions from here?

Yes. Pete. Well, first of all, I think the thing I always say is we don't claim to predict future changes to macro conditions, we don't have any special view on what's going on in Iran or the war oil prices. I mean, I think everyone's just got to have their own models for that and where interest rates and inflation are going. But we do pride ourselves on being the fastest and most precise to respond to that, at least as it relates to consumer credit, and that's what we do with the UMI.

I would say in terms of our longer-term outlook, I think the results today, what we basically said was in the near term, the macro has a pretty large impact on our results, particularly via the sort of balance sheet component of our business. But actually, on a longer-term basis, we're feeling really optimistic about the state of the company. And that basically comes from this framework around how much of the performance we've seen is alpha, how much of it is really just the macro.

And in the kind of medium term, I think if macro kind of takes care of itself, and it really mostly just means it kind of stays around where it is. then we're really optimistic that the rate at which we are delivering also the rate at which we're generating growth that is tied to our advances in technology and marketing is going to be plenty to sort of sustain the kind of multiyear growth that we've talked about and that we've guided to.

So we actually don't think that we need a tailwind from macro, but certainly, a headwind is going to subtract against whatever efforts we're putting in. But right now, we're feeling really optimistic that the rate of progress we're generating is going to be very good in a flat or in a flat environment.

That's helpful. And then I do want to ask about the secure contribution margin. Great to see that now positive, 17%, quite a slip in 1 quarter. Just trying to get a sense of how sustainable that is, is the improvement coming from I guess, more structural operational improvements or scale versus just favorable loan sale execution and funding market conditions?

Yes, it's all of the above. As I said, we put a real focus on getting these secured products to profitable and really every team touching those products what they had in their mind was, how do I improve the margins of this product? And so certainly, loan sales as a part of it. There's sort of both the mechanical and accounting part of it.

There's a real part, which is about getting the deal terms right so that we're earning the right take rates on those products, the right fee revenues. There is sort of real improvements in automation, which I talked about, that's true in both the home and auto products. Just more automation is both better for conversion and better for cost. And then there's some wins in monetization and figuring out where we generate the most value and capturing that in an intelligent way using models there.

And so all across the board, I would say, really everything got worked on. And I said that we need to walk in some of these gains the rest of this year. And that's just because we did so much in such a short period of time that we want to really make sure everything is ready to scale before we go back to focusing on growth.

We'll move next to Patrick Moley with Piper Sandler.

So I wanted to ask on expenses. Year-over-year engineering and product was up about 45%. Total OpEx was up around 32% in the quarter and 38% year-to-date. So with the implied 4Q EBITDA margin in the high teens. I was wondering how you're thinking about fixed cost growth in the next year? Is the plan to let margins keep -- or compressed and keep investing in the models? Or should we expect head count growth to slow from here? And then how does that square maybe with the 25% longer-term margin target for 2028?

Yes. Thanks for the question. So implied in our guide and what we expect from Q4 is that expenses -- fixed expenses will be about flat from Q3 to Q4 after a modest sequential decline here in Q3.

Stepping back as we look at the sort of total Arcan trajectory of 2026, this has been a bit of an investment year for the business as we've invested forward in laying the groundwork for our newer secured products, which have just flipped a contribution margin positive this quarter as well as making forward investments in the bank. And so as we look ahead to 2027 and beyond, and certainly, as implied in our 25% guide in 2028, our expectation is that we'll see improved operating leverage in 2027 and 2028 than we saw here in 2026. As the fruits and the products of those investments start to come forward.

We'll go next to Simon Clinch with Rothschild & Company.

I wanted to go back to the prior question around how to think about growth when the UMI stays around this kind of level, the 1.5 or 1.55 level. I was wondering if you could talk about the I guess the ability for the company to calibrate to a high level of UMI, and what kind of structural growth and therefore be delivered? And how long that might take for you to calibrate to those levels?

Yes. We think it bakes in pretty fast. We don't, as a company, count on macro getting better. We're not hoping for a macro tailwind to really push the business forward. And this really comes back to this idea that there's an auto component to growth, and there's a beta component to growth.

And I think there are some truly cyclical businesses out there that are just sort of hoping that the macro gets better and that's what powers their growth. And that's not us in any way, none of our numbers, none of our forecasts our guidance is built on the idea that we're waiting for interest rates to come down or we're waiting for you all mind have come down.

Really the growth driver in our business is kind of this Upstart road map around technology and marketing. And we think there's a multiyear long road map where we can keep delivering alpha at an extremely high pace like we've been coming back to this idea that in Q3, in spite of this 9-point average increase in UMI we did 48% year-over-year contribution profit growth.

And if you took that 9 points if you might increase out of the equation, it would have been like 61% in contribution profit growth. That's what we think about as sort of the rate at which we're delivering alpha, the sort of secular rate of growth when you sort of noise the graph and take out the macro part of it.

And so obviously, if the macro is just flat, even if it's flat at a high number, and we keep delivering a significant rate of sort of alpha-driven growth, then I think the business is going to do really, really well. And so that's kind of how we make our forecast, how we build our business plan. And because of that, we're extremely optimistic about the long-term gain.

Great. And just a follow-up as well. Paul, you mentioned the -- I think it was 250,000-plus repeat customers. I was wondering if you could just give some color around the characteristics of those. How many products are they buying? How much of kind of repeat penetration opportunity there is with -- just within those repeat customers alone.

Yes. That is a combined metric. It is a metric that covers both people who are taking out a repeat using the same price as well as people switching to a different product, and obviously, this is a pretty new dynamic in our business and what we're really excited about. We used to just have essentially one product to personal loans, and there wasn't a lot else for people to do. And now we have this whole suite of products around home and small dollar and cash line and the HELOC product. We have the auto secured personal loans. So there's a lot of different products that a consumer could engage with.

And I think as we complete building out the consumer product suite. We expect this to be a more and more important dynamic. And that's why we started sharing some of these metrics around there are 25 million unique Americans that have applied for credit with Upstart. I mean that is a huge number, and I don't think there are a lot of other platforms that have that kind of reach.

And as we keep growing that number, I think it's going to become increasingly important for us to just sort of do marketing within the sort of ecosystem of people who already know about upstart who already have data shared with Upstart already has the kind of relationship and trusting upstart. And I think as we just have more products, each of those products becomes better and people get to know and trust us, I think that's going to be a really powerful customer ecosystem.

We'll go next to John Hecht with Jefferies.

Andrea, you sounded like the take rate was up in the quarter as you passed on some increases to the channels. I'm wondering, was that across all products? Was there any of the products that had a steeper increase in take rate?

And are there -- is there any feeling like from a competitive factor on your ability to increase your fee structures?

Thanks, John. Yes. So we did see our take rate improved from Q2 to Q3 by about 60 basis points, and that was driven by improved take rate across both unsecured and secured. So I wouldn't necessarily characterize the main driver as kind of increasing fees through to the borrower. So on the unsecured side, the main driver of the increase in take was modest mix shift towards core personal loans, which inherently has a higher take rate versus prime.

And on the secured side, we saw a very meaningful improvement in take rate really driven by: one, increased sell-through of loans to third parties to improve execution on those deals. And three, some degree of the monetization that you're referring to, so continuing to optimize how we think about origination and other fees charged across those newer products. So those are really the sort of 2 drivers.

There's a mix dynamic and then there's sort of the broad improvement we saw in secured as we're selling more loans through at improved deal terms.

I just want to jump in -- I was just going to jump in just to remind everyone that the take rate number really is in a number that we manage the business to. It's just -- it's kind of like an output of the system, but we are every day thinking about, hey, what's the right take rate for us. Really, we think about contribution profit, and that's sort of the north star for us.

Okay. That's helpful. And then turning to funding, I mean, I think a majority of your loans are invested in the forward flow type contracts. As we get into next year, what do you think that mix will change? Or we still have a focus on that, particularly given your kind of your desire to kind of optimize or minimize the capital requirements how do we think about your goals for funding next year.

Overall, I'd say that we are -- so 1 sort of growing the committed capital partners as a proportion of our funding has been an important strategic objective for us to help improve the resilience of our platform. through the cycle. And what I'd say is that we sort of like the level that it's at today.

So as of Q3, about 60% of our platform was funded from committed capital partnerships, that's about the right level from our perspective on a go-forward. And so our expectation is that, obviously, with some plus or minuses over time, we would expect that level to stay about constant over the next few quarters. and that translates and helps translate through to as we think about improving the equity usage of our overall platform.

And so as we look to improve the equity usage of the overall platform, one level will be sort of that line item stabilizing versus continuing to grow. Two, we expect that the committed capital partnerships will increasingly start to cash flow out to us. There's some lag to cash flow there, which will reduce the equity usage associated with prior vintages.

And third, we continue to expect that as we renew our committed capital partnerships, as we've seen in the past, will drive better deal terms against those, including on the amount of capital co-invested. So overall, sort of stepping back across the platform, very important to have a proportion that is in these committed capital partnerships for overall stability and resilience of our platform.

And we think the level that we're at today is about right. Holding that level constant along with the 2 other drivers, we do expect that to contribute to reduced equity capital usage on the platform, on average over the next multi-quarter period.

We'll go next to Mihir Bhatia with Bank of America.

I wanted to ask -- I wanted to start with UMI and just go back to the impact on the business. I think you've quantified the impact on originations. But what about on the balance sheet? I think like to put a finer point on it, you've assumed UMI stays at below 15, 1.55. But if it moves to 1.6, can you just help us quantify the incremental balance sheet impact?

Like how much of the credit deterioration is already reflected in fair value? And how much could potentially come in more as UMI moves?

Yes, it's a great question. And you can sort of see in our balance sheet that over the last couple of quarters in Q2 and Q3, we've been reflecting negative fair value write-downs associated with our risk capital position, so the beneficial interest.

And so that line item moved from a positive $13 million in Q1 to negative $7 million, $8 million in each of Q2 and Q3, respectively, which is reflective of sort of credit and default pressure on those populations largely driven by the increase in the line that we are seeing broadly. And so as we've guided toward an expectation in Q4 as UMI has risen to 1.53 over the course of October.

Our expectation is that in hitting that $260 million of adjusted EBITDA, UMI at 1.55 or below would allow us to kind of deliver that we are sort of looking ahead, allowing for some degree of variability in the fair value mark as of the end the flow-through from UMI to fair value is not necessarily a direct one, though, of course, it is highly correlated as UMI is a measure of the macro-driven default risk of the population.

And so it has a real impact on the fair values and hard to quantify that exact amount specifically. And what we will say again is that in that $260 million of adjusted EBITDA for the full year, assuming you of 15.5% or below should be able to deliver that.

Got it. Okay. And then maybe just turning to credit and credit performance. I think you highlighted 660 basis point premium to treasuries over the last 12 vintages. So maybe talk about the most recent vintages against your loss expectations as UMI has moved higher. Are they all currently running above expectations.

Sorry, I was muted. Thanks for the question on credit here. there's some variability in the credit performance to vintage. And so we don't have like vintage specific disclosures that we released. But you are generally right that all else equal, when UMI is shifting up, it means that our -- what we are observing is that the same borrower is more likely to be delinquent or defaults compared to an environment where UMI is lower.

And so mechanically, that does tend to mean that loans that were underwritten in a lower ULI environment are going to have more delinquency or more defaults in a higher environment, just sort of, I think, kind of mathematically how that mechanic works. But having said that, I think there's a couple of important things to keep in mind is that we really think about the accuracy of our models as being relative to UMI, and that's because, ultimately, again, we don't control or predict what's going on in the background macro conditions.

What we can just be the fastest and most precise in responding to macro whereas kind of traditional credit metrics give you a bit of a lagged or a compounded view of what's going on in true macro as opposed to maybe what our underlying mix effects or timing effects or cohort effects, the UMI system is really good at giving us a clear read of what is really attributable to macro.

And so we can get that faster and more precise response that means newer vintages can get underwritten correctly on a much faster time line. And then we can really judge how our models performed relative to what's going on in the UMI. So yes, if Usta elevated at 1.53 or 1.55 for the rest of the life of these loans, and they're going to have higher delinquencies than if it had been at 1.5 or 1.4% for sure.

But we think separation accuracy, the thing that really our models are best-in-class, that's something that matters in any kind of macro environment. And then the second thing I would say is we talk about returns relative to treasuries as a benchmark because really, it's that spread. That's the number that investors are really earning.

That's really the sort of thing you get by partnering with Upstart and buying our loans and really, by any measure, I think those spreads are really healthy, really good. And as you can see, ultimately, that investors and capital partners are still really excited to partner with us and buy our loans, and we're still continuing to grow and improve those programs, and that's the ultimate test that we're delivering good risk-adjusted returns.

We'll go next to Arvind Ramnani with Truist.

I just wanted to ask like the -- these AI models are getting bigger and kind of more complex, how should we think about kind of compute cost per loan does it really kind of scale with the originations? Or does it really come down with volume?

Yes. It's actually a great question. And it's interesting that you asked because I think typically in lending businesses, compute costs are not a real thing to worry about because mostly, if you're using kind of a traditional credit model. It's just not going to be that expensive to compute and do the inference. In our case, entrance is a real cost, training is a real cost.

And these are things we think about, and these are things that have shown up in some of our financials in 2026, and it's something that we actively put a lot of effort into optimizing. And so that's -- there's a bunch of efforts on the training side. There's a bunch of efforts on the inference side.

Some of that is really kind of like low-level stuff in making the actual computations more efficient, and we just -- we do a lot of computation. So it ends up getting pretty expensive. I think we actually did make a lot of progress on this over the course of the year. It's been a real focus area for us. And I think that's 1 of the things that when Andrea talks about us getting more operating leverage relative to sort of the OpEx growth that we expect to see.

This is 1 of the things that is getting better, and we feel better about. So it's actually, I think, going to be increasingly an area of competitive advantage for us. It's something we've invested in that I think most others in the lending world just haven't had too much reason to think about yet.

Yes. That's great. And I guess as far as the investment, do you own some of the infrastructure here? Are you kind of using outside vendors particularly in the company savings.

We use cloud vendors. Yes, we don't have our own on-prem servers.

We will go next to Reginald Lawrence Smith with Loop Capital.

Really good numbers on the fee take rate. I know you don't drive the business that way, Paul. But just curious, when you're thinking about kind of recent origination trends, and I'm curious about the duration of the loans and whether or not you've seen a lengthening of duration because I believe that, that can impact kind of upfront economics for you guys.

And I'm also curious about thinking about like where, I guess, your weighted average coupon is for some of these core loans today and how much headroom you have to raise rates if treasury yields continue to rise and being mindful of kind of APR caps and things like that. Anything you could tell us about the duration mix of new originations and the weighted average capital coupon rather would be helpful. And then I have 1 UMI follow-up.

Thanks, Reginald. Yes, on the overall duration, it's been relatively consistent. So our personal loans have about a 1.8 year weighted average life, auto about 2 home about 3 years. So maybe a little bit of modest mix shift to secured has extended the duration very modestly, but it's not particularly visible on an aggregate basis.

And then your question on you run me the second part of your question. The weighted average, yes. sorry.

Just on duration, I'm really focused on the core loan product. And so I'm curious whether that duration in terms of new originations has lengthened at all as you've seen better fee revenue.

No. No, that's been relatively consistent. And then on the weighted average coupon front, you are right that we are originating given the borrower that we are often focused on in the core at higher APRs that often approach a 36% interest rate cap. And so kind of the sensitivity to our origination volume related to that is all embedded in the UMI and funding cost heuristic that Paul provided.

So about a 10 basis point change in funding cost flow through the platform or about a 1 point change in UMI would be expected to drive a 1% to 2% change in originations. And that sort of sensitivity and relationship includes several things, but also includes the impact of where we sit from an APR perspective relative to the cap.

Okay. That makes sense. And if I could sneak one last one in on -- and just thinking about unemployment levels, it's still fairly low from a historic perspective and UMI is already kind of 1.53. How should we think about that sensitivity? If you were to see increase in unemployment, like how might that impact your mind?

Yes, it's a great question. Whenever we talk about macro, I think there's always some confusion around what macro is for us and what parts of macro really matter. People always say things like, "Oh, well, the American consumer seems to be really healthy." People are still spending lots of money and buying lots of stuff and I'm always like, well, we don't like it when people are buying lot stuff. That's actually not the macro that is good for us.

And I would say, recessions and employment sort of the typical measures that people talk about are probably somewhere in between. They certainly do matter to us. But there -- they by themselves probably aren't the whole story of the most important story -- what we really have been very focused on are things like real wages, how much money is coming in versus how much is going out.

Interest rates obviously matter. We talked about that today. And so I think typically in a recession if you see unemployment go up, A couple of percent. That's certainly all else equal, a bad thing, but then you'll typically also see inflation lower, you'll see interest is lower, and those things will be a real positive. And depending on the magnitude of those things, it could end up being sort of positive or negative to the overall business.

And that's just because if unemployment effects narrowly only say if you get unemployment going from Florida, 6%, for example, that's 2 percentage points of the population that are negatively affected. But then the other 98% are getting the benefit of maybe lower inflation and lower interest rates. You could easily see how the math could go either way on that.

And so we don't tend to be high focused on that as a metric. We do spend a lot of time thinking about things like real wages the sort of personal savings rate, interest rates. And I think those things have been historically a much bigger driver of what kind of macro matters to us.

Next to James Faucette with Morgan Stanley.

It's Michael Infante on for James. Just circling back on the fair value market when I look at the underlying discount rate disclosure in terms of the loans that are actually held in consolidated securitizations, I think it's closer to 11.75%, still roughly, call it, 200 basis points below the late '23 peak.

So how should we be thinking about the incremental earnings pressure from further discount rate increases, particularly as we think about constructing our models out to 27%? And then Secondly, just on the beneficial interest dynamics. Like can you just comment on how your cash contribution or maximum loss exposure per dollar has sort of changed when we look at this gradual increase in beneficial assets as a percentage of associated loan balances?

Yes, absolutely. I'll take that one. So on the fair value sensitivity to discount rates a good place to look is in our Q, we sort of share the sensitivity to about 100 basis points move in discount rates, in aggregate across both our whole loan book and the beneficial interest, that is about $60 million or so.

So in the scheme of things, relatively smaller impact to our fair value, our changes in discounting and a relatively larger impact comes obviously from changes in adaptations around credit performance. but you can kind of look to that heuristic is helpful to help kind of size potential impacts on a go forward. In terms of the cash contribution as a percent of originations, so that number, if you look at on a year-to-date basis, so through the first 3 quarters of the year, it's been about 3% on the total origination volume.

So we've acquired about $400 million in beneficial interest assets, about just south of that. against just south of $12 billion or so of origination volume. So you can sort of see that marginal use is lower than the overall aggregate platform equity use and expect to -- especially as the older deals start to cash flow more to contribute to the reduction in equity capital used on at across the total platform.

That's really helpful. And then, Paul, just a quick follow-up on the conversion rate. I saw that you guys intend to discontinue that conversion rate disclosure. Can you just elaborate on why?

Because I just -- I'm curious, just given it seems to at least reinforce like the selectivity of your model and the available growth that is still out there as you drive incremental separation. So I'm curious if you could elaborate on that specifically.

Yes, sure. I think the conversion rate was a really good metric back when we were kind of like a single product, single use company and really like what we did was we acquired new people for personal loans, and really they were kind of personal loans in 1 segment, the segment we now call core. And I think it was a pretty useful metric back then. Increasingly, as we've had new products enter the mix. New segments of borrowers enter the mix, both on the primary and the less prime end products that just have really like different conversion dynamics.

And then we have this, as we've talked about today, we've got 250,000 people in the quarter that came back for a loan that was whether second or third or fourth or and flown and -- and those dynamics really kind of start confusing what this conversion rate thing really measures and it no longer kind of obviously, is like up is better or down is better at just where became a metric that was you controlled for all of these different factors was not going to tell you a clear story.

And so that's why we're kind of focusing to shifting to some of these different metrics, especially metrics that tell you about this kind of repeat borrower ecosystem, how many people are -- how many new people are coming, how many returning people are coming and then, of course, sort of ultimately, you'll see the kind of product-specific growth metrics.

We will go next to Kyle Joseph with Stephens.

I appreciate all the color you guys provided on the bank. And I know it's early, but from a high level, how are you guys thinking about the potential margin expansion possible there once that deal is done and how quickly that will ramp?

And then a follow-up there is, obviously, really looks like it strengthens the balance sheet and your liquidity. Any sort of updates on capital allocation.

Great. Thanks for that question. Yes, I think without sharing -- we're not sharing anything specific about the exact impact to margins. But -- and we are very excited about the opportunity, strategic opportunity that the bank presents to us to kind of improve our position across a number of dimensions.

So one, we expect the bank to improve the overall TAM for our business that we can underwrite all products in every state at the same rate where we're limited today in some places in how we do that. Two, as we alluded to before, we do expect to see modest uptick in take rates and improvement in net interest income driven by the fact that we'll be capturing economics that today we're currently paying out to the banks that are originating partners for us.

Third, we do expect to see lower cost of capital with deposit funding versus warehouse funding. And then overall, we expect to see a reduction in sort of overall complexity as we operate under a single regulatory regime versus via dozens to hundreds of banking partners that we're operating with today. So all of that in aggregate are the benefit that we expect to see from the bank. Some of that will come in relatively quickly.

So as we alluded to, we do expect that very shortly after the launch of the bank. Upstart Bank will start originating substantially all of the own volume on our platform. And so that component will be realized more quickly. And then some of these other components will be realized over a longer period of time as we access that greater TAM and drive operational efficiencies that come with operating as a bank.

In aggregate, our 3-year guide contemplates us getting the bank charter, and that's incorporated in. And fundamentally, our core business model with respect to acting in the marketplace and selling the majority of our loans through to third parties. That also is not intended to change as we become a bank.

We'll go next to Julian Bologna with Compass Point.

One thing that I'd be curious about as a quick question. It seems like the revenue from fees on the secured side jumped close to 50% quarter-over-quarter, it seems like there's maybe some timing impacts of loan sales.

But just putting that over volume, it comes out to 5%. Is there a rough way to think about how that should trend and how to take for it kind of comes back to the older kind of rough outlook that you guys have put out between the upfront fees and then the servicing strip.

Yes. I would say we've been really focused on getting loans too profitable, and that move is very real move. But there definitely are there are some sort of like timing elements to it. And we've alluded to needing to spend a little more time kind of locking in all the margin gains here because some of them are a function of things that haven't been totally systematized. That's stuff on the loan sales side, some stuff on the monetization side.

And so there's still work to do, but the sort of the gains are very much real. We do think that these products have reached contribution profitable in a sort of sustainable way, and we expect that to continue through the rest of this year and into 2027. We will expect to see a little bit of sort of movement around that margin. We're not so focused on maximizing that margin today.

So I said in my remarks earlier, anywhere between like 0% and 25% to us is contribution positive. It's a good number. It's where we think these products should be at this stage in their life cycle. And what we'll want to see them do starting in 2027 is increasingly returned our focus to growing the volumes at a profitable margin.

We'll go next to Rob Wildhack with Autonomous Research.

I saw that auto volumes were down quarter-over-quarter. The product had been scaling really quickly prior to that. I would not really think of the third quarter as being a seasonal drop for auto. So just wondering if there's anything that you would call out or anything to read in there?

80% of this answer is like we told everyone just focused on profitability. And I said that last quarter that that's just the 1 thing we're going to focus all of our energy on. And that's what the team did, and I'm really proud of how they've executed on that. So with no complaints about where that landed.

Maybe there's a 20% part of the answer, which is that you talked a lot about macro and people tend to think about that in the context of our core business, but it's relevant across all of the loan categories. Interest rates are faster and sort of borrower health is factor in. So those have an effect, too. But I think in category like this that's pretty young for us. Sort of the most important thing is going to be where our focus is and our focus has been on profitability. And as we get into 2017, we'll start turning it back the other way.

Okay. And then just one more on that earlier dialogue between the UMI and fair value. If I just look at the fourth quarter, the guidance implies a pretty healthy negative number for fair value. But if I heard you correctly, you're saying the UMI is only going to be up maybe a couple of hundreds of a point, right, Max, $1.5 million.

So it just seems like a much more dramatic swing in fair value for the fourth quarter versus a much smaller increase in the UMI. I'm wondering if there's any more color you can give on the sensitivity and the mechanics there? And then is the bigger drive off like realized charge-offs for on-balance sheet loans or fair value markdowns.

Yes, it's a great question, Rob. And so the fair value that we're implying for Q4 reflects both an expectation of UMI about $155 million and allows -- we're allowing for some variability around that because there are when it comes to the fair value line, there's inherently a little more variability around it than our ability to predict kind of fee revenue and contribution profit ultimately the rising UMI environment that we're seeing here in Q4, but also the higher UMI environment we've seen over the current more of 2026 is contributing to kind of building pressure but with macro-driven defaults on our borrower population.

And so the fair value marks start to reflect that pressure as we see delinquencies and charge-offs realized in our overall portfolio. And so that's kind of the, I would say, the indirect mechanism by which UMI flows through into our visibility and understanding of the default risk of our population, which then is the direct flow-through to the fair value marks.

As we look at the composition of the fair value in NII and fair value number that we are implying for Q4. Most of that is related to fair value write-downs on the beneficial interest assets, so the loans underlying those assets, that would be the primary expected driver as of right no.

There are no other questions from the phone lines.

I'd like to turn the call back to Sonya Banerjee.

Thank you. Just as we did last quarter, we invited retail investors to submit questions through X, we received a number of thoughtful submissions, and we've selected a few to answer today. A number of those questions were also addressed during the analyst Q&A portion. But certainly, we welcome follow-ups if people are curious.

I'll start with Andrea. As earlier co-investment vintages or begin returning cash, is the net new capital required to support forward flow commitments declining? And when do you expect those returns to fund a majority of new co-investments?

Yes, it's a great question. Just kind of going back to a few things that we touched on during this call. over a multi-quarter time horizon with obviously some variability quarter-on-quarter. We'd expect the overall equity usage to support the platform to decline. And one of the key drivers of that will be related to our co-investment positions in committed capital relationships. And so the 3 drivers that we see to reduce equity required are used from those positions are sort of, one, holding the funding mix about constant.

So we don't expect to materially increase the proportion of our platform that is funded from committed capital from where it is today. Two, as the question alludes to, continue to expect that sort of earlier vintages of co-invest as they release cash will help reduce the equity i and three, over time, would expect to continue to improve the deal terms as we renew our committed capital partnerships.

So all of those things in combination are expected to be key drivers of bringing both the co-invest percent of the overall platform down, but importantly, the overall equity required to support the platform down.

Thank you. Paul, as consumers start comparing and applying for loans through AI assistance like CAT GPT and Cloud. Does upstart plan to let these external AI agents directly access your pricing and underwriting services, will you build your own AI agents to proactively grow the business and integrate with other companies?

Yes. I love this category of question because I think there's just so many companies right now that are kind of like looking at what people are doing with AI with personal agents and trying to build sort of these walled gardens and say like, "Oh, man, like if people could just freely shop for the best product, they might stop being loyal to us." And I think that just says something terrible about companies that think that way is they're not confident in the real value add that their product gives to their customers.

And I think one thing that will always be really, really centrally important to us is we just want to build the best product. We think we have the best product in a lot of cases. We want to make it even better. We want to build the best product in a lot of our emerging categories.

And so we want to have no fear around like how the customer ultimately finds our product, whether it's on our surface or whether it's via a use or a grocer, whatever sort of they're using out there, we want our product to be everywhere, and we want to compete and win on having the objectively best product.

And so we think that the era of personal agents in personal AI is going to usher in a world where people just have much more ability to shop for the very best product, and we think that's going to help whoever has the best product to offer the customer, and we think we're going to win in that world.

Thank you. And then the final question is the market still values up start like a cyclical lender rather than an AI platform, what milestones over the next 2 to 3 years, do you think will force investors to change that view?

so many things I'm excited about. If we're talking a multiyear time frame 2 to 3 years. There's all these things we've talked about refocusing on the core and the sort of the strength that's already driving in our contribution profits, but I think that's really going to prove out how much the is in this business, how prove out the technology differentiation because that's really where we shine.

But there's this whole piece that we've talked about today about lowering the equity usage in the business, lowering the sensitivity of the balance sheet P&L line that, that's really going to help investors. I think this whole kind of change in the company going on right now to go from just a real product company having multiple products that are now contributing profits. There's this customer ecosystem and sort of the growing importance of how many people already have a relationship with Upstart.

I mean there's so many pieces of it that I think investors will start to appreciate over a couple of years and kind of see how rich the story around this company is. But actually, I could say all that, but I actually just don't think altogether, it's that complicated the answer to this question because in some sense, businesses are just ultimately valued on the expectations for future profits.

And I think especially in lending, lending is arguably the main profit center of financial services. And someone just today, I think, looking at us would say, you've been around for 14 years, and you haven't really made any meaningful profits yet. Like what's the point of all this fancy AI if it doesn't make money.

And so today, I just think -- I don't think we get to complain about how investors are valuing us yet. And so even though I think investors are -- to be clear, I think I met a wrong about the stock. I think they're undervaluing the stuff. But I kind of think they have every right to do that because they can't tell if and when we're finally going to make some real money. And ultimately, it's our job to change that.

Thanks, Paul. Operator, we can now conclude the call.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation. You may disconnect at this time.

All right. We are going to get going with our next fireside. We are very excited to have Paul Gu here, Co-Founder of Upstart, longtime Chief Technology Officer and more recently, assuming the role of CEO. So Paul, thanks for being here.

Yes. Excited to be here.

Before we kick it off, I'm just going to read a quick disclaimer, and then we can get into it. So today's discussion may contain forward-looking statements that relate to future results and events, which are based on Upstart's information available as of today and is subject to risks and uncertainties. Actual results may differ materially from these forward-looking statements.

The discussion may also include non-GAAP financial measures, which are not a substitute for GAAP results. Please refer to the company's filings with the SEC and the IR website for additional information, including GAAP to non-GAAP reconciliations, along with other disclosures.

All right. The exciting legal lease out of today. Paul, let's kick it off.

Thanks for being here. I wanted to start with what feels kind of like the defining strategic message of your first couple of quarters as CEO. You've been very direct that the core personal loan product is really the super power of the business, the highest margin, most differentiated. And that your first priority was simply to do a lot more of it. So how are you doing against that goal so far? And how do you think about the remaining opportunity to continue to deliver growth in that core product?

Yes. I think hopefully, we showed in Q2 that we're well on our way. In Q2, I think we did something like 3.5x as much growth in this core personal loan segment as we did in the prior 3 quarters combined. So a real trajectory change in what's growing in the business and what's not. And yes, like I said, like core personal loans is what we're really, really good at doing. I think we're world-class at being able to do risk separation in this product.

And as a result of that, we can identify a lot of really good borrowers that we can underwrite uniquely in the market. Therefore, we have a lot of pricing power. So this is a high-margin product. We're very differentiated, and we can achieve the combination of high growth, high profitability and good credit performance in the segment. And so naturally, we want to do more of it.

Yes, that makes. So what does it actually look like to change the strategy internally and get the team focused on core personal loans?

Yes. It's a good question. Really, it is a cross-company effort to grow any particular business and something as we've been doing as long as core personal loans. It's never like any 1 or 2 like really simple obvious things. It's like every team needs to orient its goals around doing this as opposed to something else. And there's always trade-offs in what people focus on.

So for us, it's like you can think of like the steps of the funnel is like there's targeting and marketing, right? And so there's like these questions of like, okay, you have like a team that's working on building targeting models for different channels. Like do you want them to like figure out this problem? Like how do you get like 3% more core personal loan borrowers or do you want them to find something else? And I think we were prioritizing something else in earlier quarters, and we switched the priority back to this core segment this quarter. And the same is basically true of every team as you go sort of each step down the funnel. And you can just imagine there's a bunch of different teams like at each step.

There's like the people who then care about, okay, once some eyeballs show up at the website, how do you convert them to applications, how do you convert those into approvals? How do you convert those into what we call rate access? How do you get those people through verification. The problems of like what kind of verification problems and what kinds of automation problems a core personal loan user has versus different segments or different types of loan users have are just different. And so we just put more emphasis for every team to focus on this as their #1 thing, and you can see step function change in results.

Yes. And just before we move on, just to be clear about the stance on the newer products, and the secured products that you've launched, obviously, growing the core personal, I think it's been very clear that, that's the main strategic objective. Have your views changed about in any way about the market opportunity or the growth in some of the newer products over time?

Yes. We definitely made some changes. And I think maybe the meta thing is I really believe in having consolidated focus and really having crisp alignment across the whole company on like what are our top priorities, and you just can't have too many of them. So among other things, one example is we paused on our auto refi product. That's a product that we've been working on for a few years. It was a good product. I think it was something that in some version of the company, we would still be working on.

I think it certainly could have had a role and there's all these sort of different advantages that, that product offered. But it wasn't as high potential, high growth, high momentum as some of our other product sets. So we consolidated that one away. And so today, like every single bet that we've got left as a company is one I'm really excited about. I think all of them share the characteristics that they have extremely large addressable markets. They're adjacent to something that the company is already really good at, and they have high momentum that we're capitalizing on and doubling down in.

Got it. Okay. Let's maybe pivot a little bit, talk about the macro backdrop. We, of course, have the Upstart Macro Index, which is kind of your view of macro as it relates to your segment of the consumer. As of September 3, that was relatively stable month-over-month at around 1.5%. It's drifted up a little bit year-to-date. So maybe if you could talk a little bit about that metric, how should investors interpret it? I know you made some changes to kind of definitions and phraseology around it. And then maybe talk a little bit about what it's telling you today about the state of the consumer and then how that translates to the business.

Yes. The simplest way to think about what UMI is it's just a sort of linearly interpretable index of how likely a consumer is to default on sort of unsecured consumer credit relative to pre-COVID levels. So a 1.0 reflects sort of the years right before COVID. So you think of this 2018, 2019, early 2020 type stuff. And the fact that UMI is at 1.5 today is really just -- it's just a way of saying the same exact consumer holding constant all the sort of borrower level characteristics and loan type characteristics is 50% more likely to default than they were pre-COVID. So it's actually a pretty big number.

And to your point about the migration this year, we've seen this number drift up 12 points since this spring. And that's quite a lot. I mean, 12 points in our business, it's a pretty significant change. I think if we had been standing still on all of the investments we make into marketing and automation and approval and underwriting risk separation, I mean, the business would just be like a fair bit smaller. And of course, it isn't because we have made so much progress and had so much focus on those things.

But yes, I think the consumer has been under some amount of pressure this year. I think it's not surprising when you look at the fact that we kind of reversed back into the space of having more inflation than we have wage growth, and that's been true probably for the last 6 months, mapping almost perfectly to the duration of time when UMI has been drifting up. I think you see it in credit card utilization rates, you see it in credit card delinquency rates.

So I think if you're looking at sort of whether you're looking at the metrics inside Upstart or outside, I think at this point, it's been pretty clear that the consumer has been -- or at least the consumer is always sort of a slightly weird word for us because sometimes we care about the opposite thing as companies that want more consumptions care about. But we would say the American borrower is under more stress today than they were 6 months ago. And I think UMI has done a nice job of picking that up early and clearly.

Yes. And then maybe if you take that conversation more forward-looking in perspective, there's a lot of cross currents out there, gas price shocks, which have been lingering, you've got fading fiscal support from tax refunds, labor market that is stable, maybe cooling on the margin. I think you said the business is fine with a stable consumer even if it's not an improving one. How do you think about how the consumer could play out over the next 12 months and then just a range of outcomes for the business?

Yes. Maybe I'll start by saying that one thing I think investors get too focused on is the action of UMI in the short term. And we have said UMI is really, really important in the short term. It's really impactful. That's actually one reason that we somewhat stubbornly refused to give like near-term guidance on results is that we want to be able to take credit seriously as a first priority, and that basically means we want to be fastest and most precise in responding to UMI changes. And we're going to do that. Then, of course, it's really hard to tell you like 1 month from now, what exactly we're going to be doing because in some sense, in the very near term, it's somewhat outside our control.

But I think investors get a little too focused on this when they think about, boy, if you're here to invest not for like the next 3 months, but you're here to invest for the next 3 years, then like the rate at which you're compounding sort of durable wins in the business across marketing and automation and underwriting suddenly matter a whole lot more than whether like the macro is up or down a few points in any given month. And I think it's really -- that contrast becomes really clear when you look at what -- where the business is today versus, say, where it was back in 2021.

In 2021, we probably had the most supportive macroeconomic climate you could possibly imagine. You had UMIs well under 1.0. You had stimulus checks, you had near 0 interest rates. And yet, in spite of the comparison being against that world in today's world of much higher interest rates, much higher UMI, much more consumer stress, we're doing more contribution profits now than we were back then. And how is that possible? It's possible because we've had 3 years of compounding sort of technology wins across the sort of like real durable parts of the business.

And so I think in any kind of medium to long term, like that just ends up mattering much, much more. And so when you talk about like where I think the outlook is 12 months from now, I think the answer on the macro is like I have no idea. And I sort of think of it as like really not my job to worry about, is there going to be like another war in the Middle East or what's going to happen to the Strait of Hormuz and energy prices? Like I don't know.

I have my guesses, but so does everybody in this room, and I don't know that my guesses necessarily are any better than anybody else's. But I think the things that are within my control are about like how fast can I move the sort of technology frontier on lending. And I know that as a company, we have a tremendous ability to execute on that. And so compounded over any reasonable time frame, I have a lot of confidence that the business is going to do really well. And so that's kind of like how we've started to think about where we can give confident guidance in the business and where we don't really want to overstretch in sort of what we can tell investors to expect.

Makes sense. I want to hit on one more macro question, and then we'll pivot away. But I wanted to talk about the supply of credit. I think that's one thing that can impact the market, but really supply of credit from other people in the market. I think I'll start one of the more discipline. You just talked about a very disciplined culture, wanting to be responsive to what you're seeing in the macro environment.

But I also think like funding markets have been less discriminate in providing funding to anyone out there in the market. And so I think when everyone competes in the same channels for the same leads, you run the risk that underwriting could move to least common denominator. How do you think about competitive dynamics in the market that you play in? And how to think about new entrants, less disciplined investors benefiting from a really supportive funding market?

Yes. Mostly, we don't think about competitors that much. And I think that's a privilege we have because of the spaces where we're really strong. We talked about this core personal loan superpower. I think we're just so differentiated there that we just don't have the luxury of not having to think too much about competitors or what they're doing.

I think in some spaces, there's quite a bit of competition. I think we tend to, all else equal, shy away from those spaces. I think in some of our newer products, of course, being the new guy on the block, we have to think about who the sort of existing players are and who we think we're going to take market share from over time. But by and large, I would say in the core business, it's not sort of a first priority.

I also want to respond to this sort of maybe this point about the capital kind of just flowing indiscriminately. And I do think, of course, that like happens sometimes. But when I look at the sort of capital markets today, I don't necessarily think that there's something fundamentally broken with how they're providing capital to the space. I actually think that over the course of the last maybe 5, 6 years, like I think a lot of things equilibrated in the sense that you look at what happened in unsecured personal loans, I think most of the players that did high volumes of kind of Internet distribution of large dollar loans to lower FICO score borrowers like stopped doing it. Like it was just too hard to do.

And I think maybe they were somewhat affected by the relatively better selection we could do in the market and kind of got pushed out. I think there's just a lot less happening there. And so therefore, a lot less capital flowing there. In our case, we've had 100% retention of all of our capital partners in recent years. We've re-upped all of the deals that have gotten longer and larger and generally at better terms. And I think that's happened because the capital recognizes where the good risk-adjusted returns are. And so I think the capital sort of markets are working pretty efficiently.

And I think even if you think it's not perfect, I think there's pretty good evidence that over a couple of years, they tend to get pretty efficient just because they can just look at how the credit performs.

You get the numbers back. If that were happening, how would it show up in your business? Will we see -- it wouldn't show up in UMI. It's not directly a borrower statistic. Is that just lower conversion rates, people being more aggressive and people not taking the Upstart loan on the margin?

Yes. I mean I think it can show up in 1 of 2 places. I think one is like there can be more noise around sort of top-of-funnel marketing. And so if you put too much money into top-of-funnel marketing, then it just gets harder to get eyeballs and get attention and borrowers don't really know who's who before they check.

And then the other would be, yes, if you get lower conversion. But in both of these cases, I think it's theoretical, we don't see any evidence of that happening in our business. And again, despite the fact that we've seen this higher UMI in our business, I think we still actually held up remarkably well in our ability to originate good loans.

Great. Let's talk about contribution margins and where they go from here. I think the guidance assumes a pretty meaningful step-up in the back half of the year. We started to see it in Q2. Margins improved nicely quarter-over-quarter. In your eyes, what still needs to happen to get to that full year target? And how do you split that between continued acceleration in core personal versus the margin profile of some of the new products stepping up and kind of reaching scale?

Yes. I always think a lot more in terms of contribution profit dollars than the margin number, which I kind of just think of as like it's -- I don't know, it just is what it is. But of course, like, yes, the contribution profit dollars have to keep going up. It's as simple as that, like if you look at any reasonable full year model for like how you get to the full year guide, like we have to have more contribution profits.

