Upstart Hldgs Q3 2026 Earnings Call Transcript

Upstart Hldgs (NASDAQ:UPST) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Upstart Hldgs reported strong Q3 2026 results with a 48% year-over-year increase in contribution profit to $218 million, despite macroeconomic headwinds impacting revenue.

The company achieved a positive 17% contribution margin in its secured products, with notable improvements in automation and loan sales, and plans to shift focus back to growth in 2027.

Upstart Bank is on track to open in early 2027, expected to enhance capital efficiency by transitioning loans to deposit funding, without requiring additional equity capital.

Upstart Hldgs revised its full-year guidance to $1.35 billion in total revenue and $260 million in adjusted EBITDA, reflecting macroeconomic challenges like rising UMI and interest rates.

Management remains optimistic about long-term growth driven by technology and marketing advancements, despite current macroeconomic pressures.

Full Transcript

OPERATOR

Ladies and gentlemen, please stand by. We are about to begin. Good morning and welcome to the Upstart Hldgs third quarter 2026 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 would now like to 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 Hldgs earnings call for the third quarter of 2026. Joining me today are Paul Gu, our co-founder and CEO, and Andrea Blankmeyer, our CFO. During today’s discussion, 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, Paul, over to you.

Paul Gu (Co-Founder and Head of Product)

Thanks, Sonya. Thank you everyone for joining us today. I like to use the expression that the growth of our business is equal to alpha plus beta times macro. The idea behind this classic formula is relevant to every business, but especially important for understanding our results and outlook today. Since laying out our 2026 focus areas earlier this year, I couldn’t have asked for better execution. The team has delivered durable compounding growth from technology and marketing advances at an exceptional rate.

At the same time, our business is sensitive to macro conditions, particularly borrower health and interest rates. Those became a sizable headwind in Q3 and have gotten worse to start Q4. Looking back over the past few months, I’ve landed on three conclusions I want to share with you today. First, I’m proud of the team and our delivery in Q3. Our results were strong by just about any measure and exceptional when accounting for macro. Second, we expect a mixed finish to the full year relative to our original guidance. We see fee revenue and contribution profit finishing higher, but total revenue and adjusted EBITDA finishing lower.

That’s because macro has an outsized impact on revenue derived from our balance sheet. Third, I am more confident than ever in Upstart Hldgs’ long-term trajectory. That’s not just obligatory CEO optimism. Macro comes and goes. The alpha compounds, and our results are proving we can deliver it. Let’s talk about each conclusion, starting with Q3 results. Contribution profit—our best single measure of profitable growth in new originations—reached $218 million in Q3. That’s up 48% year on year, a new record breaking the one we set just last quarter. This result is strong, but it understates the underlying progress in the business. That’s because our Q3 numbers, starting with origination volumes and cascading down the P and L, were held back by a sizable macroeconomic headwind.

The Upstart Macro Index, or UMI, is our estimate of how macroeconomic conditions affect defaults on our personal loans. It averaged 1.5 in Q3, up from 1.41 in Q2, and we underwrote proportionately more conservatively. The explanation is likely pretty simple. Annual inflation re-accelerated to 3.7%, with prices rising twice as fast as wages over the past quarter. Not surprisingly, consumer delinquencies have risen across a range of third-party measures.

The share of all Americans at least 30 days late on any credit obligation jumped to over 19% in September, the highest level in years. Without that 9 point increase in UMI, we estimate Q3 originations would have been at least $370 million higher. In that scenario, year on year origination growth would have been 57% and contribution profit growth 61%. We earned that alpha in two places. In core personal loans, we improved the models, user experience, and borrower ecosystem. In secured, we improved automation, conversion, and monetization in pursuit of profitability. In Q3, we added over 140 new features to our core underwriting model, including numerous proprietary signals of how consumers engage with our platform before they take a loan. Combined with improvements to our algorithms and training process, our model’s accuracy lead over a traditional credit scoring benchmark widened again.

Our model is now 2.77 times as accurate, and 87.27% of the inaccuracy gap is still ahead of us. That’s our runway. We also used better models to reach more people. Our marketing programs and user experiences drove more than a million people to apply for an Upstart Hldgs loan for the first time this quarter, bringing the cumulative number of unique Americans who’ve applied for an Upstart Hldgs loan to more than 25 million, all while lowering our cost of customer acquisition.

More than 555,000 unique Americans took out loans in Q3, a new record, and they are more likely than ever to come back. Over 250,000 of them were returning customers who’d already borrowed with us before. Now to secured products. We told you we wanted to be contribution margin positive by the end of the year. The team went all in and got it done. In Q3, secured contribution margin was a positive 17%, an improvement of more than 50 percentage points sequentially. I’ll give a few examples of how we got there. First, we sold more of our secured loans to third-party capital partners and at better terms. Second, we increased the level of automation across our secured products.

In home, nearly 40% of funded loans were fully automated with no human intervention by Upstart Hldgs, up from less than 5% a year ago. In auto secured personal loans, we significantly increased the fully automated rate over the last year from 4% to 21%. Third, in auto retail, we began optimizing dealer compensation around where we create the most differentiated value. And we rebuilt our credit application, increasing end-to-end conversion by 31%.

These are young products in enormous markets. After locking in our margin gains this year, we’ll gradually shift our focus back to growth in 2027. As we do that, we intend to hold secured contribution margin consistently positive between breakeven and 25% quarter to quarter as we refine our approach to growth in each category. Longer term, we expect those margins to resume their march upward as we create increasing differentiation and value for our customers, just as they did historically in core personal loans.

