10-Q/A: Upstart Reports Strong Q2 2025 Earnings, Corrects EPS

Upstart Holdings, Inc. reported a significant financial turnaround for Q2 2025, achieving net income and positive Adjusted EBITDA, while also correcting its diluted Adjusted Net Income Per Share upwards.

Summary

• Upstart Holdings, Inc. filed an amended Quarterly Report on Form 10-Q/A for the period ended June 30, 2025.
• The amendment corrected the diluted Adjusted Net Income (Loss) Per Share for the three months ended June 30, 2025, from $0.36 to $0.40.
• The diluted Adjusted Net Income (Loss) Per Share for the six months ended June 30, 2025, was also corrected from $0.62 to $0.70.
• Total revenue for the three months ended June 30, 2025, increased by 101.6% to $257.3 million, up from $127.6 million in the same period of 2024.
• Net income for the three months ended June 30, 2025, was $5.6 million, a significant improvement from a net loss of $54.5 million in Q2 2024.
• Adjusted EBITDA for Q2 2025 was $53.1 million, compared to a loss of $9.3 million in Q2 2024, with Adjusted EBITDA Margin improving to 21% from -7%.
• Transaction Volume (Dollars) increased by 154% to $2.82 billion in Q2 2025 compared to Q2 2024.
• Transaction Volume (Number of Loans) increased by 159% to 372,599 loans in Q2 2025 compared to Q2 2024.
• The Conversion Rate improved to 23.9% in Q2 2025 from 15.2% in Q2 2024.
• The Percentage of Loans Fully Automated increased to 92% in Q2 2025 from 91% in Q2 2024.
• Loans held on the balance sheet (at fair value) increased to $1.02 billion as of June 30, 2025, from $806.3 million as of December 31, 2024.
• Approximately $699.5 million of loans on the balance sheet are for research and development purposes, primarily auto lending products, HELOCs, and expansion into new borrower categories for unsecured personal loans.

Sentiment

Score: 7

Explanation: The company demonstrated a strong financial turnaround, moving from significant losses to profitability and positive Adjusted EBITDA, coupled with robust growth in transaction volume and key operational efficiencies. However, increased balance sheet exposure to R&D loans and a notable decrease in cash reserves, alongside ongoing legal and macroeconomic risks, temper the overall positive sentiment.

Positives

• Achieved net income of $5.6 million in Q2 2025, a substantial turnaround from a $54.5 million net loss in Q2 2024.
• Reported positive Adjusted EBITDA of $53.1 million in Q2 2025, significantly up from a $9.3 million loss in Q2 2024.
• Total revenue more than doubled year-over-year in Q2 2025, reaching $257.3 million, driven by strong fee revenue growth.
• Transaction Volume (Dollars) surged by 154% and Transaction Volume (Number of Loans) by 159% in Q2 2025, indicating robust marketplace activity.
• Conversion Rate improved significantly to 23.9% in Q2 2025, reflecting enhanced borrower funnel efficiency and competitive loan offers.
• Percentage of Loans Fully Automated increased to 92%, demonstrating continued operational efficiency and technological advancement.
• The upward correction of diluted Adjusted Net Income Per Share for both the three and six months ended June 30, 2025, indicates better underlying performance than initially reported.

Negatives

• Cash and cash equivalents decreased significantly to $395.9 million as of June 30, 2025, from $788.4 million as of December 31, 2024.
• Net cash used in operating activities was $133.6 million for the six months ended June 30, 2025, a shift from $117.9 million provided in the same period of 2024.
• Net cash used in investing activities increased to $188.4 million for the six months ended June 30, 2025, from $113.6 million in the same period of 2024, primarily due to increased purchases of loans held-for-investment.
• Maximum exposure to losses under committed capital and co-investment arrangements increased to $660.2 million as of June 30, 2025, up from $260.0 million as of June 30, 2024, indicating higher risk exposure.
• Quarterly vintages of core personal loans originated in Q2 2023 through Q4 2023 are forecasted to underperform relative to their target returns.
• The company was in breach of a covenant under the Upstart Small Dollar Loan Trust for June 2025, though a waiver was obtained post-period.