And then we've been pretty clear, again, short list of priorities, everyone really focused. It's just like kind of like 2 simple things for us. It's like keep focusing on that core personal loan segment, which is like already very high margin. We would love to just do more of it. And then the second is get the unit economics of the new products, specifically the secured products in a good place, get them from negative to positive. And of course, you get a bunch of leverage from flipping that around. So it's as simple as that -- those 2 things. And if we're right about that, you'll see it in more contribution profit dollars.

Got it. So maybe can you talk about that second point in a little bit more detail. So you saw a nice move in the contribution margin on the secured products. I think you've talked about being breakeven by the end of the year. And I think there's kind of a running list of levers that you've talked about to improve the margins. Can you talk mechanically on how that happens and your visibility into the continued improvements in the back half of the year?

Yes. We have really high visibility, really high confidence in what needs to get done to move the secured products from unprofitable to profitable. I mean, in some sense, it's almost just like the standard playbook for how you build a new business and a new product, which is like the first thing you have to do is you have to prove people want this thing, and that's -- you do that before you worry about how dialed in the margins are, you do that before you try to optimize your operations. You do that before you try to like optimize your take rates and -- so that's what we did.

And I think it's become exceedingly clear that people really want these products, both in car dealerships and in the case of the HELOC product, the combination of process and rates that we deliver there, we think are best in market. And so we've got the sort of step one done, then we were focused on, okay, we got to start onboarding capital providers because we're very committed to funding these businesses in a really capital-efficient manner, having primarily third-party capital funding.

And so that was kind of the second step that we had to prove out along with credit performance in these products. And then really, the last thing we worry about is unit economics. And so that's the step we're on now, and we are rapidly improving the margins of these products. We'll get them to a breakeven before the end of this year. And then once we do that, then we'll turn our attention back to really scaling these products up.

Yes. And where do you think they can go over time? Obviously, I'm sure breakeven is not the destination. How do you think about continued improvements over a multiyear period?

Yes. So the long-term margin, for now, I'll just refrain from speculating on just because I think when you're like negative 40% or something, it's just irresponsible to speculate about how positive it can be. You got to get positive first to earn that right. But I don't really theoretically think there's any reason that they can't be as good as what our core business has today.

I mean they're really very similar kind of businesses, similar dynamics, and we think the size of the technology advantage can be just as large over time. I think the actual value capture is going to happen a little more incrementally because we're not going to sort of like prioritize getting that all the way up at first. I think that would be over monetizing. I think we need to capture value as a function of how much we create the value we create is just a function of the level of technology differentiation, which today is not as high as in core personal loans, but it's going up. And so I think over the course of a few years, it will get quite a bit higher.

All right. I wanted to maybe talk to the other driver in the back half of the year, which is continued model improvements on the core product. And I think one of the things that's harder to understand from the outside as a follower of the company is just how you actually drive more volume growth. And you talked about the technology wins that have been able to offset a lot of the macro pressure so far this year. Q2 alone, I think you mentioned 3 new personal loan models, a lot more variables in the model.

What does that process look like from start to finish? Like is there an internal road map of known potential enhancement opportunities that require engineering staffing? Is it more of a continuous brainstorming and testing process? And then how do you get confidence to compound that process over a 12- to 18-month period?

Yes. We've been making our models better for a really long time. I mean, essentially, since we started the company back in 2012, like we've just every month, every quarter, work to make the models better. And for all of those 14 years, we've never run out of things to do. I think answer to question, yes, there absolutely is a whole backlog of things that we would do. But of course, what we actually work on 12 months from now will a little bit be past dependent, what works and doesn't work today.

In some sense, I think it's not that different than what any kind of research road map would look like at any model company, like I think if you were going to go ask OpenAI, what the road map looks like. I think there's just a lot of different ideas for making models better, and we benefit from a lot of the same fundamental research that goes into new types of neural networks or new types of chips for training, like these kinds of things help us.

And we look at a lot of the papers that come out on sort of new kinds of learning algorithms, new kinds of cost functions, and we develop a lot of our own. And so the search space is really pretty large. It gets even larger sort of longitudinally when you think about what the constraints to better models are, where one of those constraints is like our kind of engineering input. And so that's a constraint that sort of is a factor in sort of the function of like how much model improvement output we get.

But there's other ones that are kind of like time bound for us, which is like you need to have more training data. You can't like increase the levels of complexity of your model without having sufficiently more training data. At some point, you just kind of exhausted all of the signal you can get from the amount of training data that you've got. But the good news is like the training data is increasing, and it's increasing sort of exponentially. And so we've got, I don't know, 140-some million training data points now a lot more than we had a couple of years ago.

And so as that number goes up, it kind of just naturally unlocks more sophisticated models. Then there's this other piece of it, which is really about compute speed and cost. And this is where I say sometimes like you get these kind of outside things going on in chips or kind of like usage of -- or algorithmic efficiency, they become pretty important. I mean it's like I think if you're in the world of sort of traditional finance, like this is irrelevant, your compute costs are irrelevant. But in our business, it's much more like a model business and compute costs can be quite substantial.

And it's kind of become a limiting factor, like if your model gets too complex relative to the speed of the speed that they can be processed on and you've got a customer like waiting there for like 3 minutes while you're like trying to like figure out the math, and that's a pretty bad user experience. And so you've got to like have teams that are optimizing model speed. You've got teams that are optimizing model costs. You've got teams that are doing actual sort of fundamental research on the algorithms. And then you're just like over here just like waiting for more data to show up. And all these things are kind of happening in concert, and that's what makes for such sort of a powerful data flywheel.

Yes. That's super helpful. Maybe we'll just talk about the broader market opportunity. I think the process is very bottoms up, like how do we get the model to respond to kind of the opportunity that's in front of us right now. How do you think about more of a top-down framework? I mean it's kind of difficult to get market share data in this space, but I think I have to imagine Upstart is the largest game in town for near-prime personal loans. So just how do you frame the addressable market, where your current penetration is?

And then how do you think about market share versus kind of market share creation, expanding the TAM to borrowers who simply just aren't in the borrowing activity that we see today and outstanding consumer credit?

Yes. I think the good news in our business is that I think unlike a lot of others, it's kind of just like -- the market is extremely large. I mean I think the simplest way to think about it is always if you look at the amount of credit card debt, it's like $1.2 trillion or something. And about half the consumers in market are sort of not considered super prime where they sell to 720. And so it ends up being an extremely large market. Now the vast, vast majority of these people are not -- don't even know what personal loans are.

And -- but the good news is that it's not sort of like for us just say like you got to kind of convince them on sort of subjective experiential factors that they should prefer one thing over the other. Like in our case, it's just like we're just here to save people money. And because of that better ability to separate risk, if we can get people lower rates than they would get elsewhere. I mean it's sort of an objective good. Now that doesn't mean you automatically win the consumer. They still have to like find out about you and all the things that actually have to happen to get them to become a user of our product that they're not so familiar with.

But I do think the fundamentals are very, very good, very large market, objective sort of money savings for people and like who doesn't want to save money, right? So it's -- I think it's a very winnable battle. And the way that we've been going after it, even if you don't believe in any kind of like step function changes in brand recognition or the sort of number of customers we have relationships with, the thing that is really mechanical is just like basically, all we do every month is we just say like how good are our conversion rates -- and this is really -- it should be like a kind of population-adjusted conversion rate.

How good is our conversion rate? That dictates like how many people we can afford to reach based on various marketing channels. The most direct is like you look at a direct to mail kind of marginal [ cost ] curve, and it's just like, well, we send out every piece of mail that has a marginal positive return on kind of the marginal spend. And if your conversion rates get better, you can send a little bit more. And so there is a really mechanical way to just reach more and more people, and that is probably the most direct way you can think of like the business that's growing. It's like we make better models, better models allow us to reach more people and boom, you have both more people and higher conversion.

Yes. So let's talk about risk separation then. You talk about the inaccuracy gap, 87% of default risk still not being captured by your models, which I think is significantly better than what we see in sort of incumbent models. Hopefully, I got that definition of the 87% right.

So you can either read that as enormous runway or you can read it as something about credit risk is very structural and maybe just isn't knowable at the time of underwriting. How do you get comfortable it's the former, not the latter? And when -- how do you think about when you hit the point of diminishing returns on that statistic?

I mean just look at what AI has done in other fields. I think like at this point, it should not be controversial that with better models, you can get dramatically higher levels of intelligence. I think that's pretty self-evident in 2026.

And I think in some sense, that's like the founding belief of the company is that we've always believed that if you had better models, you could get dramatically better risk separation. And for 14 years, we've been continuously right about that, that the next sort of step of model improvement unlocks more accuracy in the models. That hasn't slowed down in any way, which I think is probably contrary to what almost anyone would have predicted that maybe like we would just true off some low-hanging fruit in the first 3 years of the company and then it would level off after that.

But that's not how the graph looks at all. It's just kind of almost like almost shockingly sort of a straight line of improvements to model accuracy. And if we look at our backlog, it's a long backlog. We've been doing this a long time. It keeps going this direction. So I think kind of Occam's razor, the simplest thing to project out is that you think it will keep improving.

And just when you think about the pace of improvement, I think Upstart is already a kind of deeply AI-enabled company, has been for a really long time since before kind of ChatGPT hit the world. You talked about some customer support type use cases. But when you think about that kind of core operational, like we're going after model improvements today, what types of improvements and efficiency are you seeing in terms of the ability to iterate on the product and ship faster, some of the different buckets that you talked about of kind of known potential ways to improve the model.

Yes. I think we're doing pretty well in this department. I was looking at some of that ramp data about how much sort of tokens different companies use. And I think we're probably as a technology company, something like a top 5% adopter of this technology, not like top 1%, but definitely up there. And I think we're seeing pretty good results in terms of the amount of code that's getting written, the sort of time to close tickets and -- and ultimately, I think that should show up is just like more revenue and more revenue growth per employee.

Of course, it's always a little hard to like perfectly attribute causality to these things. And so I don't know like the precise answer to this question, but I do think if you look either bottoms up or tops down, but the numbers are pretty good on what we're getting out of this, and we'll just have to keep making it better over time.

Okay. We've got a couple of minutes left. I want to jump around a little bit, but I want to talk about the bank charter. So you've got conditional OCC approval to launch in early 2027. Can you talk about just the investment that was required to do that? What sort of drag was it on just the focus of the organization, investments required? And then just how do you frame the biggest benefits that you expect to realize once that occurs?

Yes, huge investment. It's definitely the largest discrete single project that the company has done and is doing in 2026. And of course, that makes it a cost center with no benefit in 2026. So hopefully, that will reverse once the bank is open and launched in early 2027.

And by the way, I think that level of investment is totally justified. I mean it's a big deal to open a national bank, and I think we want to make sure to do it right and to do it in a way that's compliant and is going to take care of the public interest and safety and soundness. So we're -- I think we're putting a lot of effort into this. I think we're going to do it right. And hopefully, we're going to get great benefits next year when we're live.

And just for the avoidance of the doubt, I mean the casual observer may look at what's happening in fintech more broadly and say everyone is becoming a bank. What are the specific use cases for the bank for Upstart? I think you've been pretty clear that this is not signaling a change in the balance sheet strategy or the funding strategy of the business.

Yes, that's right. I mean for us, there's just a bunch of operational benefits that have to do with like simplifying so we can like reach more borrowers more easily. Today, we have like almost 100 originating partners. They all have kind of slightly different regulators, slightly different rules, slightly different disclosures, slightly different states where they can offer products and which products. And all of that simplifies a way. We can reach more people and without a lot of that operational complexity that we deal with every single day.

On the sort of funding side of it, I would say it's not like we're totally just not going to use the sort of enormous benefit that is deposit funding, but it's more like today, we have about $1 billion of loans on our balance sheet. Most of that is not levered. And so it's just a very inefficient way to use equity capital. And if you tell me, hey, now you have a way to lever that stuff at a really low cost of funds, like, of course, we're going to use some of that. And that will actually be really efficient from an equity capital perspective. So maybe like contrary to I think sometimes people worry like, oh, well, in order to open a bank, you're going to need a whole bunch more equity capital, like, no, no. Today, we have $1 billion of loan assets that are mostly unlevered like that -- sort of just going back and levering that actually like creates net new...

You have the capital or...

Net new equity or net new sort of cash. So it's actually quite equity efficient to do this.

Yes, makes sense. I apologize for the CFO type question, but you mentioned it was a big investment in the year. Fixed expenses this year were up around 30% year-to-date, pretty meaningful step up. How do you think about a more normalized level of expense growth, particularly once you're through sort of this initial investment on the bank side?

Yes. We've said that OpEx growth is going to normalize a lot in the back half of this year and go down to low single-digit type sort of quarter-on-quarter growth. And I think that that's a much more normalized level for the business.

I think coming back to this AI and productivity stuff, I think we are starting to see it show up in really nice ways. And I think that maybe like the bank thing, like some of our new products, there's just like a whole bunch of different things hitting all at once that made it so in the first half of this year, we're really in this place where we have one really profitable contributing thing, which is core personal loans. It's paying for like everything else that we're doing, all of which are unprofitable even at a contribution level. So this is like our new products in auto and HELOC, this bank effort.

And of course, some of the ways in which you ramp like the AI for post internal productivity spend is kind of very like at first, just very experimental about it, let everybody sort of do their own thing and then you start to worry about making it efficient later. And I think we're starting to turn the corner on a lot of these things from a margin perspective, from harvesting more benefits than cost.

The bank thing, of course, is we're saying early next year. So I think a lot of the time lines are such that our expectation is we're just going to be able to get a lot more operating leverage out of the business compared to what we did earlier this year.

Got it. Makes sense. Well, I think that just takes us to time, but thanks for being here. Thank you for doing this. Really appreciate the conversation.

Fantastic. Thank you.

Thanks a lot.

Hi, everyone. I'm Trey Brown. I work together with Joe Hall on our U.S. small and mid-cap strategy team within BofA Global Research. We have a few sessions going on concurrently, but Joe and I just wanted to welcome everyone to our 2-day Annual SMID Cap Executive Insights event, which provides opportunities to hear from corporates across the small and mid-cap space, where BofA has great breadth of coverage. Our analysts cover nearly 1,000 small and mid-caps in the U.S. and Joe and I have also been expecting continued leadership from SMID Cap in the back half of this year.

So please feel free to reach out if you need the schedule or want to sign up for any additional sessions today or tomorrow. We have nearly 20 companies joining or if we can help sign you up for either our small mid-cap strategy research or our daily compilation of SMID Cap fundamental research.

But with that, I'd like to pass it over to Mihir Bhatia, our consumer finance analyst, to introduce Upstart Holdings.

Thanks, Trey. Thanks, everyone, for joining and especially to the Upstart team and Paul. Really appreciate you guys joining us today.

Before we get started, one quick disclosure statement that I've been asked to read. So today's discussion may contain forward-looking statements that relate to future results and events, which are based on Upstart's information available as of today and are subject to risks and uncertainties. Actual results may differ materially from these forward-looking statements. The discussion may also include non-GAAP financial measures, which are not a substitute for GAAP results. Please refer to the company's filings with the SEC and its IR website for additional information, including GAAP to non-GAAP reconciliations, along with other disclosures.

Okay. With that out of the way, the lawyers should be happy, so we can get started. Again, like I said, a lot of you already know Upstart I think I see -- I recognize most of the names of the folks joining, but we'll go through, I think, right at the start, I'll ask Paul to give us a quick overview of the company. But before that, again, I just want to say thank you to Paul and the Upstart team for doing this conference with us today and for the opportunity to host you all today. So thank you, Paul, for joining.

And let's get started. So maybe I'll just kick it off with that, Paul. You've been with Upstart right from the start, 14 years now, I think. You recently took over as CEO. Maybe for the benefit of anyone who's newer to the story, just give us a quick 90-second version of what Upstart is today? And then I think the part that investors -- that matters for investors, that excites investors, why does this business compound for 35% over the next few years?

Yes. A really short tagline would be AI for consumer lending. We operate a marketplace business where consumers can go and shop for offers of credit. We do Personal Loans, Auto Loans, HELOCs really, over time, we will offer the entire suite of consumer credit products. And our real strategy from the beginning has been to say, hey, there's a whole bunch of transformative technology innovation happening around how we use models to make better predictions and understand sort of patterns and data. But that innovation has largely not made its way into consumer lending, which is arguably the most important place for it to go because if you think about the history of consumer lending, this is the world's oldest industry, almost everybody borrows at some point in time.

And actually, surprisingly, a large number of people, depending on your exact metric of preference, something like 50% or more of people in the U.S. we think are underserved in how they access credit, either it costs too much, they can't get approved, it takes too long. And it's all fundamentally because the ability of the models and the lending companies to understand their risk is too limited. And so what we've done over time is we've built models that can both better understand the risk, which we call better risk separation and automate away a bunch of the process. And as a result, we're able to radically reduce the cost and complexity of credit for everyday Americans who are looking to borrow, and that's just about everybody.

Great. Maybe just on the second part of that question, though, why is this going to be growing at a very high rate for the next few years?

Yes. It's exactly those two things I said. This is -- one, this is an industry that's relevant to almost everybody. The sort of addressable market here is enormous. It's almost kind of laughably large if you try to do any kind of math against it. And then at the same time, usually industries that are that big are really saturated, really well addressed. All the sort of innovations have already gotten plugged in. And that's just not the case in the consumer lending world, which I think for various reasons historically has tended to move slowly in adopting new technologies.

And so we really have been, for a number of years here, the first, and we think we have quite a large lead in taking a lot of the innovation happening in AI and applying it to this space. And we think it's one of the best possible applications there is for AI to do good and serve the consumer. And so I think you put those things together, disruptive technology transformation against a huge market that hasn't really fully injected that disruption. And I think naturally, you're going to get a business that has the ability to compound for a very long time.

Got it. And I do want to dig in on that advantage that you all have, but we'll get to that in a few minutes. Before that, I did want to just highlight that you recently took -- while you've been with the company a long time, you just recently took over as CEO in the last few months. And I think when you took over one of the -- over the last few weeks, I think in those readings, you called it the second leg of the race, right, taking over as CEO. So maybe just talk about that a little bit? And specifically, I think one question we get from investors is, well, Paul has been there a while, what's really changing? So maybe talk a little bit about what investors can expect in terms of changes? Like what are you -- what is going to be different under Paul than maybe under Dave?

Yes. Obviously, Dave and I worked together in close partnership for a long time. We started this business, as you said, 14 years ago. And the thing about this business is that it surprised us in how long it took to build. Well, at first, I think when we started, we thought, oh, we'll just do this. And within a few years, everybody is going to be chasing us on the same race of applying AI to credit and realizing how large the opportunity is. And I think we've just been consistently surprised how slowly it has taken to happen.

And I think it's actually for a lot of the reasons that it took us to build -- so long to build the sort of first -- what we call the first leg of the race, which has a lot to do with the fact that consumer credit, maybe credit in general, but certainly consumer credit, obviously, it's highly regulated. It's an industry that has a lot of kind of entrenched ways of doing things. And so think about what does it take if you're going to say, hey, we have this completely new way of understanding credit risk. What do you need to do to actually make that a market reality and do that at scale?

Well, it turns out you need a whole bunch of different kinds of very old institutions to buy-in, right? So you need rating agencies to understand the risk of this stuff, so they can rate these things in a sort of risk-appropriate way. That unlocks financing for capital partners. The capital partners themselves, of course, have to buy-in, regulators have to understand it, banks, et cetera. And so you have all of these different kinds of institutions that really sort of form this network around kind of maybe the traditional way of understanding consumer risk.

And we came in and said, hey, with this completely different way of doing things, never mind that this person's FICO score may look like this or that. And it took actually a bunch of years to overcome that because then once these people buy-in, then you are able to start making the loans, then the loans themselves take 2, 3, 4 years to prove themselves as actually good performing loans. And guess what the reality is like the first time you build a model, it's not going to be very good. So the first model is going to have a few things that gets wrong and then you're going to have to tune that model and then you have to start that 2- to 4-year clock again. And so it ended up taking us really the better part of a decade to really get the sort of first leg of the race done where we've really built the foundation for the company, which was -- we acquired really valuable proprietary data. We talked about this in terms of rows and columns of data that the company uniquely has where we gathered thousands of columns of data about people's sort of characteristics at time of taking out a loan. And then we had millions of rows of repayment data. And it's that sort of matrix that actually allows you to train the types of models that we've developed.

Of course, we had many years where we actually developed proprietary algorithms to understand the pattern of that data. Those two things work together, high volume of data, high complexity of algorithms. You really can't have one without the other. And so that was on the technology side. At the same time, we build up the sort of credibility with institutional capital markets, the rating agencies, the regulators to really believe that this is something that can work and to see the evidence and prove it out. And so those two things took a really long time. And we finally got to this place where we said, okay, it's indisputable at this point that this is just a better way to lend. If you do this, then you get a tremendous accuracy advantage that unlocks either much higher approval rates at the same loss rates or equivalently much lower loss rates at the same approval rates. And so that's something that we kind of think we proved in Phase 1 of the company.

Of course, we took the company public. We sort of built an incredible team that's able to operate this business with leverage and scale. And we started taking the same idea and going, hey, we're not just going to do this in Unsecured Personal Loans, which was our first product. We're going to do this in every category of credit that's relevant to the consumer. So we rolled it out across Auto and Home and sort of short-term lending. And so that's where the company sat at the sort of moment of transition, and that's what we called it the leap from the first leg of the race to the second leg of the race.

And in the second leg of the race, I think we have exactly the foundation that we need for the company. And now it's about really tactically and strategically applying it to the right places at the right time. And so the very first thing that I prioritized in 2026, I said, well, you look at the state of the business today, you look at the stock price today, one thing that's very clear is that the business is operating with an inordinately high cost of capital implicit in the stock price, where investors and the market just sort of is skeptical that this is a business that can sustainably deliver high rate of profit growth. And we said, well, actually, the market is wrong about that, and we know just the way to fix that.

And so instead of saying we're going to invest in every possible thing we could do at once, we streamlined the company priorities down to a very short list, very centered around what we call contribution profit, which is our sort of single best measure of the operating progress of the business. And we delivered exactly that in Q2, and you can sort of see it in our results. We said, well, first thing we're going to show you is that in our core Personal Loans business, we don't have any kind of intensifying competitive threat or sort of declining margins or any kind of structural compression there. Actually, this has just not been our #1 focus for a little bit and now it is. And we did 3.5x the growth of the prior 3 quarters put together in a single quarter. And that drove then a massive increase in our contribution profits. We got to record contribution profits in Q2 that surpassed Q4 of 2021 back when the macro conditions were much more generous in 2021, of course, than now in '26. So you're looking at interest rates for consumer default levels, I mean just sort of night and day mark difference. And we still did record contribution profits in Q2 of '26.

And second thing we said was, well, we have a few new products that we're really excited about. And in the last few quarters, we have proven that these products have real borrower demand, they have investor demand. But we haven't really shown that these products are going to be profitable, good businesses for Upstart. And so we said, let's make the #1 priority of these teams to get to contribution profitable in these segments is at Home and Auto. And so in Q2, we expanded their contribution margins by 61 percentage points. They're not all the way there, but they're well on their way to getting towards contribution profitable, and we've said that we're going to be there by the end of this year. So that's been really, really strong.

And then I think the last sort of big question has been like, is this going to be a business that just structurally constantly needs like more equity capital in order to like support the balance sheet or make the whole business work? And Q2, I think, was also a really good proof point on that question, which is like we did 23% sequential growth, right, 23% growth in originations in a single quarter, that's like $760 million. It's way higher than the sort of normalized rate of growth that I think most people would be ecstatic about in the business. And we did that while predominantly funding that with third-party funding, our balance sheet loans declined to almost a 2-year low in terms of the percent of total outstanding loans. So really, I think, just a quarter that -- where we were really hyper-focused on proving to the market that this is a business where you can expect all of the sort of underlying businesses have really strong margins because their underlying tech differentiation is very strong for that to be able to grow at a nice rate and for us to do so in a very capital-efficient manner.

Got it. That's interesting and particularly on 2Q results, one thing that struck us on 2Q results, there's a few I would say, highlights in the results. You mentioned the Unsecured margin improving so much. But what was also interesting was the growth in core Personal Loans. I think you are up 27% sequentially. The growth was probably -- I think it was like faster than the prior 3 quarters combined. Now to be fair, you had called it out in 1Q. But I did want to dig in a little bit on that. Maybe just like bridge for us. How much of it was the model and the funnel improving versus you're just much more focused on driving that product and marketing investments in that product? Some of it was, of course, a little bit easier comp. But like what drove that big improvement in 2Q? And what should we expect for 3Q with core Personal Loans?

Yes. I do think, ultimately, it's all downstream of management focus. And so I think the different categories of why it grew are really not so different in our mind. So as a reminder, the #1 way that our business grows is we invest in better funnel. That can be better models, better user experience, more automation. Those are to us sort of all ways of doing roughly the same thing, which is increasing the percentage of people that convert holding constant the applicant pool.

At the same time, of course, the applicant pool is not fixed. We're always putting effort into growing the number of consumers that we have relationships with, the number of consumers that know about Upstart, the number that are coming to us. And if you think about you had always every single quarter, have these trade-offs you're making in like which pockets are you going to focus on. And so I think in the preceding year, we had been a little more focused in some other segments. We have been a little more focused maybe on going kind of broader and in this -- in Q2, we were extremely focused on this core segment because it's a segment that we have such strong margins in, we have such a strong level of differentiation in. And we just wanted to prove and make clear that with a little bit of focus on this, there wasn't any kind of fundamental like change in the size of our advantage or compression in the margins. It was just actually a thing of like if we focus on this, then it's going to grow a lot and that the sort of untapped opportunity here is just very large.

And we will -- I think that was disproportionate maybe in Q2, but we certainly will continue to focus on this as a strategy because it's just such a good way for the business to generate contribution profits and contribution profits kind of pay for everything else we want to do.

Right. And I guess maybe if I'll push you a little bit on that, exactly where you ended, right? If you continue to focus on it and it has such a large market, you can drive a lot of contribution margin, which lets you invest in the rest of the business. Why not push even harder on this and really generate the cash flow, if you will, to help you invest in the rest of the business? Like I guess, where is the choice between investing in growth of other products versus investing more of your time in just driving personal loans? Like how do you -- take us through that decision. Like when Paul is there and looks at it, how does he say, well, that's enough for that. Let's we need to feed or water, whatever analogy you want to use, some of the other products too.

Yes. It's an evergreen debate at Upstart. We probably could go even harder in core Personal Loans. And I think that would start to come at a pretty significant expense to our new product-type growth and our ability to invest there. And so ultimately, we're like, well, you don't want to -- you don't want to just solve for the very long term. Maybe if you just solve for the very long term and you don't worry about anything in the short term, then you just have -- you're just going to invest a ton and it's going to take a long time to show profitability.

And if you only invest in the very short term, then I think you're just never going to reach your potential as a business. And so to me, like you have to land somewhere in between and you have to do it in a way that's mindful of what your implied cost of capital is and how much sort of credibility with investors in markets, and we hope to earn more and more of that over time. And I think certainly, there are businesses that have earned the right to invest more aggressively and invest for a longer duration, and we hope to be there one day. But I think I'm just cognizant of the fact that today, the reality of our implied cost of capital is very high. And so I always say like, well, there are these really great investments. Maybe this will pay off in 5 years or something. And that's really nice. And if you do the math on that and you put it in a model, it says that your IRR on that is really good.

But then I look at the stock price and I'm like, well, the sort of -- what I think the implied IRR on the stock price is like even higher than that. And so those are, I think, some of the questions that go through my head in terms of thinking about how far out we should be investing. And we want to be really smart, really rational capital allocators in how we think about those decisions. And I do think we're landing in a place that's a good in between where we are, I think, going to do a really nice job of continuing to grow our profitability as a business, and at the same time, we are keeping open sort of the entire addressable market of this business over our relevant lifetime. And I'm not super old, but I also like not going to wait around for the rest of my life for us to achieve the full market opportunity here. And so I think that's kind of the balance we're trying to strike.

I think one thing that really impressed or struck a lot of investors in 2Q is the sharp improvement in contribution margin for some of the secured products. I think you mentioned it earlier, also 61 percentage points of improvement, right, there in contribution margin. Can you talk a little bit about that? Like what clicked? Why is this suddenly seeing this hockey stick almost, if you will, growth in contribution margin? Is it just a matter of these products are now at scale and have found their product market fit, if you will? And what should we expect from here beyond 4Q where you're getting to breakeven? Like what do the contribution margins of this product look like at scale?

Yes. So both Home and Auto in the preceding quarters had really achieved kind of what I think of as the first steps in building out a new product, which is like proving that borrowers want this thing, proving that investors want this thing, a real marketplace that works. And so it was time for these products to prove the next thing, which is that these are things that can actually make money and be good businesses for us.

And so we really kind of fairly sharply turned the focus of these teams over the last few months to be your new #1 goal is to get to contribution profitable. We don't care how much you grow the business. Your new #1 goal is no longer proving demand. It is now sort of proving unit economics. And so that just reshuffles the sort of order of things that you're going to be doing. There are a bunch -- and of course, a bunch of things help both. But if you think about like what has to happen for these businesses to be -- to have good unit economics, well, you've got to do some optimization of costs. These really matter in secured products, if you look at HELOC. HELOC has pretty significant cost when it comes to verifying an applicant for a loan, much more than personal loans levels of automation are much lower. And the just number of things that you could possibly automate is just so much more when you have to deal with liens and all of that. And so a lot more focus on the kind of cost side of it.

And then also a lot more focus on optimizing our take rates, which in new products tend to be totally unoptimized where the starting point is just like you just pick some kind of slightly arbitrary flat fee and just charge it equally on everything. And really, if you compare that to what we do in, say, Personal Loans, the big difference in Personal Loans, we have intelligence when it comes to knowing like which offers we are adding a lot of value to the consumer in, which ones we're only adding a little bit of value, trying to like take -- set our take rates in proportion to how much value we're creating. And there's a very similar thing going on now in some of these businesses where if you take Auto as an example, there's just a huge amount of variation in the dealership. Some deals, were like uniquely the only offer, the only way you're going to buy this car is with an Upstart loan because no one else can understand that risk right.

And then there are other deals where it's like it's a fiercely competitive free market. And in that case, it just doesn't make sense to try to like take the same amount of economics in each case. So we're just starting to get smart to that and optimize around our take rates. And so those will continue to be dimensions that we optimize along. And I've said a few times that, that is going to be both a fast story and a slow one in the sense that I think there's going to be this very fast ramp to contribution profitable, just because we're very focused on it. It's our #1 priority. And then it's not like we're going to be done. Like if you look at our Personal Loan margins, they continue to expand for years and years after that product was mature. And that should just come as a function of how much value we create. That's ultimately what I care about doing in this business is I want consumers to get a delightful product, something that saves them a ton of money compared to the next best option. And I want us to make more money as we save people more money.

So I don't want to try to take too much all at once upfront. And I think that can be a pretty bad trap for these sorts of businesses where you say, well, I'm your best offer, so I'm just going to take every last dollar on the table. I'm going to always leave plenty of money for the consumer on the table. And then as the amount of money that we bring to the table grows, we can keep increasing amount of it. So that's something that I think will play out more slowly over the years.

Got it. We're about halfway through. So I just wanted to flag for any of the listeners. If you have any questions, you can raise your hand or shoot me a Bloomberg or e-mail and I'm happy to ask it on your behalf or if you want to just raise your hand, we can call on you.

But one question that I know we'll get just because I've gotten a ton is around UMI, the increase in UMI to the top end of your -- I think for this year, the guidance is 1.4 -- you had assumed 1.4 to 1.5. UMI is probably close to the top end of that range, but you've held your guidance. I guess what's the offset? Like what's helping you keep -- come in within your full year guidance despite UMI being higher? And at what level of UMI does the math stop working and force to revisit either the medium-term or short-term guide?

Yes. So we've shared that every 5 points of change in UMI is worth 5% to 10% in relative size of originations, which tends to be pretty proportional to everything else kind of revenue and contribution profits. And so if you do the math on that, I mean, it's a pretty sizable effect. I think if we were in the low or mid part of the UMI range for the year that we thought we might be in, probably we would have been raising guidance. And I think that's because we had a pretty extraordinary Q2 in terms of execution on what's in our control. We control our ability to build better models. We control our ability to build better user experiences, more automation, reach more customers. And all of those things, I think we have done exactly the right things and prioritized exactly the right areas of businesses, and I think the results show that.

So I think if not for the rise in UMI, I think we probably would have landed in a pretty different spot on guidance. And as it is, I think we look at those two things and say, well, there's kind of a great execution on the one hand and sailing against a bit of a macro headwind on the other and those kind of net out. So that's how we landed where we did on guidance. Of course, we also want to make sure that the bar for making any changes to guidance is just high. And we always want to make sure that people understand that if we're going to affirmatively come out and say something, we really mean it, and we have a lot of confidence behind that statement.

Got it. I actually see a couple of hands up already. So Luke, why don't we go to you first and then Jeremy, we will come to you next. Luke, if you want to go ahead?

Yes. Great. Can you hear me okay?

Yes.

Okay. Great. I have a couple of quick questions. The first is just on kind of the commentary on the focus on the core in 2Q. Obviously, you put a lot of emphasis on it, and it was really strong growth year-over-year. It sounds like that was a big push for you guys through the first half and then the second half is kind of getting the contribution profit neutral. I think it was breakeven by 4Q in the secured products. Should we basically like say that the growth rate that we saw in the core Personal should flatten out into the back half of the year? Or like as we look into next year and obviously beyond, like how should we think about the sustainability of the growth rate on the unsecured versus secured? Because obviously, getting to contribution profit margin breakeven on the secured side will right in tide lift all boats on the overall contribution profit dollars.

Yes. So our kind of strategic focuses and priorities aren't really changing. So growing in core Personal Loans is still very, very high priority for us. We've also shared that getting our secured products contribution profitable is a top priority for us. And so there, you're certainly right. Those are some of our top priorities. I would not say that we are significantly deemphasizing core Personal Loans compared to before, anything like that, still right up there at the top. Now having said that, our guidance is our guidance.

We have two pieces of guidance out there. One is around this year and one is around our growth rate that you can expect over the next few years. And we've been guiding to a 35% compounded growth rate. And of course, because the core business is such an important part of that, those are going to be somewhat tightly related to each other. And so I would just point you back to that, if you're looking to model something in terms of what kind of growth rate we think is sustainable for this business. And then, of course, our job is to execute as best we can and do the very best possible job against that guidance we possibly can. And it is, of course, in context of what's going on in the macro because our very first -- maybe the meta priority of the business is always to do credit right.

And so if you get a bit of credit tailwind, that's going to probably push you a fair bit ahead. And if you get some of the credit headwind, then maybe the opposite direction. So [ TLDR ] is sort of like look at our kind of long-term guidance, and I think that probably is going to be closely related to what's going on in the core business. And from an execution perspective on things that are within our control, a.k.a things that are not macro, the core continues to be very important to us, and we're going to do everything in our power to grow that business.

Okay. I only have one other one, and then I'll let Jeremy go. Just as we think about kind of the adjusted net income, obviously, it sounds like you think that the stock price is undervalued. I mean, can you give us some benchmarks because like as a traditional financial investor, a lot of my focus is on price to earnings, price to book, but then also understanding the capital contribution. Like I know you guys highlight that I think it's 5.9% of your loans held on balance sheet or outstanding are held on balance sheet. But that doesn't actually include the co-invests, which also include I think, another 5% plus of like capital required on the balance sheet relative to overall.

So how do you guys -- like can you give us guide-rails as to -- like I was surprised to see the stock buyback in the first quarter just because if we think about your overall kind of, call it, return on capital from maybe the co-invest, I think you guys have said it's high teens over time. And if we're looking at a stock that's 3x tangible book value and 12x, 15x kind of adjusted earnings or really 30x earnings if you back out SBC, like how should we think about the guide? Or the guardrails around like capital allocated towards the stock price versus capital allocated towards the core business?

Yes. A lot to unpack there. Let's see. So probably the first thing I would say is that we don't see the business as primarily being funded by our own equity capital. And so it is certainly true that we have some amount of equity capital that's required to operate the business. We think that over time, there's going to be increasingly efficient ways to do that. And so that's why we've talked about this 5.9% number, which sort of starts to nudge people towards thinking about this in terms of like as a proportion of the total size of the pie of origination that, of course, has been growing very quickly, and we expect to continue to grow. And so maybe that's the first thing, which is like we're going to be really efficient about what fraction of all the sort of -- of all the originations requires Upstart equity capital and how much Upstart equity capital is required, whether that's in the form of directly on balance sheet or to your point, the sort of risk capital co-invest, which is sort of a nice thing for us. It works out because it secures these long-term capital commitments from partners that's fairly unique in the market, gives the business a lot of resilience is a really good thing.

But then really like the value of the business doesn't come from the ROE of the money that goes onto the balance sheet or the risk capital. I think of those almost as like this sort of just a part of the supply -- a necessary part of the supply chain to make it all work. The real value is coming from the growth in the contribution profits of the business. That's sort of mostly fee revenue that's getting earned on transaction. And the growth rate in that, I think, is actually like that's probably like the one place I would look and say like, well, that's actually the thing that's extremely uncommon for, I think, your typical kind of comp that you might look at and say, what's the sort of typical price to book or price to earnings? I think like any kind of multiple is fine over a sufficiently long time frame if you're considering the growth rate of the underlying business. And so I think it's just really hard to be like, well, I'm going to compute at an average financial services business on a sort of price-to-book basis in 2027 when that business is probably growing at a rate that is a fraction of the rate that our business is growing in.

And so that's, of course, what it ultimately comes down to is the growth rate in the business. And in our case, I would say the growth rate in the contribution profit, which is, of course, real like fee revenue. And that -- it is true that it's powered and made possible by the amount of equity capital that's either supporting balance sheet or risk capital. And that's why I've laid out sort of my kind of framework priorities is like we want to grow contribution profits, and we want to do it in a way that's really, really efficient with equity capital. And I think if you believe those two things about the business, then you get to a pretty different view of the stock.

Okay. My only pushback would be, I mean, like obviously, contribution profits have grown significantly over the last year. But on a fixed cost basis, those are also up 30-plus percent, which which doesn't necessarily lean into the operating leverage that I think you guys are trying to kind of -- obviously, over time, that should manufacture like the operating leverage just given the growth and the TAMs of the businesses. But if you're growing contribution profits by a certain amount and you have in the last year, you would think more of that would fall to the bottom line when, in fact, 30% plus in the fixed expense base year-over-year hasn't really let that kind of come to the investors.

Yes, you're absolutely right. The operating costs have been growing. Some of that is intentional investment in some new areas that we think are going to pay off nicely. But in any event, we've, I think, made it pretty clear at this point that I think the lion's share of that growth and the rate of it has happened and that looking forward for the rest of this year, the growth rate is going to be much, much lower. And so I think it will just -- the operating leverage will start to get a little clearer as time goes on.

Why don't we go to Jeremy and then actually had a couple coming over e-mail too and then [ Arun ] will come to you after I go through the e-mail ones. But let's go to Jeremy next.

I appreciate it, Paul. I appreciate you doing this. I guess in terms of what happened on the quarter and the messaging, that was all quite clear to me. From our vantage point, you guys did exactly what you said you'd do, exactly what the investment community, I think, wanted you to do as the profitability is inflecting. You executed well despite the UMI ticking up a bit. You have a much stickier capital base now. You're buying back stock, both personally and as a company, and you and Andrea are both incredibly incentivized for the stock to appreciate and be a multibagger from here.

So like my question is like what has been the investor feedback? Because I just -- I'm trying to like understand why the stock is where it is? And sort of like what the feedback from the investment community has been because objectively that like just the reaction to the last quarter and like the stock sort of like not getting more attention given what has changed over the last 6 months for the company, which seems like a real inflection point to me across a number of dimensions. Like what do you think has been from -- I'm sure you've had a ton of investor conversations like has been underappreciated or misunderstood?

Yes. We've certainly spent a lot of time with investors since the meeting. And I do think that across the board, there's been some pretty strong appreciation of the quarter. And I think that's doing the things that we said we would do this quarter, and I think everybody has appreciated that. I think the sort of outstanding questions -- and I never felt like it would just be 1 quarter and everybody would be sold on the business or its outlook.

I think there are some outstanding questions. I think you just heard one around OpEx, which is like people are like confused why our OpEx keeps going up? And I think it makes it a little harder to model how much operating leverage you should believe this business has over the next few years.

I think that there's some concerning questions around like the sort of kind of how much -- over time, how much equity capital this business will need and what there's a bank thing coming up and what is that and what are the implications of that. And I think that's maybe just a bit of a new thing that not everybody is really familiar with yet.

And on that particular point, we've stated, I think, pretty unambiguously that we think we have sufficient capitalization to open Upstart Bank early next year and that it's going to be pretty accretive to us operationally because it's both sort of economically more efficient and operationally more efficient, lets us sort of get to more states and make more offers. So it's a really good thing for us, but I think there's just a little bit of consternation around that.

