Upstart Holdings - Earnings Call - Q1 2025
May 6, 2025
Executive Summary
- Q1 2025 was a strong seasonal quarter: total revenue $213.37M, up 67% YoY; adjusted EBITDA $42.58M (20% margin) and adjusted diluted EPS $0.30; GAAP net loss narrowed to ($2.45)M.
- Results beat consensus on revenue and adjusted EPS; contribution margin came in at 55% versus 57% prior guide, reflecting mix shift toward super-prime at lower take rates; net interest income outperformed guidance by ~$13M, driven by higher spreads and fair value gains as UMI trended down.
- Q2 2025 guidance: revenue ~$225M, adjusted net income ~$25M, adjusted EBITDA ~$37M; FY 2025 guidance raised to revenue ~$1.01B, net interest income ~$90M, adjusted EBITDA margin ~19%, with GAAP profitability in 2H and for full year.
- Strategic catalysts: $1.2B forward-flow partnership with Fortress, expanding committed capital; “AI Day” underscored modeling innovations (embeddings, automation) and funding resilience—key narrative tailwinds for the stock.
What Went Well and What Went Wrong
What Went Well
- Accelerating originations and funnel efficiency: 240,706 loans (+102% YoY); conversion rate rose to 19.1% (from 14.0% YoY); 92% of loans fully automated—an all-time high.
- Revenue and profitability improved: total revenue $213.37M (+67% YoY); adjusted EBITDA $42.58M versus ($20.34)M YoY; adjusted net income $31.19M.
- Management execution and innovation: “We continue to raise the bar in AI-enabled lending,” said CEO Dave Girouard; new embeddings introduced in underwriting; auto and HELOC originations grew rapidly; first instant approval for auto refi in 9 minutes.
What Went Wrong
- Contribution margin fell to 55% (from 59% YoY; and ~2pp below prior guidance) due to mix shifting toward super-prime with lower take rates and early-stage margins in new products (HELOC, auto).
- Variable costs rose sequentially vs slightly lower transaction volume; GAAP operating expenses $217.87M; contribution margin pressure tied to competitive segments.
- Macro uncertainties persist (tariff risk, reinflation) and funding markets remain noisy (ABS spreads wider), although committed capital relationships mitigated funding risk.
Transcript
Operator (participant)
Good afternoon and welcome to the Upstart First Quarter 2025 earnings call. At this time, all participants are in a listen-only mode to prevent any background noise. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I will now turn the conference over to Sonya Banerjee, Head of Investor Relations. Sonya, please go ahead.
Sonya Banerjee (Head of Investor Relations)
Thank you. Welcome to the Upstart earnings call for the first quarter of 2025. With me on today's call are Dave Girouard, our Co-founder and CEO, 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 the 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, Dave, over to you.
Dave Girouard (Co-founder and CEO)
Thanks, Sonya. Good afternoon, everyone. Thank you for joining us today. The first quarter was a strong one for Upstart, despite being our seasonally slowest time of the year. Platform originations grew 89% year-on-year, with model wins and improved borrower health combining with more competitive capital to drive meaningfully higher conversion rates. Our revenue grew 67% year-on-year, and our adjusted EBITDA reached 20% for the first time in three years. With fees generating 87% of our revenue, we were also right on the doorstep of GAAP profitability in Q1. Just as importantly, home and auto continued their torrid growth pace, with originations growing 52% and 42% respectively on a sequential basis. From our perspective, consumer financial health, as represented by the Upstart Macro Index, has been largely improving for almost a year now. Currently, it remains elevated but stable.
Our credit continues to perform well, and while we're vigilant with respect to any disruptions that recent government trade policy might cause, we're also confident that our ability to adapt to changing macroeconomic conditions is miles better than it was just a couple of years ago. In a time of trade disruption, we're also happy that Upstart is a 100% U.S. business that's 100% digital. Now I'll take you through some of the progress we made in each of our product areas in Q1. With our core personal loan product, originations were flat sequentially and up 83% year-over-year. We continue to make rapid improvements to our models that facilitate underwriting and automated approvals. Additionally, we continue to strengthen and diversify the capital supply that is the fuel of our business. These improvements have contributed to increasing our conversion rates from 14% a year ago to 19% in Q1.
We also reached an all-time high of 92% of loans fully automated, meaning the entire process from rate request to loan closing is entirely driven by AI-powered software with no human intervention by Upstart. While else being equal, we believe a faster automated process selects for better borrowers. Additionally, our best rates, best process for all mantra has really begun to pay dividends. In Q1, 32% of our originations were to super prime borrowers, which we, as well as the CFPB, define as borrowers with credit scores higher than 720. We measure progress against best rates not just by portfolio mix, but also by win rate versus competitors across the entire spectrum. In this vein, we've also made extraordinary strides in recent months. I'm excited to share more about this with you, which I expect to do at our AI Day event next week.
We continued to stack up model wins, putting more distance between Upstart AI and the rest of the industry. Since last we spoke, we introduced embeddings to our core personal loan underwriting model. Embeddings are a machine learning technique that converts complex, unstructured data into useful model inputs or features in ML speak. This is done by clustering data that have meaningful relationships, allowing seemingly random data to become valuable to predicting credit performance. For example, two consumers may have different credit cards, say an Amex and a Chase Sapphire card. With embeddings, our model can learn that these cards might reflect similar consumer behaviors. What makes this approach so powerful is that embeddings help us uncover subtle patterns that would be difficult or even impossible to identify otherwise. This leads to better model generalization, improved accuracy, and more informed credit decisions.