Risks

• Business is adversely affected by economic conditions (interest rates, inflation, unemployment) impacting loan funding, borrower demand, and repayment ability.
• Inability to maintain diverse and resilient loan funding from institutional investors or successfully manage risks associated with committed capital and co-investment arrangements could adversely affect growth.
• AI models may contain errors, be ineffective, or fail to accurately reflect economic conditions, leading to higher than forecasted losses on Upstart-powered loans.
• Inability to approve a significant number of borrowers for loans through the marketplace due to capital supply, borrower demand, or model requirements could adversely affect growth.
• Existing lending partners may cease or limit participation, or new partners may not be attracted, impacting loan originations and revenue.
• Limited operating history makes future performance difficult to predict and increases risks and uncertainties.
• Risks associated with the Upstart Macro Index (UMI), a new and unproven metric, could harm credibility and business if misaligned or misinterpreted.
• Inability to manage risks associated with loans held on the balance sheet (e.g., R&D loans, fair value adjustments, credit risk) could adversely affect financial results.
• Loan funding arrangements, securitization programs, and warehouse credit facilities expose the company to risks, potentially leading to reduced capital supply or more costly financing.
• Reliance on a few top lending partners (85% of transaction volume from top three) creates concentration risk.
• Reputation and brand are critical; negative publicity, perceptions of AI bias, or regulatory scrutiny could harm the business.
• Subject to a wide range of evolving laws and regulations, with failure to comply potentially leading to fines, penalties, and adverse business impacts.
• Risks related to loan servicing and collections obligations, especially for unsecured loans, could adversely affect business if not managed effectively.
• Heavy concentration in unsecured personal loan product makes the business susceptible to fluctuations in that market.
• Long and unpredictable sales and onboarding process for new lending partners can cause revenue and results of operations to fluctuate.
• New loan products and services may not be successful or may introduce new risks and regulatory compliance obligations.
• Misconduct and errors by employees, former employees, vendors, or service providers could harm reputation and lead to legal liability.
• Intense competition in the consumer lending market from various players could reduce loan volumes and fees.
• Security breaches, improper access to data, or other security incidents may harm reputation, affect operations, and expose to liability.
• Proprietary AI models rely on loan applicant and third-party data; loss of access or inaccuracies could adversely affect the business.
• Representations and warranties on transferred loans could require repurchases or payments if inaccurate, impacting liquidity and reputation.
• Borrowers' ability to prepay loans without penalty could reduce servicing fees and deter investors.
• Marketing efforts and brand promotion activities may not be effective or may become more costly.
• Unfavorable outcomes in legal proceedings could result in significant fines, penalties, or other adverse consequences.
• Long-term impact of Digital First workforce model is uncertain and could pose operational challenges.
• Estimates and key metrics are subject to inherent measurement challenges, and inaccuracies could harm reputation.
• Cash deposits in excess of federally insured limits expose the company to risks from bank failures.
• Difficulty and cost in protecting intellectual property rights, and potential infringement claims from third parties.
• Significant disruption in AI lending platform could prevent processing, reduce AI model effectiveness, and result in loss of partners/borrowers.
• Software errors or bugs in the platform and internal systems could adversely affect operations and compliance.
• Use of open source software may lead to compliance issues or intellectual property risks.
• Use of generative AI technologies by employees or contractors could expose the company to unexpected liability.
• Corporate and asset-backed debt ratings could adversely affect ability to support loan funding.
• Need to raise additional funds in the future, which may not be available on acceptable terms or could dilute stockholders.
• Provisions in convertible note indentures may deter or prevent favorable business combinations.
• Ability to use deferred tax assets may be limited, impacting results of operations.
• Changes in tax laws could have a material adverse effect on the business.
• Taxing authorities may successfully assert additional tax obligations.
• Volatility in common stock trading price due to various factors, including market conditions and company-specific events.
• Share repurchase program may not be fully consummated or enhance long-term shareholder value.
• Capped call transactions may affect the market price of common stock.
• Significant voting power of insiders could limit influence on key transactions.
• Large number of shares eligible for public sale could depress market price.
• Common stock does not provide direct rights related to loans held.
• Future issuance of additional common stock could dilute ownership interest.
• Delaware law and anti-takeover provisions could make mergers difficult.
• Exclusive forum provisions in bylaws could limit stockholders' ability to choose judicial forum.