And then I think probably most fundamentally, it's just like 1 quarter is probably just not enough if you're just fearful that actually, like if you look at the past 10 quarters of this business and you say, well, okay, this is this 1 quarter where it seems like you're able to grow profitably. And then there's all these other quarters you weren't. Maybe this quarter was just like a lucky fluke, maybe it was only because the macro was supportive or something, and that's got to change and you look at that and you just have, I think, reason to worry that 1 quarter is not enough to prove the thesis. And I can't blame anybody for feeling like they want to see more proof points. So I think what's in our control is we're going to keep doing is just like this short list of priorities, we're going to continue proving that our core Personal Loan business is really strong, really differentiated and something that can grow for a long time to come, that we've got these new horizon businesses in Home and Auto that have enormous TAMs that are going to become real businesses that are unit economic positive and something that you can believe in to give us a runway to grow for even more years to come.

And that we're going to do all this while still operating in a really capital disciplined, capital-efficient way. And I think if we can show those things and whether it's 1 quarter or 2 quarters or 5 quarters, I think that eventually lots of investors are going to have to change their minds.

So maybe I'm going to preempt it a little bit here and just jump in. I was going to ask this question at the end. But Paul, wondering what you -- since you became CEO, you've obviously increased your engagement with investors, analysts. What is the one thing that you think like people get most wrong about Upstart or struggle to understand about Upstart? Is there something that you just -- like when you meet with them compared to your understanding and from your seat, is just baffling something that people are just not getting or not understanding?

Well, I said this on the original earnings call. I mean I think the answer is everything. It's like I think when I started to see earlier this year, there just really has never been a bigger gap between like how we saw ourselves at Upstart and how the rest of the market saw us. It's like our business was stronger than ever. It's like we had the best tech we've ever had, the most committed capital we've ever had, we had more borrower relationships, more customers with traction in Home and Auto. We used to just be a one-product Personal Loans business. And all of these are things, real wins that are kind of durable no matter what the macro environment is. And the opportunity has just so big given this kind of like intersection of the AI disruption meets like one of the largest, oldest industries in the world.

And I think just like the market was like every element of the business was an area of concern. It was just like, hey, your margins seem to be compressing. You have been growing for multiple quarters, but not actually growing your contribution profits. You've just dipped back into GAAP on profitability. How are you going to fund all of these loans? And are these new businesses ever going to be real businesses? Or are they just kind of like things where you can grow originations, but again, not make profits out of it?

And I think that it's actually a lot of different concerns, each of which is a little related to the others, but sort of an independent thing that you have to get right. And I think we're just going to go and take all of these questions head on because we have a lot of confidence that actually the trajectory the business is on, is going to naturally show that you can get a ton of profitable growth for a very long time in a really capital-efficient way. And of course, the great news is if we do that, kind of no matter what I think, what investors in the market like wants to do with us in terms of what kind of multiple they want to use or valuation framework at the end of the day, I think all we're going to go up with profit. And of course, if you have the profits, then you get to bet on your own future, and that's what we're planning to do.

Got it. So I think we have about 5, 7 minutes left. So one question -- I'm going to go back to investor questions now. So one question that we did get was about the 4Q '24 vintage. It looks like it's been, I think, underperforming a little bit targets. What's driving that there? I think this quarter, it moved towards underperforming targets. So like what's driving that? Is there something specific in that vintage that we need to be aware of or that you're watching?

No, nothing terribly specific. I mean overall credit performance has been really strong. We've been really happy with the returns that have been getting delivered to investors. We always talk about how the returns have been consistently many hundreds of basis points above the spread of treasuries averaging, I think, something like 600 basis points. And so they're really, really strong returns.

Just kind of naturally, you're going to have some vintages that are a little over, some vintages that are a little under. I think that's pretty par for the course and not something that worries us terribly much. Some of that variation, which vintages do well and not well is just going to be correlated to the changes in UMI because we -- you can -- as a first order approximation, think of us as underwriting to the UMIs at the time of the underwriting. If UMI subsequently goes up a lot or goes down a lot, that's going to give either a tailwind or a headwind to the credit performance of that particular vintage, of course, because UMI mathematically is just going to be something that is linearly correlated to the rate of defaults. So that's part of it.

And then there's sometimes some idiosyncratic factors that matter a little bit to each vintage. But no, nothing there -- when we talk about underperformance in these vintages, I would say the effects are -- our effects overall tend to be pretty modest. And except for that period of time right after the stimulus ended when there was a huge upswing, in UMI that was a larger effect. But really since then, we've been very happy with the credit performance, and it's just kind of some natural variation and then some UMI-driven variation.

Got it. [ Oren ], I know you've had your hand up for a while. Why don't we go to you?

No problem. Thanks, Mihir. Thanks, Paul. I'll be brief. I think maybe a couple other things is cash flow generation is probably another focus on the market. But in terms of balance sheet growth, that's probably another thing people are focused on, which I think you're doing a great job of pulling that back. But related to that on the balance sheet, just curious on your convertible bonds since you're buying back shares, why not go after those since those maturities are trading in the 70s, perhaps just thinking if that's a good use of capital?

;

It's certainly something we looked at when we last did some share repurchases. But we mostly just looked at the like what we expected the the sort of IRRs on each to be, and we just thought that the stock's IRR was just higher, and it was so much higher that it was like, even though the other thing is more debt like and there's some value in getting that down, the risk adjusted not the same. But nonetheless, the delta, we just thought the stock IRR was just so high. So that's how we think about these things. It's just we're trying to maximize the IRR of where we deploy capital, and that could be internal uses or stock uses or various kinds of buybacks, and that's how we'll generally compare them.

Yes, it makes sense. Yes, I'm always wondering what you think that IRR is and where you think the stock goes. But just maybe lastly on just the cash flow generation, how low -- in terms of cash flow generation, you don't really have much at this point, but just curious to know how low you're willing to pay cash in terms of those share repurchases? And when do you expect to kind of ramp up on free cash flow?

Well, the business is growing a lot, and we expect it to continue growing a lot. And I said that we really -- it's really important to us that we keep a sufficient level of investment. That's the sort of long-term kind of addressable market here is on the table. And so that basically means that I think we need to keep an adequate amount of cash for all our various initiatives. Of course, like capitalizing the bank is something that's going to use cash. So that's we're being mindful around that, and we want to be mindful around the amount of cash. And so yes, I would like to generate more cash. And when we generate more cash, then we get more options of what we do. And until we do that, options are more limited.

Maybe just turning very quickly to the Cash Line product. It's one of your newer products. Talk a little bit about that product just from sort of how you work, how you're funding it today, what the end state looks like? And then also maybe just spend a little bit of time on the modeling aspect of it because it is a little bit of a different product than your Personal Loan or even the -- like the always-on credit, if you will. So maybe just spend a few minutes on that and just help us understand like how big of a lift was it to put that into practice?

Yes. The Cash Line product is a great product for us. It's one that I wish we had launched sooner and earlier in our history. It's a product where you have to be really good at underwriting because you're serving a consumer that's fairly financially stressed most of the time. And so it's really important to underwrite that consumer well. But it's also a product that can be extremely high demand as a product that people kind of search for proactively. Most credit products, you have to find your borrower, and this is one where the borrower finds you. And so that's a pretty amazing fact about that as a business.

And as a result, it's a business that if you do right, I think can be a very profitable business. And so we're really early stages on that kind of in my kind of steps 1, 2, 3, 4 of building a new product. It's just kind of clear step 1, which is proving, wow, people really want this thing. And then you've got to prove everything else about it and figure out the right kind of funding routes for it, the right sort of lock-in kind of credit calibration on it and then get unit economics. So there's still a bunch of work to do on this product, but it's extremely high potential. It's a really good match for the core competencies we have as a business. And so I wish we started sooner, but next that's time is now.

Got it. I am being flagged that we are now past time. So I will have to stop it there, though. There are a few more questions we would have loved to get to, but I think it was a really good discussion. I appreciate all the investors being super engaged in asking questions, too. And thank you again, Paul, Sonya and team. Thank you so much for taking the time and joining us today.

Thank you.

Good afternoon, and welcome to the Upstart Second Quarter 2026 Earnings Call. [Operator Instructions] 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.

Thank you. Welcome to the Upstart earnings call for the second quarter of 2026. Joining me today are Paul Gu, our Co-Founder and CEO; and Andrea Blankmeyer, 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 a 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.

For the first time, this quarter, we'll discuss contribution margin separately for our unsecured and secured businesses. As a reminder, Upstart has one reportable segment, Unsecured Lending, formerly called Personal Lending. The name change is administrative only and does not affect the underlying disclosures.

Our Auto and Home businesses are not separate reportable segments, but in certain earnings materials we refer to them collectively as secured products, which is derived by subtracting Unsecured Lending from total company results.

With that, Paul, over to you.

Thanks, Sonya, and thank you, everyone, for joining us today. At the end of our last earnings call, I shared 4 key commitments and takeaways. I want to start back there today, right where I left off.

First, I said that core personal loans are a superpower. Our technology lead there gives us unusually strong margins, and I told you we would reaccelerate its growth. Second, I said Home and Auto had found their fit with the market, and I told you we would turn their focus to improving profitability.

Third, I told you that we'd stay capital efficient, even as we pursue the enormous opportunity in credit. And putting those together, I told you that we'd drive a rebound in profitability that would show we are on track for our full year guidance.

Today, I'm pleased to report that we've executed exactly that plan. We grew core personal loan originations 27% quarter-on-quarter. That's a $526 million sequential increase, which is more than 3.5x the growth of the prior 3 quarters combined. It's also the lion's share of the growth in our Unsecured Lending segment.

Because of our strength in this market, we achieved this re-acceleration while also driving our unsecured contribution margin up 6 percentage points compared to last quarter.

At the same time, our secured products, Home and Auto, advanced rapidly towards profitability. Combined, their contribution margin improved by 61 percentage points in a single quarter, closing a large part of the remaining gap to breakeven, and they did so while still managing origination growth of 45% quarter-over-quarter.

Combined, originations across all products grew 23% sequentially or $782 million compared to last quarter. Our third-party funding strategy delivered at an equal -- at an almost equally rapid pace, allowing us to support that growth without additional equity capital. While loans on our balance sheet increased marginally, they declined to just 5.9% of total outstanding loans, our lowest level in almost 2 years.

Our strategy drove a rebound in our overall margins and profitability, including all-time high contribution profit and a return to GAAP profits. To put that in perspective, our previous peak in contribution profit was in Q4 of 2021. Back then, the business benefited from a much easier macroeconomic backdrop and the financial profile of being concentrated almost entirely in a single mature product.

UMI was below 1, consumer charge-off rates were at historic lows across the industry, and the federal funds rate was near 0. The fact that we've reached a new profit peak in today's environment is a testament to the relentless power of compounding technology wins quarter-after-quarter, year-after-year. I always tell people that while our business is sensitive to macro conditions in the short term, its value in the long term will be determined only by the pace of our execution.

Also, unlike 2021, we are now a multiproduct company. Our business today has a significant and growing share of secured products. Auto and Home made up about 14% of total originations in Q2, compared to just 1% back then. Building those businesses is showing up in our operating expenses now, ahead of the contribution profit we expect them to generate in the future. These products expand our market opportunity by many multiples and, combined with core personal loans, can fuel profit growth for years to come.

Next, I want to highlight our progress in 3 areas: our models, our customer relationships, and our secured products. As always, our most important business lever, especially in core personal loans, is improving our models.

In Q2, we shipped 3 new personal loan underwriting models, cumulatively adding more than 300 new variables. We also moved personal loan underwriting to a new distributed inference platform that is roughly 65% faster at the median relative to the prior architecture, even as it supports much greater complexity.

The end result, our model's accuracy lead over a traditional credit scoring benchmark widened again this quarter. Our model is now 2.74x as accurate as a traditional model, and we're still early. 87.38% of the inaccuracy gap is left for us to solve. That's our runway.

Turning to our customers. Q2 was another step towards becoming the most trusted brand in consumer credit. Approximately 1 in every 13 American adults has an Upstart account, and that number continues to grow. Investing in these relationships is important to us.

In Q2, we originated more than 558,000 loans, a record high. Historical experience shows that each of those borrowers will take out roughly 1.5 loans over time. Recent cohorts are trending even stronger as the addition of new products like Home, Auto and Cash Line brings us closer to our vision of having the best products for every American's credit needs.

We're also making it easier for consumers to return. In Q2, we launched a new model that allows us to better manage when we pull underwriting data from vendors, allowing us to re-engage existing accounts more frequently and at lower cost.

Next, I'll talk about our secured products. In Home, we streamlined the borrower verification and closing processes. Our cost to originate a HELOC decreased 15% versus Q1, and we can close in 6 days while also offering borrowers rates that are on average more than 200 basis points lower than competitors. That combination, lower cost, speed to close and better pricing, is the basis for a durable competitive advantage that should support our continued growth in this market.

In Auto retail, we continue to add rooftops and win wallet share. At the same time, because of the great value proposition we offer both dealers and car buyers, we began optimizing our take rates, a clear sign this business has moved from proving demand to improving unit economics.

In Auto secured personal loans, we improved the efficiency of the funnel and upgraded our ability to automatically identify consumers with eligible vehicles, which lowers acquisition costs and directly supports product margins. Each of these secured products has the potential to be as important to Upstart as personal loans over time, and we're excited to continue investing in them.

At the same time, capital discipline means holding an extraordinarily high bar for investments. And because of that, we decided to sunset our Auto Refinance business this quarter. While we're proud of what the team built over the past few years, it did not have the same velocity or potential as the other bets in our portfolio.

Turning to funding. Since our May earnings call, we've closed 3 major institutional deals, including our largest ever, which together provide up to $5 billion in new committed capacity. We've also kept our streak intact, renewing every institutional capital partner at a 100% rate since 2023. Separately, we completed an upsized $569 million asset-backed securitization, our largest issuance since 2021 at the tightest spreads we've seen in 3 years. This activity is another vote of confidence in our ability to deliver strong returns to our capital partners.

The average return of our last 12 quarterly vintages of loans exceeds U.S. treasuries by approximately 660 basis points, with every individual vintage exceeding treasuries by at least 425 basis points.

Finally, a quick update on our bank charter. In July, we received conditional approval from the OCC following a rigorous review of our credit compliance and business practices. This process, plus the work remaining to receive regulatory approvals and stand up the bank, is one of the largest undertakings in Upstart's history.

The bank does not change our strategy of funding loans primarily with third-party capital, but we expect it to unlock major operational and regulatory efficiencies, which will contribute to our financial goals over the coming years. We aim to launch in early 2027.

Before I turn the call over to Andrea, I'll close with a few final thoughts. Q2 was our first quarter executing with a new management team. We defined a strategy and we executed it.

At AI Day last year, I told you that lending's oldest truism assumes the technology stays constant, that you can't have growth, credit performance and profitability all at once. That's not the case for Upstart. This quarter, we delivered all 3.

We grew, our credit performed, and we expanded margins. We didn't have to trade one for another, and that combination, not any single metric in isolation, is the clearest evidence that our AI advantage is real and compounding. You should expect us to double down in the second half of this year.

We expect to compound wins across technology and marketing as we drive growth in core personal loans and profitability in secured loans. That's where the real durable value in this business lies, independent of any macro headwinds or tailwinds. And we will continue to steward every dollar of investor capital, expanding and deepening our third-party capital relationships and holding a high bar for operational investment.

I want to close by thanking everyone at Upstart for an exceptional quarter. Andrea, over to you.

Thanks, Paul, and good afternoon, everyone. As Sonya noted earlier, we renamed our sole reportable segment to Unsecured Lending this quarter, a naming change only with no impact to the underlying disclosures.

As a quick reminder before I walk through the numbers, Unsecured Lending includes personal loans, small dollar loans and cash line, while secured, comprised of Auto and Home, isn't a separate reportable segment. It's derived by subtracting Unsecured Lending from total company results.

This framing reflects a real shift in our business. We're no longer a single product company, and our unsecured and secured products are at different levels of maturity and have very different economics today.

Our focus on shifting the mix in unsecured towards core means we are leaning into the most profitable part of our business. Secured, on the other hand, is still working towards breakeven contribution margin and has been improving quickly.

Breaking these out separately is the clearest way to track both stories: the earnings power of our more mature unsecured segment and the additional profit engine we're building with our secured products.

Turning to the quarter. Q2 was shaped by execution on the priorities we communicated last quarter and the numbers back it up directly: a re-acceleration in core personal loans, a step change in secured product contribution margin and a rebound in total company margins and profitability.

I'll cite both year-over-year and sequential growth as I walk through our results; year-over-year for the long-term trajectory, sequential for how we executed against the plan. I'll close with what this all means for our full year outlook.

Total originations were $4.2 billion, up 50% year-over-year and 23% sequentially. Within this, Unsecured Lending originations grew 38% year-over-year and 20% sequentially, with the latter reflecting a re-acceleration of core personal loan volume growth.

At the same time, our secured products continue to scale, with Auto originations up 264% year-over-year and 62% sequentially, while Home grew 139% year-over-year and 14% sequentially.

Total revenue was approximately $365 million, up 42% year-over-year and 18% sequentially. Revenue from fees was $348 million, up 45% year-over-year and 26% sequentially. Within that, Unsecured Lending contributed $326 million in revenue from fees, up 38% year-over-year and 23% sequentially.

Secured products contributed $22 million, up 465% year-over-year and 86% sequentially. Take rate, defined as revenue from fees as a percentage of total originations, improved sequentially in both categories of products, about 24 basis points in unsecured and 81 basis points in secured. That's why fee revenue growth outpaced origination growth versus Q1.

Net interest income and fair value adjustments totaled approximately $17 million, roughly flat year-on-year, but down sequentially, reflecting the impact of a higher UMI on fair value.

Next, contribution profit, a non-GAAP metric defined as revenue from fees minus variable costs for borrower acquisition, verification and servicing. Contribution profit was $193 million in Q2, an all-time high for Upstart. That's up 37% year-over-year and up 41% or $56 million relative to Q1.

The sequential increase was almost entirely driven by Unsecured Lending, with secured products representing less of a drag versus Q1. Contribution margin was 55% versus 58% in Q2 2025 and 50% in Q1 2026. The 5-point improvement versus Q1 was driven by margin gains in both our unsecured and secured products.

Unsecured segment contribution margin increased to 62%, up 6 percentage points from 56% in Q1 and flat to Q2 2025, with the sequential improvement reflecting 3 things: one, a larger mix of higher-margin core personal loans; two, lower customer acquisition costs as a percentage of originations; and three, an expected seasonal pickup in demand.

The re-acceleration in core personal loan volume was driven by a combination of model improvements, funnel improvements and efficient targeted customer acquisition, all reflecting our increased focus on the borrower category. Our secured products contribution margin increased to negative 35%, an improvement of 61 percentage points from negative 96% in Q1.

This was driven by improved take rates and a greater operational efficiency across Auto and Home. Given this trajectory, we expect our secured products to reach contribution margin breakeven by Q4 of this year.

In total, GAAP operating expenses were roughly $350 million in Q2, up 39% year-on-year and 11% sequentially. Variable expenses, comprised of borrower acquisition, verification and servicing costs, rose 55% year-on-year and 11% sequentially. Fixed expenses, defined as total operating expenses minus variable expenses, increased 28% year-over-year and roughly $19 millionfv or 11% sequentially.

Looking ahead, we expect fixed expenses to grow in the low single digits sequentially in both Q3 and Q4. In Q2, we returned to GAAP profitability, generating approximately $17 million of net income, up 195% year-over-year, with a 5% net income margin.

GAAP diluted EPS was $0.16, based on a weighted average diluted share count of 110 million. Adjusted EBITDA was approximately $77 million, up 45% year-over-year, with a 21% margin.

We ended Q2 with approximately $1.06 billion in loans held on our balance sheet, up approximately $50 million or 5% from Q1. That increase was driven by our secured products, which continued to scale quickly. At the same time, our unsecured holdings declined and legacy securitized loans continued to run off.

As a percentage of the total unpaid principal balance of all Upstart loans outstanding, loans on the balance sheet fell to roughly 5.9%, the lowest it's been in almost 2 years. Supported by consistent credit performance, we've continued to strengthen our capital platform.

Year-to-date, we've signed committed capital partnerships that are expected to add up to $10.8 billion in incremental capacity. We also completed 3 securitizations for roughly $1.7 billion in total collateral and increased the proportion of Home and Auto loans funded by third parties.

Looking ahead, we're reiterating our full year guidance. Total revenue of approximately $1.4 billion, fee revenue of approximately $1.3 billion and adjusted EBITDA of approximately $294 million, or roughly 21% of total revenue.

Keep in mind, our guidance is informed by our most recent published read for UMI, which as of yesterday was 1.5, up 9% from the beginning of Q2 and at the top of the 1.4 to 1.5 range that framed our outlook when we initially shared our 2026 guidance in February.

With UMI having trended higher over each of the last 3 months and now at the top of the guidance range, we are maintaining our guide. We expect the underlying strength of the business, as you saw in Q2, to offset this macro headwind. Our outlook assumes UMI holds roughly at this level through the rest of the year.

To close, in Q2, we did what we said we were going to do, demonstrating that we could drive sequential improvement in contribution and overall profit margins by: one, reaccelerating the growth of core personal loans at an efficient customer acquisition cost; two, meaningfully improving the contribution margin profile of our secured products while maintaining strong growth; and three, managing fixed expenses.

Along with preparing to launch Upstart Bank, these 3 areas remain our focus for the balance of 2026. And above all else, we will continue to prioritize consistent credit performance. Whatever the UMI context, if we execute across these domains, our platform will be stronger than ever as we exit 2026.

With that, I'd like to turn it over to the operator to begin Q&A.

[Operator Instructions] And the first question will come from Kyle Peterson with Needham.

Nice results. I want to start out and dig a little more into the take rate. Great to see the uplift there. It sounds like it was across products. So I guess I just wanted to dig in, like, is there any mix at play there, whether it's in terms of where in the credit box some of these loans were originated at? Or is there anything pricing that you guys did to tweak that? Just any more color there would be great.

Yes. Thanks for the question, Kyle. We're really pleased with the results on profitability this quarter. And it's really a reflection of the strategy that we laid out at the end of last quarter's call. We said that really there are 2 important dynamics that are going to be happening through the rest of this year. One is we're going to be focused on re-acceleration growth in this core personal loan segment. That segment carries much higher margins. And because you can see in our results that that segment grew much more than it's been growing in earlier quarters, there definitely -- that's contributing to higher margin results.

And then on secured products, we very intentionally were focused on actually improving significantly the margins of Home and Auto, and we did exactly that in this quarter. That was our #1 goal for those products. And so you can see that the margins improved very substantially, 61 points in a single quarter. And obviously, that's going to help.

So the answer is a bit of both. We're very focused on our core personal loan segment, where we're very, very strong, but also each of the sort of underlying businesses did really well on their margins too.

Great. That's really helpful. And then maybe switching gears, I wanted to talk about some of the secured products scaling and particularly on, like, potential distribution partnerships. I know some competitors in the space, especially in the HELOCs, have kind of used some of these as a way to really ramp up growth, partnering with some mortgage brokers or something that offer HELOCs. But I guess, like, how are you guys evaluating and incorporating these into the growth strategy of some of these secured products? And what do you guys have now and where do you see that going moving forward?

Yes. Each of our Home and Auto businesses have some differences in the distribution strategy. So you're absolutely right that in the Home business, we think ultimately it will be very important to have Home-specific partnerships. And so that's not something we've done yet, but it's very much on our road map. It's one of the areas that we want to invest in. And we think there's a lot of potential in just because our HELOC product is so strong in terms of really best-in-class prices that we can offer the borrowers plus sort of best-in-class experience. And I think putting those together delivers an exceptional product. And so distribution, obviously, will take it the distance.

In our Auto product, there's 2 different Auto products. There's an Auto purchase product, and that's distributed at car dealerships via Upstart's specific proprietary software. And so that's a strategy that's been ramping really nicely, as you can see in the results.

And one of the beautiful things about it is that unlike our pure consumer businesses, in addition to being able to grow by getting better models, better user experience, in other words, better conversion rates, the Auto purchase business can simply grow by getting to more car dealerships, and there are thousands and thousands of car dealerships in America that we aspire to scale to.

And then we have some businesses that are more like our traditional personal loan business in being pure direct-to-consumer. Auto secured personal loans is like that. So each of the products has a distinct distribution strategy, and some of them are already fully in play and then some of them, like in HELOC, are still to come.

And the next question will come from Simon Clinch with Rothschild & Company.

And yes, nice quarter. I was wondering, Paul, could you talk a bit about the Auto refinance business that you're sunsetting? I'm curious because that strikes me as a business that would actually be quite important for just repeat business, generally speaking. So I'm wondering if you could just put a bit of color around sort of how that has fitted into your strategy there and why it doesn't necessarily belong there, aside from the economics.

Yes. We think and we thought that Auto refi is a good product. I think we built a good product over the last few years. And to your point, it is -- it was something that was relevant to returning customers.

But ultimately, we just looked at the growth rate of that business and its potential compared to everything else that we were doing, all the bets that we had out there, and we wanted to concentrate on the ones that had the highest velocity and the biggest upside. And so we decided to just concentrate a little more. And so that one didn't make the cut, just a necessary consequence of capital discipline.

Okay. Understood. And then maybe, Paul, if you could talk a bit more about, but as we see the improvements that you're continuing to drive within the secured lending margins, could you talk about some of the sort of low-hanging fruit that's left to be taken and how we should think about the future profitability of this business? If you can give any color on that, that would be useful.

Yes. There's still a lot of pretty well-defined, well-known work to be done on improving the profitability of the secured products. Broadly, they fall into 2 buckets. The first bucket is improving and optimizing where we take our economics.

And you can -- so for example, you can imagine that in the Auto purchase business, there is an enormous variation in how sensitive any particular customer, any particular car purchase deal is to the take rate that we have on it. In some deals, we are offering an extremely unique value proposition. That car would not get sold otherwise. In other deals, we're competing in a more fiercely competitive market. And so the take rates there can really be optimized pretty significantly. And that is going to, over time, as our separation and our ability to underwrite the underlying credit grows and also our ability to just understand which deals are the competitive ones and which deals are the ones where we're adding a lot of value that, that is going to improve our economics there quite a bit.

And then the other sort of big thematic category of how we improve profitability in new products is by making it more efficient to originate them. In particular, in secured products, there's quite a bit more cost involved in originating the loan, the verification, liens, all of the steps of the process. And so there's a lot of room there just for a combination of data integrations, automations and then ultimately bringing more sophisticated forms of AI to bear that can really automate a lot of the work away.

So all of these things, I would say, have both very short-term components that will hit fast in a significant way and then also more of a kind of long-term trajectory where they'll just keep getting better as the underlying product differentiation and the value we create grows.

And we'll take a question from Will Nance with Goldman Sachs.

I was wondering if you could talk a little bit about take rate dynamics on the Personal side. It just -- there seemed to be a couple of different mix shift dynamics between the positive seasonality benefits this quarter, the mix shift, I'm guessing, towards core personal as well as the pricing investments that you've talked about making. So just how would you kind of frame the puts and takes on that line item from here, given the nice improvement that you saw sequentially this quarter?

Sure. Thanks for the question, Will. Yes, and so you sort of nailed it on the drivers of the improvement in take rate on the Unsecured segment this quarter, quarter-on-quarter were driven by the mix shift primarily to core. So the increase in growth we saw in core personal loans, where we have a higher take rate on average, as well as some lift that we get from seasonality where Q1 tends to be softer seasonally and have lower takes on average. All else, I would say, is sort of relatively consistent quarter-on-quarter.

As we look out over the remainder of the year, expect sort of relative consistency with where we are on take rates today. We'll expect to continue to focus on driving growth in our core personal loan sort of segment, which has strong take rates, but ultimately are not optimizing for take rate itself, but for driving high-quality revenue and ultimately contribution profit dollars to the platform.

Got it. That's very helpful. If I could squeeze in another one just on the OpEx. I hear you on the sequential growth trajectory from the second quarter. Just maybe more broadly with OpEx up almost 30% year-over-year, just can you talk about how you're thinking about the growth algorithm there in OpEx and incremental margins over a longer period of time?

Absolutely. Yes. So as Paul had alluded to in his comments, part of the reason we're seeing some of the fixed cost growth this year is a factor -- is related to the fact that we're investing forward in our newer products and our secured products as those are driving towards contribution margin profitable.

We made some of those investments in Q1, here in Q2, seeing the roll forward of some of those into Q2 as well as some incremental investments that we made in Q2 related to tech infrastructure and model infrastructure, as well as starting to look ahead for bank preparations.

We also did a onetime restructuring in the quarter that had some severance expense associated with it. And so really, as I look at this year, a lot of the investments that we've made to support the business and our objectives have largely been made in the first part of this year, which is why we've signaled and demonstrated that we expect to grow fixed OpEx at a pretty moderate rate going forward through the remainder of the year in the low single digits, which should deliver real operating leverage this year, and we expect to continue that trajectory in outer years.

And the next question will come from Dan Dolev with Mizuho.

Great to see those results. Congrats. Two quick questions. First, on your conversion rate, it has increased to 19.7%. Just wanted to know kind of the DNA of your new borrower in terms of FICO. What can you tell us about it? And then I have a quick follow-up.

Yes. I mean, we don't tend to think a lot about our borrower in terms of FICO scores for 2 reasons. One, of course, is our core DNA as a company is that that's the thing that we think could be improved in terms of how borrowers are understood, and that's what we do every day.

But second, more just down to earth, I would say, we've just expanded so significantly in terms of the number of products that we have, the number of use cases, the range of consumers that we serve. We are moving towards this world where we think that we're going to have the best credit product for every type of credit need that any American might have. And so we're really serving a pretty full spectrum of people that are just new to credit or trying to repair their credit, all the way to people who are really prime and can qualify for really, really great rates, have a home.

And so we're getting that full spectrum. And so one of the things you may see in our earnings materials is that we left a note that we're going to be replacing the conversion rate metric and sunsetting that particular one just because it's so sensitive to the mixes that it's a little hard to interpret. And so that's what I would say about it. It's like we're serving pretty full spectrum.

Having said that, this particular quarter again, I'll just go back to this sort of main point that we did put a lot of focus on re-accelerating core personal loans, and, like, that product tends to be kind of a product that tends to serve borrowers who are maybe in the medium sort of FICO score regions. That's historically where it's been and continues to be. And that product, we did put a lot of emphasis on this particular quarter.

Great. And my quick follow-up, of course, on the guide. Amazing results. You're not raising the guide. I take this as just simply being conservative.

So we are very pleased with the results that we saw in Q2 and are seeing very much kind of strong underlying business performance. And we are seeing UMI at the end of Q2 and as of the print yesterday around 1.5, which is at the high end of the range that we set when we set guidance at the beginning of the year of 1.4 to 1.5. And so that represents a modest headwind on originations and our fair value marks. So sort of taking all of that in combination is the context in which we're maintaining our guide on a full year basis.

And we'll take a question from Peter Christiansen with Citi.

Andrea, I was wondering if you could just interpret some of your previous comments on UMI just a little bit more, help us understand. So I think you mentioned that the base business is still doing really well. So you feel good about the outlook for the year. Is that a function of some of the new capital, third-party capital that you brought in the door or -- and/or I would say, maybe some of the new product areas? Is that what's giving you confidence about maintaining the outlook despite that the UMI has gone up?

Pete, it's really all of the above. Starting with our core personal loans business, that's really the centerpiece of what we're focused on and what we're doing. That's driving a lot of the financial results that we're excited about in Q2, and it's going to continue driving a lot of the results the rest of this year.

We -- as Andrea said, we've been executing, we think, at a really high level against our priorities and the pieces of the puzzle that are within our control. We are sailing against a modest macro headwind with UMI up to that 1.5 level. And so there are some puts and takes there in the short term on how that affects originations and the trajectory of originations the rest of this year. But certainly, the personal loans numbers matter a lot to the financials of the business.

We definitely also expect that the secured products are going to continue on the trajectory they're on. And we -- in particular, we're really focused on getting those products to contribution profitable. And so we have a lot of confidence we're going to drive that this year. And so that will, of course, help as well. But there's no achieving the numbers without core personal loans.

Fair. Fair enough. And then it looks like you talked about repeat borrowers. It's been up quite a bit versus previous years. Just curious if you could take us through that dynamic. And to what degree is that contributing to a lower borrower acquisition and verification cost?

Yes. I mean that trend has really been playing out gradually over a lot of years now. So it's not any kind of, like, big sharp change in Q2 specifically. But really, the thing that's been happening is if you think about Upstart in the early years, we had a single product. We had personal loans. Our accounts didn't even offer support for people to take out second loans in the early days.

And we really thought of our business as a transactional business. We're very focused on this conversion rate metric, which is really a measure of you come in the door, do you get a loan. And it was a very onetime transactional metric.

And over the years, increasingly, as we've rolled out new products that could serve people in different circumstances across their credit lifetime, that's Auto and Home and Cash Line and small dollar product, those products have given us the ability and the relevance to people to be relevant for a long time and to hopefully serve them with more products over time.

We've also invested a lot in the experience of coming back to Upstart and making it way easier, way faster to do that, and that continues to be a focus area for us. And the net result of those things is that you can see in our earnings materials for the first time we've shared a set of metrics around how many loans the average borrower gets over time. That historically was in the kind of 1.5 range. And you can see in more recent cohorts, it's trending above that, and we think that's exactly what you should continue to expect given the investments we're making in more products and better experience.

And the next question comes from Mihir Bhatia with Bank of America.

I want to just zoom in a little bit more on the EBITDA guide just between the quarters Q3, Q4 cadence. I think your guidance implies about 24%, 25% EBITDA margin in the back half of the year. And I think you've mentioned secured breaks even in the Q4. You have fixed costs increasing single digits. So maybe, like, just talk a little bit about the cadence between Q3 and Q4. Is there some seasonality in there too? Or should we just expect step function increases each quarter?

Yes. Thanks for the question. We told you last quarter that the guide was back half weighted. We're continuing to see that here with the EBITDA expected to ramp in the second half of the year. Hopefully, the trajectory you've seen from us here in Q2 going from 13% EBITDA margin to 21% EBITDA margin this quarter versus last quarter is showing a strong trajectory.

And then really as we sort of look ahead over the remainder of the year, I would say it's just continued progress against the key levers that we operated against in Q2 and expect to continue to deliver against as we move through the year. So continued progress growing our core personal loan segment, which is really the profit and contribution profit engine of the business. That will be further boosted by improving the contribution profit profile and unit economics of our secured products as we ramp through the year, again, an expectation we expect to be contribution profit positive in Q4. And all of that supported by fixed cost growth discipline. So with fixed costs growing at a moderate low single-digit level as we progress in each quarter of the year.

All right. And then maybe if I could just ask a little bit about competitive intensity in core. When you clearly re-engaged this quarter, you had, I think, better growth than you had in the last few quarters in that subsegment, if you will. Can you talk a little bit about what you're seeing from there? Is your pricing power expanding? Is it holding? Like, is there anything in the 2Q data that gives you more confidence that the moat, if you will, is widening there?

Yes. I mean, this has been an area we've gotten a lot of questions over the past couple of quarters. And we've always tried to tell people that our advantage in core personal loans is very significant. It's very durable. And that's driven by how much differentiation we've created over a decade-plus of working on building differentiated models for understanding the credit risk of this borrower, being able to separate that risk between people much more and less likely to default.

And I think it just sort of is much clearer in the results this quarter. You can see that not only did we grow in core personal loans, we grew while actually improving the margins there. The sort of CAC actually came down. I mean, none of those things, I would say, in isolation are really the whole story, but it really does come back to this core truism of lending that if you don't have differentiated technology, then you can only choose between one of high growth, profitability and credit performance. Maybe you can get 2, but certainly can't get all 3.

And that's something that we have in our core personal loan business, just the ability to achieve all of those things at once because the level of technology differentiation is so large. And the primary difference between this quarter and earlier ones really comes back to one of management focus. We were extremely focused this quarter on this core segment, and it showed up in the results, and we think that's something that can continue.

And moving on to John Hecht with Jefferies.

I appreciate the broken out detail in secured versus unsecured. First one is just trying to get -- maybe, Andrea, your thoughts on thinking about the next couple of years. What would you like to see in terms of the mix of funding from, like, forward flow versus ABS? Do you have any kind of balance in mind that you think is optimal?

Sure. Yes, it's a great question. I think one thing that has been the real progress that the company has made over the last few years is mix shifting our capital base towards committed capital partnerships. And so today, well over half of our capital is from committed capital partnerships.

And you sort of heard the stats from us on the renewals and the overall quantum of commitments we've gotten year-to-date. That, I would say, is probably the most important for us is the ability to ensure that we have a stable, resilient funding base that is committed through -- on average, these terms are 12 to 24 months.

And so as we look out over kind of the 1-, 2-, 3-year time horizon, most important for us will be continuing to scale this capital base in a sustainable way, potentially sort of tapping different investor bases as we look to do so. Ultimately, most importantly, looking to find that right balance between at-will securitization with sort of focus on the committed capital that allows us to have real visibility into the commitments over multi-months and ideally over time, multiyear time horizon.

Okay. And then a separate question on the secured products. I know in the core product or the unsecured product, your turnaround time is very, very quick because of the technological base. What is the turnaround time for a HELOC or an Auto loan? How does that compare to your perspective on industry standards? And how much more room do you have to go on that product category -- on that level of that product?

Yes. Today, they're far slower than personal loans or unsecured products, but we do think they're industry-leading. In HELOC, for example, we're doing it in about 6 days, and industry standard, if you go into a bank or credit union, it could be weeks or months. So very, very significantly faster.

We actually think there's still a lot of room to go on these things, and that's where a lot of the work I talked about in improving the margins of these products will come from. It's actually reducing the complexity of the process, automating the process. And of course, in addition to being cheaper to do, you also make it faster to do, which is a borrower experience benefit. So that's a very, very high focus for us, and we are expecting to see a lot of wins there in the rest of this year.

And the next question will come from Giuliano Bologna with Compass Point.

Congrats on the great results. One thing I'd be curious about asking, and this is hopefully a mooted question, there's a new disclosure for loan sale fees. I'm curious if that's related to the gains that you're charging on forward flow deals for HELOC and Auto, or if it's one or the other?

Thanks for the question, Giuliano. Yes, those are primarily related to our secured products and our fees associated with forward flow arrangements. Historically, they've been a sort of immaterial amount, reached materiality here in Q2, have pulled it out as a separate line item.

And kind of going back to the guide and the kind of interplay around the -- also commentary around expenses continuing to move higher. One thing I'm curious about is, is there an expectation that there is kind of a step-up in stock-based comp and kind of continuation of the step-up that we experienced in 2Q for the balance of the year? And is that one of the levers that should flow through as part of that step-up in expenses?

That's a great question. Thanks for that. So in Q2, about half of the fixed expense growth that we saw quarter-on-quarter, so about half of the $19 million, was driven by an increase in stock-based comp. About $4 million of that $9 million increase was discrete to the quarter, and it is not expected to repeat in Q3 and Q4. About $4 million of that is related to kind of the full quarterization, if you will, of performance-based RSUs granted in March for the first time rolling through for a full quarter.

So about $7 million, $8 million in total of the increase in stock-based comp quarter-on-quarter can be attributed to those 2 factors. As you can see, inherent in those 2 factors, we don't expect that those will repeat quarter-on-quarter going forward. And so if you sort of step back on a full year basis for stock-based comp, we expect SBC to be about $170 million on a full year basis, representing as a percent of fixed expenses, something in the low to mid-20s and a modest reduction versus last year.

That's very helpful. And maybe one brief one. I'm curious when I think -- there's been a little bit of increase in, like, Auto and Home loans on the balance sheet. And I'm curious where things stand in terms of securing some final agreements on -- in terms of distribution to kind of continue to execute a lot of those loans off the balance sheet going forward.

Yes. Great question. Funding progress has been really strong. As Andrea mentioned, we've added a lot of new funding deals in the last quarter alone, more than $5 billion of committed capital. And some of the new deals that we're signing are flowing into our Home and Auto products. And so we're very happy with the progress on those products.

And generally, what I would direct everyone to think about in terms of the net of the funding math is how much originations grew and how much landed on the balance sheet. And if you think about sort of those numbers compared to each other, you can sort of infer that we must be adding a lot of third-party capital, both in the core business and in our new businesses, and we're very excited about where that's headed.

And the next question comes from James Faucette with Morgan Stanley.

I wanted to ask one operational question and then kind of one question on lending philosophy. On the operational question, I noticed that your completely automated origination percentage went down slightly, like, 100 basis points, obviously not a lot, from a very high level at 92%. Just wondering, does that imply that we're bumping up against kind of the top of that range? Or do you think you can push it higher and, I would imagine, drive better profitability that way?

No, I don't think that -- I don't think we're at the limits of automating. But really, there's a lot of mix effects under the hood. And if you think about the different products, they vary a lot.