While embeddings are widely used in other domains like natural language processing, applying them to credit underwriting is entirely novel. We're excited about what embeddings can do to drive our risk separation metrics forward, and we're equally excited about the pipeline of modeling innovations in front of us in 2025. Last quarter, I told you that our auto business finished 2024 by growing originations about 60% sequentially. In the first quarter of 2025, originations grew another 42% sequentially, despite Q1 being the seasonally softest time of the year. In Upstart, auto lending grew almost 5x compared to a year ago. These increases were driven principally by model updates and pricing improvements. At the same time, our continued focus on cross-selling existing customers reduced acquisition costs for our auto refinance product by 57% quarter over quarter.
This mega improvement in CAC was driven, as usual, by improved conversion rate, which more than doubled sequentially in Q1. In Q1, we also saw our first instant approval of an auto refinance loan, where the borrower completed the entire process in a single session of just nine minutes. As far as we know, this could be the first instantly approved auto refinance loan in the world. This is a modest beginning, but sets us down the path of automation that has been so central to our success in personal loans. In the home lending category, we're thrilled with how quickly our HELOC product is maturing. In December, we ported our personal loan models for instantly verifying income and identity to our HELOC product. This increased instant income and identity verification for less than half of loans in Q4 to nearly two-thirds of HELOCs this past quarter.
This is an experience borrowers love. Instantly approved applications convert at more than twice the rate of those requiring manual intervention. It's also a strong demonstration of how our core technology can be generalized across credit categories. In Q1, we also finally launched the Upstart HELOC in California, bringing our footprint to 37 states plus Washington, D.C., now covering almost 75% of the U.S. population. As I mentioned earlier, in Q1, our HELOC originations grew 52% quarter on quarter and more than 6x compared to a year ago. We now have agreements signed with three lending partners for our HELOC product and have begun the process of moving funding off of our balance sheet. We expect this will take considerable time as we bring both depository and institutional capital to this category. Our small dollar product continues to perform well, with originations growing 7% sequentially and almost tripling year-on-year.
Our STL continues to be a critical customer acquisition tool, accounting for nearly 16% of new borrowers on Upstart in Q1. As I previewed back in February, in Q1, we moved to a single underwriting model for both of our unsecured products. This means the small dollar product is benefiting straight away from machine learning innovations such as embeddings that I described earlier. In Q1, we continue to work to modernize and scale our servicing operations. We are rapidly automating routine tasks like processing payment failures and check handling so we can spend human time on more valuable tasks. In Q1, we automated 90% of hardship applications, making the process more seamless for borrowers and more efficient for Upstart. Beyond the technology, the work we have done to prioritize direct collections efforts for borrowers at risk of default has continued to have a meaningful impact.
For example, in Q1, we realized a 50% increase in debt settlement acceptances by extending repayment terms for at-risk borrowers. In our auto business, we doubled our recovery rates year-over-year in Q1. We've been improving our data collection and structuring and servicing for quite some time now and expect to launch our first machine learning model in this area very soon. We're excited about the potential for ML in loan servicing to increase efficiency and reduce loss rates. This is the necessary step toward launching our servicing and collections as a highly differentiated standalone offering in the market, which we hope to do in the future. I'd like to quickly touch on Upstart's 2025 priorities that I mentioned to you in February. We're making great strides against this list, and I'm grateful for the many Upstartists who are putting their all into making this an incredible year for Upstart.
First, 10x our leadership in AI. Already, this year we've made great leaps forward both in process and substance that reinforce that when it comes to AI lending, Upstart is the category of one. Embeddings are a real breakthrough for our AI foundation model, and I'm convinced it will pay dividends across all of our products over time. Our pipeline of modeling wins is beyond robust, so I couldn't be happier about our progress here. Second, prepare our funding supply for rapid growth. We continue to have well over 50% of loan funding in committed partnership agreements. In early April, we signed our first committed capital arrangement with Fortress, who's an industry leader in private credit. Looking forward, we expect to add our newer products to these partnerships, which will greatly expand on the value and efficiency they bring to Upstart.
Additionally, we added 15 new lending partners to our super prime offering, growing capital 38% quarter to quarter for that market segment. Third, return to GAAP net income profitability in the second half of the year. We're on track for this right now and excited to demonstrate the leverage in our business as both our core and newer products expand rapidly through the year. Last but not least, giant leaps toward best rates, best process for all. Earlier this year, I challenged each of our product GMs to have the best rates against major market competitors for each borrower segment they serve by the end of 2025. Specifically, this means that our win rate should be higher than any other digital competitor in each of our products. This, of course, comes with the prerequisite of on-target or better credit performance as well as solid unit economics.
I'm pleased to share that we're running well ahead of this target, particularly in our core personal loan product. You'll hear more about this next week at AI Day. To wrap up my remarks today, I think much of the world has come down with a case of AI fatigue. There's just so much discussion and so many predictions about what AI will do or what it might do to the world, to our lives, and to our children's lives. I admit I rolled my eyes at some of the debates and the discussions as well. In Upstart's case, AI and its unique capabilities are unquestionably aligned with a better future for all when it comes to financial wellness. Improvements to our risk models and expansion of our product line mean we are reducing the price of credit for the world more and more each day.
If you're still unclear about the incredible opportunity for AI-enabled lending and Upstart's leadership in this vital category, I hope you'll join us next week for AI Day. I promise you won't be disappointed. Thank you, and I'd now like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q1 2025 financial results and guidance. Sanjay?