Our other major focus this year has been capital efficiency. Loans held directly on our balance sheet declined to 4.8% of total loans outstanding in Q3. More than 95% of all Upstart Hldgs-powered loans outstanding are now third-party funded, with the bulk coming from committed partnerships. In exchange for commitments of up to two years, we co-invest and share in the performance of those loan cohorts. Those partnerships are designed to make our funding base resilient through market cycles.

Our priority now is reducing the share of equity capital our loan funding requires from us. Over the past year, we grew outstanding loans across the platform by 38% while increasing equity used only 7%. That’s a good start and we intend to keep going. Another project relevant to our capital efficiency is Upstart Bank. We are on track to open Upstart Bank in early 2027, subject to the remaining regulatory approvals. When that happens, we plan for most of the loans on Upstart Hldgs’ balance sheet today to move to the bank and become deposit funded, which will unlock net cash rather than consume it. As such, we expect capitalizing the bank will require no incremental equity capital. Once open, Upstart Bank will provide the many benefits we’ve previously shared, expanding our market reach, reducing operational complexity, and providing more efficient financing for certain loans.

As we’ve said before, it will not change our strategy of funding the vast majority of loans via third-party capital. Now let’s turn to our outlook for the full year. In February we guided to total revenue of $1.4 billion and adjusted EBITDA of $294 million. This assumed UMI went no higher than 1.5 and interest rates were flat or down. Since then, UMI has climbed 14 points from 1.39 to 1.53, while the two-year Treasury yield has jumped by more than 115 basis points as of the end of October, with around half of that increase happening in September alone. Those are large moves and I want to put them into context.

We have previously shared our estimate that a 5 point increase in UMI, for example from 1.4 to 1.45, reduces our daily originations by roughly 5 to 10%. Higher funding costs have a similar effect. Put simply, for each 1 point increase in UMI or 10 basis point increase in funding costs, we’d expect daily originations to fall by roughly 1 to 2%. This heuristic applies to our primary business model of earning fee revenue from new originations. But there’s an additional way that macro impacts our P and L, and that is via the loans and co-investments on our balance sheet. Because these positions were accumulated over many quarters, they are relatively large. As a result, an increase in UMI causes a significant reduction in fair values and net interest income. The impact to total revenue and profit from this is actually larger than the impact from reducing new originations.

Higher interest rates also lower fair values, albeit to a much lesser extent. Combined, these effects have created a substantial macro headwind for us. Without that pressure, we believe the full year will be trending well ahead of our original guidance on every line. As it stands, we’ve outrun the macro on the metrics tied to new originations and now expect full-year fee revenue and contribution profit to modestly exceed our original guidance. However, income from the balance sheet is tracking well below our initial outlook.

In addition to being more sensitive to macro, as I just explained, this line item—unlike fee revenue—does not benefit from most of our advances in technology and marketing. As a result, we now expect full-year total revenue of approximately $1.35 billion and adjusted EBITDA of approximately $260 million. This updated outlook assumes UMI does not exceed 1.55 through year end and no material change to two-year Treasury yields from current levels. Finally, I said I’m more optimistic than ever about the long term. It may sound like an odd conclusion to draw when macro is worsening and we’re missing on profit, but it’s the truth. I’ll say it again, growth equals alpha plus beta times macro. Mathematically, alpha is the difference between actual results and the results you’d expect from macro alone. Our nominal contribution profit accelerated to 48% year over year in Q3, well above what is implied in our multi-year guide.

Without the increase in UMI, we estimate it would have been at least 61%. On a full-year basis, it is remarkable, frankly, that despite the 14 point increase in UMI and over 115 basis point increase in interest rates, we still expect to generate more fee revenue and profits from new originations than we expected at the start of this year. Beta—beta is the sensitivity of our balance sheet-derived income to macroeconomic conditions—and it is high today.

Fortunately, we’re already bringing it down. As we reduce the ratio of Upstart Hldgs equity dollars required to total loans funded, we expect that will continue. Macro bounces around. Sometimes it’s a plus, sometimes it’s a minus. UMI has gone down in exactly 15 of the last 30 quarters. Same for interest rates. My own view on macro reminds me a little of Warren Buffett’s New York Times piece in 2008 called “Buy American. I am.” Borrowers are hurting this year because inflation flipped real wage growth negative. But this is the United States. People get back on their feet. Real wages rise over time. The macro will take care of itself. Most importantly, we’re proving the Upstart Hldgs engine—execution against our years-deep technology and marketing roadmap—delivers alpha at an exceptional rate.

Keep compounding that and I believe, no matter what, Upstart Hldgs becomes an extremely large and profitable company. With that, I’ll turn the call over to Andrea.

Andrea Blankmeyer (Chief Financial Officer)

Thanks, Paul, and good morning, everyone. In Q3, our focus on core personal loans improving secured Unit economics drove record contribution profit. Combined with expense discipline, we delivered higher GAAP net income and improved capital efficiency against a harder macro backdrop. I’ll walk through the quarter, then discuss our revised full-year outlook. Total originations were 4.1 billion, up 44% year over year. Within that, unsecured originations were 3.5 billion, up 33% versus last year, including core at approximately 2.45 billion. Secured originations were 587 million, up 194%, with auto loan volume roughly tripling and home roughly doubling relative to Q3 of last year. Total revenue was approximately 371 million, up 34% year over year. Revenue from fees was a record 364 million, up 41% year over year.

