Upstart - Q4 2022
February 14, 2023
Transcript
Operator (participant)
Good day, and welcome to the Upstart Fourth Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason Schmidt, Head of Investor Relations. Please go ahead.
Jason Schmidt (VP and Head of Investor Relations)
Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's fourth quarter and full year 2022 financial results. With us on today's call are Dave Girouard, Upstart's Chief Executive Officer, and Sanjay Datta, our Chief Financial Officer. Before we begin, I want to remind you that shortly after the market closed today, Upstart issued a press release announcing its fourth quarter and full year 2022 financial results and published an investor relations presentation. Both are available on our investor relations website, ir.upstart.com. During the call, we will make forward-looking statements such as guidance for the first quarter of 2023 related to our business and our plans to expand our platform in the future. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties, and assumptions.
Actual results may vary materially as a result of various risk factors that have been described in our filings with the SEC. We caution you against placing undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as the result of new information or future events, except as required by law. During today's call, unless otherwise stated, references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables. To ensure that we can address as many analyst questions as possible during the call, we request that you please limit yourself to one initial question and one follow-up. Later this quarter, Upstart will be participating in the JMP Securities Technology Conference on March 6th and the Loop Capital Markets Investor Conference on March 13th.
Now I'd like to turn it over to Dave Girouard, CEO of Upstart.
Dave Girouard (Co-Founder and CEO)
Good afternoon, everyone. Thank you for joining us on our earnings call covering our Q4 and full year 2022 results. I'm Dave Girouard, co-founder and CEO of Upstart. Obviously, 2022 was a challenging year for Upstart, and we're not happy with the results we're sharing today. In many ways, last year was the perfect storm for our business model. The withdrawal of federal stimulus disproportionately harmed our borrowers, akin to a simulated recession where millions of mainstream Americans suddenly lost what had become their primary source of income. The Fed's interest rate hikes, the fastest in several decades, left both lenders and capital markets cautious and concerned about what might come next in our economy.
Out of an abundance of caution with respect to the economy, many lenders cut back or paused their originations, despite the fact that their Upstart-powered loan portfolios have met or exceeded expectations since the program began in 2018. Having said that, we're not into excuses. The best companies take advantage of the opportunities presented in the most difficult times. 2022 was in some ways a gift because it laid bare some parts of our business that we needed to improve. We've made great progress in many of these areas. I'll share a few of them with you shortly. First, I want to make it clear that we're committed to running an operationally and fiscally tight ship, and always have been. We've been profitable for most of the time that we've been public. It's our intention to return to profitability as soon as possible.
Given the reduction in lending volume, two weeks ago, we took the unfortunate but necessary step of reducing the size of our workforce by 365 team members, representing about 20% of our staff. I'm deeply grateful for the immeasurable contributions these Upstarters made to our mission over the years, and I'm profoundly sorry that their time at Upstart came to such an abrupt end. With this reduction in staffing, we also decided to pause development of our small business lending product. This was a necessary step to ensure we can adequately resource the rest of the roadmap. We look forward to the day when we can resume our pursuit of the world's best AI-powered business loan. We haven't just focused on reducing expenses.
We grabbed the opportunity that 2022 presented to make important improvements across Upstart in ways that have made us a stronger company for the future. Let me share a few examples. First, we've traditionally viewed our business model in the simplest terms as a marketplace for loans based on price discovery and at-will participation for consumers and lenders. While this is true, it's also useful to think of the funding on our platform as a strategic supply chain that needs to be scaled and strengthened continually. In our earnings call in August, I told you that we would begin to investigate partnerships that could provide more reliable and persistent funding to the Upstart platform. I'm happy to report that we're in late-stage discussions with multiple potential partners in support of this goal.
Second, we also took advantage of the volatile economy to significantly upgrade our model's ability to understand and react to macroeconomic conditions. Last quarter, I announced our plan to productize the Upstart Macro Index, or UMI. This new metric measures how changing economic conditions like inflation and unemployment are impacting credit performance. We continue to make breakthroughs in our methodology for calculating UMI, and we expect to launch this monthly metric to the public later this quarter. This is an exciting development from our machine learning team. In an industry first, Upstart will provide lenders with near real-time insight into the financial health of the American consumer, allowing them to adjust their lending programs accordingly. This is a big step toward providing banks and credit unions with lending infrastructure that autonomously, continuously, and rapidly adapts to changes in the economy. You'll be hearing more about this soon.
Third, 2022 confirmed that we have both strong unit economics and considerable pricing power, even in the most challenging environment. Despite the fact that our lending volume in 2022 was down 14% versus the prior year, our contribution profit was actually up 13% year-on-year. Optimizing our pricing represents a large surface area of opportunity, which we've only just begun to explore. In addition to these major improvements, we've also continued to innovate across our platform in support of future growth. In fact, I believe we made more progress with our technology in 2022 than in any year in our history. As capital markets and the overall economy normalizes, I expect this will become obvious to all of you. Some important areas of progress from last year include model accuracy.
Our AI models continue to separate risk significantly better than a traditional cycle-based model, and we continue to increase our pace of model development. The increase in our model accuracy in the last seven months is more than what we delivered in the prior two and a half years. Automation. In the fourth quarter, we saw a record 82% of personal loans fully automated. By automated, I mean there was no human intervention anywhere in the process of originating the loan. This boost came primarily from eliminating or automating processes that our loan operations team has traditionally done manually. Auto retail. We finished the year with 778 total dealerships under contract, a 90% increase from a year ago. As automobile inventories are replenished and prices normalize, our ability to modernize the car buying experience for our dealer partners will only become more important.
We're piloting our AI-powered auto loan in 27 of our dealerships, helping them approve more applicants with less friction. As of now, when borrowers are presented with an Upstart-powered loan in these dealerships, they choose us 42% of the time. In Q4, about one in every three Upstart-powered auto retail loans were fully automated, an increase of 25% from the prior quarter. Small dollar loans. We launched this innovative product in June of 2022. Today, our small dollar product includes loans from $200 to $2,500 with tenors from three months to 18 months. To date, we've originated more than 24,000 small dollar loans to individuals who otherwise would not have been approved for our personal loans. More than 12,000 of these loans were originated in Q4 alone.
This expansion of borrower coverage means we are dramatically increasing the pace at which our machine learning models are improving. Just as importantly, in Q4, 88% of small-dollar loans were fully automated. Lending partners. In our earnings call a year ago, I told you we had 42 lenders on the Upstart platform. Today, that number is 92, representing growth of 130%. Despite the hostile 2022 environment, banks and credit unions recognize and appreciate a fundamental secular change in technology when they see it. These partners are starting cautiously with us, but they represent a significant expansion of potential lending capacity on the Upstart platform once there's a bit more clarity on the direction of the economy. Now I'd like to turn your attention to 2023 and our priorities for this year.