Sanjay Datta (CFO)
Thanks, Dave, and thanks to all of our participants for sharing some of your time with us today. Financially, the first quarter of 2025 came in slightly ahead of expectations with outperformance on the top and bottom line, going primarily to higher than anticipated net interest income.
The impact of the typically soft tax seasonality in Q1 played out largely as expected, and despite recent turbulence in the financial markets, the effects of the macro environment on credit performance has, in our estimation, remained relatively stable throughout the quarter and roughly consistent with our prior assumptions. Total revenue for Q1 came in at approximately $213 million, up 67% year-on-year. This overall number included revenue from fees of $185 million, which was up 34% year-over-year. This amount was in line with guidance, although from a mixed perspective, we outperformed our expectations in super prime borrower segment, resulting in higher overall origination volumes than anticipated at lower take rates. Additionally, net interest income represented roughly $28 million of overall revenue, exceeding our outlook by $13 million.
Approximately half of this amount came in the form of higher net interest spreads from our balance sheet as we passed peak charge-offs from older vintages, and half came in the form of unrealized fair value gains as the recently declining UMI trend worked its way into our various fair value marks. The volume of loan transactions across our platform was approximately 241,000, up 102% from the prior year but down 2% sequentially, and representing 163,000 new borrowers. Average loan size of approximately $8,865 nudged up from $8,580 in the prior quarter as the proportion of loans made to super prime borrowers increased.
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 55% in Q1, down 6 percentage points from the prior quarter and 2 points below guidance, largely due to the lower take rates realized in the primary borrower segments where we exceeded expectations. GAAP operating expenses were roughly $218 million in Q1, down 3% sequentially from Q4. Expenses that are considered variable relating to borrower acquisition, verification, and servicing were up 7% sequentially relative to a 2% decline in transaction volume, which is reflective of the lower contribution margins previously referenced. Fixed expenses were down 8% quarter over quarter as some of the temporary catch-up accruals from Q4 rolled off in the new year.
Taken together, Q1 GAAP net loss was $2 million, well ahead of expectation and reflecting the outperformance on net interest income against our tightly managed fixed cost base. Adjusted EBITDA was $43 million, also scaling nicely in accordance with our operating leverage. Adjusted earnings per share was $0.30 based on a diluted weighted average share count of 104 million. We ended Q1 with $726 million of loans held directly on the balance sheet, which is down 21% from the prior year but up sequentially from $703 million in Q4 as our newer R&D products continued to scale. Additionally, we recognized $89 million in loans from the consolidation of a securitization deal in which we retained minimal economic exposure.
We ended Q1 with unrestricted cash of approximately $600 million, down from $788 million in the prior quarter, with the delta primarily going towards R&D loan funding for new products, third-party risk capital partnerships, and a reduction in working capital from beginning-of-year corporate bonus payouts. In Q1, we put in place a universal shelf and a $500 million at-the-market program, which gives us additional balance sheet flexibility. We remain extremely pleased with our network of third-party capital relationships and are excited to welcome the Fortress Investment Group as a new committed capital provider on our platform. Overall, these relationships now comprise well north of 50% of the funding on our platform, and they are demonstrating their intended resilience in the current market climate of uncertainty. As we look to Q2 and the remainder of 2025, much of the discussion has shifted to potential impacts from the macro environment.
As mentioned, we've seen little discernible impact of the macro on credit performance so far. Uncertainty has increased, and we see the potential for both upside and downside scenarios that are credible in the near to medium term. The main near-term risk in our estimation is reinflation, as any persistent tariffs placed on a significant share of our import economy will make things less affordable for consumers, a clear negative influence on credit. On the other hand, in the context of an already high default environment with razor-thin savings rates, our continuing stance is that any dynamic which tempers current high levels of consumption back into line with underlying income would represent a positive effect on credit.
We remain sanguine about the prospective risks in the labor market, where we observe as many job openings in the economy as there are unemployed workers, and continue to perceive a structural shortage of labor supply that is under continuing pressure from demographic trends. Given this context, our macro assumptions for the duration of this year remain consistent with the prior quarter. Namely, we factor in no explicit expectation of any rate cuts and are planning for a steady macro environment in which the Upstart Macro Index remains in a range of 1.4-1.5. With this as background for Q2, we are expecting total revenues of approximately $225 million, consisting of revenue from fees of approximately $210 million and total net interest income of approximately positive $15 million.
Contribution margin of approximately 55%, net income of approximately negative $10 million, adjusted net income of approximately positive $25 million, adjusted EBITDA of approximately $37 million, with a basic weighted average share count of approximately 96 million shares and a diluted weighted average share count of approximately 104 million shares. For the full year of 2025, we now expect total revenues of approximately $1.01 billion, consisting of revenue from fees of approximately $920 million and net interest income of approximately positive $90 million, adjusted EBITDA margin of approximately 19%, and we expect GAAP net income to be positive in the second half of the year and positive for the full calendar year. Beyond the numbers, I would just like to reiterate our gratitude to all of the hardworking teams at Upstart who make these results achievable. With that, Operator, over to you for Q&A.
Operator (participant)
Thank you.
If you would like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press Star 1 to ask a question. We'll pause for just a moment to allow everyone the opportunity to ask a question. Our first question comes from Dan Dole with Mizuho. Please go ahead.
Dan Dolev (Analyst)
Hey, guys. Really nice results here. Congrats. I have one question and one follow-up. I was really excited to see the Walmart partnership. Can you talk a little bit more about that? I have a follow-up as well. Thank you.
Dave Girouard (Co-founder and CEO)
Hey, Dan. This is Dave. Thanks for the question.