Certainly, it's the case that you can only get to 100%. But the reason that we put out every quarter this nice graph in our earnings deck that shows the percent of people that are -- the percent of applications that are approved in addition to the percent of loans that are fully automated is that because automated loans convert at such a higher rate compared to nonautomated ones, and this is dominated by our unsecured products like personal loans, there's still a lot of room for that to go up. That's only 77% of applications being approved automatically. So that number can still go up.

And then that math is even more extreme if you think about the new products and the discussion we've already had about Home and Auto, you can imagine that the levels of automation there are significantly lower, and there's just so much more room for those products to run. And so as they scale, they're going to become a larger part of this math, and there will be more room for them to contribute by raising their levels of automation.

Got it. And then philosophically, I wanted to just follow up on the UMI and the trajectory there versus kind of how you're thinking about how aggressively you want to be lending. I think the way that you characterized UMI and what it's done directionally and how that impacts your outlook for the year makes sense.

But at the same time, I'm wondering, as you're lending against a little bit higher UMI score, what's your visibility? Or how do you think about proving out whether you're getting the type of performance from the loans and whether it be in terms of payback rates or delinquencies, et cetera, versus what you would expect? Just trying to sensitize ourselves on an ongoing basis to UMI's moves and its impact on your willingness to lend.

Yes. I mean, measuring and predicting credit performance, that's kind of what we do every day, right? So I mean, starting from UMI, obviously it's up over the last few months. And we have a lot of confidence in that system. It's something we've invested a tremendous amount in over the last couple of years. And we think we've got the fastest and most precise understanding of macro effects in consumer credit of anyone out there.

And so we trust that system to be able to read what's going on. We published just this kind of one blended number, but under the hood, there's a lot more sophistication, ability to understand what's going on with different segments of consumers, almost arbitrary sort of combinations of segments and characteristics. That's kind of what that deep learning-based approach makes possible.

And so we give our models a lot of power to react to the latest in what's going on and to price that risk into how we're underwriting new loans. And then what we expect coming out the other end is that we're going to have properly calibrated performance, and that basically means loans that deliver returns similar to the returns that we're targeting. And so when we share every quarter results about how credit performance is, the number of basis points were, performance exceeding treasuries, those are all indications that that credit is going in the right direction.

And then, of course, ultimately, this is about whether our capital partners, our third-party capital partners, are happy with the returns. And given the 100% renewal rates we're seeing, the sort of longer deals, the longer commitments people are making, bigger commitments people are making, I think you can see that the credit performance and the returns have been incredibly strong for our partners.

And we'll take a question from David Scharf with Citizens Capital Markets.

And congrats on such strong results. I wanted to follow up on, I guess, a couple of questions on the capital side. And the first relates to loan retention. I thought it was very positive on an actual dollar -- absolute dollar basis, it looks like the amount of core personal loans retained on the balance sheet is going down.

And Paul, you've kind of referred to it as core, maybe more mature, higher margin at various points on the call. To the extent that it's no longer sort of an R&D-ish product, should investors think about a time line or a specific target or goal at which point the company possibly feels like it doesn't have to tie up capital in retaining any of the personal loan product?

That's a great question. And so when we think about the uses of our balance sheet at Upstart, again, I'll point everyone back to 5.9% of our total principal outstanding is what we're retaining on our balance sheet. So the vast majority of what we originate, we are selling through to third parties and holding a minority on our balance sheet.

Ultimately, our balance sheet really serves 2 purposes for us. One is for the purpose of R&D. And the second is just having to do with kind of timing of loan sales and aggregation of sales.

On the first point on R&D, we're doing sort of less R&D overall versus a year ago as a percentage of total originations. But we still have some R&D sitting inside each of our product categories. That includes inside of Personal Lending and our Unsecured Lending as well as some continued R&D in Auto and Home. So you'll sort of probably continue to see investment there that we're making around different areas that we're working on from a credit perspective or product structuring perspective and loans that are going on the balance sheet.

And then second has to do with loan sale timing and aggregations. And that also, as we anticipate something, we'll continue to use the balance sheet for as we just think about timing of loan sales, some of which might cross over month end and quarter end marks.

And so sort of ` back and answering your question, I'd say both on unsecured and personal loans as well as in an aggregate, we have no sort of goal, which is to bring our balance sheet down to 0 or to structurally we must reduce it period-on-period forever here on out. As long as we have a strong capital position, strong liquidity position, we're very happy to use our balance sheet to support these 2 strategic objectives.

Got it. No, I appreciate that. That's great color and detail, Andrea. And just, I guess, as a follow-up, switching to the capital partner side, the flow partners. It looks like, I guess, it's about $1.3 billion of cumulative sort of co-invested capital. Notwithstanding the qualitative advantages of co-investing, obviously having some skin in the game and aligning kind of interest, can you talk to perhaps the calculus that the company undertakes when analyzing co-investing capital versus perhaps lower loan sale prices without co-investing?

And I only ask because other fintech lenders we talk to, pretty much all of their forward flow arrangements are all out whole loan sales. There's no co-investment. And just wanted to get some more color on sort of how you quantify the advantage of sort of committing some capital in that regard.

Yes, it's a great question. And we don't view the nature of our capital co-investments or putting the skin in the game as being similar to or comparable to someone that's selling loans at a discount. We think these are great loans. They're performing well. We expect to earn returns on these loans.

For us, actually the essential calculus, the reason we switched to this type of deal structure where we would commit some co-invest is that we wanted to lock in longer commitments from our partners. And I think that's something that's relatively unique in the market is that we've got deals that are committed out 24 months in terms of the capital that investors are going to invest.

And this is strategically so valuable for us because we want to have predictability in our funding supply for loans, and we want that to be immune to changes in the macro environment, changes to the market environment, changes to there's a liquidity shock or bank goes down or the ABS market seize up. We don't want any of that to have unpredictable impacts on the supply of funding for our loans.

And from a partner perspective, one of the challenges they face with making a multiyear commit like that, many of them now have is that they know what our loans look like today. They know how we're underwriting today, but they don't know what we're going to be doing a year from now or 2 years from now.

And so how do they get comfortable making a commitment to buy loans in 2028 when they don't know how we're going to be underwriting at that time. And so skin in the game is our answer to that problem. And as you can see by the number of deals we're signing and the size of those deals, the length of those deals, this is an arrangement that's working. And we think fundamentally, it's a good trade to bring in that predictability and commitment of capital in exchange for a small piece of skin in the game, which will -- we expect generally to produce nice returns for us.

Got it. No, that's very helpful. It's probably -- I think that duration planning is an underappreciated aspect of your capital plan.

And we'll take a question from Rob Wildhack with Autonomous Research.

A question on the July volume number that came out last week. Originations were up 50% in the second quarter, pretty consistent month-to-month, and July drops to 34% growth. I don't think there's really a comp issue versus July of last year. The UMI is up a little, but not a ton. So just wondering if there's anything to call out with that slowdown. And then any additional context you can give on volume growth through the remainder of the year.

Rob, thanks for the question. So July is -- we saw sort of a modest step down versus June, and June was kind of flattish to May as we think about the originations trajectory. And so sort of that trending that we see is partially reflective of sort of the UMI context that was occurring over the course of Q2.

And so what we're seeing in July represents -- is inclusive of some of that modest headwind from the uptick of UMI from beginning of Q2, up about 9% by the end of the quarter and is reflective of that. And so that's kind of the UMI impact. And as we've alluded to before, to the extent UMI goes up, that has created some headwind for originations. If UMI goes down, that provides tailwinds. All that macro context is happening.

But ultimately, as we look out over the remainder of the year, the thing that we're kind of most focused on are the levers that we control in the business to drive sustainable, durable and accretive growth. The same levers we've been pulling in Q2 around driving our model and technology wins, improving customer experience and driving more efficiency across our marketing channels and optimization across our marketing channels.

Those are the key levers that over the last few years in Upstart's history have sort of driven our sustained growth. And as we look out over the near term, we expect to continue to drive growth. And sort of the UMI context will always move around in the background, but ultimately we're focused on those controllable drivers.

Okay. And then one more on the bank and the bank charter now that you're starting to accumulate the necessary approvals. We understand the operational benefits of the bank charter. But I was wondering if you could shed some light on how you're going to run the bank once it's running.

I'm curious how much capital you think you're going to seed the bank with -- and then how quickly you think you can, a, start originating loans through the bank and what portion you might do? And b, how quickly you plan on scaling deposits? Any other details you could provide there would be great.

Sure. On the capital side, we haven't disclosed the specifics around the capital plan, but I can share that we are sufficiently capitalized at Upstart today to launch the bank and are looking forward to that.

From a sort of how quickly we can sort of turn on the operations of the bank across different -- a number of different dimensions, on the lending side, we expect pretty quickly to move the bulk to all of our originations through to Upstart Bank from the current partners that we're originating with today and also expect to be able to raise deposits within a relatively short period of time after bank launch. And so all in all, I expect sort of the core elements of the operations of the bank to be up and running relatively shortly after the launch of the bank.

And I will now turn the conference back over to Sonya Banerjee.

Thank you. For the first time this quarter, we invited retail investors to submit questions through X. We received a number of thoughtful submissions, and we've selected a few themes to answer today.

So Paul, starting with the first one, you've talked a lot about LTV efforts and have stated Upstart is deliberately not maximizing take rate today. As the models improve, how much pricing power is accruing that you're choosing not to harvest? And how do you think about pulling the lever on take rate over the long term?

Yes, it's a great question. Over the last couple of quarters, one of the themes we've talked about is investing in our customer relationships. That's something that's really important to us. We're talking more and more about that, sharing more and more metrics about that, and we expect to continue doing that.

The reason it's so important to us is that we expect to have products that can serve customers across their entire life cycle. So getting customers in the door, getting consumers into our ecosystem, even if they don't take out a loan and then, of course, even more for the ones who do, is extremely valuable to us and will pay continuing dividends over time.

So that's really valuable to do. And so we don't want to over-monetize our consumer. We don't want to sort of maximize the margin that we can squeeze out of every transaction. Even though in some of our products, like core personal loans, our pricing power is frankly fairly enormous, and we certainly could take it to a higher level.

But that's not what we're choosing to do today. We want to take a healthy margin, reflective of how much value we're adding to that consumer, but leave plenty on the table for that consumer to sort of to keep for themselves. And I think we think that's something that's going to accrue to our brand, accrue to the relationship. And so we're going to keep on doing that.

In terms of the magnitude of that, we haven't shared any specific metrics around this. But I will just say that this is not -- we didn't achieve our Q2 results by turning the screws on take rates in our core business. That's not a primary strategy for us today. And if anything, over the coming quarters, when we have the opportunity to, we're going to look to invest more into our customer relationships, not less.

Thank you. Next question. You say the model is at an 87% error with lots of room left, improving roughly linearly. How much of that residual is irreducible? Isn't there a natural limit to prediction accuracy? And how do you know you're not close to it?

Yes. I mean physics is real. So there's definitely sort of limits to what can be done in the physical world, and there's limits to predictability. But the really, really good news is that the starting point and the point of comparison is a pretty low bar. And that bar is, if you think about how consumer loans have been underwritten for most of human history, it's been something that you underwrote with people and then you underwrote with really simple scorecards, really sort of simple 3-digit numbers about people. And none of those metrics were particularly accurate at understanding credit risk.

And so when you look at these metrics about -- if you were to start from a starting point of a totally random and then advance to what a human underwriter could do, what a sort of traditional scorecard could do, you actually only solve a pretty small fraction of all the inaccuracy that's out there.

And what we've done over the past now 12 years of working on this problem in personal loans and less in new products is we've got to this 2.74x as accurate as those traditional models. But actually, that leaves just a ton of room still on the table. And that's just because the starting point is so, so inaccurate that we actually haven't seen any decline -- any diminishing marginal returns to our investments in better models and AI, more data.

And so we're pretty confident that at least in the foreseeable future, our models are going to keep getting better. They're going to keep increasing separation. And therefore, we're going to be able to keep differentiating in our value prop to the customer and ultimately win more of them.

Great. And then the third and final question, what do you believe the market is still missing about Upstart? And what specific milestones should shareholders watch over the next 12 months that could help close this valuation gap?

Yes, a lot. I would say that all year, really, there's probably been a bigger gap between how we at Upstart see the business and how the market sees us than we've ever experienced in our life as a public company.

From our perspective, the business is stronger than it's ever been. We've got tech that's the best it's ever been, committed capital that is bigger and longer than it's ever been. We've got more customers. We've got traction in Home and Auto.

We think of all these as sort of wins that are valuable. They add up no matter what kind of macro environment you're in, whether it's a UMI of 1.5 or UMI of 1 or UMI of 0.5. And those things we are going to keep delivering on through the execution that we did just like in Q2.

And then there's sort of the opportunity ahead in the business, which is like consumer credit is just massive. It's a trillion-dollar market if you look across the different types of consumer credit just in the U.S. And AI is sort of the perfect technology to transform that. And of course, we, as a company, we've been working on this particular type of AI relevant to credit, relevant to consumer finance for over 10 years now. We've got a 10-year plus head start to be the one to do it. And I think that the market, when they look at us, has really been focused on -- a lot of the basics, like, can we keep growing? Can we do it profitably? Can we fund the loans that all that growth is generating?

And so for us, like, what we need to do first is just tackle those doubts head-on and prove that we can do those things. And I think ultimately, the market will decide what it decides. But I think the good news is that with those focuses, almost no matter what kind of valuation framework the market wants to use for us, at the end of the day, all of them go up with profit. And so if the market, at some point, doesn't want to bet on our future, then we can just earn the profits to bet on our own.

Thank you. And that does conclude today's conference. We do thank you for your participation, and have an excellent day.

Well, hello, everybody. I'm Henry Dierkes, Henry Invests analyst at Rebellionaire. And today, I'm super excited to be joined by Andrea Blankmeyer, who joined Upstart as Chief Financial Officer this past March and is here today for a wide-ranging conversation on Upstart as well as to answer a few questions submitted by retail investors. Prior to Upstart, Andrea served as CFO of Cityblock Health, a company focused on improving access to health care.

Prior to that, she was CFO of Transfix, an AI-enabled transportation platform. She also served as VP of Finance at SoFi, where she led FP&A, Investor Relations and more. So Andrea, congratulations on the new role, and thank you for being here today.

Thank you so much for having me.

I kind of want to start like you have a very interesting career path working for a lot of very interesting and unique companies. And of course, Upstart is now included in that. So that's why I want to kick things off, like kind of out of all the companies you could have joined, why Upstart?

Yes, it's a great question. So I've been at Upstart for just about 3 months now. So, off to a running start here. I'd say I was drawn to Upstart for a few reasons. One really is the mission, so improving access to credit up and down the credit spectrum. It's something that matters a lot to me. I grew up in rural Arkansas and Ozark Mountains, and I saw just how much sort of limitations and access to credit can impact people's lives. So that's one reason.

Secondly, Upstart is differentiated. It has a core asset in its AI, underwriting, primarily underwriting, but also sort of operations models that it has built, and it has built a real technological lead on that front. And so as a CFO, I'm attracted to businesses that have differentiated access assets that give the company a right to win and to grow in the market that is sort of pointing itself at. And then finally, as always, very much drawn to Upstart for the team, Paul, Dave, Sanjay, they're incredibly smart and kind group of people that are the kinds of people you want to be solving hard problems with. And so sort of all of those things came together, and that's really why I'm here at Upstart.

Let's unpack that AI part of the answer a little bit more in depth. Upstart has been building these very sophisticated credit risk models for over a decade now. But I think sort of in, call it, like a post- ChatGPT, post-2022 world, kind of everybody in lending and really, I guess, every business claims to be using some flavor of AI to improve. So my question is like what makes Upstart different?

How is your technology unique relative to that of kind of like other Fi

Yes. I'd sort of simplify it as it's really differentiated models and it's differentiated data. And both of those are hard to replicate quickly even in a world with all the incredible advances that we've seen on the Gen AI side. So on the first side of it, on the models, our CEO, Paul likes to say there's kind of like two kinds of AI out there. There's what sort of has been called more machine learning type AI in the past, and then there's the sort of the generativorefront now and are incredible tools.

And what they're great at is doing things that humans can do, so sort of replacing jobs like that what you and I have, Henry. But they're not particularly good at solving numbers problems and sort of looking at very large tables of numbers and sort of drawing inferences and results out of those.

And so it's really kind of the latter type of AI, more traditionally sort of called machine learning sort of fundamentally that has been the sort of tooling that Upstart have to come as you go do that to really build sort of a complex set of models pointed at questions like not just will a borrower default, but when will that borrower default or stop paying? Not just will this borrower prepay, but when will they prepay. And it's sort of that level of nuance and sophistication of models that have been built carefully over time that allows us to actually bring any real differentiation in the underwriting that we do.

And then secondarily, you pair that with differentiated data. So Upstart has exceeded 100 million repayment events of very critical and valuable training data for us and a big milestone. But you could say that there are lots of financial institutions out there big, big banks that have many times those repayment that it's been collecting since 2012 and sort of growing in that base over time.

And so it's this richness of data, not just what has happened from a borrower activity perspective, but what did we know about that borrower and their behavior and their activity when they took out that loan that is able to really power and lend meaning to the models that we've built over time.

Let's stay on the topic of AI. You published this slide this quarter in the Q1 investor deck that I think tries to quantify a little bit about what you're talking about here. Your claiming Upstart has closed, call it, 12.6% of the gap towards a perfect credit model, whereas in traditional legacy credit models only closed about 4.6% of that gap. So that's nearly a 3x difference. Can you maybe just like unpack this slide that we're looking at here and kind of like how -- really how big of a deal is this model advantage for Upstart over the long term?

Yes, it's a great question. So this is a slide we added in the most recent earnings deck, and we think it's sort of powerful for a couple of reasons. So one, just to orient like 100% on this chart would be saying that you're sort of underwriting people fully at random. So that could be you're either assigning them a random interest rate or default risk rate or you're sort of assigning everyone the same, right? That's what 100% is. So totally random. Zero on the chart, which isn't even part of the axis would mean that you're sort of all the way at the point where you can perfectly predict exactly the cash flow characteristics of every single borrower down specific month.

And so that's what that variance means. Traditional credit models at the 95.4% you see the dotted line here, those are typically taken into account like 10, 20 different variables. So they're taking into account a subset of the variables available on traditional credit reports plus additional information like income or other information like that. And that's what your traditional kind of textbook credit model allows you to do. What's interesting to see is that really sort of eliminates only about 5% of the inaccuracy relative to sort of full randomness.

And that's good enough for pretty much everyone else that's out there, right, which is kind of incredible. And the sort of real fact is that, that's good enough for -- in particular, if you have a high credit score where your default risk is low, right? So if you're above 700 or above 720, that traditional credit model is good enough. What Upstart has done is we've been driving sequential and incremental improvements over many, many years relative to that traditional credit model. And we've been making that improvement consistently over time, and we still have a really long way to go. So it's not like there were just one or two interesting variables in a model like 5 years ago that have driven all of our wins and our market share.

It's been steady improvement over time with a long, long runway ahead of us. Who knows if you can ever actually hit sort of a true theoretical zero. And what this model has allowed us to do is to sort of take our underwriting and take our product down the credit stack. So we can separate out the risk of someone with a 650 credit score, right? No one else is looking at them and is considering giving them a $10,000 loan. Upstart can look in that individual or a subset of those individuals with a 650 credit score and identify the ones that are creditworthy and put the right rate in front of them.

And so by having this increased accuracy, we can move down the credit stack in places where FICO is less meaningful, and we can sort of put rates in front of people that are meaningful to them, that are interesting and meet their needs. And that allows us to access and tap into a market that, one, is not particularly competitive, no one else can do it, which allows us to grow at the rate we've been growing while maintaining the credit quality we've driven while also having kind of the strong unit economics that we've delivered on this product.

Yes. Let's take that a layer deeper because you've got these very sophisticated credit models, right, which are enabling greater accuracy. So you're able to offer interest rates that are very different than what some of your competitors can, maybe don't have as sophisticated of technology. And I think that's where a lot of Upstart's pricing power comes from. And historically, you've been harvesting that more as kind of like a onetime economical gain. But in recent quarters, you've been talking about lifetime value efforts and kind of leaving some on the other side of the table or passing back the economics of your differentiation to your customers and your borrowers in the form of lower interest rates or your credit investors in the form of higher returns. So can you maybe just unpack that dynamic for us?

Like why pass back some of those savings versus harvesting more of that as kind of like near-term margin in the short term?

Yes. And you're exactly right. So it's -- our ability to, one, even offer a rate to someone in the first place; and two, to offer a competitive one that's sort of correctly priced for their creditworthiness is the differentiator driving our growth and our pricing power. And we are not charging kind of the max take rates that we can across every customer all the time. And that's because we know that many of the customers that we acquire end up becoming repeat users of Upstart and coming back to the platform, one, with sort of more data that we have on them sort of understanding their credit profile, but two, coming back to us with no or limited sort of customer acquisition costs associated.

So very profitable customers on a repeat basis. What we see today is that about 1/3 of the loans that we make in any given quarter are going to repeat borrowers with Upstart. So there's real sort of power that the platform is starting to generate even as today, we -- the bulk of our originations are within a single product. I think there's real opportunity for that to expand over time. And so that's what we think about is kind of the lifetime value of a customer, right? One model would be you fully underwrite to maximize the value that you're generating sort of economic value you're generating from a customer on day 1. Sort of the full other end of the spectrum is that you underwrite and price to maximize the long-term value of the customer.

So that might mean kind of overpaying, if you will, upfront on your customer acquisition cost or bringing your take rate down in order to attract that borrow on the platform because they're part of the platform and are more likely to come back and repeat. Those are kind of like the two ends of the spectrum. And I'd say that today, Upstart is somewhere in the middle. We're not fully pricing to the LTV of the customer but nor are we fully pricing to optimize our profits today because we do know there is that lifetime value on the platform, and we want to start investing towards that.

Let's talk a little bit about how that's showing up in the guidance that you've given for the year and over the medium term. So you're guiding to be a really fast grower, 35% annual top line growth rate. On the profitability side, we're guiding for a 21% adjusted EBITDA margin this year. It's about $294 million, and you're guiding for a 25% adjusted EBITDA margin in 2028. But in Q1, that adjusted EBITDA margin was 13%. So clearly, you're implying a pretty material profitability ramp, not only until the end of this year, but also as you look out a few years in the future as well. So is it fair to say, Andrea, that the dynamic you just described on the lifetime value efforts as well as maybe a combination of some other factors could currently kind of like be masking the profitability profile or the operating leverage profile of Upstart's business in the short term?

And then kind of how are you thinking about the operating leverage of Upstart over the longer term as well?

Yes, great questions. And you're exactly right. So we did 13% EBITDA margin in Q1, which is really a reflection of a confluence of factors. So as you'll recall, we did 22% EBITDA margin in 2025. So Q1 kind of represented a step down for us that was driven by a few things, all of which we sort of -- we understood and were baked into the plan coming in the year. One is seasonality. So Q1 tends to be a softer quarter for us from a demand and a margin perspective. Two is mix. So we've seen over the course of the last year, really strong growth in our newer products, so auto and home secured products that have been growing rapidly. They tripled and quadrupled over the course of the last year, respectively. And they're still operating at negative unit economics, so negative contribution margin.

So those represent a drag on contribution margin and EBITDA as they've grown. And finally, we've seen really significant growth in our super prime segment of personal loans, which has been really important for sort of strengthening the overall platform and diversifying the customer that we can serve. And it's a customer and a product that has a lower margin because, as we said, there's less differentiation on underwriting that you can do on the upper end of the credit spectrum. And so those factors kind of came together to put pressure on our contribution margins here in Q1. And then on top of that, the company made some real investments coming into the quarter in people and some other items around sort of generative AI that were really meant to set the company up well to support its delivery over this multiyear time horizon.

So you sort of saw a step-up in costs in Q1 alongside some softness in contribution margin, and that's what drove that 13% EBITDA margin. As we look out ahead, certainly, over the course of this year, we expect Q1 to be the low point in contribution margin and for that to expand over the course of the year. We also expect to continue to see really strong growth in our core personal loan segment, which has a very strong margin profile, 55%, 60% plus contribution margins.

And we expect to keep growing our new secured products, our secured products auto and home, while also improving their unit economics. And we're going to do all of that while sort of maintaining real discipline on the cost line and growing that line faster than you all saw in Q1. So it's those combination of factors of continuing to grow while improving the contribution margin ways that we know how to do while maintaining cost discipline that's going to drive the leverage that we expect to see on the EBITDA line in 2026, which we think then positions us really well over the 3-year time horizon to get to a 25% EBITDA margin by 2028.

Okay. Yes, that's great. I do want to talk a little bit about the bank charter, very topical. For as long as I can remember, Upstart kind of had no plans to become a bank. And of course, now you're seeking to launch an Upstart Bank in early 2027, if approved. Could you maybe just help investors understand the benefits of opening Upstart Bank? One benefit I see is just on cost of funding. So especially relating that to your models.

I know you're not competing or you're not planning to compete with your partners for deposits. But the research and development or R&D portion of your balance sheet, I think, has historically been funded by kind of warehouse credit lines. If you drop that cost of capital with deposits, is it fair to say the models could get better a little bit cheaper with some less expensive capital there? And maybe any comments on that as well as how you're thinking about benefits of the bank charter in general?

Yes. That's absolutely one of the benefits that we see is that sort of the ability to access lower cost of funds relative to warehouse financing for the balance sheet that we have should provide some real -- some benefit to the business. And we don't fundamentally intend to change kind of our overall capital-light business model. So the intent is to continue to sell the vast majority of the loans we originate through to third parties. And so our goal in becoming a bank is not to build our balance sheet up to $10 billion over the next couple of years, right?

Our goal is to continue to keep a balance sheet size that is small in proportion to the overall platform. And to your point, like that -- what are the uses of balance sheet for Upstart is really two things. One, there's some moderate timing elements around timing of sales. But two, importantly, it's for R&D. So, as we are building and launching new products, that's where we sort of put loans on the balance sheet, let them season and make sure we understand credit performance before starting to sell them. And to do that at cheaper cost of capital just means, to your point, it's that much more efficient for us to go lean into and grow new products as we do so. But really kind of stepping back, the reason that Upstart is pursuing a bank charter today is to -- it's really for three reasons.

One is to expand access to allow us to offer our full range of rates and products in every state. So today, depending on the partner bank that we're originating under and the various regulatory regimes in various states, there are certain places where we can't lend above a certain rate or we can't offer all our products. That's kind of sort of unnecessarily restricting sort of our overall TAM and addressable TAM for the business. And so that will help sort of continue to power growth for the business to access the full market. Second is to streamline how we originate.

So today, we're originating through these originating banks primarily that are originating on our behalf. And then we're sort of taking those loans off and selling them through to third parties. And for the access to the charter that we get by that model, we're paying them in the order of magnitude of tens of basis points of fees for every dollar of origination that's kind of showing up today as a contra revenue on the P&L. So we'd rather not pay that, and we'd rather do that ourselves. And then third is really around streamlining regulatory cost and complexity, which is a bit of a counterintuitive statement to make because everyone thinks about the regulatory intensity of being a bank, which is very true.

And the reality today is that we're regulated in all 50 states in which we lend, and we're lending through hundreds of partners, dozens to hundreds of partners all of whom are regulated by different regulators. And so they're looking through those lending partners through to Upstart and asking us all kinds of questions very fairly, of course, about how we underwrite and how our models work. And right now, we're sort of responding to that and being regulated by intermediaries, we'd rather be regulated directly ourselves.

And so I'd say those are the three main reasons that we're looking to become a bank and sort of a fourth one would be the deposit sort of funding, resiliency and cost of funding. But overall, our goal is not to overall change our business model and how we operate, but to streamline it and make it more resilient. And we think a bank having a bank charter is a good step along that plan.

Yes. I think there's a lot of good color there, especially on the balance sheet. I kind of want to take that a little bit deeper just on capital intensity. Maybe talk a little bit about co-investments, which are these new agreements that I think Upstart has kind of like paved the way in structuring where you're sharing some of the risk on the underlying credit you're originating in exchange for committed capital. I think you signed a 24-month agreement recently, which is your largest to date -- longest to date. And you've invested a little bit over $1 billion in these agreements. You're marking them at a little over $1.1 billion.

I guess as we kind of like tie this back to the pretty optimistic 35% annual top line guidance you've given, how should investors kind of expect co-investments? And you talked a little bit about the balance sheet, but also the balance sheet as well to kind of scale during this next phase of growth for Upstart?

Yes, it's a great question. I'd say taking the -- maybe the question of like the loans on the balance sheet first is a more straightforward one. I think we do expect that loans on balance sheet will grow as the overall platform grows and originations grow. And that the percentage of the loans that we're holding on balance sheet relative to total loans outstanding should remain low. You can see historically, it's been kind of in the mid- to high single digits percent is what we've seen over the course of the last year or so. From a committed capital perspective, the sort of these co-investments, so these serve a really important function for us, which is they're part of these committed capital partnerships where we're sort of in exchange for getting something that is incredibly valuable for Upstart, which is capital that shows up every single month regardless of what's happening in the broader environment.

So securitization markets could seize up or sort of credit concerns or macro concerns could start bubbling through. These committed capital partners are committed, and they're showing us every month to buy loans from Upstart. And that's really valuable. In exchange for that, what we do is we help sort of take on some of the credit risk. So that they're not worried that they're signed up for a 24-month deal. 24 months from now, Upstart is going to be making some adverse credit decisions that are going to impact them, right? So it's sort of a form of a skin in the game where we're taking a small sort of -- we're putting up a small percentage of the value of the originations into the deal so that we're participating alongside these co-investors, sort of our co-investment partners in the upside and the downside of the loans that we're originating.

So that's really what the purpose is. And so we can sort of expect to see from these over time is that we do expect to -- as committed capital partnerships are the majority of our funding today to sort of keep putting capital to work into these co-investment structures, probably at a similar rate to what we've seen in the past, though declining on average over time as we, one, improve the deal terms with each of these partners; and two, continue to diversify our funding sources.

Okay. Great. Let's stay on committed capital here for a second because the private credit world, I think, has been pretty interesting so far this year, a lot of spooky headlines coming out of there. But against that backdrop, Upstart has done pretty well in securing longer-dated committed capital deals. But I kind of want to go back towards like 2022, that era for Upstart because at that time, the capital base was almost entirely at will, so really no committed capital. And now today, I believe CEO, Paul Gu said on the Q1 call that well over half of your funding is in committed form. So maybe, Andrea, just help us bridge that gap. Like how big of a difference is it to go from an entirely at will capital base to a capital base that is now majority committed.

And if there were to be, call it, another 2022 ask kind of macro shock, like how does that change in the capital structure insulate or protect Upstart from feeling some of those effects you felt a couple of years ago?

Yes. We think it would make a really meaningful difference to Upstart's ability to withstand credit cycles, which we should all expect to see credit and capital cycles, right? That's part of the business that we're in, in credit. And so it will sort of really strengthen the sort of the ability of Upstart to manage through with sort of dampening the impact on the business. Now going back to 2022, we saw UMI that which you're familiar with, go from sub one, like 0.8 to 1.6 over the course of a month or two, right?

So like a doubling of the default risk in the consumer. And so in that environment, no matter what, Upstart is going to be sort of contracting in the loans that we're originating because our credit models will be responding appropriately to the sort of overall macro backdrop that we're in.

And so that's going to happen, right? And that's exactly what we want to happen. We want to maintain really consistent strong credit performance through macro credit interest rate cycles, and that's really going to be the power of the platform over time. And what also happened in 2022 was that happened, -- so Upstart would naturally have shrunk its originations significantly. But then on top of that, most of this at-will capital went away. And so even the loans that Upstart believed that we wanted to originate that were creditworthy loans to originate, it was challenging for us to originate those because we didn't have partners on the other end looking to buy them.

So you saw the company put more loans on the balance sheet and sort of work to find alternative sources of funding, and that really constrained the business for a period of time, both directly over that window, but also kind of the overall perception of the business, right, in terms of the underlying sort of volatility of our originations and our performance. And so if we think about that happening again, -- what wouldn't change would be that we would see some contraction in our originations associated with kind of a worsening macro backdrop. But would be very different would be that we would have capital partners that were committed to be with us through that cycle, and we'll be able to bridge almost any kind of reasonable cycle over sort of a 12- to 24-month time horizon.

Okay. Great. Well, let's open it up to a few retail questions now. We've got a few that were submitted. So this first one comes from Pat. I think it is an interesting question. He says, Andrea spoke on the Q1 call about running a capital-efficient business. What are some of the improvements or changes that you think Upstart can make to become more capital efficient?

Yes, it's a great question. I think the sort of the capital efficiency is almost inherent in Upstart's business model, right, as we are selling the vast majority of loans we originate through to third parties. And so we're not sort of generating bank level target ROEs. We're generating something much higher, and we have the ability to grow much more quickly than potentially a regulated entity with sort of meaningful balance sheet exposure would be able to grow while needing to raise equity capital along the way, right? That's sort of what the bank model would sort of suggest that you would do. And so Upstart's model fundamentally is capital-light one, which is great.

And so I think the things that I'm kind of thinking about with the business and with the leadership are all kind of continuations and marginal improvements and progressions on how we think about sort of the return on the investments that we're making.

And what's getting more interesting for us as a business is that as we've expanded beyond our core personal loans into different borrower segments and into different products, we have more places we could productively deploy capital to deliver returns, right? We could invest into LTV on consumers, right, bringing them on to the platform. We could invest into accelerating growth on our newer products. We could invest into launching other new products, right? We could deploy capital into sort of share re-buybacks or buybacks or convert repurchase. There's all sorts of ways to use capital.

And so I think continuing to evolve the way that we think about the return that we're looking for and how to deploy that next dollar of capital most effectively to drive results for the business and returns to the shareholder is something that's sort of very top of mind for all of us.

Okay. Our second question comes from Ron. And he says, with $2.4 billion in committed institutional capital secured in roughly 60 days, can you speak towards the institutional appetite you're seeing now versus 12 months ago? And kind of what's the gating factor towards scaling committed capital well beyond $5 billion?

Yes, it's a great question. It's interesting because you sort of alluded to this in a lot of private credit kind of talk and sort of shakiness, particularly on the corporate side. And what's been really, really good to see is that the sort of institutional demand for Upstart loans has been consistent to growing over time, which is great because the platform has been growing and originations have been growing. So we sort of need that to happen. And so as that poster alluded to, we've raised significant committed capital on a year-to-date basis.

We've renewed 100% of our committed capital deals and a number of them have been coming up for renewal. Even in a tough environment, they've renewed at terms that are better than the ones we've had in the past, of upsizing or extended terms or sort of pricing, other things getting better. And so I think that's been very good to see, not surprising because we deliver a real premium, so sort of risk-adjusted returns that are very strong and that have been consistent sort of vintage after vintage. And so we're delivering a product that institutional capital wants to buy, and we're seeing them continue to show up for that.

And it's a never-ending process for us, right, because we are not looking to meaningfully increase our balance sheet to go finance this. And so as the platform continues to grow, we need to continue to be out there bringing new investors on as well as thinking about different ways to tap into different pools of capital over time so we can really continue to support the growth of the strong business we have.

You mentioned a little bit on buybacks. Our last retail question here is kind of asking about capital allocation. I know Upstart bought back $100 million worth of stock, I think it was around $31 a share or so back in February. You got $122 million remaining on the buyback program. Could you maybe just refresh our understanding of Upstart's capital allocation priorities? And given kind of the increased focus on the Q1 call on maximizing per share metrics as well as kind of doubling down on treating equity as a real cost, is it fair to say that over the medium term or long term, you should expect Upstart to be kind of opportunistic buyers of the stock on the open market when those opportunities present themselves?

I think that's a fair assessment. We are always considering all of the options. We sort of alluded to before, all of the ways to deploy our capital in the highest return way to deliver value to the platform and value to shareholders. And that's kind of the #1 orientation, maybe obviously, but sometimes not so obviously at various companies in terms of how we think about capital allocation.

And so very much one of the sort of the tools in the toolkit to do that are share buybacks. And as I said before, there are so many opportunities we have on the platform that we see as very high return investments, risk-adjusted return investments into our core product into our newer products into sort of the broader platform. And so the bar is high, right? The opportunity cost is high for buybacks for a business that we see with as much upside as we are investing towards. And as you can see in where sort of management made the decision to do the buyback back in February, there are times when the company sees real upside in the stock price itself, and we will sort of act accordingly.

Great. Well, we've covered a lot today. Maybe I'll bring us home here with one final question, talk a little bit about you, Andrea, talked about Upstart's technology, bank charter and a lot more as well. But if we kind of just like take that, put it all together and then zoom out 10 years, where do you see Upstart's business in 10 years' time? Kind of how do you focus on delivering that shareholder value? And then maybe more importantly, if you make a lot of progress towards your mission in becoming the most radically pro-consumer finance company, what does that really mean for the American borrower?

Yes. And so 10 years from now, that is our mission. And so what we want to be is the go-to place for credit for all Americans up and down the credit spectrum. I think what that would practically mean is that, we will see continued strength and growth in our core personal loan product.

We will have established strong positions in auto and home and knock on wood cash line is contributing its fair share. And there's probably going to be one to multiple additional new products kind of brought into the arsenal and onto the platform. And sort of more broadly speaking, sort of the awareness of Upstart more broadly in the marketplace is going to be a lot stronger than it is today. And that's going to create a real flywheel effect around the understanding that folks will be able to have that you can always come to Upstart -- and by coming to Upstart, you're going to get not just a fair rate or an interesting sort of offer, but the best rate out there. And we think there's tremendous power in building a brand that is pointing itself towards that confidence that we can bring sort of every American to know that Upstart is a place they can go to go get that.

And the value that we expect that to bring to consumers is meaningful. People are tapping into credit always, and they have need to do so. And those who don't have access to credit are finding more expensive or much more costly in terms of wage productivity and otherwise ways of sort of grappling and managing through stressed financial situations.

And so we hope that it contributes to a better quality of life and better peace of mind for the vast share of Americans that, in particular, are living in sort of more stressed day-to-day situations.

Great. Well, thank you, Andrea. Thank you for answering all my questions and for being here today. I think we all learned a lot about Upstart. And congrats on the new role. It will be exciting to watch and see how the story plays out over the coming years.

Thank you so much, Henry. It's been a pleasure.

All right. We'll go ahead and get started here. Thank you very much for joining us this afternoon with Paul, Co-Founder and CEO of Upstart. I'm James Faucette, senior fintech analyst here at Morgan Stanley.

And before we get started with Paul, a couple of disclosures I need to read. First, our disclosure for Morgan Stanley. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

And then also for the -- for Upstart, just A reminder, today's discussion may contain forward-looking statements that relate to future results and events, which are based on Upstart's information available as of today and are subject to risks and uncertainties. Actual results may differ materially from those forward-looking statements. The discussion may also include non-GAAP financial measures, which are not a suitable -- not a substitute, excuse me, for GAAP results. Please refer to the company's filings with the SEC and its IR website for additional information, including GAAP to non-GAAP reconciliations, along with other disclosures.

So with that out of the way, Paul, thanks for being here. Appreciate it.

Thanks for having me.

Yes. So Just -- I wanted to kick off, I mean, you've obviously been at Upstart since the beginning, Co-founder, et cetera, stepping into a new role as CEO. Love to just get a minute or 2 of your reflections on that journey thus far with Upstart and then the transition and kind of the implications for you? And maybe what shareholders should be aware of?

Yes. Well, Dave and I started this company back in 2012, over 14 years ago. So we've been doing this for a while and working in close partnership for that entire time. I was very early in my career at that time, recent college dropout with Peter Thiel's 20 -- under 20 program. And so it was a real privilege for me to be able to learn from Dave all these years. And as we build the business together through so many stages, I think we chose a business that was probably unusually hard to build. I think it was -- a lot of the ways in which it was hard. We didn't even realize when we started just because essentially, we chose this market, that kind of made a lot of sense. This consumer lending market, we said, hey, you can go into this market. And what we're going to do is we've noticed that the sort of existing traditional players haven't really done much to adopt machine learning technologies or new sources of data. And if we use those things, then we're going to be able to pick up a bunch of advantage in being able to underwrite more people at much better rates, much faster than a traditional players can. It just seems like a straightforward application of technology to an industry where there's a lot of opportunity, let's just go do it. And what we learned after we started doing this is that, well, there's a bunch of reasons that no one wants to innovate in the space along these dimensions, and it comes down to the fact that there are a lot of a lot of sort of third parties that have to believe that your thing works. So if you want to be in this business, obviously, you have to be able to attract loan funding. That loan funding often depends on financing sources, which, in turn, often depend on ratings from third-party rating agencies. There is often a high degree of regulation. A lot of the institutions involved that are heavily regulated, financial institutions that have to show their regulators that what they're doing makes sense.