Our first priority is to continue to assure proper model calibration and model accuracy for all our products, regardless of which way the economy turns. This is the foundation on which all other success is based. This implies, as much as anything, taking a conservative position relative to the UMI trends we observe today. Our next stop is to return to profitability as soon as possible. While we can't make promises given the unknowns in the economy, we are intensely focused on generating operating cash and positive GAAP net income once again. With some modest cooperation from the economy, we expect to return to our pattern of quarter-on-quarter growth this year. While the expansion of both bank and capital market funding are foundational to this effort, growth is also gated by the approval rates and interest rates that the prevailing risk in the world dictates.
This risk is conveniently captured on a monthly basis by UMI. This year, it's also a priority of ours to reduce the volatility and transaction volume on our platform in the future. This is the primary motive of the committed capital initiative I mentioned earlier. It also means improving our ability to serve prime borrowers more competitively, which is in the interest of Upstart as well as our bank and credit union partners. Lastly, we can reduce future volatility by continuing our expansion into secured products, such as auto loans and home loans, which are generally preferred by lenders in times of uncertainty. Through all of this, we're focused on using our balance sheet efficiently and wisely. We've been a model of capital efficiency since our earliest days. I expect to continue on this path in 2023 and beyond.
Before I turn it over to Sanjay, I want to share why I'm as optimistic as ever about Upstart's future. The core thesis of our business, that AI can unlock smarter credit decisions than a 30-year-old credit score can, is now obvious. The recent launches of products powered by generative AI has opened our eyes to the unlimited potential of artificial intelligence and machine learning. A couple of weeks ago, a Wharton School MBA professor admitted that ChatGPT had successfully passed his final exam. It's no giant leap to believe that AI can lead to more accurate credit decisions. Indeed, we are proving this every day. It's clear that Upstart is an established market leader in the application of AI to lending.
Despite the economic challenges of 2022, we are a much better company than we were a year ago, with more advanced technology, accelerated model development, and dramatically more training data. Our founder-led leadership team is stronger than ever. As I've said before, the price of credit is the price of the American dream. We chose this path of reinventing credit so that it works for everyone, not because it's easy, but because it's important. We chose it because no one else was doing it and it needed to be done. I can think of no better journey to improve the financial health of mainstream Americans than the one we're on, and we most certainly won't let a little economic turbulence get in our way. Thank you.
Now I'd like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q4 and full year 2022 financial results and guidance. Sanjay?
Sanjay Datta (CFO)
Thanks, Dave, and thanks to all for taking a break from your Valentine's Day to listen in. Reflecting back over the past year and on our outlook of a year ago, it's safe to say that the macro has exceeded our most wildly bearish expectations. One year ago on our earnings call, we had begun to sound the alarm on encroaching consumer delinquencies and the potentially adverse impact of the disappearing government stimulus at a time when the broader markets were still quite sanguine about the economy. Over the course of the ensuing year, the impact of changing income and consumption patterns on consumer delinquency proved greater than we could have predicted, and the resulting contraction in the funding markets was sharp. Indeed, as we exit 2022 and enter a new year, consumer delinquencies remain elevated, and the funding markets remain limited in their appetite for risk.
Despite this, we are starting to see some encouraging signs that the worst of the macro may be behind us. The personal savings rate, which we watch closely as an aggregate barometer of consumer fiscal health, has now nudged upwards for three consecutive months, reaching in December its highest level since the prior spring. Underpinning this trend is a relatively recent reversal in the growth of real personal consumption, coupled with a nascent recovery in workforce participation rates over the same period, prompting income and consumption to begin drifting back towards their historically closer alignment. The ongoing recovery of workforce participation rates and real hourly wages, both of which still languish below pre-pandemic levels, suggests to us ample runway for continuing improvement to personal savings rates over the coming quarters.
Reflecting this improving consumer fiscal health, UMI, our internal measure of the macro impact on consumer defaults of Upstart-powered loans, nudged upwards from Q3 to Q4, at a much slower rate than in prior quarters and has shown encouraging signs of stabilization in the early weeks of 2023. As UMI stabilizes, we are seeing a corresponding reconvergence of loan return performance to target for our more recent vintages as they continue to season. On the funding side, spreads for senior securities in the securitization markets have also shown some initial signs of tightening in 2023 after a very challenging Q4.
Concurrent with, and perhaps related to these encouraging trends, as Dave has alluded to, we are engaged with multiple prospective partners who are actively exploring long-term capital relationships with us, some of which we would qualify as being at an advanced stage, including formal expressions of interest. While we do not yet have anything definitive to report, we hope to have more concrete news on this front soon. With these data points as backdrop, here are some financial highlights from the fourth quarter. On the top line, revenue from fees of $156 million was largely in line with our expectations. Net interest income came in above forecast, largely a result of choosing to retain more loans on our balance sheet than anticipated given the market conditions in Q4.
Taken together, net revenue in Q4 was $147 million, ahead of our guidance, representing a 52% contraction sequentially and a 52% contraction year-over-year. The volume of loan transactions across our platform in Q4 was approximately 154,000 loans, down 69% year-over-year and representing over 106,000 new borrowers. Average loan size was up 22% versus last year. 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, up from 52% last year. We continued to expand our margins in Q4 through higher take rates and more efficient marketing spend.
Operating expenses were $205 million in Q4, down 16% year-over-year and 5% sequentially. The majority of the reduction was achieved through reduced sales and marketing, which was down by 56% year-over-year following the trends in volume. Over the last quarter, we have largely limited hiring to only a few key strategic positions in operations, engineering, and G&A, all of which were nominally down sequentially in overall spend. Taken together, these components resulted in a Q4 GAAP net loss of $55.3 million. Adjusted EBITDA was negative $16.6 million, well ahead of our guided number of negative $35 million. Adjusted earnings per share was negative $0.25, based on a diluted weighted average share count of 82.2 million.
We ended the full year with net revenue of $842 million, down 1% from 2021. A contribution margin of 49%, roughly flat from the prior year. An adjusted EBITDA of $37 million, representing a 4% adjusted EBITDA margin versus 27% a year earlier. During Q4, we made the decision to sell fewer loans from our balance sheet than were originally contemplated in our guidance. Liquidity in the secondary markets remained thin during the quarter, and in our view, the market prices for personal credit did not ultimately reflect the extent to which our models have recalibrated to the new trends of consumer default. We chose to retain loans on our balance sheet and harvest the interest income. We plan to continue testing the market as pricing normalizes and selling becomes a more attractive strategic option.
In the meantime, the balance of loans on our balance sheet rose in Q4 to $1.01 billion, up $310 million from last quarter. Of that total, loans made for the purposes of R&D, principally within the auto segment, represented $492 million of that total. We are now roughly at the maximum size of balance sheet that we are planning to maintain, we will therefore largely limit new additions to the balance sheet until we can find suitable sources of liquidity for existing loans. Despite this, we remain in a comfortable position of corporate liquidity, with $532 million of total cash on the balance sheet and approximately $674 million in net loan equity at fair value. Looking to Q1, the near-term outlook continues to be tied to the macroeconomy.