Future Outlook

The company expects to continue improving its AI models, increasing loan volume, and diversifying funding strategies. It anticipates continued efforts to secure additional capital to support business growth and further diversify its institutional investor base. The macroeconomic environment is expected to continue to impact credit performance and borrower demand, with core personal loans originated in Q1 2024 or later currently forecasted to deliver returns in line with target yields, reflecting increased underwriting conservatism and macroeconomic stabilization. The company will continue to utilize its balance sheet for R&D loans and to fill funding gaps.

Management Comments

• We believe that banks and other traditional lenders will continue to be at the forefront of consumer lending in the United States.
• We believe AI lending will become increasingly critical as this industry continues to undergo a broad digital transformation.
• Our strategy is to partner with banks and credit unions and provide them with access to an AI lending marketplace that they can configure as they originate consumer loans, according to their own business and regulatory requirements.
• We retain loans on our balance sheet to fill gaps in investor demand, to aid in price discovery, and for research and development purposes (R&D Loans), including to test and evaluate our AI models for these loans.
• To improve the loan funding capacity for our marketplace across business and macroeconomic cycles, we have secured multiple committed capital and other co-investment arrangements with institutional investors and lending partners beginning in 2023, which have delivered a significant amount of loan funding to the Upstart marketplace.
• We continue to secure additional capital to support the growth of our business and further diversify our sources of capital and institutional investor base to ensure long-term scalability.
• We consider credit performance of Upstart-powered loans to be one of the most important measures of the effectiveness of our AI models.
• The core personal loans originated in the first quarter of 2024 or later are currently forecasted to deliver returns in line with target yields. This reversion in performance reflects a combination of factors including increased conservatism in underwriting, the relative stabilization of macroeconomic conditions, and improvements in our more recent models.
• We expect that our sales and marketing expenses will generally fluctuate as a percentage of our total revenue from period to period and may increase as we hire additional sales and marketing personnel, increase our marketing activities and build greater brand awareness.
• We expect that our customer operations expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our portfolio.
• We expect that our engineering and product development expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our engineering and product development team to continue to improve our AI models and develop new products and product enhancements.
• We expect to increase the size of our general and administrative function to support the further growth of our business.

Industry Context

The financial services industry is undergoing a broad digital transformation, with AI lending becoming increasingly critical. The macroeconomic environment, including interest rate fluctuations and inflation, continues to significantly impact consumer lending, affecting both capital supply from institutional investors and borrower demand. The industry is also facing heightened regulatory scrutiny regarding AI and consumer protection, with new state and federal regulations emerging. The company's strategy of partnering with banks and credit unions and leveraging AI for underwriting aligns with the broader trend of fintech-bank collaboration to enhance credit access and efficiency.

Comparison to Industry Standards

• The company's core personal loans originated in Q1 2024 or later are currently forecasted to deliver annual returns in line with a blended target of approximately 11.3% after servicing fees, which can be benchmarked against typical unsecured personal loan returns for similar risk profiles in the market.
• The forecasted underperformance of vintages from Q2 2023 through Q4 2023 reflects broader macroeconomic challenges (e.g., inflation, rising interest rates, elimination of government stimulus) that impacted the entire consumer lending industry, not just the company's models.
• The improvement in conversion rate to 23.9% and automation to 92% suggests strong operational efficiency compared to traditional lending processes, which often involve more manual underwriting and lower digital conversion rates.
• The company's reliance on a few top lending partners for a significant portion of loan originations (85% from top three) indicates a concentration risk that is higher than more diversified lending platforms or traditional banks with broader client bases.
• The increase in R&D loans on the balance sheet to $699.5 million highlights a strategy of internal investment in new product development (e.g., auto, HELOCs) that may be more aggressive than some competitors who primarily focus on platform fees without significant balance sheet exposure to new loan categories.