Yeah, we only have so much we can really say there, but we did sign a one-year agreement with Walmart's majority-owned fintech called OnePay to basically make our products available to Walmart customers. That is actually already been launched, which is kind of how it got out into the public sphere. I will just say generally, I think with our move to have the best rates and best process for everybody, which I know you keep hearing from us, Walmart is the kind of partner that we are really excited about because they have been really focused on delivering value for American consumers for a very long time, like more than 60 years. It is exactly the kind of partnership we like where we can deliver the best value when it comes to a credit product. Hopefully, this will be a great win for both companies over time.
Dan Dolev (Analyst)
Got it.
Thank you. And just as a quick follow-up, and I apologize if this has been addressed, can you maybe give us a little bit of a sense of sort of trends in April and maybe early May? If there's anything you can provide, that would be great.
Sanjay Datta (CFO)
Hey, Dan. How are you doing? It's Sanjay here. I think anything we can say with respect to this quarter is probably aptly captured in our guidance. I think that's about as much color as we can give.
Dan Dolev (Analyst)
Okay. Yeah, fair enough. Really appreciate it. Congrats again.
Sanjay Datta (CFO)
Thanks, Dan.
Operator (participant)
And our next question comes from Ramsey El-Assall with Barclays.
John Coffey (Analyst)
Hi. This is John Coffey on for Ramsey. Thanks for taking my question. I just had two short questions.
I was wondering, now that you know you've been updating your models and it seems like that's been a process that's been ongoing, is there a good way to think about your conversion rates for the remainder of the year or the next two quarters? Should we expect that those rates could start to touch that 20% level? That is that first question I had. Also, I noticed that it used to be your UMI had a slide kind of like, I think last quarter it was maybe around page 10, and there were quite a few data points attached to it. When I look at this quarter, it's kind of pushed back to the back of the deck on slide 20, and I do not see any numbers really tied to it. Is there any reason for that? Are you de-emphasizing this as something you're reporting to the street?
Dave Girouard (Co-founder and CEO)
Hey, John. Just quickly, on conversion rates, I mean, the conversion rates, which really are a very principal driver of growth, they did grow nicely from, I think, 14% a year ago to 19% in the most recent quarter. All else being equal, we would expect to drive them up with better models and improved automation, etc. Things like if the Fed lowers rates, those are things that can also be helpful. There is a bunch of things that go into conversion. Generally, we would like to drive it up. Some of that is macro-dependent, and some of it is just technology that we could deliver. We definitely kind of showed it in our investor deck, a little bit new way to look at the conversion rate in terms of how many unfulfilled requests there were there.
We just think there are a lot of ways that we can begin to fill in those bar graphs and convert more people. All right. Hey, John. This is Sanjay. Yeah, just quickly touching on your question about the macro index. First of all, I think it has moved back in the deck, hopefully because we have put some more stuff in the front for you, so it was not meant to be personal with respect to the index. Look, some of the numbers we had on there previously, it was all Fed-reported data. It was things like the personal savings rate, some inflation indicators, and some unemployment indicators. I think it was causing a bit of confusion because I think people thought that we were deriving our index from those numbers when, in fact, we just view those to be correlative.
We've just cleaned up the page a little bit. I think if those Fed data points are useful, we can certainly point you to them. They're publicly printed.
John Coffey (Analyst)
All right. Thank you.
Operator (participant)
Our next question comes from Simon Clinch with Redburn Atlantic.
Simon Clinch (Analyst)
Hi, guys. Thanks for taking my question. I was wondering if you could just touch on the contribution margin and the mixed impacts we've had on that and just how to think about that through the year. Ultimately, what's embedded in your guidance? That's my first question.
Sanjay Datta (CFO)
Yeah, Simon, the contribution margin, I guess I would point out a couple of dynamics in our sort of core sort of personal loan product. I think in our sort of historic choice of the borrowing base, we have a relatively consistent margin. I would point to two dynamics.
One, we're increasingly adding to our mix maybe on the primer side of the borrower segment. It's obviously a more competed market. I think the margins in that segment would not sort of touch the level that we have in some of the more historic segments that we play in. That will sort of act to decrease the margin numbers, as we talked about in some of the prepared remarks. Of course, as the newer products scale, whether it's HELOC or auto lending or even some of our small-dollar efforts, as those scale and gain traction, those, because they're earlier in their life cycle, don't have sort of mature margins yet either. Those two things are going to act to bring down the average number on the P&L and some of what we pointed out with respect to our earlier remarks.
Simon Clinch (Analyst)
Okay.
Thanks. And just as a follow-up, just in terms of the environment we're in, we're hearing from some other players in the industry that there's very strong demand for personal loans feeding off the desire to consolidate debt from very large credit card balances. I was wondering if you could just talk to that demand trend and any sort of fluctuations you might be seeing in that or cooperate with that. Thanks.
Dave Girouard (Co-founder and CEO)
Hey, Simon. I think credit demand continues to be strong. In fact, I would just say on a seasonal basis, it tends to strengthen at this time of year as you come out of Q1. We are definitely kind of experiencing the end of the seasonality, the sort of tax season seasonality. Whether there's anything special to this year, a little unclear.
I guess from our perspective, gross demand, sort of the amount of just gross demand for credit out there does not vary a ton. It always tends to be quite strong. For sure, right now, we are seeing a lot of demand out there.
Simon Clinch (Analyst)
Okay. Great. Thanks.
Operator (participant)
Our next question comes from Kyle Peterson with Needham & Company.