Despite some of the encouraging trends previously mentioned, we continue to price loans with a conservative assumption of further degradation in the macro environment and consequently in our Upstart Macro Index. More specifically, our top-line guidance for Q1 reflects a higher forward assumption for UMI in our loan pricing, traditional Q1 seasonal headwinds, some further tightening from our funding partners that we have experienced coming into the year, and the withdrawal of our own balance sheet as a funding source for new loans. On the expense side of the ledger, Dave referred to the workforce reduction which we announced two weeks ago.
As a result of this reduction, we expect to realize cash savings of approximately $57 million in operating expenses over the next 12 months, primarily related to employee cash compensation and benefits, in addition to $42 million of savings from reduced stock-based compensation expense over the next three years. Also related to this event, we anticipate incurring $15 million in restructuring charges in the first quarter, which we have excluded from our non-GAAP guidance. With these specifics in mind, for Q1 of 2023, we expect total revenues of approximately $100 million, consisting of revenue from fees of $110 million and net interest income of approximately negative $10 million. A contribution margin of approximately 55%. Net income of approximately negative $145 million. Adjusted net income of approximately negative $7 million. Adjusted EBITDA of approximately negative $45 million.
A diluted weighted average share count of approximately 81.9 million shares. Before wrapping up, we would just like to take a moment to acknowledge the group of Upstarters that were affected by the reduction in force that we recently went through. The time you spent with us and the contributions you made will always be a part of the Upstart journey, and we will do our best to honor them and to take your work forward in a way that would make you proud. We look forward to seeing what amazing things you will do in your next chapter. Thank you. With that, Dave and I are now happy to open the call to any questions. Operator, back to you.
Operator (participant)
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask for a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Ramsey El-Assal with Barclays. Please go ahead.
Speaker 15
Hi, this is John. Hi, this is John Kalfayan for Ramsey. I had a question for you on pricing power. I believe a couple of quarters ago you commented that on the given the tighter environment, you had a little bit more pricing power, and I think you also mentioned something like this in your prepared comments. I was wondering, can you say whether or not any of the revenue declines you saw this quarter were partially offset by higher pricing?
Sanjay Datta (CFO)
Hey, John, this is Sanjay. I would say that our take rates were very similar to the prior quarter, maybe up a little bit. We were sort of able to offset them marginally. I don't think the impact was significant enough, obviously, to change the trajectory.
Speaker 15
Okay, great. Thank you.
Operator (participant)
Question comes from Peter Christiansen with Citi. Please go ahead.
Peter Christiansen (Director of Digital Assets and Fintech Services Equity Research)
Thank you. Good afternoon. Dave, I was wondering if you could talk. You talked to a great extent about on the supply side of funding. I was just wondering if we can dive a little bit into the demand side. I recognize that you pulled back some marketing quite a bit. Your sense for overall loan demand for the category of borrower that you serve, that would be helpful. As a follow-up, just wondering if you can give us a sense of the allocation levels that you have with your existing bank partners. Have you seen any changes in that dynamic? Thank you.
Dave Girouard (Co-Founder and CEO)
Sure. Thanks, Pete. This is Dave. I would say, you know, I don't know if there's an absolute measure of demand for loans in the environment, but I think we can safely say demand is very strong. Consumer demand for credit, in a time when people are, you know, the personal savings rate's been down. It's up recently, but, you know, just given where the American consumer has been, I think it's normal to expect that demand for credit is quite strong. We're headed into a seasonal, time when it usually actually weakens, due to tax returns and that kind of thing. We'll see, you know, sometimes that's overwhelmed by, something else.
For now, I think we can safely say that, consumer demand for credit continues to be very strong.
Peter Christiansen (Director of Digital Assets and Fintech Services Equity Research)
Great.
Dave Girouard (Co-Founder and CEO)
Sorry, the other part of the question, Pete.
Peter Christiansen (Director of Digital Assets and Fintech Services Equity Research)
No worries. Just wondering, I know, like some banks, for instance, have like a 10% cap of Upstart loans, or something like that. Have you seen like those allocation levels that some of your bank partners typically take? Have you seen them alter at all in the last, I don't know, few months?
Dave Girouard (Co-Founder and CEO)
Well, for sure, you know, every bank partner has kind of a capacity for each month, and they can change it at will as they go. That a lot depends on whatever else is going on in their business, the state of their balance sheet, et cetera. It's very common that banks would increase or decrease. Generally speaking, without question, over the last year, banks have been tightening and reducing, you know, lending as they've just had concern about the economy. They're watching the same thing on CNBC everyone else is, and have had concerns.
That's probably been one of the most, you know, impactful and challenging parts to our business in the last year, is really just, banks get very conservative naturally and cautious, when they're unsure about what's next in the economy.
Peter Christiansen (Director of Digital Assets and Fintech Services Equity Research)
Great. Thank you.
Dave Girouard (Co-Founder and CEO)
Thanks, Pete.
Operator (participant)
Our next question comes from David Scharf with JMP Securities. Please go ahead.
David Scharf (Managing Director)
Hi, good afternoon. Thanks for taking my questions. Hey, first one, maybe just following up on kind of loan demand and specifically the kind of the Q1 outlook. You know, your commentary on both kind of credit trends and consumer demand seem very consistent with the other kind of non-prime, you know, personal lenders we've heard from this quarter. As we think about kind of the step down in revenue, does that primarily setting aside tax refund seasonality, Dave, is that more a function of tightening the credit box further, or is it just kind of the limitations imposed by your balance sheet at this point?
Dave Girouard (Co-Founder and CEO)
Thanks, David, for the question. Generally speaking, it's we are kind of a supply and demand balanced or, you know, business model. Sometimes we have excess borrowers and not enough funding. At other times, it can be the opposite. Today, actually, most of the decline in our business is because rates approvals are way down and rates are way up. That's largely due to higher levels of risk in the environment. Now, at the same time, actually, as I had said earlier, in the question from Pete, lenders have pulled back as well. In a strange way, we're relatively balanced, but at a much higher, much lower approvability, much higher interest rate, and that's what's driving lower volumes.
Over, you know, over the year, as we look into 2023, of course, it's hard to say which way it will go, but we're always essentially trying to maintain balance between supply and demand. Right now, most of the decline in volume in our platform, the most fundamental reason really is because the rates are much, much higher, the approval rates are much, much lower. That's this thing we call UMI. It's just a function of the risk that's out there in the environment.
David Scharf (Managing Director)
Got it. Got it. No, helpful. Maybe as a follow-up, just turning to the expense side. You know, I realize it's always dangerous doing just simple math, but if I just kinda divide the annualized cost savings and one-third of the stock comp into the number of employees downsized, you know, it averages about $200,000 per employee, which is not insignificant. I'm just wondering, is there any color you can provide on, you know, perhaps the, you know, the type of disciplines that were rationalized? I don't know if this was primarily, you know, engineering, product development, or in other areas. You know, is there anything in kind of the downsizing that kind of alters a longer-term sort of new product and technology initiative outlook?