Unsecured lending contributed 330 million in revenue from fees, up 30% year over year. Secured products contributed 34 million, up 538% year over year. Take rate, which we define as revenue from fees as the percentage of total originations, was 8.8%, up about 60 basis points from 8.2% in Q2, with both product categories improving sequentially. Net interest income and fair value adjustments totaled approximately 6 million, down 12 million, or 65% year over year. Two main things drive this: the average balance of loans we hold and the expected credit performance of those loans and the loans underlying our beneficial interest. Sequentially, this line declined about 10 million. Roughly half of that decline was fair value write-downs and charge-offs as average UMI increased from 1.41 in Q2 to 1.5 in Q3.

The other half reflected a debt sale in Q2 that did not repeat. Rising benchmark rates had a minimal impact on our fair value position in Q3. Next, contribution profits, which is our non-GAAP metric defined as revenue from fees minus variable costs for borrower acquisition, verification, and servicing. Contribution profit reached a record 218 million in Q3, up 48% year over year. Contribution margin was 60% versus 57% in Q3 2025 and 55% in Q2 2026. The 5 percentage point sequential increase was driven by margin improvement in both our unsecured and secured categories. Unsecured contribution margin was 64%, up 2 percentage points from 62% in Q2, reflecting a higher take rate along with lower borrower acquisition cost as a percentage of originations.

Secured contribution margin was a positive 17% compared with a negative 35% in Q2 and roughly 200 percentage points better than Q3 of last year. A higher take rate and lower borrower acquisition costs helped us reach a positive contribution margin a quarter ahead of our target. As Paul mentioned, we expect more quarter-to-quarter variability in this margin than in unsecured as we scale these businesses, and we intend to hold it to a band of break even to 25%.

GAAP operating expenses were approximately 335 million in Q3, up 32% year over year and down 4% sequentially. Within that, variable expenses—borrower acquisition, verification, and servicing costs—declined 6% sequentially, with borrower acquisition costs alone down 11% to 91 million. Fixed expenses, defined as total operating expenses minus borrower acquisition, verification, and servicing costs, declined 3% sequentially to approximately 188 million, better than the low single-digit growth we guided to in August.

Within that, stock-based compensation was 41 million, down from 46 million in Q2, reflecting seasonality in how we recognize this expense. Excluding stock-based compensation, fixed expenses were roughly flat sequentially. Net income was approximately 37 million, up 15% year over year with a 10% margin. Diluted EPS was $0.33 based on a weighted average diluted share count of 125 million and reflects the assumed conversion of dilutive convertible senior notes consistent with GAAP requirements. Adjusted EBITDA was approximately 89 million, up 26% year over year with a 24% margin.

Turning to funding and capital efficiency, as Paul discussed, we’re focused on supporting platform growth with proportionately less equity capital, bringing down the beta in his equation. To measure our overall equity capital use, we combine the equity supporting (1) the loans on our balance sheet, (2) our co-investment exposure alongside committed capital partners, and (3) our retained interest in securitizations, all net of related financing. Taken together, the overall equity efficiency of our platform has been improving.

Total equity capital used represented 9% of our total platform loan balance outstanding in Q3, down from 11.6% a year ago. That improvement reflects the declining share of loans held directly on our balance sheet, even as we increased our co-investments alongside committed capital partners. Capital ultimately flows to the assets with the best risk-adjusted returns. We have been able to grow our capital partnerships on better terms over time because of our strong credit performance.

The average return of our last 12 quarterly loan vintages exceeds U.S. Treasuries by approximately 660 basis points. Next, Upstart Bank. I’ll explain how we expect to fund its launch and transition loans from the parent company, subject to the remaining approvals. First, we’ll capitalize the bank with approximately 404.1 million in cash and servicing assets. Second, Upstart Bank will raise brokered deposits through deposit partners. We have agreements with two major partners, giving us the ability to raise ample deposits shortly after the bank launches. Using deposit funding, Upstart Bank will buy most of the existing loan book and begin funding new originations on our network.

Third, the equity funding underlying the existing loan book will be released as cash, and we’ll take orderly steps to pay down the related warehouse facilities. We expect our co-investments in committed capital partnerships will remain outside of the bank. The net effect of these transactions is expected to be an increase in our consolidated cash balance. We expect these transactions to take place over several weeks following the initial bank capitalization.

Illustratively, using our actual Q3 balance sheets, these transactions would result in pro forma consolidated unrestricted cash of over 1 billion, and the bank would have a Tier 1 leverage ratio and a total risk-based capital ratio well in excess of our required minimums. Turning to October and our full-year outlook, October originations were approximately 1.25 billion, with daily volume down 9% versus September and up 26% year over year. The sequential decline reflects two macro headwinds: UMI rising over the course of the month and benchmark-driven increases in funding costs in September flowing through to borrowers in pricing in October. Those pressures weighed on volume even as our models continue to improve. October is a useful starting point for our outlook, as benchmark-driven increases in funding costs are already reflected in October’s pricing and volume.

For the full year, we now expect approximately $1.32 billion in revenue from fees and total revenue of $1.35 billion; contribution profit of $750 million, up roughly 41% year over year; adjusted EBITDA of 260 million, representing a 19% margin. Relative to our original outlook, we now expect higher fee revenue and contribution profit but lower total revenue and adjusted EBITDA. Our execution has more than offset macro pressure on the metrics tied to new originations.