And on the technical side, maybe not so surprisingly, you can build these models and what happens is the first version of these models -- invariably, they're bad. They just -- they make bad loans and you lose money on the loans. And so now you're sort of in the situation where you're going to be going through this multiyear process of iterating through bad models in order to collect the training data you need to build good models, all while there are all of these third parties kind of scrutinizing whether your thing actually works. And so you're losing money and you're losing credibility all at the same time for a period of many years before you can actually get to the promised land. And so certainly, as a private company, we just went through a lot of years where it was very hard to raise any kind of money, get anyone to believe that these models work in part because maybe they weren't working that well in the very early years, and it took a long time before you could overcome all of that to get to the place that we are today. And one of the questions I get asked the most is like why I'm still doing this after 14 years, and so much of the answer has to do with the fact that, after those first few years, we kind of realized that on the one hand, the size of this problem and the opportunity were just enormous like, this is the sort of oldest industry in the world, like everyone needs credit, and it's probably among the very most important things you could work on to impact the greatest number of people in the greatest way. And also that this was going to take a really long time, like this isn't the sort of business that you're just going to build in 2 years and have it reached the potential it can reach. It was going to be something that was going to take multiple legs of the journey. And so one of the great advantages that Dave and I had as a team is our -- is that we could run this race in multiple legs. And so that's a little bit what's happened here is that we did this 14 years together. And then we think there's just so much more opportunity to do a second leg of this.

So yes, no, like it's an interesting perspective because as you said, it's like -- I think what I take from your comments is that you're probably blessed or lucky with your night of a [indiscernible] entered the market.

Some of that, yes.

But you also have adopted more of a -- like it's definitely like not just a marathon, but an ultramarathon type distance. And it's kind of really if you -- like we were talking the other night about Capital One and the development, for example, of that business, that's been a lifelong pursuit for some of those people, right? And I think that's probably true here as well. So a really interesting perspective.

So let's talk about a couple of the things you mentioned, outside capital as well as credit performance. So let's start with private credit. That's been kind of concern to your point of investors generally maybe doesn't have anything directly to do with you, but there's concerns in the market around availability of capital and some of what's happening from a redemption perspective. And some of the recent reports indicate actually the redemption pressure in semiliquid private credit is accelerating a little bit, like we saw that in some of the initial reports here in the second quarter. Against that backdrop, though, Upstart has just signed more than $4 billion of committed capital, including its first 24-month forward flow commitment and recently completed an oversubscribed securitization. How should investors monitor whether private credit redemptions could begin to impact your credit availability and/or the pricing of the capital? Like help us get comfortable that the things that -- the headlines maybe that we're seeing in private credit are not impacting Upstart adversely.

Yes. Fundamentally, capital is going to tend to flow to the places with the best risk-adjusted returns. And if you look at our results we have for a number of years here, delivered really consistently very high spreads against treasuries. I mean I think you'd be very hard-pressed to find spreads that are almost always like 400 basis points, averaging 600, 650 basis points above benchmark. I mean, there are just not a lot of at-scale places that you can consistently get returns like that. And so I think our capital partners that have done business with us have been very pleased by the returns, and you see that in the 100% renewal rate that we have with our partners that in spite of, for them, it being a relatively more challenging environment to maybe raise capital overall that they want to do bigger and longer deals with Upstart. That 24-month deal that you alluded to, that was a big focus of ours. When we think about these renewals, what are the deal terms we're really focused on. One of our top priorities has been getting the duration of these deals to be longer, periods to be longer because we know that capital markets are finicky. And even if we're in a place where the business is very strong, credit is strong. You can be in a place where the market has liquidity challenges for 3 or 6 months at a time. And we want to make sure our business is never in a position where a 3- or 6-month seize up in the markets can have a very significant negative effect on us. And so getting committed capital deals to be a year long, 18 months long, 24 months long, that is a major solve to that problem. And I think our ability to do that in spite of the challenging backdrop for a lot of these institutions is a testament to how strong performance has been for them.

So from your perspective, like at least right now in this most recent deal, like how should we think about like the sacrifices, if any, that you had to make from a potential profitability standpoint, spread perspective, anything like that? Because I mean, I think we're all kind of accustomed to obviously, longer duration tends to mean giving up some economics. On the other hand, as you said, it seems like there's a gravitation towards the kind of performance that Upstart is being able to deliver.

Yes. In recent deals, I mean, we've been very happy with the progression of our deal terms. Now this is a relatively new and innovative structure in this market. So I don't see a lot of it. And so a couple of years ago, when we started doing deals of this flavor, it is true that, I mean, you give up something in exchange for that duration of commitment. And generally, what we're giving up is we're seeing, we are going to put some skin in the game. And so we have a component of these deals, which is a risk capital that comes from Upstart, primarily funded by the contribution profits we make from loans that are getting originated. But we are putting a lot of those profits at risk in these deals. And so that's kind of like the give -- our give to it. And when we set up the structure, we kind of knew that was the fundamental trade here, and it was a good trade from our perspective. This is capital that is going to earn a very good return, including ours, and it buys us this sort of commitment that resolved one of the largest risks with the business, which is that we have no control over what's going on in the exterior markets, and we want that to be less of a risk for us. So there, of course, just like with every business, it's our objective that we can prove that everything works as expected. The first deal is generally not going to have your best terms, and we're going to expect to improve from there. And so that's been true for us, and it's continued to be true in this environment even as it's gotten more challenging, just because of how strong our results have been.

So let's talk about at least high level some of those results. Is there anything that you would call out in your own repayment data that would either validate or I guess, contradict the broader market concern that consumer or private credit performance is deteriorating. Are you seeing anything in your results or feedback in payment terms?

Yes. So we publish an index called the Upstart Macro Index, that's something that gets published, really updated every week, published every month. And it's pretty close to a real-time view of what we think is going on in the sort of consume -- overall macro consumer health. We think it's probably one of the fastest moving indicators that anybody has on this. And so that's pretty close to an encapsulation of our view on what's going on with the consumer. Broadly we've seen that over the last couple of years, we've been in this normalization post the sort of end of COVID stimulus and that big period of inflation. Notably, in the most recent handful of weeks and months here with the energy shock that we've experienced this year, we have seen some sort of pressure put on the consumer from that. UMI has gone up a little bit as a result. And we think that's probably a real effect. The only sort of silver lining to that is to say that over the last few years, if you look at the period of time when we had a 1.6, 1.7 type UMI, meaning consumers are 60% or 70% more likely to default than in pre-COVID normal times. Those times came in a world where inflation was near 10%. It was, I mean, a pretty dramatically different world than the one we live in today. And I think even though you've got headlines like today where you're saying, hey, inflation is at 4%, 4.5%, that's double the Fed's target. Yes, that's not ideal, but it's still -- there's a large space between 4% and 10%. And I think it would be very difficult for an energy shock alone to move us to a 10% like number just because energy is only a modest fraction of the overall sort of cost portfolio. And so at present, we don't see anything that suggests we're going to get back to a world that looks like that. And from our perspective, the most important thing is just like if macro is kind of like stable-ish, we're really happy because our business grows primarily from generating kind of compounding secular technology advances, things that improve conversion rates, make better underwriting, get the higher levels of automation, get better targeting, those things are kind of durable wins that are true in any macro climate. And generally, we're doing those at such a pace that some modest amount of macro fluctuation isn't really going to be a big problem for our business. But yes, like there ultimately is, of course, always some level of consumer deterioration, which would be a big problem for us and really probably for most businesses.

I want to come back to like as UMI moves and how that factors into your underwriting models, et cetera, because I think you guys are quite dogmatic about sticking with the models, et cetera. But before we go there, I want to return a little bit to funding and capital intensity, et cetera. And so just a moment ago, we touched on new capital commitments, longer duration, including a 24-month commitment. In the past, you've talked about 100% renewal rate since you did the first forward flow agreement in 2022. What level and duration of committed capital would make you comfortable that funding can support the 3-year growth plan even through a weaker credit cycle? Like how much cushion do you need?

Yes. We have very ambitious growth plans. We have guidance out there to grow the business at the top line at 35% a year for 3 years. And we think the TAMs across our various products are large enough to support a high growth rate for a long, long time to come, even beyond that. So we certainly expect that over time, the scale of this business could be one that is going to make it one of, if not the most important sort of source of yield for a lot of our partners. And so that means we're thinking pretty hard about like what the right structure, what the right blend is. And one of the things that we think is like this committed capital is really important for us because we want to make sure that any kind of market liquidity sees up, we can get through. But we also don't want to be so committed in a bidirectional way that there's no ability to flex up or down. And so we don't think 100% is the right number for this. We do want -- so it's just a question of, in the worst kind of market sees up where there maybe actually is something going on in the world, how much like downward and upward flex do you want? And so we want almost certainly a majority of our capital to be like long-dated and committed, but it's definitely not 100%. And so somewhere in there is the right number for us. And so we're working to make that the real mix for us. We are going to have to onboard a plenty of capital. And the good news is like we're doing that. I think in normal times, this actually really isn't a constraint on our growth because, again, to this point that capital is going to tend to flow to the places with the very best risk-adjusted returns. I mean, I think we've got it. And so as long as the markets are functioning properly, like that capital is going to flow in as we're able to underwrite and originate and acquire borrowers that meet the bar, and that is our limiting factor most of the time. And so it's a good way to run the business.

Got it. So with that being said, is, you are pursuing bank charter, right? And so you've emphasized that this is a regulatory and operating efficiency strategy rather than a balance sheet funding strategy. What are the most important milestones investors should track between application approval launch and then getting the benefits? And I guess that focus on it not being a balance sheet strategy, explain why that is? Because a lot of times, you see fintechs kind of a skew that strategy just because they're reticent to engage the incremental regulatory oversight, et cetera.

Yes. Maybe on the first, I would say, I don't actually think there are like that many milestones around this that are worth tracking. There is a regulatory process. We're in it, and I don't necessarily expect tons of kind of incremental updates along the way. I do think some of that time line is ultimately in the regulators' hands. I think the regulators have been really constructive with us and with other fintech companies that have been seeking bank charters. And so we're hopeful and optimistic about it. But ultimately, that time line is going to happen when it happens. That -- the benefits of the bank, we view as significant, but also just sort of part of the portfolio of bets that we've got over the next couple of years is sort of factored in how we think about guidance and where the business can get to already. And it's just -- these are just some of the bets in the mix and all of the bets will either play out or not, and they'll play out on a certain time line, and you need -- we need some of them to land in order to hit the guidance and don't need all of them to land. And I don't think if the bank is like qualitatively different than the other bets that we have going. So maybe that's sort of a high-level comment about how we think about that.

And then to the point about the purpose of the bank and why isn't it balance sheet strategy, the most fundamental reason is just that we have ambitions for the business to be extremely large. You just look at the sort of world of consumer credit, how much opportunity there is. You look across our different products in unsecured and auto and home and sort of the size of the business that we see over time is such that it would, it would be almost impossible in the short term for that business to be funded in a balance sheet centric way where, yes, a bank brings great super efficient cost of funding on the sort of financing piece. You still need to have equity. And one thing we care a lot about as a company is just being really, really efficient with equity. We want to maximize sort of returns on equity. We want to maximize returns for shareholders, we want to maximize the sort of any kind of measures of per share earnings or adjusted earnings or anything like that over time. And so that just means we want to be really, really careful about how we use equity capital. And at the same time, we look at the scale of the opportunity and our ambitions. And there's just really no way to square those 2 things unless you say, we're going to fund this with -- primarily with third-party capital. The only alternative is to grow slower, and we don't want to choose the grow lower path. So I think -- and I think actually, it does come down to the fact that you just don't see that many credit adjacent businesses that can sustain this level of growth at this scale for a long time, and we think that that's us, that can be done, and that comes along with this implication for the right funding strategy.

So talking just quickly on funding. I know that it's something that investors pay a lot of attention to, and that is the fund -- the amount of loans that are held on your own balance sheet, at least as of right now. And that was just over $1 billion at last quarter end. You've said that you expect some reduction over the remainder of the year. But what's the right steady-state balance sheet size relative to your originations, especially when you look at newer products like auto and HELOC and Cash Line, et cetera.

Yes. So yes, we have said that we do expect some reduction in the balance sheet. I would describe that as like tactical more than strategic. Like I don't really think that there is -- it's not that we think a number modestly lower than the current number is like more theoretically ideal than the number we're at day. I don't really think there's fundamentally anything wrong with the number that we're at today. I do think that it is to the point earlier about being really efficient about equity, like that to me is like really the limit factor. It's just like as long as we're operating within that constraint, that number is hopefully, and we expect going to grow over time, the amount of equity that is in the business just as a result of generating profits and retained earnings and like the business will have more equity to use. And so one of the things that it can be used on is R&D in the balance sheet. And that's, I think, a good sensible use of funds in certain cases. And so we'll kind of like opportunistically use it for that purpose. When we roll out new products, obviously, there's a lot of return and value in proving things out. Occasionally, -- and kind of like occasionally and doing some aggregations and stuff for sales when we think that those are good channels for us to fund loans, we'll use it. And then very occasionally, you might have some like money that is essentially just being parked and earnings some return, and that's not terrible either. But I view that as all kind of just tactical. The only really strategically interesting point for us is like we're going to be -- make sure to be super efficient about the total amount of equity that the business needs. And within that envelope, it will kind of go up and down, and I think as long as we manage that, it's not a major consideration in the business.

Got it. So let's talk about like actual underwriting in the models. First and foremost, talk a little bit about how you've construct the models and why be so -- like I used the word earlier, dogmatic about having models adjust to UMI and that kind of thing. Like how frequently should we expect model updates, like why take that approach? And what do you think comes next?

Yes. I mean, I think for us, credit is just nonnegotiable. And you never get credit perfect because the world is always changing a little bit. I think the best you can do is respond to the world as fast as you possibly can. And I think if you create processes that stand in the way of that, where you're saying, hey, I need to manage to this quarterly earnings number, so I better not -- I better close my eyes on like what's going on in credit. That I think, that's how you get into trouble. And we're here to build a business that's going to be here for a very, very long time through hopefully many, many, many credit cycles. And so I think if the best thing that we can do on credit is be the very best and first to respond and respond as precisely as possible. We're just going to do that. And if it comes at the cost of a little bit more volatility in the short term like -- so be it. I think that right investors and partners in this business are going to be people who like the fact that we take credit so seriously and respond to it as precisely as we possibly can and recognize that the real value from the business comes over multiple years as you compound these technology advantages, which are orthogonal to whether you're getting headwinds or tailwinds in the macro.

Got it. Just a quick question on UMI. Is there a point at which like resetting that makes sense just because you're -- we're kind of using pre-COVID as a reference time. And you're obviously a lot larger. The landscape is a fair amount different. Like would that ever make sense? Or how do you think about that? Not that it would make that much difference on the underwriting, but...

I think maybe. I do think that we believe that this whole period of time since COVID started has had unusual features. And so we don't want to get over-indexed to like any of those particular windows of time. But I mean, ultimately, it's just kind of quite, that's kind of just math moving the needle [indiscernible].

Right, right. That's right. Yes. Okay. So let's talk about the model, long runway for games there. And you've talked about lending model improvements as having, as I said, a very long runway for improvement. With traditional models, you've talked about having a 95% error rate and Upstart still leaving around roughly 86%, just contextualize for us what that error rate represents, and how you've driven variance versus the market? And what is the cadence for model improvement?

Yes. So we have a metric that we've developed internally that essentially, if you boil it down, it is looking at the difference between the net present value of the cash flows that you expected versus the net present value of cash flows that you got, and that is really ultimately what anyone should care about if you're in the business of credit is you're expecting a certain set of cash flow, you've got a different one. And how different that is when discounted to present, that's what matters. And so on that error metric, when we talk about 100% of a totally random model, it just means like if you just kind of randomly guess what cash flows you get from any given loan and compare them to the actual ones, 95% is kind of where traditional models sit. And then Upstart is at that 86% number. So call that almost 3x as smart or as accurate as traditional models. And that's measured as on sort of the 1 minus the amount of error that remains. And so that tells you 2 things. One is that Upstart has built a fairly significant advantage over the past decade plus, we've been doing this. And second, that there's still a lot of room to go. And I think one of the pretty remarkable things about the business is that contrary to, I think, maybe what many people would have thought. We didn't just like get this 0 to 1 moment where we found 1 nice variable or 1 sort of clever insight and use that to arbitrage the market. It was like, we have just continuously found ways to improve the model at a pretty consistent, almost linear pace over the years. as time has gone on, and we've continued to bring that number down, and we think that can go on for a long time just because you're only at 86% out of 100%.

Got it. So let's talk about the core business on personal loans. You called that your super power, if you will, and first priority as CEO from a product perspective. What are the specific indicators that investors should watch to see whether the ambition for reacceleration is coming from model gains, marketing efficiency, borrower demand or funding availability, like how do you rank order those, those drivers?

Yes. So for us, we do generally think of technology improvements as the primary driver of our business. That means you get better models. Those models can allow you to either approve more people, offer them better prices, give them a more automated instant experience or target the better. And that tends to be the single most important factor in the business. And it shows up in the form of efficiency. So these are improvements that are maybe different from improvements where you're just achieving them by virtue of spending more money on marketing exclusively, therefore, driving up your CAS. And I think what investors should look at to see if we're succeeding in this is just to see how much of our growth going forward starts showing up progressively as you move progressively down the income statement. And I think with less efficient types of growth, growth that it's like less technology-driven, you're just going to -- it's not going to show up in the way that you like. You see more of it on the top line, less of it as you move down. And I think throughout the course of this year, investors should look and hope to see that we're going to show not just what we've recently shown, which is that we have the ability to continually grow the top line really nicely, but that starts to sort of walk down the income statement as you go throughout the year.

So I want to talk about that. And I like how you characterize it and how to evaluate is like let's look at the P&L. And specifically, contribution margin was roughly 50% in Q1. And you've talked about that being the low point for the year, assuming no macro change. What level of contribution margin should investors think as being sustainable for particularly as auto, home, prime personal loans, Cash Line become a larger mix of the originations. Help us think through like the contribution margin differences in different products? And then what are going to be the drivers of improvement, at least assuming no macro change?

Yes. So a big part of the story of what's happened to our margins in recent periods does have to do with the mix across these products and segments. The go-forward story on these is pretty different, so I want to take a moment to break them out. Within personal loans, there's a really big difference between the margins we get on our core business and the margins we get on the super prime segment. Super prime, not surprisingly, is a very competitive market. It doesn't tend to come with very high margins. And frankly, it was -- if you look at the numbers, the place that, as a company, we put a lot of focus and got a lot of growth in over the last year. And going forward, you can expect that our focus is going to flip the other way, and we will care much more, invest much more, be focused much more on growing the core segment than super prime segment. We have, I think, achieved some great things with the super prime segment. 2 years ago, if you went to Upstart as a super prime person, you would have found a terribly noncompetitive rate. I think that translated into certain inability to use generalized marketing channels. It came with a certain brand reputation that didn't lend itself to being the very best. And I think today, we have established a product that any American can go to Upstart and find some of the very best rates that you can anywhere for anybody. And that's really powerful. It unlocks much more generalized forms of marketing, which are useful even in our core business. But from how much market share, how much growth do we need to do their perspective, I would call it mission accomplished, and that is no longer sort of going forward, our top priority. Now -- then there are these new products, in particular, auto purchase and HELOC and the sort of emerging Cash Line product. These products, we're really optimistic about. We think these products are going to be a really important part of the future. These products are still relatively new at different parts in the life cycle, but their contribution margins still have a lot of room to improve. And I want to maybe anchor everybody to the sort of point that our personal loan margins were improving for almost a full decade since we started the company, they were -- it's not like personal loans is a business that got to mature margins after 2 years and then just scale. It was scaling while it was improving it's margins. And that's because the amount of margin you can take is so deeply tied to the amount of tech differentiation that exists because that tech differentiation is what unlocks pricing power, right? It's like when our rate is so much better than anybody else's rate. That's why we can afford to take some of the highest take rates that exist in the industry on that product because the next best alternative is so much less good than what we offer now in personal loans. And so I expect that same dynamic to play out in these products. I think in the very near term, their margins will improve very rapidly because they're quite negative today, frankly, on these new products. And so they'll have a period of rapid improvement. And then they'll just continue to improve. And I think they'll probably should improve for years and years to come here. So I don't think we're going to reach like a mature margin anytime soon. I do think we're going to get a much higher margin soon and that's going to help out sort of the near-term financial business relatively quickly.

So help me in just the last minute balance this out. So I get like as you kind of go to the core part of your market that, that has better margins, and so that will be an uplift on a contribution margin versus where you have been. It sounds like you're going to see improvement on new products as well. But yet even as they grow as a percentage of revenue, they're still probably dilutive to overall contribution margin. So it's a little bit of a combination there where if you were just going -- changing the mix on personal loans, you probably could improve contribution margin faster, but then you're growing, and you're going to get improving margins. And so the amount of dilution will come down, but it's -- they're still going to be dilutive for a while. Is that how we should think about it?

Yes, that's true. And the sort of exact net effect does depend a little bit on how fast they're growing. But I mean there is definitely -- I mean, you do get you do get a benefit from moving from deeply negative upward exactly like that, that helps you a lot. So I do think there is a -- we have a lot of reasons that we feel good about where the lower half of the income statement is going this year, and that -- these are some of the reasons.

Got it. Well, we're out of time. Thank you so much, Paul. Really appreciate you being here and telling the Upstart story. It's been really fascinating. Thank you.

Great. Thanks.

All right. Hello, everyone. My name is [ Rod ] Dewan. I'm the Co-Head of our Fintech Investment Banking practice. I'm pleased to be joined by Paul Gu, who's the Co-Founder and CEO of Upstart. Looking forward to the discussion today.

To ensure that I don't get my wrist slapped, I'm going to read a disclaimer before we get into it. Today's discussion may contain forward-looking statements that relate to future results and events, which are based on Upstart's information available as of today and are subject to risks and uncertainties. Actual results may differ materially from these forward-looking statements. Our discussion may also include non-GAAP financial measures, which are not a substitute for GAAP results.

Please refer to the company's filings with the SEC and its IR website for additional information, including GAAP to non-GAAP reconciliations, along with other disclosures.

All right. Maybe with that, AI is the leading AI lending marketplace, connecting consumers to hundreds of partner banks and credit unions. Enabling an automated and streamlined borrowing experience, Upstart has expanded access to credit for millions of consumers and improved risk decisioning, leveraging its advanced AI models. Paul, you co-founded Upstart, what, 14 years ago now?

2012.

And you previously served as the company's CTO, where you helped build and scale the core technology and AI-driven credit platform. And congrats on your recent appointment to CEO, and appreciate you being here today.

So maybe with that, just take us to the beginning. You cofounded this company 14 years ago. You dropped out of VL as a Thiel fellow. What was the fundamental problem that you were trying to solve? And just think back over a decade, did you set out to build an AI lending marketplace? Or what was the vision back then? And how has that evolved over time?

Yes. So way back when I was 20 years old, as you said, I dropped out of college, I did the Thiel fellowship. And before -- this was before Dave and I had met Dave my co-founder, who was CEO until very recently.

And from my side of it, I had spent a summer after dropping out of college at D.E. Shaw and generally was very interested in playing around in the world of quant finance. And my observation there was that you hired very smart people using really sort of cutting-edge computing techniques to go after a problem that I thought was a very narrowly defined problem that was like how do you arbitrage securities prices to be a little bit more efficient, but to go after that problem with extreme amounts of accuracy, extreme amounts of sort of intelligence.

And it occurred to me that if you could just take these same techniques and apply them to a problem that would impact a lot more people, you could solve something that would be fundamentally very important for the world. And so naturally, you take just one step from the world of kind of maybe securities finance to the world of consumer finance and you say, okay, are there problems that you could solve here by using these techniques?

And I thought that if we could use very similar techniques as are used in sort of the world of quantitative finance, but apply it to this problem of how you understand consumer risk, you could get a lot more people access to credit that maybe they didn't have or didn't have good enough of.

And so that's what I wanted to do. I met my co-founder, Dave, while thinking through this idea and working on the very first versions of it. We got together because we both thought that the right packaging of the solution would be something called an income share agreement, which is basically an idea that you give someone money in exchange for a small fraction of their future income. So kind of like a loan, but not really.

But what it had in common with the thing that the business later did was that, one, we were solving a credit access problem; and two, we would solve it by building models that could understand the financial trajectory of someone who didn't necessarily have a lot of conventional credit history. And pretty quickly, what we realized once we got into this business was that this was exactly the right problem to be solving. Tons of people had it. It was a huge market opportunity and the incumbents just weren't going after it.

And that also we could solve this problem with this particular technology approach of building machine learning algorithm-based models on alternative data for consumer underwriting. And so we started to do that, and we discovered that in the sort of conventional loan format where people understood what the APR was, what the repayment terms were, you didn't have to explain to someone like what an income share agreement was or why it wasn't indentured servitude. It just worked much better.

And so we did more and more in that business. We quickly discovered that it wasn't just people who were new to credit or didn't have a lot of credit history who had this problem. It's really people across the entire economic spectrum that are underserved in terms of credit.

Either they don't get approved enough, they don't get the right APR for them or they get served an offer of credit that comes with a huge number of procedural steps and verification required. And all of these people could be much better served by an AI-first way to do credit. And so that's what we started to invest all of our energy and attention into, and that's how we built the business that we have today.

I like how you frame the problem. Just again, think back 14 years ago. How is the problem similar versus different today than it was a decade ago?

Surprisingly, very similar. So one of our favorite metrics is a metric about the amount of inaccuracy in lending decisions. And so if you said 100% is a metric where you have just a totally random model, you have no intelligence, you're just making lending decisions at random, 0% means that you have gotten rid of all of the inaccuracy and now you have a totally perfect model that can get everything right. A sort of textbook traditional model lands you at about 95%. That's how much of the error a traditional textbook model leaves on the table.

Our model after 14 years of optimizing and improving at a really -- what we think is really a decent pace, has us down at 86%, which is to say that 86% of all the error in lending remains to be solved. And that means that if you were just to start from where we are today and look out, you would say that there is an enormous amount of opportunity for models and lending to get more accurate to understand the consumer risk better. There's more opportunity to get more data into the models, more opportunity to build more sophisticated algorithms that understand the signals from that data better.

And frankly, the difference between 86 and 95 like zoomed out doesn't look all that big. So I think if I were starting a company today, it probably wouldn't be much different than the one that we started 14 years ago.

Now let's maybe shift gears a little bit on your role. So you're now the CEO, you were formerly the CTO. If I just think about that dynamic, Satya and Sundar both had kind of technical backgrounds and experience, then became CEO. What's going to stay the same? What's going to change from your vantage point?

We always had a strong conviction that the answer to making consumer lending fundamentally better and different was going to come from technology. I think that's probably always been our most contrarian take on this market is that if you look at most players in this business, they don't have a technology-oriented thesis. They have either a capital markets or funding-oriented thesis, like they have some sort of better way to get a lower cost of funding or they have a sort of marketing-oriented thesis.

They have a better way to sort of get the consumer into their ecosystem to have customer loyalty or to get customer acquisition. And our thesis from the very beginning was that those things are nice, but the most transformative thing that you can do in lending is if you can actually change your understanding of the risk, so you can get dramatically better separation of risk. That's what allows you to approve people that otherwise couldn't get approved or approve them at much lower APRs and therefore, have the pricing power to generate unusually high margins and build a really fantastic business.

And so I think that comes from technology. You have to be a really good technology company. And when I say technology, I don't mean in the sense of just building a website or writing a bunch of code that has features, really like technology in the sense of, I think, being a research-first company that fundamentally is about building models and building more accurate models is sort of much deeper type of technology than I think your -- maybe your typical software company.

And I think the DNA for doing that as a company is fundamentally a very technical thing. So I think in that sense, we've always had that conviction. I think that's even more true for me coming from the seat that I sat in before. And I'm going to be very focused on making sure that we extend that lead, grow that lead and keep investing in it going forward.

That's great. So we've talked about the past. Let's flash forward 10 years from now. AI permeates the consumer finance space. How does the experience change for the average consumer? That's part one.

And then part two, just as you think about AI for your business specifically, are there certain things that you're seeing an acceleration in with respect to operational performance, costs, et cetera? Or is it more driven kind of top line basis?

Yes. Today, I think we live in a world where if you want credit, a bunch of things have to happen. One is that you have to know that you want or need credit. You have to know which type of credit is the right one for you. That could be a HELOC, it could be an auto loan, it could be a refinance loan. It could be an unsecured loan, it could be another kind of revolving loan. You need a lot of knowledge and sophistication as a consumer to know which one is the right one for you.

And then you have to have the willingness to actually do the work required to go and get that loan. And when you put all those steps together, it's no surprise that the vast majority of people just don't do it. They don't get the right form of credit at the very lowest price at the right time for them. Instead, what you see is you see a lot of people sit on really large amounts of credit card debt for a large number of years accruing at a very high interest rate, not because that is the very best price for them in the market or the very best thing for their financial lives, just because of all of those steps that you have to go through.

And I think instead, we can get to this world where credit can be what we call always on, just there for you, where you can have sort of AI that helps people figure out what the right form of credit for them is, and then you can make it effortless and instant as the vast, vast majority of our loans are today to actually get that credit so that there's no friction between a consumer and doing the thing that's best for their long-term financial health.

And as you think about that always on credit, which I think is the right kind of frame, what are the different ways to potentially monetize that over time?

Well, the beautiful thing about credit is that if your credit is actually differentiated, it's just a fantastic business, and we see this with our core personal loan business. When we serve a personal loan to a consumer that's not rated conventionally prime in the market, this is a consumer that gets a huge amount of value from our loan.

And as a result, we have a lot of pricing power in that product. We're able to earn very good margins in that product, and that basically happens because it's such a differentiated product and has a ton of value creation for the customer. And so I think in a similar way, when you think about something like the always-on credit, it's -- first of all, it's credit.

And if that credit has the same great underwriting attributes, the same level of technology differentiation as all of our credit products today do, it's going to have the same margin profile, same margin tailwinds. But then it gets an extra benefit, which is that today, especially in our business, we continually have to acquire customers for each loan as if it's a new transaction, a new customer, and that comes, of course, with customer acquisition cost.

I think in a world where you have people that are living within the ecosystem and the credit is coming automatically as just a part of being in the ecosystem, then obviously, you're going to be able to amortize that acquisition cost over a much longer customer lifetime.

And as you think about the products, and you talked about the customer acquisition cost, top of funnel, do you lean towards one specific type of product or type of customer because you've seen the customer acquisition cost for that being lower, all else equal, and as they move down the funnel and become multiproduct customers? The overall opportunity is greater?

Yes. I'll say 2 things. First is we're very committed to having the best product for Americans of every category, people up and down the economic spectrum. Anyone should be able to come to Upstart. And for any use case of credit, obviously, we're not quite there.

We don't have all the products yet. But for any use case of credit, eventually, you should be able to go to Upstart and just confidently know you're going to get the very best credit product. Now having said that, the second thing is also true, which is that some customers are much less well served by existing credit markets than others.

And those consumers that are not conventionally rated super prime tend to have many fewer good options in the market. A conventional issuer will rate their risk of defaulting much higher. And so the space to reduce their prices, improve the speed of their process, improve the sort of size of credit lines that they have access to is much greater.

And therefore, our ability to built a great business there is much greater. And so we will increasingly going forward, be focused on how we can grow the most in the segments where we have the most differentiation while maintaining the baseline fact that anyone can come to Upstart and get a very good product.

You talked about a few of your different products. Let's double-click on just the product road map and that journey. So you started out as a single product company way back when, right, unsecured consumer lending.

It's now a multiproduct platform that's had a great amount of success spanning auto, HELOC and now revolving credit. Now as you reflect on the journey, is that kind of how you imagine things to happen sequentially? And if not, maybe just share a little bit around the dynamics of how you decided to prioritize expansion into one product over another.

Yes. I would really say, actually, this is a pretty new thing for us. Until very recently, we effectively were a one product company. We had a personal loans business and just a bunch of exploratory bets.

I think really as of the last quarter, I would say that we are really have grown into our own right as being a multiproduct company. We have shown that we can deliver real growth in distribution in our auto purchase product and our HELOC product.

And those products are, I think, now well past the exploration phase. They've sort of made it on their own, and I think are going to be very good businesses for us. I think in terms of the order, probably if I could do it again, I would do the order a little differently.

We just announced a new product called Cash line. It's actually a natural adjacency to our core personal loan customer segment and core personal loan product. And if you look at the success that a lot of players have had in that market, it just was a really natural product for us to be in.

Probably the lift to get there was lower than the lift to do something like an auto or a home. I think those are really, really good markets to be in. They have enormous TAM. We want to be growing in them for a really long time to come. But the lift to get from 0 to 1 on those products, frankly, took longer than we would have thought.

I think especially in auto, we've been humbled a little bit. I think if you asked us 3 or 4 years ago, how long it would take for us to get set up in auto, we would have just been too optimistic about the time lines. And so we're really, really happy to have the auto business working now, but it was hard work to get there.

We had to really understand the dealer as a customer, and that's something that wasn't natural to us coming from kind of a direct-to-consumer background as a business. We just weren't naturally attuned to thinking in terms of the end borrower.

And we've had to learn kind of all the idiosyncrasies of how car dealerships work, what they need to be successful, how to think about them as really our customer. And that's a capability that we've developed over the last couple of years that's enabled us to be very successful in auto, but it took work.

Maybe just while we're on that topic, 1 or 2 lessons learned that you can apply to the rest of your product road map? And then maybe just spend a little bit of time on like how do you think about conceptually, like where do you want to go next?

Yes. Just working backwards, ultimately, we want to have the very best credit product for every consumer credit need. And I think at this point, we're actually not that far away from that. We're probably just a few major products short. So there's probably not that many degrees of freedom in how we go from here to there. We're going to build all of those products.

We're going to make it so that if you are an American consumer and you need credit, Upstart is the place to go. And whatever stands between here and there, we're going to build those things. And so I think there probably were more degrees of freedom in the past when we needed to build everything than now when we've built many of the things.

So I think we are well on our way. Having said that, I think we just now have a much better understanding of the different pieces of standing up a new product in terms of managing the R&D on the balance sheet, managing the sort of credit models and how you want to ramp those, thinking about when you're first scaling distribution channels, having realistic expectations about getting the -- about when those channels are going to scale at what kinds of -- and there's a lot of learnings in there.

I think we kind of understand the life cycle of a new product now, and we'll finish the consumer credit suite soon.

And while we're on the topic, just build versus buy a framework, how do you think about that given the journey that you've been on?

Yes. I always think that the things that you want to be, best-in-class at that you want to be really differentiated at that you really are going to be your source of alpha in the market, those are things you have to build. You need to own them.

And if you're going to make them better than what else is available in the market, then, of course, you can't just buy elsewhere in the market because by definition, that won't be differentiated, won't be the very best.

And then I kind of think for everything else that you don't care to be the very best at, there's no reason to spend your own effort building it. So when people talk about, oh, everybody is going to build their own sales force or something and there's going to be no more vertical SaaS, mostly, I think maybe some company will decide to do that.

But for a business like ours, where the growth rates are very high and the TAM is very large, and you can sort of do that growth rate and compound for a long, long time. It's just very hard to justify spending your resources anywhere other than investing back in the things that are going to make you special and different.

But for us, all of lending is that. We want to be differentiated in auto, home, unsecured, every major category of consumer credit, we want to have the very best product in. So all of those are going to be built for us.

Okay. Maybe just shifting gears to financial profile. So there's a lot of debate in the space around growth versus profitability. How do you think about that today? How has that shifted over time? And just in your new seat, just any dynamics relative to just the way that the business has operated historically?

Yes. We've always -- taking sort of a 10,000-foot view first, we've always felt that consumer credit in general, is insanely competitive market. There's a countless number of players that want to be in loans and have been since forever. So there's nothing inherently interesting or special about just being another player in credit.

What's interesting is where you can find places in the market that you can be really different and have a lot of pricing power. And we've built that and established that in what we call the core personal loan segment, core personal loan business for us. That is a fantastic business.

If you were to look at that on a stand-alone basis, it's a very high-margin business, and it's done really well for us over the years. It's also a business that we think can continue to grow at a very high rate because its fundamental driver of growth is just better technology. We make the models better.

We can approve more people at lower prices with more automation. That leads to higher conversion rates, that leads to more of the market being addressable. The growth engine is one that we're really good at. We've really well understood for a long time.

And we think that product can just keep growing. Now it has not been our focus to maximize growth in that product because we've been focused on so many sort of adjacent priorities around rounding out the product suite. But this year, in particular, we expect to see growth return to this core personal loan segment as we've put the focus of our product, technology and marketing teams back on to it.

And it's actually the natural thing for us to do. It's probably easier for us to do that than all of these sort of new and different things that came less naturally to us. And this product naturally, as it grows, it's very nice because it both comes with growth and it comes with profitability.

And so it moves things on both fronts. And so as that happens, I think naturally, you're going to see that sort of impact the income statement up and down. I think over the course of the year, gradually, we will see a sort of re-expansion of some of our contribution margins from local minimums that were just the result of sort of some of these shifting mixes.

And as that sort of shifts back towards growth in core personal loans, we will gradually see it go back the other way.

Let's go a little deeper on the growth side of things. So if you think about just new customers, expansion within your customer base and then things that are kind of pricing related, how do you think about that dynamic between those as you think about just driving your future growth?

Well, our growth always -- we always think about growth as -- in a mature product for us, the most important source of growth is going to be higher conversion through better technology. And that will always be the sort of #1 thing we come back to. We think there's a lot of that left to do. We can just keep delivering 1%, 2%, 3% type wins, and we have a bunch of teams that's mandated to do exactly that. So we will keep on doing that.

Then there's our new products. New products have a slightly different dynamic where sometimes they have product-specific marketing channels that need to be experimented with and activated and understood. So if you think about something like the home loans market in HELOC, for example, there's a lot of home adjacent businesses that you can have partnerships with.

Those are like very specific channels that you have to come to learn how to work with and understand. Obviously, our auto purchase business, as we talked about earlier, that business has very specific dynamics that's distributed through car dealerships. So you have to understand the car dealership as a customer.

And so that's a distinct channel that you have to come to learn. So new products have some of their own dynamics in terms of mastering channels that has sort of a 0 to 1 dynamic and 0 to 1 motion associated with it. But once mature, then it really becomes a technology compounding game, and that's the game that we play in personal loans and one that we've really built the whole business around being good at doing.

That's great. I have one more, and then I'm going to open it up to the audience. I have a few more topics that I'd love to cover. You reported Q1 recently, strong results. How do you bridge kind of Q2 through Q4 of the business relative to how Q1 performed? And is there anything that you think that the Street is missing?

Yes. So our Q1 results, I think the real sort of fundamentals of them, the actual growth in the underlying business, the sort of proof points on new products, we think, in a long-run sense of the business are really, really good facts. It's like we have a core business that is doing really well, can continue to grow for a long time, it's very profitable.

And then we have these new segments in home and auto that have enormous relative to personal loans, almost like unlimited sized TAMs that you can just grow in and compound in for many, many years to come. And that's a really positive set of things for the business. Now I think the market was pretty surprised by the bottom line results in Q1. We didn't have very high EBITDA margin.

But we did reaffirm the full year guidance. We expect that to ramp back up over the course of the year so that we still get back to the full year guide on that. And that is going to be pretty heavily backloaded in the year.

And that's a function of a few different things. Some of those are kind of like not strategically interesting, just have to do with like the timing of when certain expenses are growing in the year. But basically, we expect that fixed expense growth is sort of like disproportionately growing at the very beginning of the year, basically will moderate in terms of its growth rate from here.

It's not like it's going to like a big step down or anything, so nothing terribly unnatural, but just like the relative growth rate was very high in Q1 and then just going to be very modest after that. And then there's going to be -- then there's basically back to like the actual business and what's growing in it, we have a real focus now on growing in the core personal loan segment, and this is a segment that has much higher margins.

And so as that increases its sort of percentage of all the growth that's happening throughout the year compared to the last few quarters, that naturally is going to have an effect that pulls margins up.

And that's because it's a mix type dynamic, it's not something that happens overnight. It is an effect that happens gradually. But you'll see it in the contribution margin line, you'll see it in the sort of EBITDA line.

And you'll see it sort of up and down, but it will happen gradually as that sort of mix of -- as a percentage of the growth comes in and therefore, affects the overall mix of products and segments that we're originating.

I have a few more topics I want to hit, but maybe I'll just open it up to see if anyone in the room has questions. So maybe if not, let's talk bank charter. So there's multiple companies, including yourself that have announced moves towards a bank charter. Just walk us through the evaluation of that decision and maybe what you see as the tangible benefits for that near term, medium term and longer term?

Yes. Our rationale for getting a bank charter are really different than I think many players in the market. We have long held that we want to be very capital efficient. We don't want the growth of the business to be tied to growth in the amount of equity capital that the business has. And one of the challenges with being -- running a bank business model is that those things can get mixed up.

We have no intention of doing that. So while we will hope to have a bank charter in the near future, we don't intend to use a bank business model to fund our loans. We will still be predominantly third-party funded and run in a really capital-efficient manner. That is super important to us.

However, what a bank charter will do for us is it will give us much clearer and faster regulatory ability to lend and lend where we want to across the country. Today, in our current business model of lending across a network of partner banks that do the actual origination from a legal perspective, there are a lot of states where you have a restricted ability to operate.