Sanjay Datta (CFO)
Hey, David, this is Sanjay. Let's see. In terms of the sort of the, let's call it the allocation of the reduction in force, it was pretty evenly spread across the company, I mean, so functions took a bit of a different absorption than others. Overall, you know, almost all teams were affected as you'd expect when, you know, you have a workforce reduction on the order of 20%, which is what I was. With respect to the product roadmap, you know, I think the main thing that we communicate to the market is that this will at least for the time being, put our efforts in small business lending on pause. We do have every intention of getting back to them when the time is right.
I think that's the sort of the main call-out. There's a couple of other things, you know, on the margins that maybe weren't quite as understood or public. I think that's maybe the sort of the big impact to call it the near to medium term roadmap.
David Scharf (Managing Director)
Got it. Great. Thank you.
Operator (participant)
Our next question comes from Simon Clinch with Atlantic Equities. Please go ahead.
Simon Clinch (Research Analyst)
Hi, guys. Thanks for taking my questions. Lots of really useful information in today's report, Dave, thanks very much. I guess I just wanted to get a sort of a bigger picture perspective on the business model here. When I think back to the performance, and the market share gains you had coming out of the pandemic, I was wondering, I guess, what are the differences in the market structure today in the business model and the institutional funding channels that might mean the share gains that The advancements you've made with your AI models, might perhaps not live up to the standards that we saw coming out of, you know, that very unusual period of the pandemic.
I'm just wondering sort of have a think about the pace of those share gains and what might be working or what might work against it coming out of this particular environment.
Dave Girouard (Co-Founder and CEO)
Sure. I think, you know, our technology has only gotten better. The environment, of course, changed pretty dramatically. As I kind of acknowledged in my, you know, remarks at the beginning, it definitely showed us some things we needed to know kind of that an at-will model where funding can come and go, or lending and/or investing in loans can come and go, you know, month to month is, well, it might be sort of beautiful on a, on a, on a whiteboard and from a pure economist point of view makes a lot of sense. In reality, we need to have volume more locked in and secured, which is, you know, an important initiative for us. The issues we've had really to date are almost entirely related to the funding side.
Some of it is macroeconomic, and some of it, frankly, is on us and things we need to fix. None of it, in my view, is on our technology. I think it continues to be extraordinary and differentiated, if not more so today than it has been. All the improvements I kind of talked about in my remarks earlier, are in some sense masked because if the funding markets aren't operating properly and if lenders aren't deciding it makes sense to lend, then there's only so much we can do. We are, you know, pursuing some initiatives as we've said, to sort of make sure we don't go make the same mistake twice. Having secured funding, committed funding over longer periods of time to us is very fundamental.
This effort we're doing with what we call UMI is really to be really transparent with lenders, in particular with banks and credit unions, of what's going on in the economy so they can make very informed decisions, which might be to tighten standards and slow down volumes at times, but it hopefully won't be as dramatic as it has been in the past, where maybe they didn't have as much insight as they needed to what's going on out there. These are all efforts on our side to fix what we think needed to be fixed in our business. None of them, at least in my view, are really related to the core AI and its predictiveness, et cetera, which we feel very confident in.
Simon Clinch (Research Analyst)
Okay. Maybe just touching then as a follow-up on the UMI index. Yeah, is this something that will potentially prove a really useful tool at accelerating the pace of bank partners coming onto the platform and also you know, keeping it you know, keeping the relationships even stickier than they have been in the past?
Dave Girouard (Co-Founder and CEO)
Well, we certainly hope so. I mean, I think the idea of having a very quantified, and near real time, meaning just you're getting information about the month that just finished, indication of the health of the consumer that you lend to and with different sort of slices and dices available for a lender, is really powerful because it's not something a lender's done in the past. If they have either over-performance or under-performance in their credit programs, it's really hard to attribute that either to something about how you set your system up and the rules you have in your system or maybe the economy is deteriorating in some way, you don't have visibility.
This is really powerful way to say, "No, we can actually isolate the performance of credit model from the impact of the macro economy." That itself, I think is going to be a very powerful new tool and one we think that lenders of all flavors will get excited about.
Simon Clinch (Research Analyst)
That's really useful. Well, thank you very much.
Dave Girouard (Co-Founder and CEO)
Thanks, Simon.
Operator (participant)
Our next question comes from Rob Wildhack with Autonomous Research. Please go ahead.
Rob Wildhack (Director and Equity Research Analyst)
Hi, guys. I wanted to ask about your more committed funding sources. Wondering if you could give me some more detail there. What type of partners you might be in discussions with, what kind of arrangements you're working out with them. Any additional color, and the timeline too, would be really helpful. Thanks.
Sanjay Datta (CFO)
Yeah, Rob, this is Sanjay. Let's see, on sort of the more committed capital style, relationships, I guess I would say, first of all, I think we've always been pretty cautious in saying that this is sort of a transition over time for us. It's not something that would necessarily happen, you know, in the near term. I think these are large, you know, very strategic relationships.
That said, I think we sounded a note of optimism in our prepared remarks. Just to sort of reiterate the points there, you know, I don't think we have anything definitive to call out right now, but we are in a number of conversations with multiple partners that I guess I would qualify as sort of advanced stage. We sort of, you know, mentioned that we had some indications of interest. Again, you know, hopefully we'll have something more definitive to announce soon. I think in the meantime, we're sounding some sort of notes of optimism, if you will. I think they're related to some of the optimistic trends we're seeing in the broader environment, some of the things that we took through.
Your question really is like, what are the sort of the nature of these arrangements. At the simplest form, you know, on the one hand they would, sort of on the partner side, be more committed, for sort of forward commitments at scale of capital. In exchange, you would imagine some kind of, sort of premium in the economics. You know, that could take a couple of different forms. You know, I think we're discussing different structures with different partners, as we speak. It's a bit hard to sort of be too precise. That's sort of the most general sort of description of how these partnerships will work.
Rob Wildhack (Director and Equity Research Analyst)
Got it. That is very helpful. On your current funding partners, how do your conversations with them vary by type? I'm wondering if the conversations with, say, a larger bank might be different than that with a credit union or with a credit fund or your ABS partners. Any additional color you could add there would be really helpful.
Dave Girouard (Co-Founder and CEO)
Sure. This is Dave. Well, I would just say maybe on the bank and credit union side, I mean, they do vary a bit. Credit unions were really flush with deposits a year ago. That is much less the case today. Where credit unions were really starved for loans because they were, again, very flush with deposits, I think that's a little reverted to normal. You know, that just changes their appetite. Banks not much so. I mean, I think banks, there's a lot of interesting competition for borrowers going on out there with regard to deposits. I think it's one of the more interesting dynamics is really seeing some of the new guys in the market really pushing the APYs pay for deposits up.
