Upstart (NASDAQ: UPST) Q3 2024 financial results analyzed and explained in detail

Upstart Holdings, Inc. (NASDAQ: UPST) reported financial results for the quarter and nine months ended September 30, 2024. The company’s revenues increased year over year, with particularly strong growth in fee income. On the other hand, service fees declined slightly due to lower loan balances. The company operates a cloud-based platform that provides an artificial intelligence (AI)-based consumer credit underwriting process.

Source: Unsplash

First, overall commission revenue increased to $167.59 million in Q3 2024 and $436.19 million for the full year, up 14% and 7%, respectively, from the same period last year. In particular, platform and referral commissions increased significantly, growing from $112.34 million to $134.19 million for the quarter and from $295.86 million to $336.65 million for the full year. This increase was attributed to higher transaction volumes, but was partially offset by lower service prices. Meanwhile, service fees decreased from $34.39 million to $33.39 million for the quarter and from $117.26 million to $99.537 million for the full year. This was mainly due to a decrease in loan balances serviced.

Interest income and fair value adjustments showed a net increase of $12.2 million for the third quarter of 2024 and a net decrease of $186.26 million for the full year, representing an overall increase of 46% over the same period last year. This is due to higher interest income and lower unfavorable fair value adjustments.

As for operating expenses, sales and marketing expenses increased from $33042 thousand to $43229 thousand for the quarter and from $88371 thousand to $111,337 thousand for the full year. This increase was mainly due to increased advertising and marketing activities. Customer operations expenses also increased from $36914 thousand to $39302 thousand for the quarter and from $114,301 thousand to $117,394 thousand for the full year, but as a percentage of sales decreased.

Engineering and product development expenses increased from $549,419,000 to $64,887,000 for the quarter and from $222,986,000 to $186,431,000 for the full year. In particular, a significant cost reduction was realized for the full year due to a reduction in personnel expenses. On the other hand, administrative and other expenses also increased from $53505 thousand to $59874 thousand for the quarter and from $156,616 thousand to $170,508 thousand for the full year.

Net loss improved from a net loss of $60758 thousand to an adjusted net loss of $3869 thousand for the third quarter of 2024 and from a net loss of $125826 thousand to an adjusted net loss of $47770 thousand for the full year. This was the result of excluding the impact of stock compensation expense and gains on extinguishment of debt.

With respect to liquidity and capital resources, the company held $445.3 million in unrestricted cash and $5 million in time deposits as of September 30, 2024. In addition, the company has $730.4 million of convertible bonds outstanding, including those maturing in 2026 and 2029. The company has also borrowed $170.1 million from the Warehouse Credit Facility, which it is using to purchase unsecured personal loans, small loans, and auto loans.

In terms of cash flow, for the nine months ended September 30, 2024, the company used $297.25 million in cash flow from operating activities, $159.81 million in cash flow from investing activities, and provided $50.54 million in cash flow from financing activities. In particular, cash flow from operating activities was significantly higher than in the same period last year, which was due to the timing of lending.

Source：finviz

Overview of Key Financial Metrics

Revenue and Revenue Breakdown

Period	Total Revenue (in thousands USD)	Platform and Referral Fees, Net (in thousands USD)	Servicing and Other Fees, Net (in thousands USD)	Total Revenue from Fees, Net (in thousands USD)
Q3 2023	146,755	112,437	34,318	146,755
Q3 2024	167,590	134,199	33,391	167,590
Nine Months 2023	407,585	295,859	111,726	407,585
Nine Months 2024	436,190	336,653	99,537	436,190

Factors Influencing Revenue Changes:

• Platform and Referral Fees: Increased by 14% in Q3 2024 compared to the same period in 2023, and by 7% over the nine months. This growth is primarily driven by an increase in transaction volume.
• Servicing Fees: Decreased by 3% in Q3 2024 compared to Q3 2023, and by 11% over the nine months. The decline is mainly due to a reduction in outstanding principal of serviced loans.

Interest Income, Interest Expense, and Fair Value Adjustments

Period	Interest Income (in thousands USD)	Interest Expense (in thousands USD)	Fair Value Adjustments, Net (in thousands USD)	Total (in thousands USD)
Q3 2023	37,692	(9,414)	(40,476)	(12,198)
Q3 2024	40,845	(10,818)	(35,477)	(5,450)
Nine Months 2023	116,923	(20,828)	(130,430)	(34,335)
Nine Months 2024	144,899	(33,002)	(130,523)	(18,626)

Factors Influencing Changes:

• Interest Income: Increased by 8% in Q3 2024 compared to Q3 2023, and by 24% over the nine months, driven by an increase in the average outstanding principal balance of loans held.
• Interest Expense: Decreased by 15% in Q3 2024 compared to Q3 2023, and by 58% over the nine months.
• Fair Value Adjustments: Improved by 12% in Q3 2024 compared to Q3 2023, and remained relatively stable over the nine months.

Operating Expenses

Period	Sales and Marketing (in thousands USD)	Customer Operations (in thousands USD)	Engineering and Product Development (in thousands USD)	General, Administrative, and Other (in thousands USD)	Total Operating Expenses (in thousands USD)
Q3 2023	33,042	36,914	54,941	53,505	178,402
Q3 2024	43,229	39,302	64,887	59,874	207,292
Nine Months 2023	88,371	114,301	222,986	156,616	582,274
Nine Months 2024	111,337	117,394	186,431	170,508	585,670

Key Drivers of Changes:

• Sales and Marketing Expenses: Increased by 31% in Q3 2024 and by 26% over the nine months, primarily due to higher advertising costs and personnel expenses.
• Engineering and Product Development Expenses: Increased by 18% in Q3 2024 but decreased by 16% over the nine months, influenced by the cancellation of certain expenses in the previous year.