You can't quite reach all customers in all 50 states. You also have a lot of costs involved in using the structure that because you have other partners that are taking pieces of revenue along the way before it gets to us. And so there's just more efficiency there.

And then finally, I think in the most fundamental sense, today, we have a lot of costs and process associated with maintaining regulatory relationships via a large number of intermediaries. And I think as AI becomes a more central topic, it just is natural that as the AI lending company that we establish a first-hand direct relationship with the regulator to represent how AI is going to help the American consumer, and we're excited to do that.

That's great. While we're on the AI topic, just you've been an AI forward company for a period of time. How do you think about just the end state and working backwards from where you're at today? What do you want to see achieved over the coming quarters with respect to AI being infused further in your business?

Well, we've been doing AI and lending for a really long time. And the thing about what we do is that it's a very different kind of AI than, say, when you're looking at LLM models or foundation models that are now very popularly used in a bunch of applications. Broadly, I think the problem space divides into problems that AI is better at people and problems that AI sort of started out being worse than humans.

Like are humans good at this problem? Are they bad at this problem? And a lot of the problems that we deal with are like giant math problems. They're like problems of the form. You have a ton of data about a person. You can know thousands upon thousands of different facts about a person. And then you have to crunch that through a bunch of historical data to decide based on the patterns if you think this person is going to pay back a loan. And that is sort of like a giant math problem.

And it's actually a problem that humans have been terrible at forever. It was never a problem you want to hand even to a really smart person to decide how to underwrite a particular applicant for credit. And so it always required a very different kind of model than what you use, say, in Quad or ChatGPT or something like that.

It was always something that was going to be much more heavily numeric and fairly proprietary to the type of problem that is present in lending. And so we spent the better part of the last 12 years or so building models that are optimized for this use case. There's sort of a lot of Upstart-specific innovations that have made that successful. And then there's a classic problem that humans are actually pretty good at and are more like multimodal sort of general intelligence problems. And some of those problems, I think, are now newly solvable because of what's changed and advanced in AI.

So if you think about some of the problems associated with, say, verification of a home loan, you're looking at property records, they're coming from a fairly offline county system. They might involve like hand sketches of property borders and you have to like decipher that, interpret and decide whether that matches up with the property that you're trying to verify and place a lean on. Those are problems that multimodal sort of foundation models are very good at dealing with and are suddenly possible now.

And I think that there's something really powerful about the idea of bringing these 2 types of models together, so you have the sort of like crunches large amounts of data to do a giant math problem and get really high numeric predictive accuracy, but something that a human would just be terrible at is not sort of a general intelligence AI problem is instead a giant math problem.

You combine that with those types of problems like the sort of home loan verification problem that is much more of a general intelligence multimodal AI problem. And now you can really get much closer to this world that we talked about at the beginning, where you can have this kind of always on credit that gives people much better rates, much better access and does it effortlessly from their perspective.

And always on credit, how far along on that journey are you right now?

We're early. We're early. So we recently launched a product called Cash line. It's our first product that really is always on in the sense that Cash line is a product where someone can be a regular subscriber to the product and the credit will always be there for them no matter what happens as long as they're meeting their commitments to us, our product is going to be there for them.

And that is, in some sense, a very small first step. You can imagine that within the same kind of subscription membership ecosystem, there will be other types of credit that we can start sort of bringing into that and making similarly always on and available to the customer, having the sort of like always-on underwriting, always on sort of data access to what's changing in the consumer's financial life.

Those are the other pieces of it that are getting tied together. And then, of course, the last step will be bringing the really big kind of secured credit products into that ecosystem. And then I think you have something that is really different and powerful and suddenly looks very different than the way that people normally had -- traditionally had to get credit where they had to go looking for it and decide that now is the time to refinance particular debt or other.

We're coming up on time. Just one last question for me. What's one thing that's either been misunderstood or underappreciated about Upstart?

I think people always have always thought that Upstart was a business where you had one clever mousetrap, you found maybe one little arbitrage opportunity in a model and it was over. In the earliest days, that took the form of people asking us, what's the one secret sauce variable that explains your success? And we try to tell them there's not just one. There's a bunch of variables.

And then nowadays, I think it's reflected in the perspective that I hear a lot, which basically boils down to when you look at how people think about the growth of this business, they think, okay, well, you found this mousetrap, you're basically going to arbit out in the next year or 2. And then I guess from here, you'll just cash flow. And it doesn't look like you have that much cash flow. So it must not be that good of a mousetrap.

And the very strange thing about this is if you actually look at what's happening in the business, it's like we have a business that is growing at an incredibly fast rate into a market with an extremely large TAM, so large that we're just a rounding error in the size of it. And so by every -- like every measure, this is a business that I believe can compound at an extremely high rate for many years to come. And so it's just going to be much more sensible.

The math is very clear that the thing you should do in a business like this is you should make investments back into the business, make sure that you can maximize how much of this TAM you can address, how quickly you can go after it. And that's what we're setting ourselves up to do.

So we certainly hope to be compounding in this business for a very long time to come. And I think we're going to prove a lot of models were too shortsighted in how long they thought this could go.

This is great. Thanks for being here, Paul. And congrats again on the new role.

Great. Thank you.

Good afternoon, and welcome to the Upstart First Quarter 2026 Earnings Call. [Operator Instructions] 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.

Thank you. Welcome to the Upstart Earnings Call for the First Quarter of 2026. Joining me today are Paul Gu, our Co-Founder and CEO; and Andrea Blankmeyer, 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 a 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.

With that, Paul, over to you.

Thank you, Sonya, and thank you, everyone, for joining us today. I want to start my first official earnings call as CEO by stating simply that the Upstart leadership team and I are here to build a high-growth and high-return business. I'm the founder at heart. I dropped out of college at 20 to start something. And now after 14 years, I wouldn't be doing this if I didn't believe the upside ahead for Upstart was as good as that of any startup.

In recent decades, there's been a growing trend for the fastest-growing companies to stay private. And as a result, public companies are typically past their high-growth years. We believe Upstart is not. As reflected in our 3-year outlook of 35% annualized revenue growth, we expect to be one of the fastest multiyear compounders at our scale. Consumer credit is arguably the oldest, most economically foundational business there is, and today is the perfect time to reimagine it. Unlike in some areas, the application of AI to credit is an unambiguous good for the consumer, saving them time and money to use on the parts of life that really matter.

For lenders, AI will transform credit from a structurally commodity-like business to one where the player who wins the technology and modeling race wins the market. With a decade-long head start, we believe that race is ours to loose. Capitalizing on this enormous market opportunity will require some investment. Fortunately, we have just the right business to fund it, core personal loans, unsecured installment loans to consumers not conventionally considered super prime. Our significant and growing lead in technology built up over that decade plus gives our product there the best rates and best process in the market, making room for unusually high margins while still delivering the best product to the customer. You're going to hear me talk a lot more about this as CEO. Our core personal loan business makes a lot of money and my first priority is to do a lot more of it.

Businesses in today's world, especially in lending, can too easily put up big numbers that depend on even bigger equity bases. At Upstart, we have always treated equity as a real cost, and I intend to double down on that rigor. Our operating strategy is to reinvest the profits from core personal loans into building the best product and most trusted brands across every category of consumer credit. This approach allows us to simultaneously maximize earnings over the long run while running an extremely capital-efficient business. Similarly, our funding strategy for loans will continue to be one that relies primarily on third-party capital. As they say, the market is a weighing machine in the long run, and my bet is that the businesses with the most profits and the least dilution will weigh the most.

Now I'd like to turn to Q1 and where we stand today. Originations grew 61% year-over-year and revenue grew 44%, while profit declined marginally. These are strong results and put us comfortably on track to meet our full year guidance on both the top and bottom lines. These numbers reflect a mix of 4 factors: secular improvements to technology and marketing, strong momentum in newer products in the super prime segment, the usual Q1 seasonal headwinds in borrower demand and annual employee-related expenses and some planned investments. I'll focus on our platform and product strategy, and Andrea will walk through the numbers.

As always, our most important growth lever is improving our underwriting model. In Q1, we increased the accuracy lead of our personal loans model over benchmark by 1.4 percentage points. Our models to manage now stands at 173.6%, while 87.4% of the total inaccuracy remains to be solved. This quarter, we extended the scope of our models to predict post-default recoveries, replacing the assumptions we've used historically with the full strength of our AI models. This fuller view of loan economics lets us serve more creditworthy borrowers, which drove approximately 3.5% more originations at equivalent risk levels relative to our prior model. Simply put, our lead over traditional credit scoring continues to grow.

We're also moving quickly to maximize use of AI across every part of the business. In servicing and collections, we doubled daily AI-assisted borrower conversation volume, brought that capability to our mobile app and expanded our AI-powered payment features. We also deployed AI-driven quality assurance tools to review customer service calls, giving us a scalable, consistent way to continuously improve the borrower experience. Across our platform, we originated more than 425,000 loans in Q1. We believe more Americans are choosing to borrow from us than any pure fintech platform. With well over 20 million unique consumers having created accounts to check their rate with Upstart, we are rapidly building towards being the most trusted brand in consumer credit.

In auto, originations grew more than 300% year-over-year and 30% sequentially. Auto retail was a standout with originations up roughly 13x year-over-year and nearly doubling sequentially, driven by a rapidly expanding active dealer network. Our work to reduce friction for dealers is paying off. About 1/4 of retail transactions in Q1 use the remote signature capability we launched late last year. We also rolled out a new feature that lets dealers generate firm AI-powered offers across multiple vehicles from a single customer application. And we deepened integrations with dealers' existing compliance and CRM tools, embedding Upstart more naturally into how they already work.

Home originations grew approximately 250% year-over-year and 16% sequentially, driven by better marketing reach and efficiency. In Q1, more than 1/4 of these loans were fully automated, and we achieved an average time to close of just 6 days from application to signing, a new record for us and a fraction of the industry average of roughly 40 days. In early April, we also added richer bank account data to our HELOC income verification process, improving accuracy and the salability of these loans to capital market partners. This progress in auto and home has set us well on our way to serving the full range of consumer credit needs. With growth strong and technology advancing rapidly, the time is now right for both products to begin shifting some of their focus from pure growth to unit economics.

Last month, we also launched cash line, our first unsecured revolving credit product. This is an important step toward our vision of always on credit for every borrower, and we're thrilled by the early results. Looking forward, the next area we're focusing our product and growth efforts on is none other than core personal loans. I said earlier that the profits from this business are central to our strategy, and we have already begun taking action to grow it. While we would normally expect originations to decline sequentially in Q1, core personal loans were flat to Q4. That stronger than seasonal performance signals the early stages of the reacceleration we expect to continue through the rest of the year.

Now I want to turn to the capital side of the business. Funding supply for loans is strong. Thanks to the pioneering work Sanjay and the capital team have done, well over half of our capital is committed. Year-to-date, we've expanded and deepened our forward flow relationships, securing over $4 billion in new committed capital. That includes about $2 billion in new commitments from [ Altura ], Centerbridge and [ Wafra ], alongside renewals from Fortress and Blue Owl. Notably, we've closed a 24-month commitment, which is our longest deal term yet, designed to provide durable capital through market cycles. I'm also proud to share that this continues our track record of a 100% renewal rate with every partner since our first deal in 2022.

Additionally, our recent securitizations totaling approximately $1 billion were multiple times oversubscribed with the most recent transaction upsized. This reflects strong secondary liquidity for our loans even in the broader market volatility. We also included auto secured personal loans in a securitization for the first time, an important milestone when it comes to new product funding. These results happening against the backdrop of market volatility in other areas of credit are a clear vote of confidence in our platform. We take the trust our capital partners have given us seriously and always treat credit performance as an uncompromising first priority. The average return of our last 12 quarterly vintages of loans exceeds U.S. treasuries by 651 basis points, with every individual vintage exceeding treasuries by at least 385 basis points.

Finally, the bank charter. In March, we announced our application for a national bank charter. As I said earlier, our strategy for funding loans is to rely primarily on third-party capital and the bank charter doesn't change that. We expect banks, credit unions and institutional investors to continue to purchase the vast majority of loans originated on our platform. Bank charter will, however, bring significant regulatory benefits to Upstart, including by expanding our addressable market across all 50 states, reducing the operational and financial cost of originating loans and accelerating our technology velocity by enabling us to interface with regulators directly. These benefits directly support our growth and profit goals and will show up over the next few years.

Now I want to close by welcoming Andrea, who joined us as CFO in March. Andrea is an incredibly talented finance leader with a background in complex novel business models. She's learning the ropes here faster than I could have hoped for and is already making an impact on how we plan, prioritize and execute. It is now my great privilege to turn the call over to her for a discussion of our financial results.

Thank you, Paul. I appreciate the warm welcome, and good afternoon, everyone. I look forward to spending more time with many of you in the coming weeks and months. It is a privilege to take my first earnings call as CFO. The Upstart team has built a highly differentiated AI-powered credit platform and the runway in front of us is enormous. I take seriously my responsibility as the financial steward of this platform, including the discipline Paul described around treating equity as a real cost and running a capital-efficient business. I spent my first weeks here digging into the business and the plan, and Paul and I are fully aligned on our financial priorities. I look forward to updating you on our progress each quarter.

Turning to Q1. Before I review the numbers, I'll provide some color around some of the factors Paul mentioned that were specific to the quarter and an expected part of our trajectory for the year. Starting with newer products. We continue to make progress growing our auto and home businesses and saw strong growth in super prime personal loan originations as well. This drove a sequential dip in our overall take rate and our contribution margin.

Next is seasonality. At the top of the funnel, we typically see consumer demand for personal loans soften in Q1 as tax refunds reduced borrowing needs. This soft demand typically translates into lower conversion and a modest step down in contribution margin in Q1 versus Q4. Additionally, our business has OpEx seasonality in the first quarter of the year with a step-up in corporate costs associated with our compensation and benefit cycle and the timing of our annual company-wide gathering.

Finally, we made deliberate investments in talent in Q1. This sets us up to achieve our objectives for 2026 and beyond. Each of these factors, mix, seasonality and investments, in addition to the platform and product gains Paul mentioned, was contemplated in the team's planning for the year. We are on track to deliver on our full year guidance.

Now I'll walk through our Q1 results. Originations were $3.4 billion, up 61% from the prior year and 8% sequentially. Within this, total personal loan originations grew 6% relative to Q4, reflecting 26% sequential growth in super prime and better than typical seasonal performance in our core business, which was roughly flat sequentially relative to the historical Q1 step down. Our newer secured products continue to scale with auto originations up 32% sequentially and home up 16%. Taken together, these results demonstrate the strength of our core business and the growing contribution of our newer products to overall platform growth.

Total revenue came in at approximately $308 million, up 44% year-on-year and 4% sequentially. This included revenue from fees of roughly $277 million, up 49% year-on-year and 4% sequentially, driven by growth in platform originations. Within fee revenues, servicing revenue continued to show solid growth, up 52% year-over-year and 22% sequentially, driven primarily by higher origination volumes, along with an increase in fees connected with the sale of loans. Net interest income and fair value adjustments totaled approximately $31 million, up modestly year-on-year and roughly flat with Q4.

Our contribution profit, a non-GAAP metric defined as revenue from fees minus variable costs for borrower acquisition, verification and servicing, was $137 million, up 34% year-over-year, but down 2% sequentially, primarily as a result of increased marketing investment to optimize digital channels and support new product growth. Contribution margin came in at 50%, down 3 percentage points from the prior quarter, reflecting the mix, seasonality and marketing investment dynamics. We expect contribution margin in Q1 will be the low point for the year, barring any changes in the macroeconomic environment.

In total, GAAP operating expenses were [ $16 million ] in Q1, up 45% year-on-year and 14% sequentially. Variable expenses, borrower acquisition, verification and servicing rose 68% year-on-year and 12% sequentially with the step-up versus Q4 reflecting marketing investments. Fixed expenses were up 31% year-over-year and 15% sequentially, reflecting the beginning of year investment and seasonal step-up in corporate costs I discussed earlier. I'll note that our fixed cost investments for the year were front-loaded into Q1, and we expect more modest sequential growth for the remainder of 2026. This sets us up for the adjusted EBITDA margin acceleration we've guided to as the year progresses.

In Q1, we had a net loss of approximately $7 million. GAAP earnings per share was negative $0.07 based on a diluted weighted average share count of 97 million. Adjusted EBITDA was roughly $40 million with a margin of 13%. With this quarter's results, we are on track to deliver on our adjusted EBITDA outlook of $294 million for the year and to be solidly profitable on a GAAP basis. We ended Q1 with just over $1 billion in loans held on our balance sheet, up approximately $30 million from Q4. It continues to be our strategy to primarily rely on third-party capital to fund our growing originations. Notably, our secured products and other R&D loan balance declined modestly quarter-over-quarter, even as auto and home originations accelerated.

More broadly speaking, as Paul mentioned, and supported by consistent credit performance, we've continued to enhance our capital platform. So far this year, we've signed more than $4 billion in committed capital partnerships, completed 2 securitizations for $1 billion in total collateral and increased the proportion of home and auto loans funded by a third party. Additionally, in February, we bought back 3.2 million shares of Upstart stock for $100 million, and we have about $122 million remaining under our current authorization.

Looking ahead, we are reiterating our full year guidance. This means that for full year 2026, we continue to expect total revenues of approximately $1.4 billion, revenue from fees of approximately $1.3 billion, adjusted EBITDA of approximately $294 million, which equates to approximately 21% of total revenues and consistent with our prior guidance. Our guidance assumes a stable macroeconomic backdrop.

Additionally, I'll share some color on the drivers and the shape of the year. First, for the full year, we continue to expect growth in absolute contribution profit dollars to be within at least 5 percentage points of fee revenue growth. We plan to deliver this profit growth using 2 complementary levers: growing our core personal loan business where margins are already strong and continuing to improve the unit economics on auto and home as they scale. Second, marketing and OpEx growth should moderate in the remainder of the year relative to what we saw sequentially in Q1. Third, we continue to expect adjusted EBITDA to be weighted towards the second half of the year, driven by originations growth, improved contribution margin and OpEx leverage as we progress through the year.

To close, our performance in Q1 was right on track. We entered Q2 with momentum across our core business and our newer products with consistent credit performance and with a reinforced capital base. I also want to thank Paul, Sanjay and the whole team for their support and partnership as I come up to speed.

With that, I'd like to turn it over to the operator to begin Q&A.

[Operator Instructions] Our first question will come from Mihir Bhatia with Bank of America.

Congratulations to both of you on the new roles. So just I guess in 1Q, you guys called this out a little bit. Originations were up 60%, revenues up 40%, but profitability declined. You highlighted some of the OpEx headwinds during the quarter. You're reinforcing the full year guide. So maybe just take a step back since you are both newer to the roles and just elaborate on how you're thinking about balancing near-term profitability versus reinvestment and growth. I guess, specifically, is there a framework guiding that trade-off? Or are you just comfortable prioritizing reinvestment at the expense of margins given the opportunity that you're pursuing?

Yes. I think the first thing I would say is that we are very much on track for our full year guidance. We are reiterating the guidance on the year. And so a lot of what you're seeing in Q1 is very specific to Q1, which are some seasonal effects and some sort of front-loaded investment effects. But I wouldn't say necessarily that as a matter of strategy, we've decided to make any changes to how profitable the business is going to be. We're very much on track for the annual guide, which does have $294 million of adjusted EBITDA there and net income positive.

So we feel really good about that. I would say taking a step back and just thinking about the business on a go-forward basis, we do think there's an enormous amount of growth ahead of us. We think we can keep compounding revenue at a high rate for a long time here, and we certainly intend to do that. I think the math is just really clear that in the long run, this business is going to throw off the most profits and be worth the most if we capture that growth in that market share. And so we definitely want to be reinvesting.

But as you heard me say earlier, we want to reinvest in a way that's capital efficient. And so a big part of the way we intend to do that is by growing in segments where we have high contribution margins and take those margins and reinvest those into growing the business. Some of that is from an accounting perspective, is going to show up as costs and some of that is going to show up in ways that will decrease the near-term profitability, but they are sort of investment choices that we think we can make in a capital-efficient way to grow the sort of total long-term profits of the business.

And then if I could just ask a follow-up on the revolving product some more. Talk about the availability of that? Is it broadly availability? And also just discuss the economics, funding partners, how you're thinking about that product evolving? It seems like a little bit of a credit card replacement. Is that the right way to think about it? I just -- yes, anything more on the revolving product?

We don't have too much to share on that product other than, yes, it's out broadly. It's called Cash line. We're really excited about it. It had probably the best first day we've ever had for a new product launch. I think there's an enormous opportunity, enormous need in the market. It is a revolving-like product. And as it grows and reaches scale, we'll naturally, just like with our other products, figure out the right third-party partners to work with on the capital side. But for now, it's early days. We're getting the product right, and we're very optimistic about it.

We'll now take our next question from Kyle Peterson with Needham.

I wanted to follow up on the prior questions on expenses. I guess, both in sales and marketing and G&A were a little higher than we expected. I know you guys called out some of the seasonality. So I guess I just wanted to see geographically, where did some of the seasonal expenses fall? And were there any costs related to the announcement that you guys are pursuing a bank application? And I guess, how should we think about that expense load moving forward as you guys go through the process?

Great. Thanks for the question, Kyle. So the expenses from a seasonality perspective are largely showing up in 2 places. So one is kind of on the payroll expense and with respect to our people that's really related to the annual reset of our compensation and our benefit cycles. And then additionally, I'd say primarily in G&A is where we see costs associated with our annual company-wide gathering, which happens here in Q1 and represents a seasonal uptick. And so those are the 2 largely the seasonal elements that we see here in the P&L. As we mentioned on the call, as we look out over the remainder of the year, our expectation is both on the marketing and the more fixed OpEx side for the business that we'll see more moderated sequential quarter-on-quarter OpEx growth relative to what we saw here in Q1.

Okay. I guess were there any material expenses from the bank application this quarter or nothing worth calling out?

That's a great point. There's nothing material this quarter. We are contemplating the expenses associated with implementing and sort of launching the bank in that application throughout the remainder of the year in the guide.

Okay. And then I guess just a follow-up on funding, it's been great to see the volume hold up. I know there's been a lot of concerns about private credit. I guess, could you guys give at least at a high-level update like where kind of your funding comes from in terms of what is maybe stickier institutional money with more permanent forms of capital versus some of these either interval funds or BDCs that probably are suffering a little more with redemptions and such. I guess just if you could size up the relative nature of those and I guess, how you guys feel about and feedback you guys are getting from your partners, I think that would be really helpful.

Yes. Great question and what I'm excited to talk about. Funding has been a real area of strength for us. It's been an area of strength because I think fundamentally, in the markets, the capital is going to flow to the places with the best performance. And the performance that we've had on the credit side and that our partners have been able to see over the last couple of years has been exceedingly strong. Earlier in the prepared remarks, I shared about the performance over the last 12 quarters and the spread to treasuries being very consistently high. And our partners have been able to see that. And as a result, year-to-date, we've been able to add over $4 billion of additional capacity. And most of that capacity is coming in the form of committed capital deals. So these are deals that have commitments over an extended period of time.

I mentioned that we now have our first 24-month deal. That's a new high for us in terms of how long these deals are committed. And that's so important to us because fundamentally, we can -- we have a lot of confidence in how our credit is going to perform, but we don't have a lot of control over what happens in the outside world with market volatility, market perception, what's going on in other categories of credit, whether it's software or something else. And so from our perspective, it's a huge derisking to be able to do deals with partners that believe in the credit and want to sign up for a commitment over an extended period of time that can get us through any potential market cycle that arises. And so we think of that as a real win, and we've been able to get a lot of partnerships going that have that extended commitment in place. And so we feel very good about where we are on loan funding.

We'll take our next question from Simon Clinch with Rothschild & Company Redburn.

I was wondering just on the point about funding and the long-term capital commitments, Paul. And when we think about the signings you've had recently, could you perhaps just describe whether the economics of the sharing of risk have changed in any way or how that's sort of evolving as these newer deals are being renewed?

Yes, sure. So we do have risk sharing as a component in many of these deals, and you can -- investors can see some of the details about that in our earnings presentation. I would say those deal terms have largely stayed consistent to improving over time. And certainly, like anything as we do more of these and we do them at greater scale and we sort of prove how they work, we expect over the long run that the terms will work better and better for us. But certainly, they've been consistent and consistent and improving.

And so there is a risk-sharing piece of these deals that is capital that we think is well spent. It's a very small percentage of all the capital that funds these loans. And increasingly, that is capital that, from our perspective, is expected to earn a quite healthy, strong return. So capital well spent and certainly fits within the framework of running a capital-efficient business that we talked about.

Okay. Great. And just as a follow-up, just going back to the balance sheet. They were up marginally sequentially. I think usually, when we see a lot of new funding commitments or agreements coming through, sometimes they come with upfront purchases of loans off the balance sheet. And it doesn't look like we've seen that. I was wondering, could you talk about the dynamics of that, please? And is $1 billion really the kind of the level that we should be expecting on a go-forward basis?

Sure, Simon. Yes, I'm happy to take that one. So the -- really, what we see, we expect to see some degree of normal course fluctuation on the balance sheet side on a quarter-on-quarter basis, just driven by the timing of sales, and that's largely what we saw here in Q2. It is our expectation that as we look out over the remainder of the year to see some step down in that overall balance in the rest of the year relative to Q1.

With respect to the dynamic of back book sales versus forward flow, we saw both, a mix of both on the balance sheet in the quarter. I think what was very good to see when it comes to the strength of the capital platform is in Q1, we did see a higher proportion of our originations on auto and home sold directly through to third parties versus what we saw in Q4 and in 2025. So making very good progress on that front on the secured products. And then otherwise, just have this timing dynamic on the balance sheet that we do expect to see from time to time.

We'll now take a question from Dan Dolev from Mizuho.

Congrats on the quarter. I got 2 quick questions. I'm looking at, I think it's Slide 22, and that's the expected cash flow versus the upside downside. Can -- I mean, it looks like the trend is widening there. Maybe can you explain some of the dynamics? And then I have a quick follow-up.

Sure. I'm happy to speak to that, and then Sanjay can chime in here as helpful. So basically, we sort of see it widening out, that's really reflective of just the increased capital co-investment amount. And so you sort of see the max upside, max downside is really just reflective of the total dollars that are at stake and co-invested here. Does that answer your question?

Yes, it does. It does. I do have a quick follow-up. Can you just give some comments about the overall health of the consumer that you're seeing? I think it will be helpful for investors and congrats again.

Yes, certainly. We see the consumer -- the American consumer as largely stable over the period. In fact, we've seen the consumer largely stable really since late last year, and we've been kind of in a pretty tight range of what we call the Upstart macro index. And from our perspective, stability is a really good thing. That's all we ever ask. Certainly, an improving consumer could be a tailwind, but a stable consumer is a good one from our perspective. And that's what we've seen -- we are -- like everybody else, we watch developments, but probably where we're unique is that we are very committed to being a model-first, model-led company. And so we let our models detect all that's going on in terms of consumer repayment patterns, both in the aggregate and at the segment level. And we just -- we haven't seen any of the factors in the news come into play in a significant way yet. And so consumer is stable.

Our next question will come from Peter Christiansen with Citi.

Congrats on the committed capital level. That's great to hear. Just would love to hear your take, at least on demand that you hear more on the [ at-weel ] side from some of your bank partners there? And then I have a follow-up.

Yes. It's -- and feel free to follow up if this isn't what you're asking about. But we have been announcing and signing deals with partners, both that are sort of traditional financial institutions, banks and credit unions as well as with institutional investors that are private credit or another form of institutional capital. So both sides of the demand for loans has been very healthy and growing. That's, again, against the market backdrop where there have been concerns in other categories of credit, in particular, in software and some other areas. But for us, because of the strong performance, the demand from both types of institutions have been very strong, and we've been doing deals in both places.

That's helpful. And I just want to dig into conversion rate seasonality a little bit here. You did have a little bit of a step down last year in 1Q as well. Maybe it was a little bit more profound this year around. But generally, as we look at the conversion rate and how it progressed last year, kind of peaked in 2Q and then like leveled off and stayed fairly flattish in the second half of '25. Should we think about that progression being the same or at least expectations right now for the remainder of '26? And at least on the 1Q sequential step down, which is seasonal, it seems like it was a bit more than in previous years. Just wondering if you had any additional comments on that.

It's a good observation. You're right about that. So there's 2 different effects going on with conversion rate. The first is a seasonal effect, and that happens every Q1. Every Q1, there was a noticeable reduction in borrower demand for loans related to tax season and tax refunds. And that happened this year just like it happens every year and is an important part of the story. But with respect to the conversion rate metric specifically, this particular metric has a lot going on in it. It used to be a much simpler metric when we really just had one product, one segment, what we now call core personal loans. But now because we've got a mix of products in there that serve consumers up and down the spectrum, there's pretty significant mix effects going on here. And this metric in recent quarters has become increasingly affected by our small dollar product, which is still a relatively new, not totally mature product.

But the small dollar product, because they're very small loans, don't have a big impact on the sort of origination dollars or the financials of the business, but they do have a quite outsized impact on the unit count conversion rate, just like how many loans in the numerator converted. And so we did have a decline in the small dollar product in Q1, and that had an outsized impact on the conversion rate metric that we cite. So this is something we'll think about how to improve going forward. But just from a metric perspective, I mean, but from a core personal loan perspective, that business actually had very stable conversion rates, unseasonally strong conversion rates and unseasonally strong volumes as we talked about earlier.

That is super helpful, Paul. I appreciate it. Sorry, just one follow-up on that. considering Upstart macro index is doing marginally better at least on a trailing basis. Should we expect some of that small dollar mix shift impact perhaps bleeding a little bit into 2Q?

We don't have any specific guidance on the small dollar product volumes at this time. I would say that we -- the seasonal effects, of course, will run off as we get further into Q2 just as we get past tax season, obviously. So that will no longer be a factor. But you are right that there is an effect where small dollar sort of sometimes can move inversely with core personal loans just because of -- because it sits after core personal loans most of the time in our approval funnel. So that can be a dynamic, but we don't have any specific guidance on the small dollar numbers. They're not a very large part of the overall financials right now.

Our next question will come from James Faucette with Morgan Stanley.

Just a couple of -- maybe a follow-up on forward flow agreements and then just a more strategic question. So on the forward flow details, obviously, you've been really active there. But just wondering on top of the ability to sign those, are you seeing any change from those partners with respect to target gross yields or return on equity? Any internal metrics that are changing at all, especially given kind of the environment that people have pointed to?

Well, as I said earlier, our -- we've been able to do these deals against a challenging macro backdrop, and we've been able to do them with largely consistent to improving deal terms, and that includes the kinds of spreads that people are looking for above benchmark rates. So -- and that's -- ultimately, it's all downstream of credit performance. If credit performance wasn't good, then that wouldn't be true. We might not even be doing some of these deals. But because credit performance is strong, ultimately, everything else is downstream of that. The amount of spread you need is a function of how much risk you perceive there to be and underperformance and all of that. So we've been really happy with the way we've been able to do these deals, and we expect to continue doing them.

Got it. And then I wanted to ask about the HELOC product. Obviously, really good growth and the highlight of being able to look at a 6-day or so process versus up to 40 days as being the industry norm. just talk about where you're seeing, at least in these early days, that speed advantage show up. I mean I've got to imagine maybe it's everything, but wondering if you're seeing outsized benefit in higher conversion, lower CAC, loss selection, partner appetite take rates, anything like that? And where is that mix coming from or what's driving that? Is it cross-sell from personal loans or direct-to-consumer? Just trying to get a little flavor of the type of customers you're seeing in HELOC, what they're responding to and where they're coming from.

Yes, you're absolutely right that being able to run a 6-day process is huge. It's a huge advantage in the HELOC product. And -- it does manifest in all of those places that you listed. You get better conversion, better conversion necessarily means lower CAC. The other place that is really, really directly impactful for the HELOC product is in the operational cost of originating one of these products. Every time you can move a loan from one that has a heavy dose of sort of manual work involved to one that can either be fully automated or just require a tiny bit of manual work, there's very significant op savings there.

I talked earlier about how we're now turning our attention towards optimizing the margin profile on these new products. And a big part of that is right in here of getting the process right and getting the cost down associated with that. So technology and getting that 6-day process are just a huge part of making that happen. From how do we find customers for a HELOC perspective, it's also -- we do a wide range of things, but probably compared to our personal loans product, we do have a heavier dosage of cross-sell from the existing customer base, and that will be an increasingly important part of our strategy going forward just because as I talked about, we have a growing and very large population of people that have established a relationship with Upstart.

Over 20 million people have created accounts at some point to check their rate. That means we've got a lot of information on these people. We've got a relationship with them. They think of us as a place for credit. And as we get more offerings that can serve Americans across the full economic spectrum across all types of credit needs, that's going to be a really powerful thing, and it's already showing up in HELOC and our ability to cross-sell.

We'll now take a question from Will Nance with Goldman Sachs.

I just wanted to follow up on the commentary around the 5% spread between CP and revenue from fees. And I was wondering if you could talk about kind of the framework for thinking about that, particularly in light of the ramp of new products, which I understand put some pressure on that spread, but maybe isn't something you want to artificially throttle. So can you just talk about the puts and takes there and what would cause you to come in above or below that level?

Thanks, Will. And yes, you're sort of hitting the nail on the head there. And so we're looking to grow contribution profit within 5 points of fee revenue growth this year. That is sort of the lag on contribution profit dollar growth relative to revenue is primarily driven by mix and the strong growth in our newer secured products as well as in prime. And it still represents very substantial sort of contribution profit dollar growth against the platform throughout the year.

And so if you look at the things that are going to drive that contribution dollar growth on the platform this year, it's really the 2 things we alluded to in our comments earlier. First is continuing to lean into the strength on our core personal loan product and to drive the growth of originations there, which are quite accretive from a margin perspective. And second is going to be driving the continued growth of the secured products alongside the continued improvement on the unit economic performance of those products. So as those products grow and scale, that will contribute to improved contribution margin as we continue to drive more automation in our process and reduce friction in the process that will help improve the unit economics there. And as we continue to improve and increase the sell-through of the product off the balance sheet, that will also help drive the unit economic performance of those products, representing sort of a tailwind to the contribution profit dollar expansion throughout the course of this year.

So that's really how we're thinking about it. We are looking to continue to sort of hit that number on a contribution profit dollar basis, very important from a platform perspective. And those 2 levers are the things that are going to drive it.

Got it. I appreciate that. And then if you could just talk about -- I think you had a comment around seeing the early signs of acceleration. You mentioned unseasonally stronger contribution margins and better than seasonality performance in the core personal products. So just maybe talk about what you're seeing that is allowing you to outperform seasonality and make the comment that you expect to accelerate that over the course of the year?

Yes. So these comments were in reference to the core personal loan business. Core personal loans, you can think of this as our historic personal loan product offered to consumers that are not conventionally defined as super prime. And so these borrowers have long been the place that our business has had the largest competitive advantage. We have a very large amount of differentiation in our ability to underwrite these borrowers compared to what the market offers. And as a result of that, we've had very strong pricing power historically in this segment.

Over the last year, I would say that we've been very focused on growing -- establishing our foothold in new products, especially in home and auto and also balancing out the platform by getting very competitive and having a best rates -- a set of great rates to offer very prime customers. And so we've had maybe relatively less focus on this core personal loan segment. And so we've -- now with the success we've had in home and auto, we've been able to redirect more focus back to the core. And so we just see that growth is basically driven by investments in technology, improvements in that funnel, improvements in marketing directed towards that customer. And so we've just been doing those things. Those are all kind of durable improvements that we make, and we make those week after week, month after month, and they compound, they add up.

And so we're starting to just see some of those benefits come into the Q1 results. That's why it was able to beat its sort of seasonal expectations and run ahead of those, and we expect that to continue through the year where we keep reinvesting back into this product and make -- widen its technology lead, improve its sort of marketing, get -- reach more people. And by doing those things, we will see this product grow more, which in turn will generate more contribution profits for the rest of the business to use and reinvest.

And just put some numbers on what we're seeing here in Q1 versus previous year. So in Q1 '25 and Q1 '24, core personal loans saw about a 10% quarter-on-quarter decline. And so this year, we're seeing flat originations. And that's sort of what we're looking to additionally from a numbers perspective to speak to that better than seasonal performance.

Our next question will come from John Hecht with Jefferies.

You guys talked about some of the seasonal factors and product shift changes with customer acquisition costs. But I'm wondering, is there anything going on at the unit level? Like have you seen any changes to origination fee structures in various products? And/or are you exploring different channels of customer acquisition? Anything going on there just to talk about that piece of the business?

No large fundamental changes there. I would say we still use the sort of a full range of marketing channels that we used before. We've made improvements across many of those leading to some of the wins and better than seasonal numbers that we've had. We have largely -- we talked last quarter a lot about our intentional strategy not to not to max out on take rates from borrowers, and we've stuck to our strategy there. So we are very intentionally not maximizing profitability of the business. If that was our North Star short-term profitability, I think we could have a lot more of it by squeezing more out of take rates and fees, especially in certain segments. But that's not our strategy because we don't think that is the best way to maximize the long-term value here.

We think there's just incredible value associated with winning over customers and building relationships with them and leaving a little bit of extra on the other side of the table. So we've been doing that. We've stuck to that strategy with respect to how we think about origination fees. And when we go out and do marketing, we certainly keep in mind that it's valuable to win over a customer, and it's not all about maximizing the profit on day 1.

And then with that in mind, any comments on whether it's recurring customer activity or maybe even think about as direct-to-customer activity or cross-sell? Any kind of signals you're seeing there?

Yes. We certainly do both. We think it's really important to have to have a lot of repeat customer activity. We are increasingly focused on what we think of returning user activity. So these aren't necessarily people that got loans with us before, but you look at that $20-plus million number, those are all people that have decided to come check their rate from Upstart at some point and maybe they couldn't get approved the first time, maybe they couldn't get the sort of type of loan or the dollars of loans that they were looking for the first time so they didn't accept. These are all perfect candidates for people as we've got more and better products to go back to.

And so certainly, we do more and more of that, and that's something that we want to maximize. But we're also still so early in our growth journey, 20 million is just a fraction of the U.S. population. And as the player in the market that uniquely, we think can serve the entire spectrum from having great rates for people on the very prime end to having great offers for people at the other end of the spectrum, we think we can be sort of a full spectrum offering. And so we think our addressable market is a lot more than 20 million Americans. And so we want to keep adding new people into the database. And so we're going to keep marketing to do that. And that -- you put those together, and I think in the long run, you're going to have a very, very valuable business.

Our next question will be from Patrick Moley with Piper Sandler.

Just wanted to go back to the Bank Charter. Could you walk us through maybe some of the key regulatory milestones ahead there? And what's the expected time line before you start realizing some of these operational and financial benefits that you talked about?

Yes. We're excited about the Bank Charter. As you mentioned, the benefits are primarily regulatory. So just to clarify in case that was lost on anybody, but we expect to get nice improvements that are both operational and financial out of doing the bank, but it is not a balance sheet strategy. It's not something that we're doing to change how we fund loans or how much capital the business needs to operate.

In terms of process from here, we have submitted our application with the OCC. It's for a national bank charter, and we're working with the OCC on pieces of that application. We don't have any specific guidance on the exact timing of this. That's going to come in our work with the regulator, but we're very motivated, and I think the regulators have been really constructive in how they've worked with us and other companies in this current situation.

Okay. Great. Then maybe just a quick one. You bought back $100 million of stock in the first quarter. I think you have like a little over $100 million left on the authorization. How are you thinking about the pace of buybacks, I guess, throughout the rest of the year? And how do you balance that kind of with some of the balance sheet co-investment and new product funding needs?

Yes. Well, I'll go back to saying that we think capital efficiency is really important to us. We want to think of equity capital as a real cost. We want to think about metrics in per share terms as often as we can. And so in the long run, we're just going to be thinking about how do we maximize the earnings of the business and how do we minimize the amount of dilution in the business. And so whenever there are opportunities afforded by a combination of considerations of available cash and liquidity and financial outlook and the price is right, we're going to be looking at an opportunity to use those stock buyback dollars.

Now having said that, the reason we aren't like always buying back all the time is that we just have so much growth ahead of us that the threshold for doing that is really, really high. We know that there are so many growth opportunities that we can invest in operationally that our threshold for using cash for any other purpose is going to be really high. But yes, once in a while, I think we'll have that opportunity in the market. And whenever that is, we will certainly consider doing it.

We'll now move to Vincent Caintic with BTIG.

I wanted to follow up on the bank question. And I actually wanted to focus on the economic implications of becoming a bank. I thought it was interesting on Upstart's blog post when you highlighted about $200 million of annual frictional costs and also the lack of being able to be in certain geographies or serve certain customers. I wondered if you could elaborate on that. How difficult is it? And could you really remove $200 million of annual frictional costs that would be big versus your EBITDA guidance of the $294 million. So I'm just kind of wondering like how difficult is it to achieve those things? Do we see that in economics in terms of EBITDA? Or does it come from higher transaction volumes or some combination?