There's just a lot going on out there that I think is changing pretty quickly. We don't, we don't fundamentally see any overwhelming change in dynamic other than as usual, you know, you can hear it from the CEOs of the largest banks. I mean, there's caution about the economy. They're all kind of caging, you know, will this be an in and out, small recession? Will it not be a recession? You know, hard, hard landing, soft landing. I think that's just sort of the cautiousness that's out there. A year ago, I would say generally there was, you know, on all sides, there's definitely swimming in deposits and in need of credit as a result, and that's definitely much less so today.
Rob Wildhack (Director and Equity Research Analyst)
Thanks, Dave.
Operator (participant)
Our next question comes from Mike Ng with Goldman Sachs. Please go ahead.
Mike Ng (Managing Director of Global Investment Research)
Hey, good afternoon. Thanks for the question. I just have two. They're both on the 1Q 2023 guidance. It was helpful to get a lot of color around what was driving some of the sequential decline in revenue, which sounds like it was mostly a funding constraint. First, I was just wondering if you could talk about whether that sequential decline in revenue was solely due to a tougher funding environment, or are you actually expecting lower levels of rate requests or and conversion? Thank you.
Sanjay Datta (CFO)
Hey, Mike Ng, this is Sanjay Datta. I would say I think that the sort of the constraints that are conditioning our guidance for Q1 are happening on both sides of the ecosystem. On the, let's call it the borrower side, approvability, is constricted on a couple of fronts. One, we did sort of mention that the assumptions around sort of macro forecast and their impact on loan performance are becoming more conservative as we go from Q4 to Q1. Some of that is not necessarily a reflection of what we're actually seeing. It's a reflection of conservatism because the most important thing we need to do in our business is get the loan performance right. You know, we sort of doubled down on that as we exited Q4, and that will spill into Q1.
Of course, there's the seasonality impact that Dave referred to, which is the fact that traditionally in Q1, as you get sort of closer to tax season, you do see a 10%-15% trough, you know, depending on the year. The funding side, as we said, yeah, there's some continuing pullback on funding sources, particularly those who are more reliant on leverage and liquidity, those who rely on the ABS markets. You know, Q4 was turned out to be a tough quarter for ABS issuance. I think that sort of affected some of what we had coming into Q1. Then of course, we've mentioned sort of the loss of our own balance sheet as a funding source, which was, you know, not the majority of our funding source, but it played a factor as well.
I think when you add all of those things together, you sort of some things on the borrower, the approvability side, some things on the funding side, and they sort of add up to where we guided.
Mike Ng (Managing Director of Global Investment Research)
Great. Thank you for all that color, Sanjay. Then just the last question, the second question. What's a, what's a good way to think about the rest of the year? You know, appreciating your comments about, you know, 1Q, likely being, you know, the trough. Should we, you know, expect to grow off of that, you know, $110 million of fee revenue throughout the year, you know, assuming that the funding environment and the, and the UMI environment doesn't necessarily change or, you know, can it be significantly better than that? Thanks.
Sanjay Datta (CFO)
Sure. Yeah. I mean, I guess at the highest level, I think the mechanics that we most focus on and the way I think this will play out. Two things that are very closely related. The first one and the most important one really is expressed by that metric that we call UMI, which is essentially, you know, as that stabilizes and starts to come back down, it means that risk, insofar as the macro is sort of contributing to borrower risk and borrower delinquency that it's subsiding. As that happens, we believe what you'll see is a reconvergence to target for loan performance, which, you know, some of those materials are in our investor slides.
That, that sort of performance will go back to target and in fact back to exceeding target as it has historically. As those two things happen, the approvability side on the borrower side of the ecosystem becomes accretive to the business so that approvals go up, risk goes down. Typically the funding markets will follow that when they start to see signals of subsiding risk and signals of sort of loan target performance and overperformance. You know, typically that's accompanied by, you know, easier ABS markets and certainly if we get a couple of deals in place along in the style of a committed capital, you know, that will provide, you know, the fuel on the funding side to sort of go back to our prior levels.
Mike Ng (Managing Director of Global Investment Research)
Excellent. Thank you for all the thoughts, Sanjay. Really appreciate it.
Sanjay Datta (CFO)
Thanks, Mike.
Dave Girouard (Co-Founder and CEO)
Thanks, Mike.
Operator (participant)
Our next question comes from James Faucette with Morgan Stanley. Please go ahead.
Sandy Beatty (Equity Research Associate)
Thank you. This is Sandy Beatty for James. I have a question on the loan performance trends. The ABS data that we track, has shown a pretty meaningful deterioration just looking at annualized losses, delinquencies, of the majority of the public deals over the last, call it three or five months or so. I just wanna make sure, are we interpreting that correctly? How is your team thinking about that? Just contextualizing with the UMI and then the general comments on the consumer.
Sanjay Datta (CFO)
Yeah, sure. Hey, Sandy. This is Sanjay. I guess there's a couple of, if you're looking at sort of broader ABS issuance right now. There's a couple of phase delays I would call out. The first one is just the time it takes from the issuance or the origination of a loan for it to get sort of issued into season in an ABS deal. Sort of that's sort of, you know, I think a bit of a lagging indicator in that sense.
To sort of speak in the language of vintage, and this is, you know, I think reflected in what you see us sort of produce with respect to the loan performance to target chart that we have in our investor materials. I think that the trough or the low point of loan performance or maybe the high point of excess delinquency, if you will, happened in our view in sort of late 2021, maybe towards the end of 2021, if you will.
Then there's a second phase delay, which I think is probably relevant to what you're looking at if you're looking at broader issuance, which is, in our view, it's pretty clear that, from a phasing perspective, it's the lower income borrowers that became impaired first then now it's the sort of the prime borrowers that are coming under stress. Of course, you know, I think in our sort of issuance and in our collateral, you'll typically see the former more reflected because we tend to work with lower income borrowers. I think if you're looking at broader issuance, it does, you know, probably err towards the side of higher prime borrowers, certainly if you're looking at the other digital players.
I guess in my view, the way I describe it is, I think the lower income borrowers probably hit their trough at the end of 2021. The prime borrowers probably are sort of troughing somewhere mid-2022, and all of that, you know, takes a quarter or two to actually flush through the ABS sort of numbers. That, that's how I would maybe describe the system from our, from our perspective.
Sandy Beatty (Equity Research Associate)
Got it. That's very helpful. One that's more general in nature and really on the back of the January restructuring plan. I know we've talked about 1Q and the forecast in terms of cost cutting. I just wanted to ask generally how you're thinking about timing with respect to the path to profitability, obviously a focus of the market this year, given rates, et cetera. Has that been a conversation? Is there a general target? What's the thought process at a high level?