Sam Salvas (Analyst)
Great. Thanks. Hey, guys. It is Sam Salvas for Kyle today. Nice results. Thanks for taking the questions. Good to see the agreement with Fortress today. I was wondering if you guys could talk a bit more about how you are thinking about funding and the funding mix, kind of given the more noisy macro climate we are in today.
Sanjay Datta (CFO)
Yeah. Hey, Sam. Yeah, just maybe as a refresher on it, contextually, there are maybe three sort of general sources of funding we think about.
There is the originations that happen by other lenders who are using our technology. They tend to be banks and credit unions originating for their own balance sheet. We've got a number of large-scale partnerships. You referenced the latest one we announced, which is with Fortress. There is what you might think of as the sort of at-will or securitization market. We like a balance between all three of those. I think they each have a place in our ecosystem. Obviously, with the added uncertainty in today's market, securitization markets and sort of at-will funding is a little bit less reliable. I think that the things that were behind our strategy for creating a number of large sort of committed partnerships is kind of playing out right now and really shining.
In the current market, maybe there is a bit more sort of reliance placed on those agreements, given that they are sort of designed for this market in particular.
Sam Salvas (Analyst)
Got it. Okay. Yeah, makes sense. You guys called out some take rate pressure from higher subprime borrowers. Could you talk about how you guys are thinking about take rates as you kind of update your models throughout the remainder of the year?
Sanjay Datta (CFO)
Yeah. San, just to clarify, that sort of take rate, I would not call it pressure. We are sort of increasingly successful in the super prime segment, not the subprime. Very prime borrowers have a lot of competitive alternatives, and take rates and margins are necessarily lower in that segment. As we gain share or increase mix from maybe the prime and the super prime segments of borrowers, you will see the average take rates come down.
Dave Girouard (Co-founder and CEO)
It is also important to say that our contribution margin and take rates are well above what they were back in 2021. We have a lot of room. It is not really our goal to maximize our contribution margin at this point. Diversifying into super prime loans has such value to us that I think taking down our contribution margin back toward where it was in our earlier days is actually a very good thing.
Sam Salvas (Analyst)
Okay. Gotcha. Okay. Thanks, guys.
Operator (participant)
Our next question comes from Mihir Bhatia with Bank of America.
Mihir Bhatia (Analyst)
Hi. Good afternoon. Thank you for taking my question. The first question I wanted to ask was about just how have funding partners reacted to the volatility?
Did you see any pullback from either your forward flow partners or even from, I guess, the third-party partners, the more opportunistic capital in early April from the volatility we saw in the fixed income markets?
Sanjay Datta (CFO)
Yeah, Mihir. I think that these committed partnerships are, frankly, behaving exactly as designed. The basis of those partnerships was that we essentially committed to navigating the different parts of the macro cycle together. The structure of these deals helped to even out the different phases of that cycle. Those things are going exactly the way we expect them to. We believe we have the tools to react, to read and react to shifts in the credit risk environment very quickly on behalf of the partners. A lot of these partnerships, frankly, have now accumulated some overperformance in these structures that are there for a rainy day.
I think that they are behaving exactly as intended. More broadly, the sort of securitization markets and the at-will markets are still functioning. I think that spreads are a little bit higher, and advance rates are not as high as they were before. The beautiful thing about the large committed partnerships we have is that we do not have to rely as much on the at-will markets. As a result, our funding rails are as resilient as ever, and we have not had any pullbacks.
Dave Girouard (Co-founder and CEO)
Let me just add to that, Mihir. I mean, just for clarity, we have had no pullbacks from our private credit kind of committed capital partners, and we have likewise had no pullbacks from banks or credit unions. I think our credit continues to perform, and I think the confidence that they have in Upstart is quite strong.
Mihir Bhatia (Analyst)
No, that is helpful. Thank you. I did want one other question on a similar topic, really, in terms of the macro volatility. Dave, you mentioned you all have more tools to react to it. I guess the question really is, how has Upstart reacted so far to how have you changed to the rising uncertainty around macro? Have you changed any underwriting, any of your product mix, maybe where you're trying to commit more marketing dollars? Has there been any changes so far to how you're operating the business, to the way the macro uncertainty has changed over the last four months? Thank you.
Dave Girouard (Co-founder and CEO)
I will say, first of all, I mean, we're definitely a conservative business who is very careful about fixed costs and hiring and things of that nature.
We have been forever, but I think for years now, I think we're extremely cautious about how we plan our own business. Just by way of example, all of our guidance and all does not assume any reduction in Fed rates this year. That would just be a sample of that. With respect to credit, which you seem like maybe you're asking that as well, generally, we rely on our models being very, very quick and adept at adapting to macroeconomic changes. We also build some conservatism in there so that we don't assume the future will be as good as the past was. That combination, we think, is as good as you get in the market. I don't think there's anyone else that has models that are as adaptive and quick to hone in on any changes in the macro.
We have some conservatism built in, and it's serving us really well, as well as, of course, our lending partners and our private capital partners.
Mihir Bhatia (Analyst)
All right. Thank you for taking my question.
Operator (participant)
We'll move to our next question from Pete Christiansen with Citi.
Peter Christiansen (Analyst)
Thank you. Good evening. Nice trends here. I do want to talk, you gave some good color on the consumer credit side. Seems still pretty healthy. Also, your partners and the Atwheel side still fairly healthy. I want to dig a little deeper onto the ABS side. I know you had a $320 million transaction. Was it two weeks ago? Just curious if you had any feedback on the health of what you're seeing in the ABS market for more consumer loans. Do you think there's opportunity to do more there this year?
If you can comment on some of your risk retention and how you believe that is going to trend in the next few quarters. Thank you.
