Upstart reported earnings (see PDF presentation here) after the bell yesterday and overall it was a somewhat positive report, beating analyst expectations for both earnings and revenue.

But any good news was overshadowed by a weak projection for the current quarter. The fintech lender is now expecting revenue of $125 million in Q1 revenue versus expectations of $152 million.

Here are some of the key takeaways from the earnings report:

Q4 and FY 2023 at a Glance

Upstart’s Q4 2023 revenue saw a slight year-over-year decrease to $140.3 million, with a notable improvement in income from operations, which was less negative at ($47.5 million) compared to Q4’22’s ($58.5 million)??. This suggests a trend towards operational efficiency, although the company still operates at a loss. The full year paints a starker picture, with a 39% year-over-year revenue drop to $514 million, and a more than double increase in the loss from operations to ($257 million) from the previous year’s ($114 million)??.

Investment Areas and Product Efficiency

Upstart continues to invest in three key areas: providing the best interest rates, enhancing borrowing and lending efficiency, and expanding its footprint??. Their use of AI has led to more accurate risk differentiation than traditional lending models, which has resulted in 44% higher approvals and 36% lower APRs for customers.

Market Expansion and Diversification

Upstart has significantly expanded its partnerships with over 100 banks and credit unions, up from 10 at IPO, and increased the number of dealers offering its auto lending product to 88 from the previous year’s 27??.

Consumer and Credit Trends

The company keeps a close eye on macroeconomic indicators with its Upstart Macro Index (UMI), which launched in March 2023. As of December, the UMI stood at 1.652, with the macroeconomic risk to consumer credit remaining steady??. This index, along with other consumer trends, is an important part of the company’s forecasting and helps with adjustments to lending strategies.

Loan Performance

Upstart’s loan performance data suggests an expected delivery of approximately 13% gross returns for the most recent vintages, with a baseline return in line with a target of 9.0%??. Expected cash flows are now closely in line with target cash flows.

Social Impact and Fair Lending

Upstart is also making strides in social responsibility, particularly in closing the racial wealth gap. Their model approved 35% more Black borrowers and 46% more Hispanic borrowers than traditional models, at significantly lower APRs??.

Loan Originations

Total loan originations in Q4 2023 stood at $1.253 billion compared with $1.542 billion in Q4 2022. Upstart continues to improve the percentage of loans that were fully automated, in Q4 2023 that number was 89% compared to 82% in Q4 2022.

Q&A with Analysts

In the Q&A section of the earnings call, Upstart CEO Dave Girouard talked about tightening their credit box. He explained that while they have not fundamentally changed their approval criteria, the credit box has tightened, particularly for higher-income and prime consumers. This means that these consumers might face slightly higher rates or receive a smaller loan size than requested. However, they are generally still getting approved. For less prime consumers, the credit box tightening might lead to declines if their rates exceed a certain threshold, as these changes are part of the adjustments made when loss assumptions increase or credit models are tightened.

Girouard also talked about moving to a single application for credit where the resulting loan is the one that is best for the borrower It could be an unsecured loan, it could be one secured by some asset, maybe in auto or something else, it could also be a home equity loan. It will also depend on how much cash the borrower is looking for.

Overall, the analysts generally thought this was a decent earnings report. There are obvious headwinds in Q1, which is a seasonally slow quarter anyway, but the difference between expectations and what is now forecast is substantial.

That explains why Upstart’s stock price opened down almost 20% as of this writing.