A reduction in our outlook reflects lower net interest income and fair value adjustments primarily driven by higher UMIs. Our latest UMI reading is 1.53, above the average we saw in October. Our updated guidance assumes UMI remains at or below 1.55 through year end and no material change in two-year Treasury yields. With October originations known and only two months remaining, we have greater visibility into full-year fee revenue. Fair value adjustments remain more sensitive to changes in macroeconomic conditions across our existing loan portfolio.

To close, we enter the final months of the year with record contribution profit, positive secured contribution margin, and improved capital efficiency. Our focus remains on building on that product while maintaining expense discipline. With that, operator, we’re ready for Q&A.

OPERATOR

Thank you, ladies and gentlemen. If you would like to ask a question, please signal by pressing star one 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 one to ask a question. We’ll go first to Dan Dolev with Mizuho. Your line is open. Please go ahead.

Dan Dolev (Analyst)

Hey guys. Really nice results. Thank you for taking my question today. Really appreciate it. Can we ask you a little bit about the growth in home loans? We thought this was like a really nice thing. There is a lot of strength in the home loan growth. How do you feel about selling those versus some of the other loans and how you feel about this market overall? Thank you.

Paul Gu (Co-Founder and Head of Product)

Hey Dan, thanks for the question. Yeah, we’re really excited about our home loans business, as we are really about, at this point, every product that we’re in. Every business line that we’ve got is one we have a lot of conviction in. So we’re really, really focused as a company, and in this quarter we were hyper-focused on getting the secured products to profitability. What we shared over the last couple quarters is that that was our real number one priority for the secured product teams. And I’m really proud of what those teams pulled off as they did a really hard pivot to just focus on margin, getting above break even. And you can see in this quarter we did it a whole quarter early before the end of the year; we hit a 17% secured contribution margin.

And yeah, we absolutely expect a lot more growth out of these products. But to me the sort of first order of business was getting to profitable. We have a little bit more work to finish up some of the efforts there. That will really be what we do this year. And then as I said in 2027, our attention is going to turn back to growth and we certainly expect these to be a really big part of our future.

Dan Dolev (Analyst)

Thanks and really nice results.

OPERATOR

We will go next to Kyle Peterson with Needham.

Kyle Peterson (Analyst)

Great, good morning and thank you for taking the questions. I guess I wanted to start out on interest rates and kind of the moving pieces’ impact on the model. So, per your comment that obviously I think there’s a bit of volume and approval choke-off with the higher rates, but I guess is that the full impact that you guys expect, or are there any kind of knock-on impacts from funding partners? I’m assuming their cost of capital probably ticked up a little bit in October as well.

So just want to see if there are any other second-derivative impacts we should be mindful of with regards to rates.

Andrea Blankmeyer (Chief Financial Officer)

Thanks for the question, Kyle. Yeah, for everything we sort of know as of today, the impact of rate increase that we saw in September and where rates were in October is fully reflected in the pricing on our platform in October. So our October originations are reflective of the pass-through of that cost of capital to our platform and our pricing. Just kind of, you know, stepping back maybe to say a little bit more about how rates kind of show up on our platform and in our funding costs, at a high level you can think about most of our institutional capital as kind of being most levered to two-year Treasuries on average.

And our depository and bank capital kind of being benchmarked to fed funds. That’s kind of the mix of benchmarks kind of on average underlying our platform. And as a marketplace, what we’re typically doing is updating pricing on the marketplace on about a monthly lag. So to the extent that we see rising rates in the month of September, as we did for the most part, that is flowing through into pricing on our platform and funding costs in the month of October.

The final thing I’ll just maybe comment on is that while we’ve seen treasuries up 120 basis points over the course of this year, that hasn’t necessarily been the effective funding cost passed through to our platform over the course of this year. We have seen across our cost of capital improve spreads and improve cost of funding that has partially, though not fully offset that increase in rates. Yes, that’s a great question. And so one of the benefits of the bank charter will be improved economics for Upstart Hldgs in that we will no longer need to pay the fees and accrued interest to our bank partners that are originating loans today. So we will retain those economics. And so in expectation we would expect to see modest improvements in take rates as we transition to Upstart Bank as we will be retaining fees that we currently pay to our originating partners today as well as a modest improvement in net interest income as some of the economics to those parties are flowing through interest income line.

OPERATOR

We’ll go next to Peter Christensen with Citi.

Peter Christensen (Analyst)

Good morning. Thanks for the question, Paul. I guess how should we think about UMI staying around these kind of levels 1.55, 1.53-ish throughout next year? And I’m curious, you know, how do you think about Upstart Hldgs still growing fee revenue contribution profit at attractive rates, or does the longer term framework require some improvement in consumer credit conditions from here? Thank you.

Paul Gu (Co-Founder and Head of Product)

Yeah. Hey. Hey, Pete. Well, first of all, you know, I think the thing I always say is we don’t claim to predict future changes to macro conditions. You know, we don’t have any special view on what’s going on in Iran or the war, oil prices. I mean, I think everyone’s just got to have their own models for that and where interest rates and inflation are going. But we do pride ourselves on being the fastest and most precise to respond to that, at least as it relates to consumer credit.

And that’s what we do with the UMI. I would say in terms of our longer term outlook, I think the results today, what we basically said was, hey, in the near term the macro has a pretty large impact on our results, particularly via the sort of balance sheet component of our business. But actually on a longer term basis we’re feeling really optimistic about the state of the company. And that basically comes from this framework around how much of the performance we’ve seen is alpha, how much of it is really just, you know, the macro.