Sanjay Datta (CFO)
Yeah. Hey, Pete. Yeah, we were really pleased with the way that the latest ABS deal printed. Frankly, it was a very healthily oversubscribed book on the bonds. The spreads were a little bit wider than they were earlier in the year. That is sort of natural. Overall, I think we were really happy with the way it worked. In particular, we use that market opportunistically. We do not rely on it. Our committed capital partners do not rely on it. When it is available and we can print deals like that, it is great. If it is not, it is not sort of a cog in the wheel that we have a lot of reliance on.
All in all, it was a good story.
As to, I guess, part of your question is where the ABS markets go from here. I do not know that we have a strong view on that. They are famously hard to predict. I guess the fact that they are just an opportunistic channel for us makes it less acutely important.
Peter Christiansen (Analyst)
That is helpful. I guess on the Fortress plan, and then also, I guess you had 15 new partners as well. Just curious if there is any trend changes in risk retention, co-investment, and how that has been going.
Sanjay Datta (CFO)
Not really. I think the structure of these deals is very consistent now. No trend, particularly in either direction in terms of how they work or how they are structured or what the terms are.
Peter Christiansen (Analyst)
Okay. Thank you. Nice report.
Operator (participant)
Our next question comes from James Faucette with Morgan Stanley. Hey, Ryan, it's open.
Michael Infante (Analyst)
Yeah, hey, Ryan. Michael Infante for James. Hey, it's Michael Infante for James. Thanks for taking our question. I just wanted to sort of dig in on how you're thinking about the TAM opportunity today. If I just think about the overall unsecured personal lending market, is there any rough segmentation you can provide just on how that TAM opportunity of, call it, $150 billion, sort of segments by FICO score? I'm just trying to contextualize your relative penetration with a more traditional Upstart borrower versus a newer prime borrower. Thanks.
Dave Girouard (Co-founder and CEO)
I would say we have some sort of back-of-the-envelope notion of that. We don't try to measure that too particularly.
But I would say roughly that consumers in the U.S. split somewhat evenly between what you would call a prime or even super prime borrower, 720+ or more, the people that we have typically served, low 600s to 720. If you just want to, I think that at least my take is, from a personal loan perspective, the size of those markets are relatively similar. I think from that perspective, as we began to really open up to the super prime part of the market, we've kind of doubled the TAM, particularly in personal loans. Of course, that's all quite small relative to the TAM in home and auto put together. That's how we would think about that.
Michael Infante (Analyst)
That's helpful.
Maybe just on customer acquisition, anything you would call out just in terms of how your mix is evolving between pure organic traffic to upstart.com, how much is originated via direct mail, and what you're sourcing via third-party marketplaces? Thanks.
Dave Girouard (Co-founder and CEO)
Yeah, hey, Mike. Yeah, nothing really to call out in terms of channel trends from last quarter to this. All has been pretty steady.
Operator (participant)
We'll move to our next question from James Heck Jefferies.
John Heck (Analyst)
Hey, guys. It's actually John Heck from Jefferies. Hope you got thanks for taking my questions. Real quick, Sanjay, maybe a little bit more just kind of on, I guess, thinking about the fluctuations in the take rate. Obviously, we know there's a difference between core and super prime or the prime customer. But maybe what are you guys thinking about in terms of mix over the quarter or over this year?
Will prime continue to be a growing part of the mix? And then at maturity, what is the take rate of HELOC and auto? I mean, I know those are different markets with different sets of factors. What are the kind of mature take rates of those versus the current take rate?
Sanjay Datta (CFO)
Hey, John. Sorry about the name slip there. I do not think we have an explicit split between maybe sort of super prime and near-prime segments within our guidance. I will say that, as we said in our remarks, I think we did disproportionately well in the prime segments, and we hope for that to continue. It is an area we are bullish on. We are earlier on, obviously, and we are sort of at maybe the more beginning stages. We maybe hope to grow that disproportionately.
With respect to take rates on the newer products, it's still a little bit early to tell, I think. I think, in general, I would say both home and auto would have the profile of being larger loans, maybe with more modest, at least initially more modest take rates until our models can create the type of separation we have in personal lending, which allows us to sort of increase take rates over time. There'll be larger loans with initially lower take rates and maybe sort of similar, maybe sort of similar dollar contributions per loan. In the case of some products, such as maybe, for example, auto is a good one, that contribution will be more ratable over the life of the loan in the form of servicing economics and less about upfront transaction take as we have almost exclusively on our core PL business.
John Heck (Analyst)
Okay. That's super helpful. And then follow-up, clearly, the private credit markets, yeah, they can structure, I guess, mutually favorable deals with you guys. And as a result, and they have a lot of liquidity in that market, as a result, it's pretty active. How would you define kind of the banks? I know there was earlier on, they were fairly active. And obviously, just given economic uncertainty and inflation and just sort of the last few years, I think they've been less active. How would you characterize that? And then what are you looking for in terms of ability to kind of re-engage more aggressively with that group?
Dave Girouard (Co-founder and CEO)
I think the thing that you can say about banks is they love secured products much more than unsecured products. So personal loans, a lot of the funding at the primer end comes from credit unions.
Increasingly, institutional capital, private credit blended in certain ways, we think will compete quite well in the super prime part of our business. With respect to banks, they really prefer secured products. Right now, there is certainly more demand from them for our HELOC product. I believe soon enough, our auto products that we would be struggling to fill that demand for a very long time. I think that's okay. I think it's a good balance where personal loans are mostly credit unions plus institutional funding combined in interesting ways. Secured products really have a lot of interest from banks. Honestly, it will take us some time to grow those businesses large enough to really begin to fill that demand.