Yes. So a lot of that 200 number is really a missed opportunity on the revenue line. So I think it might show up in a different place than you would think if you were just thinking about these as true kind of like friction costs. But the way it manifests is a few different things. The first is that we have a number of states and segments of the market where we can't operate or we're limited in how much we can operate because of state-level regulatory issues and having a national bank charter to operate through resolves most of those and gives us access to sort of the full market up to the 36% rate limit. So that's a big deal. I mean that's just TAM that we're missing out on today that directly gets solved by having access to the National Bank charter.

The second issue are direct kind of operational and financial costs associated with the way we operate today, and that is we originate loans through a large network of many financial institutions, and that comes with both direct financial costs that are paid or earned by the financial institutions instead of us or the cost of friction in managing that sort of complex system of many players originating.

And then the last is -- so those, I would say, are the kind of really concrete costs that go into that $200 million number. And then there's a separate thing, which is more of an intangible. It doesn't go in that number, but I think it's just as important. And that is that it's obviously, we think, a decade where there's going to be substantial advances in AI that AI is going to do a lot to transform consumer credit. And I think every regulator is going to naturally be asking questions about that, wanting to understand that, wanting to work with the leading frontier companies in doing that. And we just felt that from our position as the company that's been doing this longest, we should have a direct relationship with the regulators in helping them understand what it means to apply AI in the context of lending, help them get that right and do that directly as opposed to trying to do it through a large number of intermediary financial institutions.

Okay. Great. That's super helpful. Switching topics, if you could maybe kind of going back to the topic about take rate. Seeing the transaction volumes grew 61% year-over-year and your overall revenues grew 44% year-over-year. I'm wondering if you could kind of talk about how we should expect that dynamic going forward. And when you talk about, say, improving the unit economics of Auto and Home, I know you said that you didn't want to maximize profit, but does part of improving the unit economics involve the revenue side? Or is that primarily on the cost side?

Great. Thanks for the question, Vincent. So with respect to the take rates we're seeing here in Q1, those are largely a reflection of the dynamics we've spoken about previously. So it's about the growth of our newer secured products as well as mix shift to prime in personal loans, all of those have been growing very well. And so those have largely manifested in take rate that has come down year-on-year as expected, right? And that's something we were expecting here in Q1 in addition to the seasonality dynamic we spoke about before.

So we typically do see some softness in take rate in Q1 relative to Q4 kind of associated with the softness in demand, all of which is quite expected.

As I sort of step back and think about the remainder of the year, a couple of things. One, take rate is not a metric that we -- it's really an output metric for us, not kind of like an input metric, if that makes sense. And so largely, as take rate moves in the business, it's going to be reflective of kind of changing mix on the products. That being said, as we alluded to before, a key driver of kind of the ability of the platform to deliver contribution profit dollar growth this year is going to be the improving unit economics on our auto and home products throughout the course of the year, where we've already seen meaningful progress on that over the course of the last year, but we expect that progress to continue.

And to your question, that should show up sort of up and down the P&L. So it will come from both improvement in efficiency on the cost side, driven by increasing automation as well as just the benefits of scale and kind of having more loans kind of moving through the platform. And we do expect it to show up in improving take rates on average across the sort of secured product set as we look throughout the remainder of the year, driven primarily by an expectation of increased sell-through of loans off the balance sheet to third parties.

Our next question will be from Giuliano Bologna with Compass Point.

Congrats on the results. As a first question, last quarter, you mapped out an expectation of around $100 million of revenue from HELOC and auto between a ballpark 4% upfront take rate and 2% servicing. Is that still the rough expectation? And then when I think about that, one thing that I noticed this quarter is that within the servicing line item, there was a step-up in kind of the other fees, which has historically been de minimis it's closer to $3.9 million. Is that anything related to servicing some of those HELOC or auto loans? And how should we think about that going forward?

Yes. Thanks for the questions, Giuliano. So on the first point on the $100 million or so fee revenue from auto unsecured, that continues to be sort of in the right ballpark in terms of what we expect. The sort of the take plus servicing that Sanjay spoke to last quarter represents more of, I would say, sort of the medium-term take rate for that product set in aggregate. So may or may not fully achieve that inside of 2026, but sort of more over a 1- to 2-year time horizon as those products grow and scale.

Go ahead, sorry.

On your second question on the other fees and servicing, I might need to follow up with you on that one, but I can certainly do that.

That's very helpful. And then thinking from an execution perspective, as you sell more of those loans you flow more through, should we expect servicing fee revenue to be an incremental driver, especially on the margin side because you're probably spending disproportionately on marketing and other expenses on the front end, but then a lot of the revenue from the growth in those new products is really deferred and realized over time?

I -- I think I'm understanding your question. And yes, that would be the case. So as we sell these loans through, it will -- in terms of how it impacts revenue, will allow us both to recognize kind of fee recognition or take rate upfront upon the sales of those loans. But especially on our auto product, where we expect to have a higher proportion of the compensation come from servicing, we will also be generating a servicing revenue that we will recognize over time and will offset those servicing costs that we bear.

We'll now take a question from Rob Wildhack with Autonomous Research.

I just wanted to follow up on that comment around the medium-term take rate and servicing rate for the HELOC and auto. In your experience, do you have any sense for how long like a new product takes to reach like mature unit economics? Andrea, you mentioned like maybe not 12 months, but 12 to 24 months. Will they be mature by then? Or is there scope to improve beyond sort of that 1- to 2-year time frame?

Yes. Great question. The beauty of our business is that there's not really any moment where we deem a product mature because the margins ultimately are driven by the level of differentiation that have been created by our technology. And so it was a lot of years before our core personal loans product reached its current level of take rates and its current contribution margins. We were doing that for probably 7, 8 years before we got to levels like the ones that we have today. And that's basically because year after year, the models kept getting better, the level of automation kept getting better. And that's really the thing that allows you to be able to get pricing power in that market.

When the next best offer is so far away that you can increase the take rates there and still have the best product. That's where it makes sense to start. ramping that up. So I would say we are very much in a position today where these products have found a great fit in the market. We are ready to start optimizing their margin profiles. But it's not like they're going to be done optimizing this year or even next year or probably even the year after that. They're going to just keep getting better as we create more space for differentiation and therefore, more space for pricing power. And that's -- we view that as a fundamentally very good dynamic in our business where we can keep on improving the technology that keeps on creating more differentiation, which then allows us to have more pricing power. But we do expect these products to get meaningfully better in their margin profiles in the near term.

Okay. And I just wanted to ask too about the cash line product. Can you talk a little bit more about who the target user is for that? Is it something you see as a complement to personal loans or maybe more of a substitute for someone who doesn't need or want $15,000, $20,000. And then what about the economics there, like origination fees? And do you expect that those are balances and loans that will sit on your own balance sheet? Just any color you could provide there would be interesting.

Yes. Cash line is a product designed for someone who has generally a need for a smaller amount of credit, but on a more regular basis. So if you think of personal loans, there's a one-shot $10,000 loan. A cash line is -- we're talking about hundreds of dollars, but something that you might access multiple times a month, multiple times a quarter. And so the design of the product needs to be very different. But it's actually still a really valuable loan, a really valuable customer because it's accessed so frequently over a period of time. And so that's who it's designed for. In terms of its funding, yes, in the -- in the medium term, as that product grows, it's going to have its own sort of dedicated funding partners that are the right home for it. But because the product is so short term, the loans are so small, it's not a major factor in the balance sheet today, and it's not something that we're particularly worried about.

And we'll now take our next question from David Scharf with Citizens Capital Markets.

I had a couple of questions, but both related to how we ought to be thinking about the impact of kind of the shifting origination mix, specifically more prime personal loans, HELOC by definition, is going to be more of a prime borrower. And first, just focusing on capital. It looks like 1/3 of your retained risk on the balance sheet is the beneficial interest, sort of the co-investing. Should that relationship or percentage drop over time as a bigger part of your business becomes prime focused? Because it seems like the investor part of the marketplace is going to require risk retention to a greater extent, the lower rate of the credit. Can you just kind of walk us through if the balance sheet is going to change as the mix shift of your originations change?

Yes, it's a good question. I think I maybe want to start by just correcting a misconception about the required level of risk sharing. I mean, really, when we thought about -- when we looked at our business over the last few years, strategically, one of the most fundamental convictions we've had was that we had confidence in our credit, but we didn't have control over what happens in the outside market. And so there would be market environments where funding was less available and there would be market environments where funding was more available. And much of it would have -- much of it would be outside our control even if our credit was performing well.

So we thought it was strategically critical to us in our desire to build the sort of largest provider of consumer credit that we needed to have capital arrangements and capital partnerships that could endure through market cycles. And so the -- our putting in risk -- a small portion of risk sharing into some of these deals was fundamentally in exchange for having committed capital over multiyear windows. And so we don't view that necessarily as a requirement and certainly not a bad thing. We actually view it as something pretty innovative that allows us to solve one of the most important sort of fundamental challenges in a fast-scaling business like ours.

Coming back to your question on newer products and prime mix and how that will affect it. I think you are right that the sort of primer products will tend to have a lower sort of level of capital required from a risk-sharing perspective. But I wouldn't necessarily leap to the conclusion that the ultimate mix will be any particular sort of mix of primeness. And that's because we have so much growth in multiple product categories right now. We're putting a lot of focus on growing that core personal loan segment, which is an extremely strong segment for us, a very profitable segment. We have a lot of growth in the auto product, auto, which is a product that every American across the entire economic spectrum needs. And you are right that, of course, the HELOC product is -- it tends to be a more prime product. But depending on the sort of exact rate at which each of these products grow, you could end up either with any particular mix of primeness.

Got it. Understood. That's helpful. And maybe just as a follow-up, sort of applying maybe the same rubric to kind of the medium term, the 3-year guidance. The -- I mean, 35% revenue CAGR is obviously significant and margins going from 21% to 25% is material as well. But the margin increase is possibly maybe not as much of a pickup as we would expect with revenue kind of more than doubling, increasing 2.5x over that time frame. Is that related at all to kind of product mix? Or should we just interpret that as 3 years from now, you still anticipate being in growth mode and probably still in an above-trend period of investment spending?

Yes, more of the latter. So we are expecting this business to grow at a significant amount for a long time. Obviously, we gave the 3-year guidance of 35% CAGR. But maybe the interesting thing about that from the perspective of your question was that 35% was approximately the same amount of growth that we guided to in the first year as the later years. And so maybe you might infer from that, that it's not heavily front-loaded like it might be for a business that you expect to grow a lot and then basically just taper off. We think the market opportunity here is so large across so many new categories of credit that we hope to be doing this for a very long time. And so it is our working expectation that there will be great opportunities to reinvest profits into continuing to grow the business over time. And I couldn't tell you today, given we've got 3 years of guidance, I couldn't tell you what's going to happen in year 4, year 5, year 6. But if I had to guess, I would guess that there's going to be great opportunities to reinvest for some time. And so that's what's in our plan today.

And it appears there are no further telephone questions. I'd like to turn the conference back to Mr. Gu for closing comments.

Great. Well, thank you, everyone, for your questions and for your time today. I just wanted to leave you with a few things I hope you can take away from our conversation. First, Q1 was strong and puts us comfortably on track to deliver our full year outlook on both revenue and profit. Second, core personal loans is our superpower. It has great margins, and we're going to do a lot more of it. Third, home and auto have found their places in the market, and it's time to make them profitable. And finally, the opportunity ahead for us for AI to remake consumer credit is enormous, and we intend to go after it while making every dollar of capital count.

Thank you to our team, our capital partners and our shareholders. We look forward to seeing you next quarter.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.

Afternoon, everybody. Thanks for joining us this afternoon here at the 2026 Morgan Stanley TMT Conference. Very excited to have Sanjay Datta, President of Upstart. Thanks for being here.

Thank you.

Before we get started with Sanjay, quickly, I've got -- I'm going to read a couple of disclosures. We have ours, which is please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures.

And then Upstart has asked me to read theirs. Today's discussion may contain forward-looking statements that relate to future results and events, which are based on Upstart's information available as of today and are subject to risks and uncertainties. Actual results may differ materially from these forward-looking statements. The discussion may also include non-GAAP financial measures, which are not a substitute for GAAP results. Please refer to the company's filings with the SEC and its IR website for additional information, including GAAP to non-GAAP reconciliations, along with other disclosures. Did I do it all right?

I feel like your disclosure is a lot more cogent than ours...

Well, I think we get away with referring people to -- anyway, thanks for being here. Really appreciate it.

Look, I want to start with just kind of like some of the leadership changes that have been announced. I don't know that they were under adverse circumstances or anything like that, but it does create questions for people. How should we think about strategic continuity versus change with the leadership transitions that have been announced, where should investors expect meaningful change, if any, in priorities or pace over the next 12 to 18 months?

Yes. I think this has got to be one of the leadership transitions with as much continuity as you could hope for. I mean, Paul and Dave have been covering the company since inception for the last 14 years, they've essentially been co-decision makers and aligned leaders throughout. And they started planning this transition -- I mean, I knew about it as of 5 years ago.

So it's been -- they've been working towards it. And it's sort of like -- it's like Dave was running the company, and Paul was his co-leader, and now Paul will be running the company, but Dave is not going far. He's still the Chairman and the biggest shareholder. So he's still [ flocking ] us and giving us his opinions. And -- so I don't -- nothing will change with respect to our priorities with respect to our objectives and strategies.

Got it. So I want to talk about another announcement that you made and one that I know that we in the investment community grapple a lot with, and that is the periodic disclosure of KPIs and how that may impact volatility. I know certainly, I feel like there's probably a lot of opportunity for investors if there was a way to tamp down volatility of stock itself. And one of the things that it seems like it could be a step in that direction was your decision to start to publish monthly transaction volumes.

That being said, is like anything, monthly transactions or any shorter period of time has the potential for more variance from period to period. How should we investors separate what is signal versus noise, particularly in month-to-month prints, whether that be seasonality, marketing cadence, partner onboarding? How should we try to digest those numbers as they come out?

It's a good question. We've sort of done two things with our guidance framework. On the one hand, we went more short-term transparency, right, from just quarterly guidance to like monthly updates on volume. On the other hand, with respect to guidance, we're now emphasizing the longer-term view, the 1-year view and beyond.

And really, what we're doing there is on the short-end side, we're trying to provide real-time transparency to what is going on. There's so much speculation out there and so many third-party data sources trying to figure out what's going on. And they're adding to the noise because sometimes they're right and sometimes they're wrong and...

And sometimes they're right by a little bit and sometimes they're wrong by a lot...

Yes, it's created its own dialogue. And we are just like, look, just -- we'll just put the facts out there. And so it's kind of like maybe just kind of desensitize that a little bit.

Now with respect to what within that is noise and what is signal because I do think like people tend to get maybe overly wrapped up in -- with this month versus last month. So I think the way we'll sort of signal what's important is when we come back and say, well, here's how you should think about how the year is change -- like if there's a trend in those things that are useful. We're going to come back and tell you that the year is kind of changing. And we'll give you a different outlook on the year to sort of reflect that.

But short of that, I think a lot of it is just there's like different calendar days or different business days, depending on how the weekends fall in certain months versus others, there's seasonality, there's all these other things. And so yes, I think what we're going to really try to do, if you're interested in the signal of the business, is really telegraph that through our evolving view of how the year is going.

Right. And it seems like, to your point, is like it's going to put incremental -- create incremental opportunity for us on the investment side of things to try to take into account those things. But if I put it together with the way that you disclosed UMI, et cetera, it seems like there's a lot of message and signal, if you will, that we should be able to deduce as investors.

So let's talk about the additional piece of this communication, and that's the multiyear framework. And give us a little bit of insight, if you can, into the thought process around providing a multiyear framework like you did, especially given the cyclicality inherent in the business, right? Like there's a lot -- and by cyclicality, I mean, the economy is changing, it's you're an economically -- cyclically sensitive business in some ways, et cetera.

Yes, that's an important point. I mean, one of the assumptions underpinning that longer term, I won't call it a guide, but it's the targets that we're operating against, if you will, is that it will -- it's sort of what we believe in a roughly macro neutral environment.

Now the macro won't be neutral probably. Who knows if it will be a headwind or a tailwind, it may be both in that time frame. But really, what it's meant to say or meant to sort of connote is in that kind of a time frame, the underlying growth characteristics of the business will be a secular one. And the secular growth dynamic in our business is related to getting better base models and more automation over time.

So as we do that underlying work, we get models that do a better job of avoiding default, which then reduces APRs for all the other applicants, who are not subsidizing as much default. And you get more automation, meaning you take friction out of the funnel, you take documentation out of the process, and that also acts to improve conversion rates.

And so I think the road maps we have and the backlogs we have of all the R&D projects that are going to chip away at those things, incrementally more automation, incrementally better risk evaluation is long enough that we're signaling that we think secularly, we can -- we're very confident we can maintain that kind of a growth clip over the coming 3 years.

And so it's really meant to telegraph the fact that -- I think -- because there maybe was a mental model out there that's like, okay, I see it's a pretty good core business. It's going to start cash counting in 2, 3 years. The margins will be -- I think what we're saying is, no, we've got a big growth curve ahead of us. Like the out-year outcome of our business should be a very big one. And the sustainability of the growth, I think, in the next 3 years is something we feel very confident in. So that's the main signal.

Now of course, there will be macro puts and takes to that, probably. We can't predict what they will be. And so from that perspective, yes, we're not trying to put a stake in the ground and predict that. But I just -- we're trying to signal that in the underlying growth characteristics of the business, there's a lot of -- there's a lot more persistence that we see.

Got it. So let's talk about some of the components of that multiyear framework. And part of that is the scaling of secured risk -- secured lending. And I guess the thing that a lot of times we're asked is, hey, the unsecured personal loan market is still really large. What is the strategic necessity of scaling into secured lending? Is it risk diversification, capital durability? Are you looking to expand TAM? Or is there something else within that?

Yes, there's no necessity to do it in a sense. I think we could build a nice big business with healthy margins in our core. But I think this is like the difference between big and massive, right?

The secured categories, I think the rationale for why we can and should be successful in them is the same as in the unsecured categories. There's always a combination of too much friction to access to credit and like a significant part of the market that's not getting access because the risk models aren't good enough. And the TAMs on that thing are like multiples bigger on the unsecured side.

So I kind of view it as like, yes, no, we're very excited about the opportunity in the unsecured world and in our core business. But I think there's also this like there's a bit of a race that we're running alone right now, but we don't expect to be running alone forever. And it's like who's going to bring machine learning models into these new segments of credit and then ultimately, for maybe new geographies as well.

And I think there's a huge first-mover advantage because you start generating the -- what's interesting and unique about applying AI to the credit space, unlike a lot of what's being done out there, where the training data is just hoovering up the Internet. The training data is not out there. You have to generate it. And so whoever is first, whoever starts generating that training data, not just through repayment history, but all the variables you collected against it. Where did that borrower study and where do they work? And what's their title and what's their role? And how do they interact digitally with my application? And when I ask them their FICO, how close were they to knowing it before I check -- like all those things provide a richness of data that then train the models. And because it's not out there on the Internet, you have to go and generate it.

And so there is a bit of a first-mover advantage in taking AI into these spaces. And so we're just trying to plant the flag in these areas. We think there'll be massive opportunities. And it's not to sort of diminish the opportunity that we feel exists in the unsecured space. We're a bit greedy, frankly.

Right. So let's talk about mix of secured versus personal unsecured loans, consistent with what you said is like the TAM for secured is much, much larger. And so you've obviously made the assessment or said that you expect that secured products should become a larger share over time. Remind us kind of what that time frame could be or should be in your planning and how you're thinking about it? And what would have to happen in the auto and home funnel performance for them to overtake personal loans sooner than expected?

With respect to time frame, the honest answer is I don't really know. And the reason is because I think we will grow faster in these new categories. But they're trying to catch a course that's moving pretty fast -- and it's a bit hard to tell exactly. I mean I think we've telegraphed a couple of years of strong growth in the core. And the new products will outgrow it, but that's a big and fast-growing business on its own right.

So there's a lot of internal bets as to what we look like in 5 years. Has the core been overtaken? Is it auto? Is it home? I think everyone has a bit of a different take. So I don't think we have got...

Yes, everybody has a different take. I'm sure both externally, but it sounds like even internally.

Even internally, we all have our own favorites and our own -- I mean, we're obviously betting or hoping for all of the above, but everyone has different kind of view. And with respect to -- you said, what would have to happen...

In the funnel or a conversion, like help us think about like the differences between the different products, whether it be auto, home, or unsecured and what you see in terms of conversion rates, et cetera? And even reach.

Reach. Yes. I mean those are the two dimensions, right? One is -- one sort of variable is how quickly are we going to improve the models. And to what extent do we get some unexpected surprises, some unexpected progress. Some of the advancements we make benefit all the models and some of them are sector specific. And so there's different teams working against the different areas, and if they have some big advancement in one particular area, it will improve our conversion mechanically.

And then the other axis really is about distribution. And they all have a slightly different distribution strategy. Unsecured lending is obviously heavily D2C. It's heavily digital. Our main distribution strategy in auto is taking software to the dealerships. In HELOC, we're still early days. We've stood it up as a D2C business. I think there's a lot of opportunity as a white-label strategy, working with other depository institutions and the like.

So again, you can have big breakthroughs like -- just as an example, I think that we, for many -- a couple of years have been trying to figure out the right product market fit with the dealerships in terms of our software. Because once you get the software in there, you can surface the loan offers [ and ] the commercial flow. And I think we spend a lot of time trying to find like something that was very powerful and integrated, but it didn't take too much of a lift for retraining and like changing workflows.

And I think that -- and relatively recently, I think we've hit it. And so I think that, I mean, some of the growth you saw in Q4 in the auto space, that's just like we found the right product market fit with dealers and it's starting to fly off the shelves...

And by product market fit, you mean like the way that the software itself has put together, how it integrates into their own sales flow, et cetera.

How much the dealers are demanding it. Like you can -- like sometimes selling things is hard, and it's like knocking your head against the wall. Other times, they're calling you, "Hey, I heard about this, like can you give me a demo." And I think we're starting to get a great flywheel in that regard. So that's just like one example. You can get these distribution breakthroughs that sometimes create a big sort of unexpected leap forward.

No, for sure. So let's talk about unit economics. As secured becomes a larger share, what's the right way to think about the blended take rate and contribution margins? And I ask this question because inevitably, investors, right or wrong, are also trying to grapple with it and see if the take rates are suggesting some -- one thing or another. But what should we expect headline take rate compression to look like even if contribution dollars improve?

It's a good question. We don't exactly know. But part of the reason we don't exactly know is because the take rate itself within a product has its own life cycle. If you think about the advent of -- or history of our unsecured business, for the longest time, our take rates, I think, were probably in the average of 5% or something like that, okay? And what happens is you can think about the market benchmark in terms of how loans are being priced to consumers as being somewhat credit score centric.

And as our model get smarter and smarter and smarter relative to that benchmark, it's avoiding more and more and more. So if you think about that average price, there's half of the borrowers are riskier and half are less riskier and you get an average. As you avoid more and more of the riskier borrowers, your APRs start to come down. And as your APR start to come down, you create margin opportunity.

And so by 2024 compared to 2018, we were charging 10% to 12% take rates. And we could, and we were still the best offer in the market because of that margin we had created. And that margin did not exist back in 2018. So if we had tried to charge those rates, we would have gotten adversely selected.

So as your models get more mature, as they get better, you create economic opportunity. And that opportunity can go to the borrower in the form of lower rates or it can come to us in the form of higher takes or you could conceivably give it to the investor in the form of overperformance or some split of the three, right, which is typically what we do. And so that same thing is going to play out in the secured products.

So I think we said in the latest earnings, I think the average upfront take rate for secured products out of the gate is going to be something like 4%, but there will be a higher component of servicing economics. When you think about the analog, our servicing rates in unsecured lending are 1% per year. So as the loan amortizes, you get like a ratable revenue stream in addition to the upfront take. In secured products, we think that will be closer to 200 basis points, okay? But there will be a differential between home and auto. And I think both of those segments will evolve. As we get better models, we should create room for more economics.

And so it's a bit of a -- there's a lot of moving parts. In addition, our -- in our core business, our take rates went up to 10%, 12%, we signaled that they're starting to moderate down a little bit because at some point, it's not the best long-term business strategy to run an economic model where you're charging 10% take rates. Like there's some money you can sort of invest forward now in exchange for a much bigger business down the road. And so I think that one will moderate a little bit as we've telegraphed. I think these ones will improve over time and the relative mixes of the three, who knows.

Yes. So let's talk about competition in secured. The competitive set seems like it should change pretty materially in secured. Where do you see your primary advantage versus the incumbents? Is it better credit decisioning, a better conversion UX, better partner economics, time to close? Where do you think you have an advantage initially and which one of those facets or front, do you think will end up being most defensible?

Yes. I think it's different mixes of the same playbook. Almost every credit segment, you've got sort of a hyper-served prime segment and a very underserved, sometimes nonexistent riskier segment. And in the riskier segment, we aim to compete and sometimes create markets just by being good at underwriting.

Now as you get more secured, you probably get more of the sort of prime sort of well-served customer. And then there, you're competing on two things. One is automation. Like how much friction can you take out of the process. And the second is your -- the efficiency of your capital.

And so I think in each of these -- I think we're discovering that each of these areas, we've got opportunities for both. Like let's take HELOC as an example. It takes the industry 30 to 40 days to do a HELOC, we and maybe one or two other fintech players are down to 5. That's like a significant experience improvement. So for people who can access HELOCs already, we're not creating access for them, but it's like, well, you can wait 40 days at your bank branch or you can get this next Tuesday. And so that's a very powerful way of competing.

But by the way, the HELOC space, they're typically coming from the home buyer, like the mortgage space, and they will take loss rates up to 2%. There's not a lot of 4%, 5% loss HELOCs out there. That's viewed as very risky in the home space. But guess what, like we're working with unsecured buyers who are buying 10% loss loans and 5% looks pretty good to them. And so -- but in order to sort of create a new sort of market space in a world where the traditional market isn't touching the risk, you have to have a lot of credibility in your underwriting. And so I think both of those are opportunities, whether it's auto or home or whatever is next.

Why don't I take a breath, see if there are any questions in the audience here. Before we go to funding, et cetera.

So probably the biggest apprehension in the credit market right now, and you can see this even with you or others that they put up good results, be it the stocks or don't react in a way that maybe you would expect, seems to be tied to private credit and the state of capital availability. And there's been a lot of chatter of late on the health of the private credit space. There's an article on the front page of the Wall Street Journal talking about a big provider of private credit and kind of the things they're working through right now.

That being said, recent vintages and their returns have looked really attractive versus benchmarks for you. How should we expect the spreads to express themselves and to evolve as you skew more to the prime and secured? And what are your capital partners talking about that they're looking for from Upstart?

When you say the spreads, you mean like the pricing of the loans...

Yes, the pricing on the loans and the [ fees ] they're willing to pay.

I see. Yes. I mean I think from those guys' perspective, so you got two dynamics. On the one hand, each of these credit classes has some traditional buyer population. And then you get folks who I think are maybe, you could say, coming along with us for the ride, right? And so for that latter category, I think they kind of view all of this as some version of ROE, right? So a more secured credit class compared to unsecured will have more competitive APRs, lower APRs but they'll also have higher financing advance rates because they have lower losses. And it's sort of like levers up to the same mid-teens ROE or something like that.

So I think, like whether the underlying asset is risky or very secure, that will be sort of compensated for in the leverage ratios, and it will ultimately -- you should sort of have a comparable level of risk and return across those products because of how you use the financing.

I think that folks who -- they're sort of like folks who know Upstart very well, but maybe are getting their feet wet with new credit categories. And I think that what they want from us is consistency in performance and improvement. And then there's people we're engaging with who know credit classes very well, but are new to Upstart. And there, it's a lot of diligence, kicking the tires, making sure that we have the right incentives, the right sort of guardrails.

So for those capital partners, both existing and potential or newer, have you seen any reticence in their kind of behavior recently, et cetera, that would indicate like some apprehension that they're demonstrating around their own performance or access to credit and capital?

Yes. None at all, really. I mean the big annual tentpole Structured Finance Conference happens every year, it was actually last week. And I got to say that the tone was constructive and confident. But it's because the underlying credit is benign. The moment that turns, then there'll be discussions. But I think despite all the headlines out there and the talk of equity exposure, cross contamination, like everyone is like, I think these vehicles are very specific to consumer credit. And I think the underlying stuff, as you said, is performing very well, and everyone's happy. So everyone's like looking to deploy. And so that, yes, the tone is good right now, but the tone is always a reflection of credit performance and credit performance is in a good shape.

Yes. So let's talk stay on the funding topic just for a couple of more minutes. Let's talk about secured products and as those scale. Would you expect your ABS forward flow structures to become more central versus whole loan buyers? What kind of constraints, whether it be structure, ratings, data history, do you have to get past for that to matter?

No. The ABS sort of component of our strategy is very secondary in a sense, everything that we do is -- like the predominant objectives are to get the yield in the hands of either lenders, like depository lenders or institutional buyers. And then from there, if institutional buyers themselves want to securitize loans, we'll create -- we create the vehicle for them to do that. But there's very little sort of the prioritization of having us run a securitization shelf off our own balance sheet. It's really for -- it's like a feature of liquidity for the people who are buying the loans.

That said, we do intend to stand up liquidity like ABS shelves for these new products because it's good for the buying community, it creates all kinds of good hygiene in terms of liquidity and price discovery. And I don't know that there's any massive hurdles other than usually in those vehicles you need to prove yourself, right? You need some history. You need to work with the rating agencies.

It will probably be some version of what we've already gone through in unsecured, but hopefully a little bit short circuited because now these rating agencies know us. The first time we said, no, this is not going to perform how it looks like it will perform. They thought we were smoking something. And then like 8 years later, they're like, okay, they're now sort of taking our grades at face value. And so hopefully, that will sort of -- that will play itself out in auto and home lending as well.

So let's touch on balance sheet as I think you guys have gone through the process of educating people pretty well on, hey, as you're experimenting and entering into new markets, there may be some changes in balance sheet, even the amount that you carry initially may grow, et cetera. I think people are well conditioned and informed on that.

That being said, you've been reducing on balance sheet exposure and scaling third-party funding recently. What's the road map to get home lending and that component of maybe that -- what you will carry on balance sheet initially to look -- be auto-like and get to the third-party involvement there so that you can kind of normalize and stay within your real long-term objectives?

The -- I mean it's just doing what we're doing, that's sort of my day job, right? We've got to do the deals. We've got the first couple of HELOC deals in place, and we've got other people looking at it. And yes, it's just a question of cementing those partnerships. Some of them are heavy lifts because they're meant to be multiyear commits. And so you got to do a lot of diligence upfront. But once you lock it in, it's very resilient. So I think we're just maybe a quarter behind where we are [ in a lot of ] the other emerging products.

Okay. Okay. Got it. Okay. So pretty good. All right. So let's talk about back to kind of this medium-term target and the profitability is we've got this roughly 25% EBITDA margin target. On that path, how do you think about how much do you expect to come from operating leverage versus internal AI productivity versus improving contribution margins as products mature? And just help us think through like what the drivers of -- or the points of leverage on your profitability should be.

The majority will -- should and will come from operating leverage. Yes. I mean, I think we view ourselves as a business that can grow the top line pretty quickly with a relatively controlled expense base, a fixed expense base.

Now I think AI productivity will be a component of that, not the headline. But yes, like I think that we would expect to, on the balance to be able to do more growth with the same number of engineering bodies as they become more productive, so that will enhance operating leverage.

I think it will be less so about contribution margin. I think we want those to settle into some nice stable ranges and there should be like, as I said, sort of some incremental improvement over time. But really, I think the headline is the bottom line of this business should largely be a function of operating leverage as we scale.

Got it. So let's talk about your technology moat and operational AI. Through our conversation this afternoon, you've talked about some of the challenges of taking even the emerging AI technologies and scale and applying them to this industry because of data, accessing data, developing the data repositories, et cetera. And something that you guys have been doing for a long time now.

And you've mentioned that model updates incorporate broader outcome data beyond loans just originate on your platform. How are you validating that label and data quality and to avoid selection bias? And what's the impact on approvals for previously lost borrowers? How do you improve not only your data, but your ability to underwrite people maybe that you weren't able to originate for previously?

Yes. So I guess your first question is how do we sort of avoid bias in this expansion of our -- I mean in a sense, it's just -- it's more data available to our models. In a sense, the bias was bigger beforehand. So before, obviously, if you have a bunch of applicants and you give out a bunch of loans and you deny a bunch of people, you can only see the outcomes -- so you have this inherent bias, which is like you may be not approving some people and you'll never learn from that. And what you're referring to specifically is we figured out how to see the outcomes for the people that we decline who get loans elsewhere. And so we can learn from that.

So in a sense, all we've done is expand our sort of visibility set in a way that reduces the bias compared to when we just saw the selection bias of the ones we have approved. So I think it's just like net positive, and it's had a positive -- so the benefit of that, of course, is then you'll learn from those people in ways that you're like, "Oh, I sort of declined a bunch of these people. But look, they got loan somewhere else, and they did pretty well." So then that's additional model learning that your model otherwise would not have had and then that obviously contributes to higher approval rates going forward.

And with that incremental visibility, like just remind us where is that coming from? And what's the opportunity or potential to further expand that capture data capture?

It was a body of work that really involves matching the data we had on applicants that were declined to outcomes of theirs that we found in the credit files.

In the credit files, right.

So it was being able to link those in a large data set. I'm sure there's further opportunity to be better at this, right? Like ultimately, you want the model to see as many outcomes as possible, so you learn as much as possible. So we've got other ideas for how to run sort of R&D programs aimed at learning from declines, but that's a good example of one big outlook.

Yes, really fascinating. I mean, certainly, I think you can see that there's a lot of nervousness in certain elements of what may happen in the market, but it's certainly encouraging and reassuring to hear that things still seem quite solid, both on the consumer front and performance as well as even on the financing side of things. So I really appreciate all your insights here, Sanjay. Thanks for joining us.

Thanks for having us. Yes.

That was awesome.

It was a pleasure.

Good afternoon, and welcome to the Upstart Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to turn the call over to Chelsea Williams Investor Relations. Chelsea, please go ahead.

Thank you. Welcome to the Upstart earnings call for the fourth quarter and full year 2025. With me on today's call are Dave Girouard, our Co-Founder and CEO; Paul Gu, our Co-Founder and CTO; 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 a 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.

Before I turn the call over to Dave, please note that concurrent with today's earnings release, we also issued a press release regarding our leadership evolution. Management will address these plans during today's conference call.

With that, Dave, over to you.

Thanks, Chelsea. Good afternoon, everyone. Thank you for joining us. I want to start today with what most of you have heard by now. I'm super excited to announce that on May 1, my cofounder, Paul, will become Upstart's next CEO. While I'll continue on to my role as Upstart's Executive Chairman.

Why now? Well, in a few weeks, as hard as it is for me to believe, I'll celebrate my 60th birthday. And for more than 5 years, we've talked about this milestone as the right time frame for Paul to step into the CEO role at Upstart. I can't imagine a succession plan more thoroughly considered or executed with any finer level of detail than what we've done at Upstart in the last few years to prepare Paul and the company for this day. As I said in the press announcement, Paul and I have been building Upstart together, side by side, for the last 14 years, and I expect we'll continue to build it together for the next 14 or even longer.

When we cofounded the company, Paul was barely old enough to drink, and I was older than his parents. So this transition is an incredibly rare opportunity to have a founder-led company for decades to come. To be clear, I'm not going anywhere and expect to be quite involved with Upstart. Beyond my role as Upstart's Executive Chairman, I'll continue to help shape the company's strategic direction and important initiatives.

I want to thank all of you for this opportunity. Building and leading upstart has been the experience of a lifetime, second only to the life I've built with my amazing, my Tiffany and our 2 incredible children, Jackson and Tristan. In particular, I want to thank Upstart employees past and present. It's been an honor to work alongside you through ups and downs, whether a good day or otherwise, it's been an experience I will always cherish. I couldn't be more optimistic or excited about the next phase of Upstart.

Some time ago, Paul said to me that most of the trillions of dollars in interest paid by borrowers in this world is unnecessary in the age of AI. So our mission is a glorious one, and it's one requiring determination and perseverance not just for years, but for decades. I'm confident that in due time, under Paul's leadership, we'll look back with nostalgia at our first 14 years as the early days at Upstart.

Now to move on to our regularly scheduled update. I'm proud of all the Upstart team accomplished in 2025. We grew originations by 86% and revenues by 64% and while growing head count just 18%, a ratio of any business would die for, and we reestablished Upstart as a strongly profitable business. This growth in profitability was driven first and foremost by a significant market share gain in our personal loan product where Upstart grew originations 75% year-on-year.

But just as importantly, our newer products had an incredible year with originations for auto and home, both growing 5x year-on-year and originations for both actually accelerated in the fourth quarter. Even with this Epic growth across all 3 product categories, we reduced loans on our balance sheet by 20% in Q4 and expect this trend to continue.

With 70% of funding for auto and home loans originated in Q4 coming from 11 different partners and an additional 13 signed up for the coming year, we've officially begun a new era as the everything store for credit.

Looking forward to 2026, I feel like Upstart has emerged from a multiyear rebuild and begins the new year from a position of unprecedented strength. In addition to radically improving our AI in the last 3 years, we've also entirely rebuilt our capital supply for resiliency and competitiveness. And as we wrapped up 2025 powered by excellent credit performance and rapidly improving conversion rates in the last few years, we finally took the last steps to launch our home, auto and small dollar credit products into the funding markets.

Upstart is the leader in providing the best rates and the best process across products and to consumers across the credit spectrum. In 2026, we'll be about increasing our lead in establishing our brand in these dimensions. All of this sets us up for building incredible franchises in each of these product areas for years to come.

In the coming quarters, I expect AI-powered lending led by upstart to rapidly gain market share across these enormous unsecured home and auto segments as well as additional lending categories in the near future. We've been building the teams, the skills and the technologies to deploy AI in lending for more than a dozen years, and I believe we are peerless in this regard.

With this strong foundation and expansive TAM in place, I want to share today that we project Upstart to achieve a compound annual growth rate of 35% for the next 3 years. In addition to sharing longer-term guidance, we're also refreshing how we share near-term financial information with the markets. Starting today, we've begun to publish the monthly transaction volume on our platform at the beginning of each subsequent month, providing a fresher look at how originations are trending.

Beyond that, we'll also focus on providing annual guidance, which we expect to update as we report each quarterly earnings. The opportunity to radically transform access to credit with AI is unimaginably large, and we want to offer the world a court-sized seat as this future unfolds. With these upgrades to our disclosures and guidance, investors can better understand both the near-term dynamics and the long-term potential of Upstart.

With all that said, I want to say welcome to the new era of upstart. With that, I'll turn things over to Paul Gu, my Co-Founder and upstarts next Chief Executive Officer. Paul?

Thanks, Dave, and good afternoon, everyone. I've had the chance to get to know many of you over the last year, and I'm excited to spend some time today sharing how I see the business as we head into the next chapter. I'm incredibly grateful to have had the opportunity to learn from Dave these past 14 years. I got to work alongside Dave finding our very first customers, onboarding the first outside capital for loans evolving from one office to multiple to digital first, taking the company public, weathering the boom and bust of the COVID stimulus era and doing virtually everything else needed to build the Upstart of today.

Through that long journey, we built what I consider the very best team and technology and credit. Today, I have the great fortune to take the baton from that enviable starting point. I am also extremely excited to welcome Sanjay, Grant and Andrea to their new roles. Sanjay will serve as President and Chief Capital Officer; Andrea is joining us as CFO; and Grant is returning to upstart as CTO.

Sanjay and Grant have long been key leaders in Upstart's history, and Andrea is an incredibly talented finance leader with a background in complex novel business models. I look forward to partnering with them to show the world the potential of AI-powered credit. As Dave said, Upstart is a far stronger company today than it was 1 year ago or for that matter at any point in our history. We always judge ourselves by the trifecta of growth profits and credit performance and 2025 saw tremendous progress on all 3. Looking specifically at the Q4 results, we grew total loan origination dollars 52% year-over-year.

That is function of finding strong product market fit in our new products, but it's also a testament to the persistent and large opportunity for us to grow with and win share in our personal loan business, where origination dollars grew 41% year-on-year in its 12th year of operation.

Because of our strong unit economics and operating leverage, that growth in revenue flipped our net income from negative $2.8 million in Q4 last year to positive $19 million this past quarter. We expect revenue growth to continue outpacing expense growth and make 2026 an even more profitable year.

I want to pause and touch on our contribution margins. You'll notice that these have declined over the past year. This is expected and intentional due to 2 dynamics, both of which we're actually excited about. First, we have grown rapidly in secured products and prime borrowers, segments which come with lower take rates but dramatically larger market sizes. Second, we increasingly have the financial ability to consider the long-term value of acquiring a customer and the reputation value of saving them more money than anyone else. Together, these are putting us on a path to become the best and most trusted place for every American to fulfill all of their credit needs.

