What Upstart (UPST) Said on Its Q3 Earnings Call

Key Points

• Q3 performance was strong operationally: Originations rose 44% year over year to $4.1 billion, while fee revenue increased 41% to a record $364 million. Contribution profit reached $218 million, with the margin improving to 60%.
• Secured lending turned profitable ahead of schedule: The segment achieved a 17% contribution margin, compared with negative 35% in Q2, supported by higher third-party loan sales, improved automation and better execution.
• Macroeconomic pressure reduced the outlook: Higher interest rates, funding costs and consumer-credit risks led Upstart to lower its full-year total revenue forecast to $1.35 billion and adjusted EBITDA forecast to $260 million, although fee revenue and contribution profit are expected to exceed original guidance.

Upstart NASDAQ: UPST reported third-quarter results marked by record contribution profit, accelerating fee revenue and a shift to positive contribution margins in its secured lending products, while worsening consumer-credit conditions and higher interest rates prompted the company to reduce its full-year total revenue and adjusted EBITDA outlook.

Co-Founder and CEO Paul Gu said the company’s execution in technology, marketing and product operations continued to drive growth, but macroeconomic pressure weighed on originations and the value of loans and related investments held on its balance sheet.

“We see fee revenue and Contribution Profit finishing higher, but total revenue and Adjusted EBITDA finishing lower,” Gu said. He attributed the divergence to the outsized effect that economic conditions have on balance-sheet-derived revenue.

Third-Quarter Results

Total originations rose 44% year over year to $4.1 billion. Unsecured originations increased 33% to $3.5 billion, including approximately $2.45 billion of core personal-loan originations. Secured originations climbed 194% to $587 million, with auto-loan volume roughly tripling and home-loan volume roughly doubling from a year earlier.

Total revenue increased 34% year over year to approximately $371 million. Fee revenue reached a record $364 million, up 41%, while net interest income and fair-value adjustments totaled about $6 million, down 65% from the prior year.

• Contribution profit was a record $218 million, up 48% year over year.
• Contribution margin rose to 60%, compared with 57% a year earlier and 55% in the second quarter.
• GAAP net income was approximately $37 million, up 15% year over year.
• Diluted earnings per share were $0.33, based on a weighted average diluted share count of 125 million.
• Adjusted EBITDA was approximately $89 million, up 26% year over year, representing a 24% margin.

Chief Financial Officer Andrea Blankmeyer said fee revenue benefited from a higher take rate, which increased to 8.8% from 8.2% in the second quarter. The improvement reflected a mix shift toward core personal loans in unsecured lending and stronger loan-sale execution, higher sell-through and monetization efforts in secured products, she said.

Secured Lending Reaches Positive Margin

A key development in the quarter was the company’s secured lending segment reaching a positive 17% contribution margin, compared with a negative 35% in the second quarter. Upstart had previously targeted positive secured contribution margins by the end of 2026.

Gu said the company increased sales of secured loans to third-party capital partners, improved loan-sale terms and expanded automation. Nearly 40% of funded home loans were fully automated during the quarter, compared with less than 5% a year earlier, while the fully automated rate for auto secured personal loans rose to 21% from 4%.

Upstart also rebuilt its auto retail credit application, which Gu said increased end-to-end conversion by 31%. The company plans to focus on maintaining secured contribution margins between breakeven and 25% as it prepares to shift more attention toward growth in 2027.

Gu said auto-loan volumes declined sequentially in part because management directed the secured-products team to prioritize profitability. He also cited macroeconomic pressure, including interest rates and borrower health, as a factor affecting secured-product demand.

Macro Conditions Pressure Outlook

Upstart’s Macro Index, or UMI, averaged 1.50 during the third quarter, up from 1.41 in the second quarter. The company uses the index as an estimate of how economic conditions affect personal-loan defaults. Gu said Upstart responded with more conservative underwriting.

The company estimated that, without the nine-point increase in UMI during the quarter, originations would have been at least $370 million higher. Under that scenario, Upstart estimated year-over-year origination growth would have been 57% and contribution profit growth would have been 61%.

October originations were approximately $1.25 billion, down 9% sequentially but up 26% year over year. Blankmeyer said higher UMI levels and benchmark-driven increases in funding costs pressured October volume after being reflected in customer pricing.

Upstart now expects full-year fee revenue of approximately $1.32 billion, total revenue of approximately $1.35 billion, contribution profit of $750 million and adjusted EBITDA of approximately $260 million. The updated outlook assumes UMI remains at or below 1.55 through year-end and that two-year Treasury yields do not materially change.

The revised revenue and EBITDA forecast compares with the company’s prior outlook for $1.4 billion in total revenue and $294 million in adjusted EBITDA. Management said fee revenue and contribution profit are now expected to modestly exceed the company’s original guidance, while net interest income and fair-value adjustments are expected to fall short because of macroeconomic conditions.

Capital Efficiency and Upstart Bank

Upstart continued to reduce direct balance-sheet exposure. Loans held directly on its balance sheet represented 4.8% of total loans outstanding in the third quarter, while more than 95% of loans outstanding were funded by third parties.

Total equity capital used to support the platform represented 9% of total platform loan balances outstanding, down from 11.6% a year earlier, according to Blankmeyer. The company said approximately 60% of platform funding came from committed capital partnerships in the third quarter, a level it expects to remain broadly stable in coming quarters.

Management said Upstart Bank remains on track to open in early 2027, subject to remaining regulatory approvals. The company plans to capitalize the bank with approximately $404.1 million in cash and servicing assets and use brokered deposits to fund loan purchases and new originations.

Blankmeyer said the bank is expected to retain certain economics currently paid to originating bank partners, resulting in modest improvements in take rates and net interest income. Using its third-quarter balance sheet as an illustration, Upstart said the planned transactions could result in pro forma consolidated unrestricted cash of more than $1 billion.

About Upstart (NASDAQ:UPST)

Upstart Holdings, Inc NASDAQ: UPST operates an artificial intelligence-powered lending marketplace. Its platform connects consumers seeking credit with banks and credit unions, using data-driven underwriting models designed to evaluate applicants beyond traditional credit-score-based methods.

The company provides technology for several lending categories, including personal loans, automotive retail and refinance lending, home equity lines of credit, and small-dollar lending. Upstart's platform supports financial institutions with application processing, risk assessment, loan origination, and related automation, while offering consumers a digital borrowing experience.

Founded in 2012, Upstart is headquartered in San Mateo, California, and primarily serves the United States.

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