John Heck (Analyst)
Perfect. Thanks very much for the color.
Dave Girouard (Co-founder and CEO)
Thank you.
Operator (participant)
Our next question comes from Rob Wildhack with Autonomous Research.
Rob Wildhack (Analyst)
Hi, guys.
A question on, I guess, both funding and the outlook. The Fortress agreement obviously comes with a big headline number. The full-year guidance kind of up only a little bit. I mean, given that you're not seeing any pullback in funding and you've added sort of $1.2 billion in incremental funding from Fortress, I guess I'm just curious why the 2025 outlook isn't up even more.
Dave Girouard (Co-founder and CEO)
Hey, Rob. The short answer is that we were never short of funding per se. We're not funding gated in 2025. Having more funding is good and allows us to handle upside scenarios and have more diversification in the funding. The gating item really is kind of economic acquisition of the right borrowers. That's almost always in our history been what gates our growth. It's great to have more funding, and we hope to add more partners.
But it doesn't translate directly into growth.
Rob Wildhack (Analyst)
Okay. If I could just ask one more on OnePay. Can you comment at all on the underwriting or credit box there? Is that Upstart's decision? Are there any minimum volume commitments or approval rates embedded in the agreement?
Dave Girouard (Co-founder and CEO)
It is our underwriting and our models that drive these things to a joint venture structure with them. We sit alongside them and bear some of the risk, which is the nature of these co-investment partnerships. It is purely our technology and our models that drive the originations.
Rob Wildhack (Analyst)
Got it. Thank you.
Operator (participant)
Our next question comes from Reggie Smith with JPMorgan.
Reggie Smith (Analyst)
Hey, guys. Congrats on a quarter. I'm not sure if this is covered, but I was curious. It was nice to see the increase in super prime borrowers over the last couple of quarters.
I guess my question is, how do you drive that? Is that to acquire different marketing messages, or are you marketing in different channels? How are you kind of controlling that, and what has driven the shift there? I have a follow-up if you have time.
Dave Girouard (Co-founder and CEO)
Hey, Reggie. This is Dave. A great question. I mean, this is a transition that is in process, but it started first with having a competitive product. That means competitive rates for very high FICO, high credit borrowers. That really came through working with our lending partners to realize that we had to have a lower take rate ourselves, and then they had to have lower expectations, but also have corresponding lower loss rates. That is what we announced as our T-Prime program a while back. We have really been focused on that since mid-2024.
If you sort of fast forward to today, we have very competitive products across the credit spectrum, including for the primest borrowers out there. Now, as you suggest, there is more to the puzzle in terms of becoming the leader in all segments, which is our goal. That really is to adjust our messaging and our marketing targets. If most people perceive Upstart as really good for people who are treated poorly by traditional lenders, then that is, of course, a dated message. We have a lot of work going on to update our story to the market, particularly to consumers, to realize that Upstart is always going to be a great first place to start if you want the best rate and the fastest process.
Reggie Smith (Analyst)
Got it. Okay. That sounds good.
I guess you have a slide toward the back of your deck that shows your kind of return bands, and it compares it to the two-year treasury yield. Clearly, that spread has widened the last couple of quarters, which is great. I guess to the extent you could, how do your investor partners kind of think about that dynamic? What type of spread is reasonable, or are they satisfied with over the two-year yield? How do they think about that? I would imagine the volatility of returns plays in that as well. That interplay between those two variables, how was that received or thought about by your investment partners?
Sanjay Datta (CFO)
Hey, Reggie. Let's see. On the institutional side, it's very much a function or a reference with respect to how the market is in credit.
Obviously, when uncertainty is higher, now spreads are wider, and we would then reflect that in our product that we deliver to investors. If you rewind many years before this chart, if you rewind pre-COVID and sort of the 2018, 2019 timeframe, base rates were low and spreads were also very tight, and you would have seen a much tighter spread. I think that spread there is just a reflection of the risk environment, the environment of uncertainty. That is exactly how it functions in the underlying credit markets as well. Got it. I guess to drill in on that, at where it is today, is that kind of perceived as excess spreads to those guys? Is there alpha in there for them, or is that about kind of where their expectations are? I mean, their expectations ultimately are around a return on equity.
The spread is a component of the return on equity. The spread itself, you think of as, I mean, I guess some premium above what you might think of as a risk-free rate or a government rate. In this case, it is the treasury. The way that this builds is there is some requirement of spread given the uncertainty of the environment, and that results in a certain target ROE. Ultimately, what we talk about with our counterparties is the ROE.
Reggie Smith (Analyst)
Got it. Okay. That sounds good. Thank you for taking the questions. Congrats on the quarter.
Sanjay Datta (CFO)
Thank you, Reggie.
Dave Girouard (Co-founder and CEO)
Thanks, Reggie.
Operator (participant)
Our next question comes from Giuliano Bologna from Compass Point.
Giuliano Bologna (Managing Director)
Hi, Dave. And congrats on the quarter.
One thing I'm curious about kind of digging into a little bit is the first thing is that obviously you've mixed a bit more towards prime, and that's putting pressure on take rate. I'm curious if there has been any real change in the take rate for subprime or if it's entirely mix-driven. And then related to that, if I think about sales and marketing as a percentage of origination volume, that stayed roughly flat. I mean, and I think completely flat at 263 basis points the last two quarters. I would think that if you're mixing more towards prime, that would come down to reflect the lower take rate for prime. I'm curious how we should think about the interplay of those two dynamics.