And you know, in the kind of medium term, I think if the macro kind of takes care of itself, that really mostly just means it kind of stays around where it is, then we’re really optimistic that, you know, the rate at which we are delivering alpha, the rate at which we’re generating growth that is tied to our advances in technology and marketing is going to be plenty to sort of sustain the kind of multi-year growth that we’ve talked about and that we’ve, we’ve guided to.

So we actually don’t think that we need a tailwind from macro. But certainly, you know, headwind is going to subtract against, you know, whatever efforts we’re putting in. But right now we’re feeling really optimistic that the rate of progress we’re generating is going to be very good in a flat or in a flat environment.

Peter Christensen (Analyst)

That’s helpful. And then I do want to ask about the secured contribution margin. Great to see that now positive 17%. Quite a flip in one quarter. Just trying to get a sense of how sustainable that is. Is the improvement coming from, I guess, more structural operational improvements or scale versus just favorable loan sale execution and funding market conditions?

Paul Gu (Co-Founder and Head of Product)

Yeah, it’s all of the above. As I said, we put a real focus on getting these secured products to profitable. And really every team touching those products, what they had in their mind was how do I improve the margins of this product? And so certainly loan sales is a part of it. There’s sort of both the mechanical and accounting part of it. There’s a real part which is about getting the deal terms right so that we’re earning the right take rates on those products, the right fee revenues.

There’s sort of real improvements in automation which I talked about. That’s true in both the home and auto products. Just more automation is both better for conversion and better for, better for cost. And then there’s some wins in monetization and figuring out where we generate the most value and capturing that in an intelligent way using models there. And so all across the board, I would say really everything got worked on and I said that we need to lock in some of these gains the rest of this year.

And that’s just because we did so much in such a short period of time that we want to really make sure everything is ready to scale before we go back to focusing on growth.

Peter Christensen (Analyst)

Thanks, that’s very helpful. Thank you.

OPERATOR

We’ll move next to Patrick Molly with Piper Sandler.

Patrick Molly (Analyst)

Yes, good morning and thanks for taking the question. So I wanted to ask on expenses year over year, engineering and product was up about 45%, total OpEx was up around 32% in the quarter and 38% year to date. So with the implied 4Q EBITDA margin in the high teens, was wondering how you’re thinking about fixed cost growth in the next year. Is the plan to let margins keep or compress and keep investing in the models, or should we expect headcount growth to slow from here and then how does that square maybe with the 25% longer term margin target for 2028?

Andrea Blankmeyer (Chief Financial Officer)

Yeah, thanks for the question. So implied in our guidance on what we expect from Q4 is that expenses, fixed expenses, will be about flat from Q3 to Q4 after a modest sequential decline here in Q3. You know, stepping back as we look at the sort of total arc and trajectory of 2026, this has been a bit of an investment year for the business as we’ve invested forward in laying the groundwork for our newer secured products which have just flipped a contribution margin positive this quarter as well as making forward investments in the bank.

And so as we look ahead to 2027 and beyond, and certainly as implied in our 25% guide in 2028, our expectation is that we’ll see improved operating leverage in 2027 and 2028 than we saw here in 2026 as the fruits and the products of those investments start to come forward.

Patrick Molly (Analyst)

Okay, great. That’s it for me. Thank you.

OPERATOR

We’ll go next to Simon Clinch with Rothschild and Company.

Simon Clinch (Analyst)

Hi, thanks for taking my question. I wanted to go back to the product question around how to think about growth when the UMI stays around this kind of level, the 1.53 or 1.55 level. I was wondering if you could talk about the, I guess the, the ability for the company to calibrate to a high level of UMI and what kind of structural growth can therefore be delivered and how long that might take for you to calibrate to those levels. Thanks.

Paul Gu (Co-Founder and Head of Product)

Yeah, we, we think it bakes in pretty fast. You know, we don’t, as a company count on macro getting better. We’re not hoping for a macro tailwind to really push the business forward. And this really comes back to this idea that, you know, there’s an alpha component to growth and there’s a beta component to growth. And I think there are some truly cyclical businesses out there that are just sort of hoping that the macro gets better and that’s what powers their growth.

And that’s not us in any way. None of our numbers, none of our forecasts, none of our guidance is built on the idea that we’re waiting for interest rates to come down or we’re waiting for UMI to come down, down. Really the growth driver in our business is kind of this Upstart Hldgs roadmap around technology and marketing. And we think there’s a multi-years long roadmap where we can keep delivering alpha at an extremely high pace. Like we’ve been coming back to this idea that in Q3, in spite of this nine point average increase in UMI, we did 48% year over year contribution profit growth. And you know, if you took that nine points of UMI increase out of the equation, it would have been like 61% in contribution profit growth.

That’s what we think about as sort of the rate at which we’re delivering alpha, the sort of secular rate of growth when you sort of denoise the graph and take out the macro part of it. And so, you know, obviously if the macro is just flat, even if it’s flat at a high number and we keep delivering a significant rate of sort of alpha driven growth, then I think the business is going to do really, really well and so that’s kind of how we make our forecast, how we build our business plan. And because of that, we’re extremely optimistic about the long term here.

Simon Clinch (Analyst)

Great, thanks very much for that. And just a follow up as well. Paul, you mentioned the 250, I think it was 250,000 plus repeat customers. I was wondering if you could just give some color around the characteristics of those. How many products are they buying? How much of that kind of repeat penetration opportunity there is just within those repeat customers alone. Thanks.