Dave Girouard (Co-Founder and CEO)
Sure, James. This is Dave. I would say generally when we took the action we took, you know, a few weeks back, we definitely thought we need to put ourselves in a position where fixed expenses make sense in the environment as it exists, not in the environment as we wish it will be later this year. We've largely set ourselves up to be, you know, fairly neutral or, if you will, on fixed expenses and then not making any, you know, large assumptions about the economy improving, et cetera.
Sanjay Datta (CFO)
That's just how we think about it. We're in a very stable position and, you know, in our view, the market we serve is not likely to deteriorate this year. It could stay where it is for a while, and that, you know, is something we could live with. That was the nature of it is let's get ourselves, you know, forget about how many people we had last month or whatever. Let's get ourselves to a fixed expense position that we feel like makes sense in the environment we're dealing with right now. It will not only, you know, give us more confidence in our future from a financial perspective.
We, we'll in fact, you know, be able to emerge out of this at some point, with a lot of leverage and a lot of sort of profit potential in our business 'cause we have slimmed down fixed expenses. We've also gotten really good about, you know, marginal spending on marketing. Our contribution margins are way up. Our acquisition costs on a per loan basis are way down. We're just set up, I think, really well for the future. Again, we're not making any assumptions about a dramatic improvement in the macro.
Sandy Beatty (Equity Research Associate)
Perfect. Thank you for taking my questions.
Sanjay Datta (CFO)
Thanks, James.
Operator (participant)
Our next question comes from John Hecht with Jefferies. Please go ahead.
John Hecht (Managing Director)
Hey, guys. Thanks very much. I guess, you know, thinking about what you guys did about $1.5 billion of volume this quarter or Q4, it looks like you're doing somewhere between, you know, closer to $1 billion in Q1. You're not balance sheeting it. I'm wondering kind of can you characterize, you know, over that 6-month period, who are the buyers, kind of the key, you know, the main channels of buyers or investors, and kind of what's the transfer pricing within each of those channels?
Sanjay Datta (CFO)
Hey, John. This is Sanjay. The channels are, you know, largely similar to what we've described in the past. You know, there's a channel that's sort of balance sheeting, I would say, at the primer end of the spectrum, and they tend to be banks and credit unions. Then of course, in the capital markets there's sort of maybe a bifurcation between, let's call it folks who rely on the ABS markets and folks and funds who do not. I think most of the remaining funds that are working with us are the ones that do not rely on the ABS markets, just given the volatility in the ABS markets.
When you think about, you know, the pricing of loans, well, the banks who are using our technology to put loans on their own balance sheet, you know, through their own origination channel, are pretty much setting their own prices, with respect to what the borrower is paying, and we just, you know, charge a pretty standard fee. There's no real transfer of the loan in that regard. They use our technology and the loan is originated for their own, for their own use, for their own balance sheet. With respect to the capital markets, we've always originated and transferred at par. There's been some minor exceptions to that for folks who have committed volumes forward.
You know, in exchange for that and in exchange for scale, we provide a bit of a discount, but it's something that's, I would say, very close to par.
John Hecht (Managing Director)
Okay. We know you've raised pricing over the past year. You mentioned the loan sizes are a little bit larger on average. Can you give us, like, maybe what's the kind of goalpost of duration and rate and kinda size of loans just for us to think about like what the portfolio, originating portfolio looks like at this point?
Sanjay Datta (CFO)
Well, let's see. With respect to duration and loan size, you know, we don't necessarily have a proactive view on what we're trying to achieve. We, you know, we present the options to the borrower, and the market will sort of... The marketplace will do its thing. I think in the way that the marketplace has trended because we've restricted approvals so much and because we've raised rates so much, the remaining or the resulting collateral is primer than it was, you know, call it six, nine months ago. Primer loans tend to be bigger loans. The fact that many of the sort of the lower grade loans have been removed from the approval box has acted to increase loan size. That's maybe a bit of a mixed effect.
With respect to I think when you say rates, you're sort of describing, take rates, or are you talking about interest rates?
John Hecht (Managing Director)
Well, I mean, I guess I'd be interested, yeah, in the fee, the average fee per, you know, per dollar of origination. What are the yields that you're passing on? Like for like, whether it's a prime cohort or a non-prime, what's the yield differential now versus say a year ago?
Sanjay Datta (CFO)
Sure. Well, on the take rate side, I guess in a general sense, you'll see that the take rates, if you look at our sort of fee revenue as % of origination, they've gone up. They've gone up, really as a reflection of, you know, I think Dave answered a question earlier about underlying loan demand. Right now, fundamental demand is very high. Approvability is low. When demand is high, there's a lot of inelasticity. We've said in the past that we can use that as a way to improve our unit economics in times where volume is contracting.
As you've seen volume contract over the course of the year, our take rates have gone up, and that's despite the fact that the banks, and the prime loans are increasingly a larger fraction of the mix, right? Because they are less impacted by, you know, the, the changes that kick loans out of the approval box.
You've seen an improving take rate, even despite the fact that the, you know, the percentage of loans and the percentage of bank capital has gone up. With respect to yield, again, there's that bifurcation where banks, you know, typically originating lower loss rate sort of primer loans, if you will, are setting their own rates, and they're setting them as assumption of what they see in the economy and what their own cost of capital is. They've obviously not had as direct an impact on their own cost of capital, as for, say, the capital markets. I would say that their yields have gone up, on average, somewhat, but, you know, it's a little bit bank by bank is a bit of a different case.
In the capital markets where we have one essentially monolithic program, you can sort of see, certainly in the investor materials, we've sort of laid out what our gross loan targets are after loss. Just in rough terms, you know, if a year ago they were around the sort of seven, eight ballpark, they're now sort of near 11. They've gone up, you know, roughly commensurate with what has happened to treasury rates, sort of at the two-year duration.
John Hecht (Managing Director)
Okay, great. Makes sense. Thanks.
Sanjay Datta (CFO)
Thanks, John.
Operator (participant)
Our next question comes from Hal Goetsch with Loop Capital. Please go ahead.
Hal Goetsch (SVP and Senior Fintech Analyst)
Hey, thanks for taking my question. I just wanna ask about your automotive business. I just wanna make sure I understand what you said. Your... The AI-powered platform is in only 27 of the some 178 dealerships. Is that right? You're making loans in 27. In those 27, it's taken nearly 42% share of the loans on those dealer management systems. Is that the best way to think about that?
Sanjay Datta (CFO)
That's right. Though that was-
Hal Goetsch (SVP and Senior Fintech Analyst)
Yeah.
Sanjay Datta (CFO)
citing when our loan offer is shown to somebody.
Hal Goetsch (SVP and Senior Fintech Analyst)
Okay. Is the loan like shown? Is it participating every time and being given an opportunity? 'Cause this is the point-of-sale part of your business. The other part of your business is kinda, you know, refinancing other expenditures. This is a pretty cool part of your business, this point-of-sale essentially for very large ticket. I just wanna know, you know, how many extra deals maybe, you know, your system is helping the, a dealership complete on an average week because those are very profitable transactions for a car dealer. Could you just share with us what you can about that?