Sanjay Datta (CFO)
Hey, Giuliano.
I guess the first question is, what's going on with the take rates in maybe sort of the core or the nearer prime segments? I would say they're largely stable. We are doing some what we call revenue science, some origination fee experimentation. I guess on the different parts of the curve, we're maybe going through optimizations, and that may have some minor impacts. I think writ large, these are relatively stable take rates. Your second question had to do with acquisition costs, I believe, and whether they're very different in the prime space. I don't think they're dramatically different. Our margins are consequently slimmer, which we called out. As Dave said, I think our distribution programs and our marketing are still at a relatively nascent stage in this sort of relatively new segment for ours.
They're not yet at a place where they're mature. I think when they are, you'll see something like maybe similar acquisition costs, lower take rates, and consequently more modest margins in a more competed space. I guess important to point out that this is all dollar accretive, right? This is all additional dollars to the bottom line, which is ultimately what we care about.
Giuliano Bologna (Managing Director)
That makes sense. It looks like you just changed the slide around in the presentation to kind of show the loan performance and the tracking over time. It looks like the 4Q 2024 mix is coming down a little bit versus 3Q 2024. I'm curious if that's because there's a higher mix of prime loans in there or if that's just representative of kind of the core subprime or credit tier loans.
Sanjay Datta (CFO)
Yeah.
That's the main thing going on, which is as you get a higher mix of primer loans, you'll get lower spreads and lower returns. There may be also some normalization. I think that in the Q2 to Q3 vintages, we were probably overperforming our targets, and the models will act to recalibrate that over time. I think the main dynamic is the one you called out.
Giuliano Bologna (Managing Director)
That's very helpful. I appreciate the time, and I'll jump back in the chat.
Dave Girouard (Co-founder and CEO)
I just want to add a comment. I had gotten a question. This is Dave. I got a question earlier from Rob about the OnePay Walmart partnership. I misheard him. My answer was referencing the Fortress partnership. Just so it's clear, I didn't want any confusion there. I was actually referencing Fortress.
If Rob wants to hop in again and re-ask about OnePay Walmart, we're happy to talk about it.
Operator (participant)
Ladies and gentlemen, if you would like to ask a question, please press star one. We'll move right now to Matt O'Neill with FT Partners.
Matt O'Neill (Managing Director)
Yeah. Hi. Thanks so much. I think most of the questions were asked and answered. I'll follow up on Rob's on OnePay Walmart. In addition, could you just make it clear, is that being accounted for in any of the guidance changes, or did that deal have any effect on the guide or any other moving pieces to the guide beyond the one key result, obviously?
Dave Girouard (Co-founder and CEO)
Hey, Matt. This is Dave. I think we said that this OnePay Walmart agreement, we didn't expect to be materially financial this year. It doesn't mean it can't be.
It just means it's unable to know that right now because it's very early stage, just launched in the last few weeks. I certainly think there's upside to it. We're hopeful there's more things we can do beyond the initial phase with them, but it is not today sort of influencing our 2025 guidance. Got it. As far as any other sort of underlying changes, whether it's macro or otherwise, any other moving pieces to the guide beyond the results being incorporated? I think what we said is we assume the macro doesn't change dramatically one way or the other. We also assume no reduction in Fed rates or no reduction in the underlying rates that tend to fuel the platform. There's upside and downside in those, but we take what we feel is a fairly conservative stance.
We always have confidence that our pipeline of model improvements and technology improvements will lead to growth, and we try to account for them conservatively as well. I think we feel pretty good to reaffirm and at least modestly raise the guidance that we shared.
Matt O'Neill (Managing Director)
Understood. Thank you.
Operator (participant)
Our last question comes from Rob Wildhack with Autonomous Research.
Rob Wildhack (Analyst)
Hey, guys. Thanks for that, Dave. Thanks for letting me back on. I was just curious with respect to OnePay, who controls the underwriting and credit box there, if that's Upstart's decision, and if there were any minimum volume commitments or approval rates in the OnePay agreement. Thanks again.
Dave Girouard (Co-founder and CEO)
Hey, Rob. No, it's entirely our business, our model. All the 100-plus banks, credit unions, private credit have exposure to that or can benefit from that borrower flow. It's fairly perfect.
I mean, there are people who will get from Walmart that could be 800 FICO and wealthy. There are certainly people that are Middle America. That is the beauty of our platform. I think one of the reasons we have that agreement is that we can serve a very, very broad swath of America with the products and the diversity of the marketplace structure that we have. I think the timing works out perfectly with this whole notion of best rate for everybody. Got it. Thanks. Just quick, do you share any economics back with OnePay, maybe like take rate or anything like that? Oh, for sure. They have a financial interest in it. I mean, they are kind of bringing a customer to us. There is some shared, but we feel very good about the economics and the agreement.
I think it is definitely a win-win for them, for us, for their customers. Very excited about the partnership.
Rob Wildhack (Analyst)
Okay. Thanks a lot.
Operator (participant)
Ladies and gentlemen, that was the end of our quick question and answer session. I'll now turn the conference back to Dave for closing remarks.
Dave Girouard (Co-founder and CEO)
Thanks, everybody, for joining. We're actually really pleased with the progress that we've had so far in 2025. I think the rest of the year might be even more exciting. We'll see many of you at AI Day next week in New York, and I hope that many others will be joining us via streaming if you can find the time in your day to do that. If you really want to really understand what we're building at Upstart, I think AI Day will be super fun and an informative event. Thanks again for joining us.
Operator (participant)
This concludes today's call. Thank you for your participation. You may now disconnect. Good.