Paul Gu (Co-Founder and Head of Product)

Yeah, that is a combined metric. It is a metric that covers both people who are taking out a repeat using the same product as well as people switching to a different product. And obviously this is a pretty new dynamic in our business. And what we’re really excited about, we used to just have essentially one product, personal loans, and there wasn’t a lot else for people to do. And now we have this whole suite of products around home and small dollar and cash line and we have the HELOC product, we have the auto secured personal loans.

So there’s a lot of different products that a consumer could engage with. And I think as we complete building out the consumer product suite, we expect this to be a more and more important dynamic and that’s why we’ve started sharing some of these metrics around. There are 25 million unique Americans that have applied for credit with Upstart Hldgs. That is a huge number. And I don’t think there are a lot of other platforms that have that kind of reach.

And as we keep growing that number, I think it’s going to become increasingly important for us to just sort of do marketing within the sort of ecosystem of people who already know about Upstart Hldgs, who already have data shared with Upstart Hldgs, already have a kind of relationship and trust in Upstart Hldgs. And I think as we just have more products, each of those products becomes better and people get to know and trust us. I think that’s going to be a really powerful customer ecosystem.

Simon Clinch (Analyst)

That’s great. Thank you very much.

OPERATOR

We’ll go next to John Hecht with Jefferies.

John Hecht (Analyst)

Thank you guys for taking my question. Andrew, it sounded like the take rate was up in the quarter as you passed on some fee increases through the channels. I’m wondering, was that across all products, was there any of the products that had a steeper increase in take rate and is there any feeling from a competitive factor on your ability to increase your fee structures?

Andrea Blankmeyer (Chief Financial Officer)

Thanks, John. Yeah, so we did see our take rate improve from Q2 to Q3 by about 60 basis points. And that was driven by improved take rate across both unsecured and secured. Though I wouldn’t necessarily characterize the main driver as kind of increasing fees through to the borrower. So on the unsecured side, the main driver of the increase in take was modest mix shift towards core personal loans, which inherently has a higher take rate versus prime.

And on the secured side we saw very meaningful improvement in take rate really driven by, one, increased sell-through of loans to third parties; two, improved execution on those deals; and three, some degree of the monetization that you’re referring to. So continuing to optimize how we think about origination and other fees charged across those newer products. So those are really the sort of two drivers. There’s a mix dynamic and then there’s sort of the broad improvement we saw in secured as we’re selling more loans through at improved deal terms.

Paul Gu (Co-Founder and Head of Product)

Okay, I was just going to jump in and just remind everyone that, you know, the take rate number really isn’t a number that we manage the business to. It’s just, it’s kind of like an output of the system. But, you know, we aren’t every day thinking about, hey, you know, what’s the right take rate for us? Really, we think about contribution profit, and that’s sort of the North Star for us.

John Hecht (Analyst)

Okay, that’s helpful. And then turning to funding, I think a majority of your loans are invested in the forward flow type contracts. As we get into next year, do you think that mix will change or will you still have a focus on that? Particularly given your desire to kind of optimize or minimize the capital requirements. How do we think about your goals for funding next year?

Andrea Blankmeyer (Chief Financial Officer)

Overall, I’d say that growing the committed capital partners as a proportion of our funding has been an important strategic objective for us to help improve the resilience of our platform through the cycle. And what I’d say is that we sort of like the level that it’s at today. So as of Q3, about 68% of our platform was funded from committed capital partnerships. That’s about the right level from our perspective on a go-forward, and so our expectation is that, obviously with some plus or minuses over time, we would expect that level to stay about constant over the next few quarters.

And that translates and helps translate through to, as we think about improving the equity usage of our overall platform. And so as we look to improve the equity usage of the overall platform, one lever will be sort of that line item stabilizing versus continuing to grow. Two, we expect that the committed capital partnerships will increasingly start to cash flow out to us. There’s some lag to cash flow there which will reduce the equity usage associated with prior vintages.

And third, we continue to expect that as we renew our committed capital partnerships, as we’ve seen in the past, we’ll drive better deal terms against those, including on the amount of capital co-invested. So overall, sort of stepping back across the platform, it’s very important to have a proportion that is in these committed capital partnerships for overall stability and resilience of our platform. And we think the level that we’re at today is about right. So holding that level constant along with the two other drivers, we do expect that to contribute to reduced equity capital usage on the platform on average over the next multi-quarter period.

John Hecht (Analyst)

Great, thank you very much.

OPERATOR

We’ll go next to Mihir Bhatia with Bank of America.

Mihir Bhatia (Analyst)

Hi, good morning. Thank you for taking my questions. I wanted to ask, I wanted to start with UMI and just go back to the impact on the business. I think you’ve quantified the impact on originations, but what about on the balance sheet? I think, like to put a finer point on it, you’ve assumed UMI stays at or below 1.55, but if it moves to 1.6, can you just help us quantify the incremental balance sheet impact? Like how much of the credit deterioration is already reflected in fair value and how much could potentially come in more as UMI moves?

Andrea Blankmeyer (Chief Financial Officer)

Yes, it’s a great question, and you can sort of see in our P&L and on our balance sheet that even over the last couple of quarters in Q2 and Q3, we’ve been reflecting negative fair value write-downs associated with our risk capital position, so the beneficial interest. And so that line item moved from a positive 13 million in Q1 to negative 7.8 million in each of Q2 and Q3, respectively, which is reflective of sort of credit and default pressure on those populations, largely driven by the increase in UMI that we’re seeing broadly.