Sanjay Datta (CFO)
Yeah. I think, I mean, I don't have a specific number for you, but for sure we have. One of our very primary values for dealerships is that we can make loan offers to borrowers that aren't getting them elsewhere.
Hal Goetsch (SVP and Senior Fintech Analyst)
Yes.
Sanjay Datta (CFO)
or sometimes just better rates than they would see elsewhere. Also, the close rate, because it's a very automated process, is significantly faster and better for the dealer. That's the kind of primary value proposition. I think if you wanted to just look at kind of wallet share, which is a different sort of cut on things, and you take out the captives, meaning the OEMs running programs themselves. Outside of the captives, I think we've about, in those 27 dealers, about 20% wallet share outside of the captive loans.
Hal Goetsch (SVP and Senior Fintech Analyst)
20% outside of captives. Okay. Okay, great. In one part on the overall, you know, market, for the, you know, the side of the platform for, you know, supply, the supply for loans, the buyers. You know, how much of this recent, you know, issue is that those buyers have so many more places to go now that rates have moved up. How would you characterize? Is that a fair characterization of what's going on? Is this, you know, 2 or 3 years ago, hey, trying to find something yielding 6%, 7%, 8%, 9% was hard. Now it's a little bit easier.
Sanjay Datta (CFO)
Yeah. That's definitely been a dynamic over the, you know, the past couple of quarters.
Hal Goetsch (SVP and Senior Fintech Analyst)
Yeah.
Sanjay Datta (CFO)
You know, let's call it hedge funds that, you know, previously needed to sort of, you know, buy and lever up in order to get high single-digit returns can now buy senior bonds that are returning 7% in some cases. They can sort of meet their hurdles with different alternatives, as compared to before. There's been, you know, a lot more competition for yield. I think that, you know, that's been an environment that has been a little bit anomalous. I think that we're starting to see signs certainly of the senior instruments out there starting to revert a little bit and tighten up in terms of how they're pricing. Yeah, there's been some substitution.
Hal Goetsch (SVP and Senior Fintech Analyst)
Okay. I think I have one last question. Like on your, you know, 92 lenders now, is, you know, is there generally like kinda same store sale growth, or are we still in a period now where the macro is still causing even the 42 that were originally on there to lend less because it's the macro? You really don't have that view yet because the macro has changed even on the original 42 you started with.
Dave Girouard (Co-Founder and CEO)
Yeah, for sure. The macro affects everybody. Meaning all of our partners generally to one degree or another are feeling the impact of the macro. That can mean they're slowing down or they're pausing. Sometimes they're signing with us and implementations are taking longer because they're not as. They're just more cautious. They know this is a direction they're going in, but they're moving a little cautiously in the beginning of 2023 or the end of 2022. For us, you know, we are adding them at a good clip, and if you sort of see the pace of additional lenders on the platform, we're really happy with that.
They're not converting into large, you know, quotas, monthly quotas very, as quickly as they would've in the past, and that's a function of the economy. Having said that
I think we feel happy that we're adding future capacity right now. You know, when the clouds part a little bit and there's a little more clarity, I think, you know, we'll have a much larger number of lenders on the platform that are ready to go and perhaps have been running at a very small level for a while out of caution. We'll, you know, presumably be ready to go to larger volumes when they have confidence.
David Scharf (Managing Director)
Great. Okay. Thank you so much.
Dave Girouard (Co-Founder and CEO)
You bet. Thank you.
Operator (participant)
Our next question comes from Arvind Ramnani with Piper Sandler. Please go ahead.
Arvind Ramnani (Managing Director)
Hi. Hi, thanks for taking my question. Yeah, I just wanted to ask about the lenders, lending partners that you onboard. You know, I mean, how much of that is like, you know, kind of like a sales process where you have a sales team going out there looking to sign up new lenders and then onboard them, and then once they're onboarded to kind of, you know, kind of show them loans or kind of syndicate loans, you know, with those particular lenders? I understand, like, you know, kind of the loan processes have, you know, you have like a, you know, 80% above kind of a processing rate. In terms of lenders, if you can just kinda walk through that process a little bit, that'd be helpful.
Dave Girouard (Co-Founder and CEO)
Sure, Arvind. This is Dave. I think it's easy to compare it to kind of an enterprise selling process, right? We're selling technology to banks to help them lend along with the flow of borrowers. The process really looks like what you might expect out of seeing somebody selling, I don't know, SaaS software for this or that. you know, you have to win the business side. There's a lot of effort to get through committees and such because they have risk committees and credit committees and such. We know the drill now, so we've done it a lot of times, but it is an enterprise selling process. Then an onboarding process, which, you know, you could think of as the customer success team, et cetera, helping somebody walk through a process of getting live and originating loans.
After the fact, there's just, we're almost constantly in touch with them, and they're thinking about what they wanna do next and where volumes are and what we're seeing. There's a lot of, you know, a fairly heavy amount of account management. That's why, you know, there's, I think we said 90+ lenders on the platform today. You know, we're imagining a day when there's 500 or more. We want them to be able to do as much as they can themselves, but we're certainly handling them very carefully one by one today.
Arvind Ramnani (Managing Director)
Okay. That's great. Like, you know, to throw a number out there, whether it's 500 or number bigger or greater, will that solve kind of this problem of, kind of a constrained lending environment? Like, you know, I mean, like you said, you know, we may be too late to kinda solve the problem kinda right now, and we're potentially even getting out of it. Like, you know, let's say, you know, a few years from now, we go through another kind of tough economic cycle, and then you're sitting with a base of, you know, maybe 500 or more, like lenders. Will that, will that kind of make this situation a lot easier?
Dave Girouard (Co-Founder and CEO)
I would say it's one of several things that we would like to put in place before the next cycle, if you wanna put it that way. Having a lot more lenders on the platform is great, but if they all act and behave the same, then it doesn't help all that much.
In reality, the lenders that are on the platform today, they will look back at this time and say, "Well, it turns out the Upstart loans performed all the way through that." We are today building a proof point for a lot of the credit unions and smaller banks on our platform who have not seen credit deteriorate, who've actually performed really well, yet out of an abundance of caution and because this is the first cycle they've been through with us, they do pull back and they do sometimes pause. I think, first of all, having another proof point, or having this very large proof point, if you wanna call it that, of the last 12 months, will serve us well in the future because the loans for these banks and credit unions have really performed well.
We'll also be in different categories. If they started with us in personal lending, it may be in auto lending or home lending, et cetera. That, of course, I think has a lot of opportunity to sort of cement the relationship further. The lenders definitely have a lot of potential for us to fill out a large part, the primer end of what is originated through our platform. A lot of things we can do and we are doing. The next time round, you know, there'll always be some volatility in our business given the nature of what we do, but we certainly hope it won't look like it has in the last year, and we are working very hard at that.