Management Changes

Corporate Governance

Legal Proceedings

• Crain v. Upstart Holdings, Inc. et al. (S.D. Ohio): A securities class action lawsuit alleging false and/or misleading statements or omissions, with a class action certified on March 27, 2025. The company believes claims are without merit and intends to defend vigorously.
• O'Connor v. Huber et al. (S.D. Ohio): A derivative lawsuit with allegations similar to the Crain complaint, naming current board members and CFO as defendants. Consolidated with Chung v. Huber et al. and stayed pending resolution of the related securities class action.
• Chung v. Huber et al. (S.D. Ohio): A derivative lawsuit with allegations similar to O'Connor, naming current and former board members and CFO as defendants. Consolidated with O'Connor and stayed.
• Hsu v. Girouard, et al. (D. Del.): A derivative lawsuit with allegations similar to the consolidated derivative matter in Ohio. Stayed pending resolution of the related securities class action.
• Sornchai et al. v. Girouard, et al. (D. Del.): A derivative lawsuit with allegations similar to the consolidated derivative matter in Ohio. Stayed pending resolution of the related securities class action.
• Okhai v. Girouard, et al. (Del. Ch.): A derivative lawsuit with allegations similar to the consolidated derivative matter in Ohio. Consolidated with Romanyshyn and Agarwal matters and stayed pending a decision on Defendants' renewed motion to stay.
• Romanyshyn v. Girouard, et al. (Del. Ch.): A derivative lawsuit with allegations similar to the consolidated derivative matter in Ohio. Consolidated with Okhai and Agarwal matters and stayed.
• Agarwal v. Girouard, et al. (Del. Ch.): A derivative lawsuit with allegations similar to the consolidated derivative matter in Ohio. Consolidated with Okhai and Romanyshyn matters and stayed.
• The company cannot estimate the reasonably possible loss or range of loss from these actions due to their uncertainty and preliminary stage.

Stakeholder Impact

• Shareholders: Positive impact from improved financial performance (net income, Adjusted EBITDA, EPS correction) and strong growth metrics, but potential dilution from future equity raises and ongoing litigation risks.
• Lending Partners: Continued strong transaction volume and automation rates indicate a healthy marketplace, but reliance on a few top partners and past underperformance of certain loan vintages pose risks to their returns and continued participation.
• Borrowers: Improved conversion rates and automation suggest better access to credit, but higher interest rates in the current macroeconomic environment may lead to less favorable loan terms.
• Employees: Workforce reductions in prior periods aimed at cost efficiency, but ongoing growth and new initiatives require attracting and retaining qualified personnel, potentially impacting morale and resources.
• Institutional Investors: Increased loan volume and committed capital arrangements provide investment opportunities, but growing maximum exposure to losses and past underperformance of loan vintages present credit risk concerns.

Next Steps

• Continue to improve AI models and technology to enhance effectiveness and predictiveness.
• Increase the volume of loans facilitated through the AI lending marketplace.
• Maintain a diversified and resilient loan funding strategy, including lending partnerships, whole loan sales, committed capital, and other co-investment arrangements and securitization transactions.
• Secure additional capital to support business growth and further diversify sources of capital and institutional investor base.
• Expand loan product offerings beyond unsecured personal loans, such as auto loans and HELOCs.
• Manage risks associated with loans held on the balance sheet, including R&D loans.
• Address ongoing legal proceedings and regulatory inquiries vigorously.
• Monitor and adapt to macroeconomic events, including inflation and interest rate changes.
• Continue to attract, integrate, and retain qualified employees.

Key Dates

Recommendation

The company's Q2 2025 results demonstrate a significant and impressive financial turnaround, moving from substantial net losses and negative Adjusted EBITDA in the prior year to profitability and positive Adjusted EBITDA. This is supported by robust growth in total revenue (over 100% YoY) and transaction volume (over 150% YoY), indicating strong demand for its AI lending platform. Improvements in conversion rates and automation further highlight operational efficiency and the effectiveness of its AI models. While there are acknowledged risks, such as increased exposure to R&D loans on the balance sheet and ongoing legal proceedings, the core business performance shows a clear positive trajectory. The upward correction of Adjusted Net Income Per Share reinforces the positive momentum. For a seasoned investor, this turnaround, coupled with continued growth in a challenging macroeconomic environment, suggests strong execution and potential for future upside, making it an attractive 'buy' opportunity.

Keywords

AI lending, Fintech, Consumer credit, Personal loans, Auto loans, HELOCs, SEC filing, Earnings report, Financial technology, Credit risk, Loan origination, Securitization, Marketplace lending, Adjusted EBITDA, Net income, Revenue growth, AI models, Risk management, Capital markets, Corporate governance, Legal proceedings, Share repurchase, Convertible notes