And so as we’ve guided toward an expectation in Q4, as UMI has, you know, risen to 1.53 over the course of October, our expectation is that, in hitting that 260 million of adjusted EBITDA, UMI at 1.55 or below would allow us to kind of deliver that. We are sort of looking ahead, allowing for some degree of variability in the fair value mark as of the end of Q4. The flow-through from UMI to fair value is not necessarily a direct one, though of course it is highly correlated, as UMI is a measure of the macro-driven default risk of the population, and so it has a real impact on the fair values.

It’s hard to quantify that exact amount specifically. What we will say again is that in that 260 million of adjusted EBITDA for the full year, assuming UMI of 1.55 or below, we should be able to deliver that.

Mihir Bhatia (Analyst)

Got it. Okay. And then maybe just turning to credit and credit performance, I think you highlighted 660 basis point premium to Treasuries over the last 12 vintages. But maybe talk about the most recent vintages against your loss expectations as UMI has moved higher. Are they all currently running above expectations?

Paul Gu (Co-Founder and Head of Product)

Hey, sorry, I was muted. Thanks for the question. On credit here, there’s some variability in the credit performance vintage to vintage, and so we don’t have, like, vintage-specific disclosures that we release. But you are generally right that, you know, all else equal, when UMI is shifting up, it means that what we are observing is that the same borrower is more likely to be delinquent or default compared to an environment where UMI is lower. And so mechanically that does tend to mean that loans that were underwritten in a lower UMI environment are going to have more delinquency or more default in a higher UMI environment.

Just sort of, I think, kind of mathematically how that mechanic works. But having said that, I think there’s a couple important things to keep in mind. One is that, you know, we really think about the accuracy of our models as being relative to UMI. And that’s because ultimately, again, you know, we don’t control or predict what’s going on in the background macro conditions. What we can do is be the fastest and most precise in responding to macro. You know, whereas kind of traditional credit metrics give you a bit of a lagged or confounded view of what’s going on in true macro as opposed to maybe what are underlying mix effects or timing effects or cohort effects.

The UMI system is really good at giving us a clear read of what is really attributable to macro. And so, you know, we can get that faster and more precise response. That means newer vintages can get underwritten correctly on a much, much faster timeline. And then, you know, we can really judge how our models performed relative to, you know, what’s gone on in the UMI. So yeah, if UMI stays elevated at 1.53 or 1.55 for the rest of the life of these loans, then they’re going to have higher delinquencies than, you know, if it had been at 1.5 or 1.4, for sure. But separate, we think separation accuracy, you know, the thing that really our models are best in class at, that’s something that matters in any kind of macro environment. And then the second thing I would say is we talk about returns relative to Treasuries as a benchmark because really that spread, that’s the number that investors are really earning.

That’s really the sort of thing you get by partnering with Upstart Hldgs and buying our loans. And really by any measure, I think those spreads are really healthy, really good. And as you can see, ultimately, investors and capital partners are still really excited to partner with us and buy our loans, and we’re still continuing to grow and improve those programs. And that’s the ultimate testament that we’re delivering good risk-adjusted returns.

Mihir Bhatia (Analyst)

Understood. Thank you for taking my questions.

OPERATOR

We’ll go next to ravindramnani with Truist.

ravindramnani (Analyst)

Hi, thanks for taking my question. Sorry, I just wanted to ask, these AI models are getting bigger and kind of more complex. How should we think about, you know, kind of compute cost per loan? You know, does it really kind of scale with the originations or does it really come down with volume?

Paul Gu (Co-Founder and Head of Product)

Yeah, it’s actually a great question, you know, and it’s interesting that you asked because I think typically in lending businesses, you know, compute costs are not a real thing to worry about because mostly, you know, if you’re using kind of a traditional credit model, it’s just not going to be that expensive to compute and do the inference. In our case, inference is a real cost. Training is a real cost. And these are things we think about, and these are things that have shown up in some of our financials in 2023.

And it’s something that we actively put a lot of effort into optimizing. And so that’s, you know, there’s a bunch of efforts on the training side, there’s a bunch of efforts on the inference side. Some of that is really kind of like low-level stuff in making the actual computations more efficient. And we just, we do a lot of computation, so it ends up getting pretty expensive. I think we actually did make a lot of progress on this over the course of the year. It’s been a real focus area for us. And I think that’s one of the things that, you know, when Andrea talks about us getting more operating leverage relative to sort of, you know, the opex growth that we expect to see, this is one of the things that is getting better and we feel better about. So it’s actually, I think, going to be increasingly an area of competitive advantage for us.

It’s something we’ve invested in that I think most others in the lending world just haven’t had too much reason to think about yet.

ravindramnani (Analyst)

Yeah, that’s great. And I guess as far as the investment, do you own some of the infrastructure here? Are you kind of using outside vendors, particularly on the compute side?

Paul Gu (Co-Founder and Head of Product)

We use cloud vendors. Yeah, we don’t have our own on-prem servers.

ravindramnani (Analyst)

Very good, thank you.

OPERATOR

We will go next to Reggie Smith with Loop Capital.

Reggie Smith (Analyst)

Hey, good morning, guys. Really good numbers on the C take rate. I know you don’t drive the business that way, Paul, but just curious, thinking about kind of recent origination trends, and I’m curious about the duration of the loans and whether or not you’ve seen a lengthening of duration, because I believe that that can impact kind of upfront economics for you guys. And also curious about thinking about where, I guess, your weighted average coupon is for some of these core loans today and how much headroom you have to raise rates if, you know, if Treasury yields continue to rise and you know, being mindful of kind of APR caps and things like that. So anything you could tell us about the duration mix of new originations and the weighted average capital coupon rather would be helpful, and then I have one UMI follow-up.