Operating Loss

Period	Operating Loss (in thousands USD)
Q3 2023	(43,845)
Q3 2024	(45,152)
Nine Months 2023	(209,024)
Nine Months 2024	(168,106)

Summary of Operating Loss:

• The operating loss slightly increased in Q3 2024 compared to Q3 2023 but significantly decreased over the nine-month period, driven by revenue growth and improved cost efficiency.

Other Income and Losses

Period	Other Income, Net (in thousands USD)	Gain on Debt Extinguishment (in thousands USD)	Net Loss (in thousands USD)
Q3 2023	3,540	—	(40,315)
Q3 2024	5,078	33,361	(6,758)
Nine Months 2023	11,334	—	(197,734)
Nine Months 2024	8,993	33,361	(125,826)

Key Drivers of Changes:

• Gain on Debt Extinguishment: Increased significantly in Q3 2024 and the nine-month period due to the repurchase of a portion of the outstanding 2026 Notes, which contributed to a reduction in net loss.

Overview of Non-GAAP Financial Metrics

Contribution Profit and Contribution Margin

Period	Contribution Profit (in thousands USD)	Contribution Margin (%)
Q3 2023	94,154	64%
Q3 2024	102,376	61%
Nine Months 2023	257,699	63%
Nine Months 2024	259,635	60%

Significance of Contribution Profit:

• Contribution Profit is calculated by subtracting variable costs from total revenue, providing insight into the scalability and operational efficiency of the business.

Adjusted EBITDA and Adjusted EBITDA Margin

Period	Adjusted EBITDA (in thousands USD)	Adjusted EBITDA Margin (%)
Q3 2023	2,252	2%
Q3 2024	1,413	1%
Nine Months 2023	(17,836)	(5)%
Nine Months 2024	(28,182)	(7)%

Significance of Adjusted EBITDA:

• Adjusted EBITDA excludes non-cash items and certain expenses to provide a clearer view of the company’s core operational performance.

Adjusted Net Loss and Adjusted Net Loss Per Share

Period	Adjusted Net Loss (in thousands USD)	Adjusted Net Loss Per Share (USD)
Q3 2023	(3,869)	(0.05)
Q3 2024	(5,325)	(0.06)
Nine Months 2023	(37,207)	(0.45)
Nine Months 2024	(47,770)	(0.54)

Significance of Adjusted Net Loss:

• Adjusted Net Loss excludes stock-based compensation, debt extinguishment gains, and reorganization expenses, offering a clearer picture of the company’s actual loss from operations.

Liquidity and Capital Resources

Cash and Liquidity Position

• Cash and Deposits: As of September 30, 2024, the company held $445.3 million in unrestricted cash and $5.0 million in certificates of deposit with maturities exceeding three months.
• Convertible Senior Notes: The company has convertible senior notes totaling $730.4 million, with interest rates of 0.25% (2026 Notes) and 2.00% (2029 Notes), maturing on August 15, 2026, and October 1, 2029, respectively.
• Warehouse Credit Facilities: Up to $325.0 million for unsecured personal loans, $100.0 million for small dollar loans, and $50.0 million for auto loans. As of June 14, 2024, $170.1 million was drawn.
• Operating Lease Obligations: Total lease payments of $59.6 million, with $15.3 million due within the next 12 months.
• Loan Purchase Commitments: $66.8 million in loan purchase commitments and $8.0 million in unfunded credit line commitments.

Funding and Expenditure Outlook

• Cash Utilization: Current cash and operating cash flows are expected to cover liquidity needs for at least the next 12 months.
• Additional Capital Raising: The company may raise additional capital through equity or debt financing, which could result in shareholder dilution or additional debt burdens.

Cash Flow Summary

Period	Net Cash from Operating Activities (in thousands USD)	Net Cash Used in Investing Activities (in thousands USD)	Net Cash from Financing Activities (in thousands USD)	Change in Cash and Restricted Cash (in thousands USD)
Nine Months 2023	33,887	(88,562)	137,236	82,561
Nine Months 2024	297,257	(159,817)	50,540	187,980

Factors Influencing Cash Flow Changes:

• Operating Activities: Increased significantly in 2024 due to non-cash adjustments and changes in operating assets and liabilities.
• Investing Activities: Increased cash outflows in 2024 driven by higher loan purchases and originations.
• Financing Activities: Decreased cash inflows in 2024 due to repurchases of convertible notes and repayments of warehouse borrowings.

Upstart Holdings, Inc. achieved revenue growth for the period ending September 30, 2024, primarily driven by increases in platform and referral fees due to higher transaction volumes. However, servicing fees declined due to reduced outstanding principal of serviced loans. Operating expenses increased overall, with notable rises in sales and marketing costs, although engineering and product development expenses decreased over the nine-month period due to cost management efforts.

The company continues to incur operating losses, though these losses have decreased over the nine-month period compared to the previous year, aided by revenue growth and improved cost efficiency. Liquidity remains strong with substantial cash reserves, but future capital needs may require additional funding, which could result in shareholder dilution or increased debt obligations.

Cash flow analysis reveals a substantial increase in operating cash flow in 2024, primarily due to non-cash adjustments and favorable changes in working capital. However, investing and financing activities have seen increased cash outflows, particularly from loan purchases and debt repayments.

Overall, Upstart Holdings, Inc. is focused on revenue growth and efficient cost management, yet it continues to face challenges in achieving profitability. Sustainable growth and profitability remain key objectives moving forward.