Arvind Ramnani (Managing Director)
Perfect. Just kinda last question? I mean, you know, you certainly provided guidance, which was helpful and, you know, kind of provided some guardrails on what you'll need to do to kind of meet those, meet those numbers. You know, if you kind of think of like, you know, like what scenario would kind of drive like either upside or downside to kind of the estimates you provided? kind of what needs to happen, kind of with the broader macro for like, kind of the range of outcomes to change as the year progresses?
Sanjay Datta (CFO)
Yeah. Hi, Arvind. This is Sanjay. It's relatively straightforward. There's sort of an answer both on the borrower and on the funding side. Upside would look a lot like sort of what I described earlier. UMI comes down, mechanically loan performance will sort of achieve target slash overperform. Then, you know, I think as a consequence of that, the funding will sort of return to the platform where we will sort of create some partnerships that will create some scale that would create upside certainly or a sort of a trajectory back to where we were previously. Downside would be the opposite. I mean, if the world degrades or devolves further.
Personal savings rates do a U-turn and sort of go back down to low levels and or the funding markets get even more skittish versus where they are today that, you know, I guess theoretically could create some downside as well.
Arvind Ramnani (Managing Director)
Perfect. Just last one, if I could, you know, this AI and ChatGPT and, you know, bunch of these things that have kind of made kind of more mainstream press, you know, has kind of... Have some of your kind of conversations with some of your partners become a lot easier, right? Like, I mean, you know, two years back when you were talking about AI, people were there may have been a cohort of folks, you know, expressing some level of skepticism that, you know, this AI thing is, you know, kind of not very tangible.
Now with it becoming more, kind of broadly, kind of well-known and publicized with, you know, kind of just overuse the word ChatGPT, have some of those conversations changed where people are like, "Okay, fine. You're, you're using AI. I can, I can actually kind of wrap my hands around it now that I've touched it.
Sanjay Datta (CFO)
I think in some sense, ChatGPT and this kinda generative AI as it's known, is obviously a different class of AI trying to do something very differently. In some sense.
Arvind Ramnani (Managing Director)
Yeah.
Sanjay Datta (CFO)
It's free marketing for us because the category of AI is getting credence. When you see what ChatGPT does, you, it can sort of stunning to just try it if you haven't tried it. It sort of says, well, if it can do that, certainly it can build a better credit model and can make smarter lending decisions. What we're trying to do actually seems much more straightforward in many ways. It's an advertisement for the power of AI and for the fact that AI is gonna be very central in our economy for the decades to come. If you're a bank executive, you really wanna think about how that fits the new future, how you start to get awareness of it, and it just makes Upstart, I think, a more attractive partner.
Arvind Ramnani (Managing Director)
Great. Thank you very much.
Sanjay Datta (CFO)
Thanks, Arvind.
Operator (participant)
Our next question comes from Dan Dolev with Mizuho. Please go ahead.
Dan Dolev (Senior Analyst and FinTech Equity Research)
Hey, guys. I only have one question. I'm gonna make it easy for you guys. Just really quick, it looks like the, you know, like, the subprime and even near prime is kind of beyond their trough. Does that mean that you can, like, reopen the credit box in Q1?
Sanjay Datta (CFO)
Hey, Dan. Sorry, I didn't quite hear. You said that the sort of the lower prime borrowers are beyond their what?
Dan Dolev (Senior Analyst and FinTech Equity Research)
Yeah. It looks like based on what you said is that the, you know, the near prime and subprime is kind of beyond the trough in terms of their credit risk.
Sanjay Datta (CFO)
I see.
Dan Dolev (Senior Analyst and FinTech Equity Research)
Does that mean that you can actually reopen the credit box in the first quarter? That was my other question. Thank you.
Sanjay Datta (CFO)
I think we would look to reopen the credit. We would look to sort of increase approvals as they started to trend back down. I don't think we've quite reached the point where we're willing to call that. I think they've been at a very stable level now for a multiple months. You know, we'd need to see evidence of them, you know. Let me maybe talk about it in macro terms. We need to see further evidence of personal savings rates rebounding. We need to see further evidence of income coming back into line with consumption. The model will adjust as it sort of detects the patterns in repayment, which will result from that.
It's not necessarily a thing we need to sort of, you know, take a decision on. The model will react to improving trends as they begin to play out in the data.
Dan Dolev (Senior Analyst and FinTech Equity Research)
Got it. Thank you. Appreciate it. Nice results on the quarter.
Sanjay Datta (CFO)
Okay. Thank you, Dan.
Operator (participant)
Our final question comes from Vincent Caintic with Stephens. Please go ahead.
Vincent Caintic (Specialty and Consumer Finance Analyst)
Hi. Thanks for taking my questions. Two-part question, both related to the funding side. First, on the balance sheet, if you could discuss, you know, how much capacity you do have for increasing the amount of loans that you have on balance sheet, and if there's maybe other ways to increase that capacity. You know, some fintechs, for example, have banks as an example. The second part of the question is, saw that you recently had an Upstart securitization, so the 2023-1. Just wondering if you could talk about that, the appetite there and any learnings you can have, like if there's some, you know, potentially more opportunity there. Thank you.
Sanjay Datta (CFO)
Sure. Thanks, Vincent. Let's see. On the first one, well, let me start by saying I don't think we have a desire to substantially increase our balance sheet capacity, certainly in terms of its percentage of the overall platform and what it represents. I don't think a sustainable strategy would be to create bigger and bigger balance sheet capacity in the way that some, you know, peers have pursued through bank charter. I just don't think that's the model for us for a lot of reasons which we've covered in the past. I mean, we could effectively scale up our capacity as the platform scales up. You could imagine when we're doing many different products and running different R&D projects with maybe want a bigger capacity.
I think we're at our local maximum now, and I think it's suitable to the size and the scale of the platform. We would want the recovery of the platform to be driven by the funding markets, not by, you know, increasing balance sheet capacity. That's I think a fairly deliberate strategic choice. With respect to the ABS markets, we did, you know, close and price a deal in January. Yeah, like I said, I guess I would characterize it at a high level. I would say that the...
You know, if you think about basically the senior and the subordinate parts of a securitization, the, the senior instruments seem to have a lot, a lot of rebound in demand and their spreads have tightened a lot. I think they priced significantly better than they did in Q4. We're still not at the point where there's a real market for subordinate risk, that has not improved versus Q4. You know, typically that's the way that things get sequenced. The, the senior or the sort of less risky instruments come back first, and then you sort of eventually will see a rebound in the, in the subordinate parts as well. I think we're sort of maybe...
Hopefully, if nothing, you know, if nothing does a U-turn, we're sort of midway through that transition, hopefully.
Vincent Caintic (Specialty and Consumer Finance Analyst)
Okay. That's very helpful. Thanks very much.
Sanjay Datta (CFO)
Thank you.
Operator (participant)
Thank you. This does conclude today's call. Thank you for your participation, and you may now disconnect.