Thank you.

Andrea Blankmeyer (Chief Financial Officer)

Thanks, Reggie. Yeah, on the overall duration it’s been relatively consistent. So our personal loans have about a 1.8-year weighted average life; auto about two; home about three years. So maybe a little bit of modest mix shift to secured has extended the duration very modestly, but it’s not particularly visible on an aggregate basis. And then your question on weighted average—can you remind me the second part of your question?

Reggie Smith (Analyst)

Question? Oh, the weighted average, real quick. Sorry. Just on duration I’m really focused on the core loan product and so I’m curious whether that duration in terms of new originations has lengthened at all as you’ve seen better fee revenue?

Andrea Blankmeyer (Chief Financial Officer)

No, no, that’s been relatively consistent. And then on the weighted average coupon front, you know, you are right that you know we are originating, given the borrower that we are often focused on in the core, at higher APRs that often approach a 36% interest rate cap. And so kind of the sensitivity to our origination volume related to that is all embedded in the UMI and funding cost heuristic that Paul provided. So about a 10 basis point change in funding cost that flows through the platform or about a 1 point change in UMI would be expected to drive a 1 to 2% change in originations.

And that’s that. That sort of sensitivity and relationship includes, you know, several things, but also includes the impact of where we sit from an APR perspective relative to the cap.

Reggie Smith (Analyst)

Okay, that makes sense. And if I could sneak one last one in on the UMI and just thinking about, you know, unemployment levels, they’re still fairly low from a historic perspective and UMI is already at kind of 1.53. How should we think about that sensitivity if you were to see an increase in unemployment? Like, how might that impact UMI?

Paul Gu (Co-Founder and Head of Product)

Yeah, it’s a great question. You know, whenever we talk about macro, I think there’s always some confusion around, you know, what macro is for us and which parts of macro really matter. You know, people always say things like, oh, well, the American consumer seems to be really healthy. People are, you know, still spending lots of money, buying lots of stuff. And I’m always like, well, we don’t like it when people are buying lots of stuff. That’s actually not the macro that is good for us.

And I would say recessions and employment, sort of the typical measures that people talk about are probably somewhere in between. They certainly do matter to us, but they by themselves probably aren’t the whole story or the most important story. What we really have been very focused on are things like real wages, how much money is coming in versus how much is going out. Interest rates obviously matter. We talked about that today. And so I think typically in a recession, if you see unemployment go up a couple percent, that certainly all else equal a bad thing. But then you’ll typically also see inflation lower, you’ll see interest rates lower. And those things would be a real positive. And depending on the magnitude of those things, it could end up being sort of positive or negative to the overall business.

And that’s just because if unemployment affects narrowly only, say, if you get unemployment going from 4 to 6%, for example, that’s 2 percentage points of the population that are negatively affected. But then the other 98% are getting the benefit of maybe lower inflation and lower interest rates. You could easily see how the math could go either way on that. And so we don’t tend to be hyper focused on that as a metric. We do spend a lot of time thinking about things like real wages, the sort of personal savings rate, interest rates.

And I think those things have been historically a much bigger driver of what kind of macro matters to us.

Reggie Smith (Analyst)

That makes sense. Thank you guys.

OPERATOR

We’ll go next to James Fossett with Morgan Stanley.

Michael Infantino (Analyst)

Hi everyone, it’s Michael Infantino for James. Thanks for taking our question. Just circling back on the fair value marks again. I think when I look at the underlying discount rate disclosure in terms of the loans that are actually held in consolidated securitizations, I think it’s closer to 11.75% still, roughly call it 200 basis points below the late ’23 peak. So how should we be thinking about the incremental earnings pressure from further discount rate increases, particularly as we think about constructing our models out to ’27?

And then secondly, just on the beneficial interest dynamics, can you just comment on how your cash contribution or maximum loss exposure per dollar has sort of changed when we look at this gradual increase in beneficial assets as a percentage of associated loan balances?

Andrea Blankmeyer (Chief Financial Officer)

Yes, absolutely. I’ll take that one. So on the fair value sensitivity to discount rates, a good place to look is in our Q. We sort of share the sensitivity to about a 100 basis points move in discount rates in aggregate across both our whole loan book and the beneficial interest that is about 16 million or so. So in the scheme of things, relatively smaller impact to our fair value are changes in discount rates, and a relatively larger impact comes obviously from changes in expectations around credit performance.

But you can kind of look to that heuristic as helpful to help you kind of size potential impacts on a go forward. In terms of the cash contribution as a percent of origination, that number if you look at on a year-to-date basis, so through the first three quarters of the year it’s been about 3% on the total origination volume. So we’ve acquired about 400 million in beneficial interest assets, about just south of that against just south of 12 billion or so of origination volume. So you can sort of see that marginal use is lower than the overall aggregate platform equity use and expect to, especially as the older deals start to cash flow more, to contribute to the reduction in equity capital used on average across the total platform.

Michael Infantino (Analyst)

That’s really helpful. And then, Paul, just a quick follow-up on the conversion rate. I saw that you guys intend to discontinue that conversion rate disclosure. Can you just elaborate on why? Because I’m curious given it seems to at least reinforce the selectivity of your model and, you know, the available growth that is still out there as you drive incremental separation. So I’m curious if you could elaborate on that specifically. Thank you guys.

Paul Gu (Co-Founder and Head of Product)