Setting aside a couple of transitional and accounting factors specific to Q4, we expect to be able to accomplish this while still growing absolute contribution profits nicely with the business, albeit with a modest lag to revenue. The growth in 2025 also came alongside another year of exceptional credit performance.

The average return of our last 12 quarterly vintages of loans exceeds that of U.S. treasuries by 608 basis points with every individual vintage exceeding treasuries by at least 270 basis points. This combination of scale, consistency and returns is only made possible by our use of AI lending, and we believe will be a growing draw for capital partners, banks and credit unions.

We achieved this combination of record revenue and consistent credit performance with the Upstart Macro Index in the 1.4 for most of the past year and quarter. By comparison, during our prior peak revenue year of 2021, UMI averaged around 0.8, meaning that statistically identical loans were 43% less likely to default back then as they are today, that our 2025 results surpassed 2021, in spite of that UMI backdrop, is a strong testament to the power of our AI first strategy. Improving separation and automation quarter after quarter is a recipe for delivering results over a multiyear window, regardless of how macro moves the short run.

Now I want to quickly highlight a few of those technology advances from Q4. First, we launched 2 major model updates, Model 24 and Model 25. Model 25 added a significant number of consumers who never took loans from the upstart ecosystem to our training data set by joining past applicant data to similar loans taken outside upstart. This adds a rich diversity to our training data set and better positions our model to understand consumers whom we historically did not approve or win.

These models increased our measured separation accuracy advantage over our benchmark textbook model by about 1 percentage point to 172.2% on previously observed upstart loans, but had an accuracy boost more than 100x as large on those loans we did not previously win. Second, we redesigned our partnership models and integrated new data sources into our partner APIs together driving 24% more channel originations quarter-on-quarter, while lowering latency by 34%.

Finally, we launched a brand-new architecture of our verification models that lowers default rates by 0.8% and launched our first voice LLM for when manual verification calls are required. 2025 was also a year our new products found product market fit. In our auto business, we doubled the number of live lending rooftops for the third quarter in a row and began applying AI for the first time to our auto secured personal loan product.

In our dealerships, we launched the ability for car buyers to sign their loan contracts remotely and begin automating document verification processes with LLM, thereby reducing funding times by 12%. As a result, our combined auto originations in Q4 were up 56% sequentially and 340% year-on-year.

In our home business, we tripled the percentage of HELOCs using automated underwriting and rapidly scaled our campaigns to cross-sell the product to homeowners in our existing member base by integrating property data. As a result, home originations in Q4 were up 70% sequentially, totaling 350% year-on-year.

You may have noticed that I called out technology wins in nearly every area of the business I discussed. This isn't because I'm partial to technology by background, though I am, but rather because technology is the story of how we're building a differentiated business for the long term at Upstart.

In Q4, the scale of our training data crossed 100 million borrower repayment events for the first time, 14 years after we started the company. The next $100 million repayment events will come dramatically faster. And include data on almost every major category of consumer credit.

We believe that proprietary training data, when combined with the ever better learning algorithms our team develops drives a long-run growth trend that persists independent of any ups and downs of the macroeconomy or competitive environment.

We have executed against the strategy and observed its results for more than a decade. And in looking at our technology road map now have every reason to expect that compounding to continue for many years to come.

With that, I'll turn things over to Sanjay. Sanjay?

Thanks, Paul, and good afternoon to all for listening in with us unless you are [ a Sox fan ]. Looking back on what we believed and messaged almost exactly 1 year ago today, I am proud to say that Upstart called its shot in 2025. Last February, we guided to $920 million of fee revenue and $1 billion in total revenue on the year.

We finished the year with $950 million in fee revenue and $1.04 billion in total revenue. We are aiming for positive net income, an 18% adjusted EBITDA margin. We ended at positive $54 million in net income and a 22% adjusted EBITDA margin. Notwithstanding some of the inevitable twists and turns over the course of the year, 2025 landed right on schedule.

Overall for the year, we grew our total revenue by 64%, and we held our fixed expense base to a mere 5% growth, a nice flex of our operating leverage, which allowed us to more than 20x our adjusted EBITDA from $11 million to $230 million, despite concurrently investing in the scale up of multiple new early-stage products.

We took meaningful steps to reduce balance sheet exposure in Q4, while simultaneously graduating 3 new product categories from their R&D phase and almost quadrupling their volume year-on-year. We added new funding sources for our growing product portfolio in Q4 and converted several of our existing funding partnerships into multiproduct relationships.

Notably, for auto lending across both refinance and retail, the most mature of our new bets. 92% of our Q4 originations were funded via third parties, supported by the continued expansion of our institutional and lender funding relationships.

In home lending, we have similarly signed our initial institutional and lender partnerships who have collectively taken a majority of our Q4 HELOC production and expect to attain third-party funding levels similar to that in our auto segment in the near future.

Taken together, these developments have allowed us to accelerate new product growth rates in Q4 while simultaneously reducing our balance sheet holdings by 20% quarter-over-quarter. All in all, we are entering 2026 feeling enthusiastic about the momentum of our financial performance as well as the strength of our capital supply. With this as context, here are some of the financial highlights from Q4 of 2025. Total revenue for Q4 came in at roughly $296 million, up 35% year-on-year and 7% sequentially. This overall number included revenue from fees of approximately $265 million which was up 33% year-on-year and above quarterly guidance, reflecting the impact of recent underwriting model launches.

Within fee revenues, our servicing revenue stream continued its steady growth clip at 28% year-over-year, driven by higher origination volumes and improving servicing fair value marks. Net interest income of approximately $31 million, ahead of guidance by $5 million, resulted from continuing strong return performance on a loan balance that remained elevated during part of the quarter.

As discussed, we made progress reducing balance sheet exposure by quarter end and would expect the contribution of net interest income to moderate as those efforts continue. The volume of loan transactions across our platform is approximately $456,000, up 86% from the prior year and 6% sequentially, representing approximately 307,000 new borrowers. Transaction growth was driven by continued model improvements and continued growth across our new products. Average loan size of approximately $7,000 was 5% higher than the prior quarter, reflecting an increasing mix of nonpersonal loan products, which generally carry larger loan sizes.

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 53% in Q4, down 4 percentage points from the prior quarter and in line with guidance.

The sequential decline primarily reflects the increased weighting of lifetime value in our pricing calculations, which results in lower take rates but higher future profits. In total, GAAP operating expenses were around $277 million in Q4, up 9% sequentially from Q3.

Expenses that are considered variable relating to borrower acquisition verification and servicing, were up 11% sequentially relative to the 12% increase in the volume of loan transactions. Fixed expenses were up 7% quarter-on-quarter, reflecting continued investment to support the growth of the business.

Q4 net income was approximately positive $19 million, ahead of expectations and reflecting outperformance on the top line, alongside continued discipline across our cost structure. This result builds on our return to GAAP profitability in the second quarter of 2025 and reflects continued progress in the current credit environment. GAAP earnings per share was $0.17 and based on a diluted weighted average share count of 112 million.

Adjusted EBITDA was roughly $64 million, in line with expectations. We completed the full year with total revenue above $1 billion, up 64% from 2024, a contribution margin of 56% and positive adjusted EBITDA of $230 million, representing a 22% adjusted EBITDA margin versus a margin of 2% a year earlier.

We ended Q4 with approximately $985 million of loans held directly on our balance sheet, down from $1.2 billion in Q3. The sequential reduction reflects loan transaction activity during the quarter alongside continued progress transitioning funding for new products over third-party capital.

As we set up for the year ahead, we are evolving our approach to financial guidance by emphasizing the annual outlook and by focusing on the longer-term trends of the business. To supplement this, as David has mentioned, you will also be able to view more frequent updates on origination volumes that will be published each month at upstart.com/volume.

This year, we expect to continue growing our core personal loan business at a healthy clip via consistent model improvements and growth wins. As we increasingly weigh the future benefits of customer lifetime value in our loan pricing, we expect that take rates will moderate reducing current contribution margins in return for higher borrower volumes and lifetime profits.

Notwithstanding this dynamic, we expect absolute contribution dollars from our platform to grow at a robust rate which we are aiming to maintain to within at least 5 percentage points of corresponding fee revenue growth. We also expect to continue the rapid scale-up of our new secured product categories in auto and home which taken together, we expect will contribute over $100 million in fee revenue in 2026.

As they reach mature scale and sell-through, we anticipate this category will attain average upfront take rates of around 4% and in addition to average servicing rates of around 2% of outstanding balance on average loan sizes of approximately $30,000. Within those averages, home lending will tend towards higher upfront take rates, while auto loans will exhibit a higher proportion of ratable servicing revenues over the lifetime of the loans.

Across both unsecured and secured lending, we aim to continue streamlining our balance sheet. And building new committed multiproduct relationships with lenders and investors alike. And finally, we expect to continue maintaining tight fixed cost discipline and improving operating leverage as we further grow our profit base. On the macro environment, as per our tradition, we assume a constant default risk environment with the UMI holding study at its current value of around 1.4 to 1.5 and a static interest rate environment as well.

More specifically, for 2026 in the aforementioned scenario, we are anticipating total revenues of approximately $1.4 billion, revenue from fees of approximately $1.3 billion, and an adjusted EBITDA margin of approximately 21%. Looking even further out, our ambition will be to maintain a relatively steady growth clip over the coming several years, paired with improving margins and operating leverage. For the 3-year period spending 2025 to 2028, in particular, we are targeting to maintain a 35% compound annual growth rate in a macro-neutral environment, with a terminal adjusted EBITDA margin of around 25% in 2028.

We 2025 was a year of tremendous effort and perseverance across the company, and I want to thank the teams at Upstart for their continued dedication to the cause. On a personal note, I'm excited and grateful for the opportunity to be a part of this leadership transition and to contribute to the next phase of Upstart's journey.

I'm also very excited to welcome Andrea to the finance chair starting next month, where she will unquestionably be raising the bar. And on that note, I would like to now pass things back to the operator to kick off the Q&A. Operator?

[Operator Instructions] We'll pause for a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Dan Dolev with Mizuho Securities.

Outstanding quarter like really, really strong congrats. I have a quick question and then a quick follow-up. So growth was really, really strong. in autos and HELOCs in Q4. So how did you manage to reduce the balance sheet loans? And then I have a quick follow-up on that one.

Dan, this is Dave. Yes, thank you. Yes, we were happy. We've been telling the market for a while that the balance sheet loans for the purpose of incubating these newer products and making sure the models were right and beginning to line up partners.

And we lined up quite a few of them. I think we said 70% of these products were funded by third parties and off our balance sheet. So we've kind of achieved lift off on that now. And when you sort of put all the numbers together, that meant not only really fast growth in both of those product areas. But at the same time, the amount of loans on the balance sheet dropped and we expect that trend to continue.

So it's just a matter of doing what we've told the market we were doing. And even that acceleration we saw in the fourth quarter in both HELOC and in auto, despite that, we were still able to actually reduce the loans in the balance sheet.

So I think that's a good signal that we're doing what we said. These products are now mature in the market. We have another dozen or so investors or lenders that are going to participate in those parts of our business in 2026. So we're in a great position with them right now.

That's amazing. And then a quick follow-up on the UMI guys. Like how much conservatism is built into your UMI guidance? Like can you maybe give us like a rule of thumb, your might gets better than your underwriting should improve dramatically. Something like that, I think, would be helpful.

Yes. Great question. This is Paul speaking. Our guidance always assumes a constant UMI. So we wouldn't necessarily say it's either conservative or aggressive. It's just really our very best estimate of what the UMI is And the UMI itself is as a reminder to everyone. It is our measure of the background consumer risk when you hold constant, all of the variation in loans, all of the variation in consumers.

And it gives us what we think is the fastest and most precise read on the background level of consumer risk in the economy.

We'll go next to Kyle Peterson with Needham.

Great. I want to start out on the guide. I noticed you guys guided for -- it looks like EBITDA margins to be down a bit in '26. So I want to see, is this a function of like mix as the balance sheet has been run off a little bit, which is obviously like a positive trade-off? Or are there any like notable investments or something you guys are making in the upcoming year? Just any color there on the EBITDA margins would be very helpful.

Yes. Thanks for the question, Kyle. Yes. So on the topic of the margins that we guided to, we guided to a contribution -- or sorry, to an adjusted EBITDA margin, but of course, baked in there is an implicit set of assumptions about how contribution margin will move. And in my earlier remarks, I described some changes that we've been expecting and planning for on contribution margins.

That's a result of a few different factors, all of those intentional and all of those, we think, actually long term, very healthy for the business. There's basically 2 different things in there. One is a changing mix where we're expanding into the largest markets for consumer credit. These are some of the secured products and these products the loans are much bigger. The profile of the product is different and you tend to have lower take rates in these products, but the TAM that you get access to are just enormous many, many times larger than in just pure unsecured or pure personal loans. So a very good thing for us to have great winning products in those categories.

And the second is that, frankly, I think relative to just the last couple of years, we've gained the ability to be able to take a longer-term view of our customer, the value of acquiring customers, the value of building up our brand and our reputation for being the very best place for consumers to shop for credit.

And we want to lean into that. We want to press our advantages that we've got in the market in terms of having best rates and best process and really just sort of cement our reputation for having that best credit product for customers, and we think that is going to ultimately be winning in the long term.

Now in the short term, that both of those things, the change in mix and taking those longer-term considerations into the mix does, of course, have some impact on the margin. But we think ultimately, that's going to be a very good thing for the business.

Got it. That's really helpful color. So I appreciate that. I guess as a follow-up, I wanted to touch a little bit on private credit and some of the capital partnerships. In the last few months, there's been some spookier headlines about the health of some of these providers, whether it's due to credit exposure on either the consumer side or software exposure or something like that.

But I want to see -- it seems like the pipeline in -- for funding is -- remains really strong there. So I guess is I guess that correct? Is there any change in health or appetite for the consumer credit in the paper that you guys are underwriting? Just any color on how those conversations are going would be great.

Kyle, it's Sanjay here. A couple of thoughts. So first of all, I would say we're very deliberate about who we engage with in the private credit world and I think that we can probably limit our observations to the ones we work directly with. But for those partners that we're working with, I would say that these are counterparties that do deep diligence on both the credit and on us. I think they do their job really well, and I think they take the credit as seriously as we do.

And I think our best reflection of how all of that credit is performing is in how we are assessing our own co-investments in those relationships and as you could see in the earnings materials, they are performing better and better.

And so I think that's probably just a reflection of the kinds of partnerships we've made and the kinds of co-investments we've made together, but everything is, I think, in very good shape with respect to the direct partnerships we have.

Next, we'll go to Simon Clinch with Rothschild & Company Redburn.

I'm kind of curious just your thoughts around the general environment for the consumer, particularly as it potentially of what your models are seeing. In the third quarter last year, you talked about how there are some sort of slightly sort of uncertain signals that sort of materialize in the model and the model reacted. There's been a lot of volatility in the fourth quarter.

There's been some sort of some news that maybe there's been some constraints put by some of your peers perhaps? And I was just wondering if your model saw anything if you react in any way or any sort of signals that are work sort of notify.

Yes, thanks. The health of the consumer is good. We in the UMI values return to what I call post-COVID normalization, which is sort of a long-term multiyear stable to down trend that has been really playing out since the consumer really took a hit back in 2022.

And it is true back in Q3, we had detected a real ultimately temporary increase in the background level of consumer risk. We think back in Q3, our models responded to that appropriately, but that has since faded. And I think we're back to the broader trend that we've been in for the last couple of years, which is which is a bit of normalization to where consumer health was before COVID and kind of stimulus to consumers to an unusual place.

But in short, I think there is always a lot of noise out there about macro and volatility, but if it was showing up in any way in borrower behavior, we picked that up first in UMI. The really good news is that UMI has been showing really good and solid patterns for the consumer lately.

That's great. And just as a follow-up, with the -- particularly with the likes of auto and now moving into home, when we think about the long-term market share opportunity in businesses like this, where it's much larger loan sizes, much larger TAM. I know Dave, you talked about, I think, in the past, aspiring to be like double-digit share in auto.

And I was just wondering, has anything changed in the environment that means that those kinds of targets are perhaps not achievable or are they very much in your size?

I think they're very much in sight. I mean 5x growth in a year, certainly auto and HELOC as categories grew a tiny, tiny fraction of that, meaning we gained rapid market share in 2025. I would say generally that look, our view is that AI-enabled lending as a specialty is going to be the dominant market share in all of these categories, probably a decade from now.

And so maybe the question is, if you're an investor or analyst trying to understand this, is everybody just going to develop this? Or are there going to be real leaders in developing sufficiently different AI models that they become giants. And that's what we intend to do.

We're -- we don't think there's anybody else building the sophistication of models that we are. And we think the economics make it inevitable that an AI-centric platform will be used to originate the majority of loans in these categories over time.

So for us, it's not a question of whether AI will dominate in these categories, it certainly will. The question for us, and for everybody, of course, is what fraction of that will belong to Upstart in our platform, and we're, of course, quite bullish on that.

We'll next go to Peter Christiansen with Citi.

First congrats to Paul. Great to see you transition here. Also congrats to Dave and Sanjay and the team and looking forward to meeting Andrea. And certainly, I want to applaud the added transparency with the monthly disclosure should go a long way towards reducing some volatility in the stock.

My question is your perspective generally on the personal loan market. I -- there's some who opine that maybe there was a bit of saturation, a lot of growth last year. Just curious where -- how you see that perhaps accelerating or normalizing in '26? And what do you think that means for Upstart and their selectivity? And then I have a quick follow-up.

Thanks, Pete. Good to hear from you too. On personal loans and the sort of competitive market there, I think I would say I don't think we necessarily build our business around any assumptions about how the whole market is growing or not growing. But I do think personal loans are extremely useful product. They've generally grown nicely.

But for us, it's all about winning market share. We think we're growing very nicely on our market share. Our product is competing extremely well better than ever on both the basis of rates and process. And we increasingly -- when we do market intelligence, it suggests that, that level of competitiveness is getting better and better over time.

And we're really just in a position, I think, to press and cement that advantage, and that comes from the differentiated technology that we've built. We're going to keep investing in that, widen that lead. And ultimately, that's going to translate into an even bigger lead on best rates and best process for the consumer, and we think that's going to transfer to a bigger and bigger market share in a category that is really useful and important for a lot of people.

That's helpful. And then as you think about the first half of this year, it's not a Big Beautiful Bill, tax refund, no tax on tips, those sorts of things. Likely benefit the consumer shorter term and likely improves credit performance, at least the seasonality aspect of it, do you think that potentially may put a crimp in demand for term demand for personal loans?

Yes. Good question. Generally, borrowers and therefore, we will benefit from looser economic policy that helps consumers. While you're right that when people have more money, there may be marginally lower demand for credit, the much bigger factor in our business, the reason we ultimately end up really aligned with our consumers on their level of financial well-being is that the dominant factor in our business is our ability to approve people for competitive affordable rates.

And that is much easier when people are in a healthy financial spot. So whether it's through interest rate cuts or tax bill changes or other policy changes that make life more affordable for the Media American, and those tend to flow through and be really beneficial to our volumes and business.

And we'll next go to Mihir Bhatia with Bank of America.

Good afternoon. On a second, the congratulations to the team, especially, Paul, also taking the comments on added monthly disclosure. I think the market will appreciate those.

Now in terms of my question, the first question I had was I just wanted to double click in on a statement you made about -- I think you mentioned an increased weighting in lifetime value, which drives lower take rates.

Can you just expand on that? Is really what's happening there are you considering repeat loans there? Or is that more of a product mix comment? Just trying to understand that and what that means as we think about 2026 and into the medium-term guide.

Yes. Thanks, Mihir. Yes. So that comment, I think, both Sanjay and I made reference to that. And it really was referencing the decline in contribution margins over the past year. And the really like -- the important thing to take away is that, that decline is expected, it's intentional, and it is the result of a few different things. One of those is a changing mix into these much larger product categories, but another one is the one you flag, which is the increased consideration of longer-term value coming from both customers and our business.

And really, you can just think of that as it's a little bit like, we think Costco is like a much more valuable and bigger business than Whole Foods. I think we could certainly charge like Whole Foods because we just have such differentiated products to offer the consumer. But we don't want to take all of that surplus even when we can. Now obviously, if we need to, I think we could like in some years past, but we think we can ultimately build a much bigger business, getting more of the value to the customer and just winning a much bigger share of the market being the very best product, saving people and amount of money that's really share worthy. And so we're starting to do that.

Got it. And then as my follow-up, I wanted to ask about the partners you're signing up for some of the newer secured products. firstly, kudos of getting the balance sheet smaller, I think that's a good sign.

But like just maybe just expand on the partners you're signing up for the secured products. Are they different? Are they -- is this more banks? Are they less yield, I guess, focused or is it like pretty similar partners as you have on the personal loan side?

Mihir, this is Sanjay. Yes. I would -- I guess the short answer is it's all of the above. In all of these markets, there's a traditional super prime segment, and there is relative to the existing markets, riskier segments.

We've got depository institutions like credit unions and banks that are now working with us. And in the institutional world, we have a mix of existing partners who expanded their scope with us. And then some new partners as well who are maybe more specialized or focused in these specific secured segments. So as usual, we are building a very broad resilient supply chain that's designed to be essentially the broadest risk aperture in the segment.

And we'll next go to John Hecht with Jefferies.

Congratulations to the team for the executive evolution. First is just a quick modeling question. I mean, I assume the tax rate now, you've been profitable for a few quarters. What -- is there anything you could tell us about your expectations for the tax rate next year?

John, I would expect that our operating loss carryforwards will continue to be in force for 2026.

Okay. And then you guys talked about ABS markets and forward flow. And I think some of the bank and credit unions have been consistent buyers over time, too. But maybe can you give us an update on that channel? And any kind of expectations for changes there?

John, are you referring specifically to the ABS market or the bank channel?

Well, I'm interested in any changes to the bank and saving -- excuse me, and credit union channels and their appetite for purchasing loans.

I see. I think that the existing set of partners we work with in study buyers, and I would say, a sort of steadily increased appetite. As we scale up in these newer secured categories, I think they attract the interest of maybe a larger size institution. Certainly, the bigger size of bank than has been interested in unsecured lending. And so we're starting to develop those relationships in a very interesting way.

All right. And then you had pretty good growth in the core product both in the -- well, you had a good growth in the core product and the super prime product. Any -- and I know you talked about the average loan size, but anything you could talk about in terms of duration or other characteristics that we should be thinking about?

Let's see, duration in our core business has been pretty steady. A mix of 5- and 3-year terms. Obviously, the secured products have a slightly longer duration. So as they become a larger fraction of the mix, they will pull the duration up a little bit. But I think that they're still at a scale for such that their effect is not particularly meaningful.

And we'll go next to Reggie Smith with JPMorgan.

And Paul congrats on the promotion. And Dave, I had no idea you were 60. You're like Benjamin Buttons, aging backwards. But congrats on the move up as well. My question, I guess, you guys have approved like more than 2 million loans over the last 2 years.

And I'm curious like how you guys would rate or think about your engagement with those borrowers during the repayment period, specifically with an eye towards selling additional loans and products. And I ask because I look at your app, and it seems like there are probably some low-hanging fruit from a feature perspective that could probably increase engagement. But I don't want to, I guess, kind of mistake that. So I'm curious how you guys feel about that.

And you also mentioned LTV during your prepared remarks, is there any stats you can share around recent trends there because I'm curious what the repeat usage is or what's giving you confidence that the LTV is kind of bending and the right direction?

Well, Reggie, you've got a good eye and we do have a lot of job openings if you're looking. So I mean you're absolutely right. There is a lot of low-hanging fruit there. We are relatively early in our journey to really building on the engagement of our customers once they've taken out their first loan.

We do have a lot of people that take out second loans in the same product or second loans in another product. But it's really a relatively nascent program that we've built and we don't even have it fully rolled out. We have more limited mobile cross-sell capabilities today. So there is a lot of low-hanging fruit, and we actually think this is going to be a very significant source of upside in the next few years is really getting that whole ecosystem working.

We are starting to invest in it very seriously, both on the tech side, but also as we talked about in the contribution margin discussion on how we just think about the value of acquiring a new first-time customer. We don't have any metrics on this to share yet. But certainly, as this becomes more important, that's something that we'll consider.

Got it. Okay. No, that makes sense. If I could add one more. I guess I'm looking at the mix of loans this last year. And obviously, you've grown your mix of super prime. I see R&D auto HELOC all increasing in ratio, but they haven't increased a whole lot and the platform referral fee take rate has come down a lot this year.

And so I'm trying to think about -- it sounds like these are going to be bigger pieces of the book, trying to get a sense for where this take rate can kind of go because it would seem like it's not really in the run rate just yet, but my numbers could be. Any color you can provide there would be great.

Yes, Reggie, there's a few dynamics going on. First of all, the newer businesses grew really quickly from a small basis. But the core business -- the core personal loan business growing very quickly itself. So the percentages there didn't like move as much as one would imagine when you get that kind of growth. But again, it's somewhat of a rich problem to have that all the products are growing really quickly. I would say, generally, in the personal loan product, also the super prime segment, you can think of that as 720-plus is the fastest-growing part of that.

And when you put that all together, the percentage take rate would expect to be trending down. But at the same time, both super prime personal loans as well as these new categories tend to have larger loan sizes. The dollars that you're -- that we're getting from each aren't necessarily small, in fact, may be larger. So that's kind of the way to think about it.

The percent take rate in some ways, may become less useful as a metric because these other products can be much, much larger, particularly HELOC, for example, and have a smaller take rate, but actually, the dollar margin on them is quite large. So anyway, that's -- it's sort of a bunch of things moving at the same time.

Got it. If I could sneak one more in real quick. Does your guidance, 3-year guidance contemplate any new products? And I'm thinking something like a smaller duration high-velocity loan, like I see some of your peers doing these kind of payday loans, but I guess duration 6-week loans. Are there any other products that aren't out yet that we should be thinking about as feeding this guidance?

Yes, Reggie, I mean, I think we've got a lot of exciting ideas. But with respect to financial guidance, I think you can assume that, that will be largely earned off the back of our existing portfolio, including the new growing products.

Next, we'll go to James Faucette with Morgan Stanley.

I wanted to dig in a little bit on kind of the -- some of the profitability or how we think about contribution, et cetera. And when we -- particularly as you push more into auto and home and when you think about sales and marketing, how should we be anticipating things like target unit economics and borrow acquisition costs for those loans and products versus your traditional personal loans?

James, let's see. In terms of acquisition costs, a bit of a, I think, a unique story to each product. Auto, in particular, as you know, is not a D2C product outside of refinance. It's one where we have enterprise software being embedded at the point of sale in the dealership. And so there's a go-to-market cost there, but once you're working with the dealership then per loan acquisition costs can look very low.

And HELOC as well as a market where there's a big fraction of the market that is direct-to-consumer. And I think we would target a similar acquisition sort of margins per loan as we do in personal loans. Obviously, those loans are a lot bigger. So of course, a bit more dollar cost per loan.

And then there's a large fraction of the market that is done again through maybe B2B type points of sale, either through contractors or in branch at existing institutions. And so there is a bit of a mix there in terms of what is D2C and what is sort of B2B, if you will.

Got it. Got it. And before I forget, and as I suppose my second question, congrats to everybody a lot of exciting moves for everybody personally, it sounds like.

But on my second question, turning back to HELOC. Just curious are bars, are you getting any cross-sell from the existing funnel or from -- or is that from distinct acquisition channels? And then how do we think about the opportunity to cross-sell and how that may be built into your medium-term outlook and profitability targets?

Yes. We are absolutely doing cross-sell for HELOC. It's one of the most important strategies for acquiring HELOC today. And it's because a lot of people that naturally show up in our personal loans marketing have homes, and HELOC is just an incredibly efficient way to refinance other debt they have or get financing for a project they want to do. And historically, the reason more people didn't want to do HELOC as the process was so arduous. And as we increasingly automate that and make that our application to close process faster and faster.

Today, we're at about 6 days versus an industry average of that process gets a lot closer to a personal loan like process and with the much better rates. I mean it's just an incredibly attractive product for many overlapping customers. So absolutely, we do a lot of cross sell.

Our next question comes from David Scharf with Citizens Capital Markets.

Reggie stole my Benjamin Button's observation, but congrats as well. to Dave and Paul and the whole crew. I wanted to take a step back and maybe just ask you for a little more color or the thought process on the guide? And specifically, maybe 2 questions. First is, as you noted that there was a kind of pretty substantial 20% reduction sequentially in the on-balance sheet exposure.

As you look out 3 years, it's $2.5 billion of revenue, roughly, quite a bit of scale. Do you have a particular target in mind or how much balance sheet exposure you'd like to see when the business is at that level?

Yes, it's a good question. I don't think we sort of target a level of exposure. I think we think of it more as appropriately using our balance sheet as a tool to propel the business forward. And that, as we have said in the past, it primarily means incubating new product areas and proving out new parts of the model that we need to do kind of internally.

And a little hard to project it would sort of depend on what new products were in the market with at those times. But just to be clear, we don't aim to be a predominant balance sheet lender of any sort. We don't aim to have NIM, net interest margin, as anything dominant in our financials. So we are using it as a tool. Again, our expectation, and if you look at our guidance for 2026, you can see it's almost entirely dominated by fee-based revenues, and that's how we see our business going forward. But we don't try to make specific predictions on it.

We don't view a $0 balance sheet or 0 loans on the balance sheet as an ideal future state, it might, in fact, indicate we're not doing enough R&D or we're not innovating fast enough. So we always intend to use the balance sheet in that way.

And maybe just to add on to what was saying, David, maybe better said, our strategy, I would articulate on the capital side as being we want to build the largest and most resilient supply chain of third-party capital to power these businesses as we can.

And as you know, our personal loan business, which is very mature, has historically been well into the 90% plus range in terms of our ability to fund it with third-party capital, and we want to get these new businesses to the same place.

And I just want to say, I mean, one of the outcomes of incubating and doing it properly with our own capital is we have 100% retention of private capital partners. So they're depending on us to deliver a quality product that performs as it's supposed to. Part of that is, again, eating our own dog food, if you will, for a period of time.

And that has resulted in, as I said, 100% retention and I think a long list of other private capital or private credit partners that we can potentially work with in the future.

Got it. Understood. No, that's very helpful. And maybe just kind of one more follow-up. As we -- you think about the margin guidance for 2028, it's a notable roughly 400 basis point expansion from the 2026 level. Just trying to get a sense for how to think about -- I hate to use the word mature, you're not going to want anybody to use the word mature.

But nevertheless, somewhat mature advanced margins if there's a ceiling. I know the company had a few quarters above 30% back in the 2021 late 2020 [ date ]. Do you view 25% is an informal kind of steady state level of profitability at scale? Or should we just think of that as nothing more than a 3-year medium-term piece of guidance?

Yes, it's a great question. The short answer to all the questions is just operating leverage. We expect to grow fixed costs by a fair bit less than we're growing the top line and also a fair bit less than we're growing contribution profits.

Now we've answered a few questions about changes in the margin profile on the contribution side because of mix and getting into secured loans and lifetime value and all these things. And so that change within that 400 basis point move to that 25% EBITDA margin is really a whole bunch of different things that are happening.

But ultimately, it's like -- we are building a much bigger business at the top of the funnel. That business is being built in categories that have slightly lower take rates and therefore, a lower contribution margins. But that will still significantly outgrow our increase in fixed expenses. That's partially just because naturally, we don't need we don't need to linearly grow all the fixed functions as we grow the business. There's just natural operating leverage in the business. But it's also frankly because we're pretty bullish about just how much productivity lift.

We're already getting and will continue to get from adoption of AI internally and that we expect to continue to happen and give even more give us even more operating leverage. So I definitely don't expect 25% to be some kind of terminal state. I think if you were to break those numbers apart, there's a lot of room for to keep going higher.

And at the limit, I think it can be approaching what contribution margins look like. And -- but just keep in mind that those won't be quite as high as they were, say, back in 2021, where the only thing we were really optimizing for was really like honing in on those profit levels as we're facing that macro pressure and top of funnel volumes were declining.

We'll take our next question from Kyle Joseph with Stephens.

Good afternoon, and yes, echo congrats to everyone. Most of my questions have been answered, but just kind of want to get your take, obviously, AI, at least in the last few weeks has been really disruptive to the market, whether it was software originally or data services or wealth management today.

But just kind of want to get your updated take on the competitive environment and how you see the proliferation of AI impacting things? Obviously, I consider you guys to have an advantage there. But any updated thoughts.

Yes. Thanks for the question. We've been doing AI and lending long before really AI was even a term or people were talking about this in other contexts and categories.

So I think we'd be really happy to see more players come into the AI lending world. I think it's still pretty thin ranks over here. And I think it's just good for the industry, it's good for the consumer, and we'd certainly welcome it. I think ultimately, if and when that happens, it's going to be a technology velocity question, and that's the kind of competition we like to be in, which is one where we think we've got a 12-year head start across data, across algorithms across infrastructure. But we're really still very, very early in the application of AI to this business and the industry.

And so we expect our technology to get much better at a rapid pace. We talked a little about the amount of data that we have collected and how fast that's growing. We just cleared 100 million training data points over really the first 14 years of the company's life, but the next page is going to come that much faster. That unlocks all of these proprietary algorithms that we've been building for all these years and lets us build more complex models that just can't run on smaller amount data.

And then wrapped around that is this infrastructure layer where as you get these more powerful models with much larger amounts of data, you just need the ability to deal with more memory problems, more latency problems, more cost problems, and you have to build a bunch of engineering infrastructure around that. And so it's definitely the sort of problem with a natural technology flywheel in there. And we think we've got both the best starting position and the fastest velocity. And -- so I think it's -- as more people get into this, we think that's going to be good for the consumer, and we think we're going to still be in a very good position to compete.

We'll go next to Rob Wildhack with Autonomous Research.

And congrats on all the new roles. On 2026 and the outlook there. You're exiting '25 at like a $300 million quarterly revenue run rate. You've got 1Q that's kind of a seasonal low say that's another $300 million.

That would mean you have to average like $370 million in quarterly revenue for the rest of the year. And the high watermark for the company ever was, I think, $310 million back in '22 per quarter. So I'm just curious how you see this all coming together in like the revenue and I suppose volumes to ramping and accelerating throughout the year.

Rob, it's Sanjay here. I think of your back of the envelope math is roughly right. I've checked it specifically, but yes, I think you can assume that Q1 will be one with a bit of seasonal headwind and then from there, we'll continue our growth clip.

And our growth story, hopefully, is familiar by now, but I think we've got a pipeline of exciting model wins and growth wins lined up to continue improving our funnels and allowing us to grow our campaign sizes at constant CAC, which will power our core business, allow us to continue taking share.

And then, of course, we've got these new products that, as Dave said, have been sort of released into the wild now we -- I think we made in hindsight fortunate decision to continue investing in them. And now you're seeing the fruits of that labor.

And I think they'll really begin to contribute in 2026 as well. So I think the combination of all of those things has us and our internal model is feeling pretty good about that.

Okay. And then a similar question on '28. Can you connect the 35% revenue CAGR to volume growth? I know you're not going to give like a '28 volume estimate, but just contextually, like how much of the 35% revenue growth do you see coming from maybe personal loans versus growth in the other products like home and auto?

Well, yes, we're obviously not sharing a more specific mix breakdown nor frankly do I think we could honestly tell you the exact mix in 2028. Now obviously, our new products are growing very fast. They're growing off smaller bases, but they are growing much faster than personal loans. So they're going to be a much larger share than they are today just because they're huge, they're huge markets.

And ultimately, and I can't tell you if ultimately it's going to be in '28 or a few years after that. But I do think, ultimately, those products are going to be bigger for us in personal loans just because the addressable markets are that much bigger. And so it's sort of a question of getting there from here. And I think we're going to keep growing very fast all the years between now and then. And I think it's going to be a race between all of the categories, HELOC auto and unsecured and we're going to be doing cool stuff in all 3. The tech is going to get better in all 3.

And the product is going to be just very, very competitive for the user on both best rate and best process. So I think it's anyone's race to win.

And for our last question, we'll go to [ Arvind Ramani ] with Truist.

I did want to follow up on the question on AI. And we've talked about this before. upstart has been working on AI for a very long time now. But the question I had is, with some of the broader advancements in AI, there is Upstart like sort of like able to sort of leapfrog what -- what are some of the advancements -- broader tech advancements have enabled you to kind of leapfrog some of the kind of AI kind of programs you all had internally And are there any segments where you are feeling a little bit more exposed just because like something that was special that you've developed is not more broadly available?

Thanks for the question. We're really big fans of all the progress in AI. It's a huge benefit for our business in a few different ways. We don't feel threatened remotely by it. We actually feel extremely grateful for it and I'll kind of explain why. So I would say just from the perspective of do we feel threatened by it.

I mean the simple answer is just that a lot of the advances in AI are really good for work that humans are naturally good at. And I think that's what makes it really exciting. So what makes it really useful for so many different kinds of applications. But unfortunately, humans have never really been very good at precisely underwriting loans and figuring out the cash flows they're going to produce for the next 5 years. And that's something that has always been solved as a big math problem, better solve this big math problem. And so it's not something that you can just do because you have a language model that replicates human behavior, well, again, not something that humans are naturally good at.

In order to solve this problem well, you need to have some pretty specific kinds of data that connect lots of information about people at the time they want loans historically with what happens later in the lives of those loans.

And then you need very specific kinds of algorithms to connect those two things in a way that is going to maximize your signal extraction and that's what we've been working on for 12 years. And now turning to like why we're so grateful for all the progress. Well, one reason is actually that a lot of the advances in basic infrastructure or some of the basic types of algorithms that we then innovate and build on actually coming from all of this progress in AI.

When you read about how many billions of dollars are going into funding all the R&D there, some of what comes out of there are just better kind of base algorithms or better kinds of infrastructure that then we get to use. Of course, you think about chips and compute and memory and all of the progress there, like we benefit from all of that. But then at the actual application layer like the types of models you actually need are just totally different. The types of data you need is totally different. So we sort of get the benefits, but we aren't really aren't really threatened.

Now we do also get to use -- directly benefit from and use a lot of the AI technology that's now coming out we get to use that in new ways, ways that are different than what I thought -- think of as these big math problems that traditionally, we were really good at solving.

We now get to do things like if you think about something like HELOC, and how you automate more and more of HELOC, will naturally because so much of the process of securing and perfecting a lean, checking like the property records like a lot of that stuff is mess in a human way and traditionally comes with very high operations cost because you have a lot of people that are checking to make sure things are right.

Those are actually perfect problem to throw sort of LLM style AI against. And so we're doing a lot of work like that now. And that's actually going to help us get the rates of automation much higher in the business than would have been possible, say, 5 years ago. And we absolutely are excited to be at sort of forefront of applying AI in those ways. Of course, also, that's relevant to how we operate and how we make ourselves productive as a team. really relevant to the question of ultimately how much operating leverage the business gets. I think in all those places, we're super, super optimistic about AI.

But ultimately back to the question of like how much does it threat. And what we've built over the last 12 years, I would say it's a huge boost, not at all a threat.

Great. And just -- that's really helpful. Just last quick follow-up on that. In terms of like kind of the AI apps and tools, right, I mean, you'll kind of use open eye, anthropic, lovable cursor, like who are your big I partners?

I mean we are happy to use we use all these models from all of the foundation model providers in the different kinds of uses that I described. But when it comes to the models that we use in our core lending business, those are all proprietary to us. They're ones that we've been building for the last dozen years or so. And those are not things that -- they're not directly built on top of anybody else's technology. And that's really because when I say that we benefit from some of the base algorithm innovations. It's like there are -- there will be a paper about a new kind of neural network, and we'll certainly ingest that we'll try out that new type of network.

But actually to make it work as well as our models do on loans, you have to make a whole bunch of modifications to it to make it care about the right kinds of things naturally like you don't want it to be naturally interested, for example, in getting something right only in a 1 or 0, which a lot of these models are naturally set up to do.

You wanted to really care about the whole series of cash flows, the timing of cash flows, like exactly how many dollars in sense. And -- so you have to change a lot of the internal math of these things to make them really optimal for our problem. And so those are all proprietary algorithms that we've built over many years.

Okay. And so that means the message I can take away is that you all have -- your tech stack is kind of so unique to you all that even if there's some advancements out there, no one can just like kind of just strip together the solution. This needs to be stitched together by hand. Like this is not like easy to replicate.

100%. Again, it's really important to just remember that the LLM models coming from Anthropic or OpenAI or any of the others, Gemini. They are really good at solving problems that humans are good at solving and they can do it at scale. They can work 24/7. You can spin up 100 of them in parallel and have them work.

But no matter how many humans you have, you don't want that army of humans underwriting loans for you.

I'd now like to turn the call back over to Dave Girouard for any final or closing remarks.

All right. As we wrap up, I just want to thank each of you for your time and attention over the past few years. As I said earlier, my time as the CEO of upstart is something that I will always cherish. I couldn't be more bullish about the company's future under Paul's leadership.

We are really just getting started and now more than ever, those who stay will be champions. Thank you for joining us today.

This does conclude today's call. We thank you for your participation. You may now disconnect.