10-Q: Upstart Returns to Profitability Amidst Strong Growth

Upstart Holdings, Inc. reported a significant return to profitability and robust revenue growth for the nine months ended September 30, 2025, driven by increased transaction volumes and improved AI model performance.

Summary

• Net income for the nine months ended September 30, 2025, was $35.0 million, a substantial improvement from a net loss of $125.8 million in the prior year period.
• Total revenue increased by 79% to $747.8 million for the nine months ended September 30, 2025, compared to $417.6 million in the same period of 2024.
• Revenue from fees, net, grew by 57% to $684.8 million for the nine months ended September 30, 2025, primarily from platform and referral fees.
• Transaction Volume, Dollars, more than doubled, increasing by 104% to $7.8 billion for the nine months ended September 30, 2025.
• The number of loans facilitated increased by 131% to 1,041,361 for the nine months ended September 30, 2025.
• The Conversion Rate improved to 21.2% for the nine months ended September 30, 2025, up from 15.3% in the prior year.
• Adjusted EBITDA saw a significant turnaround, reaching $166.8 million for the nine months ended September 30, 2025, compared to a loss of $28.2 million in the prior year.
• Adjusted Net Income was $133.4 million for the nine months ended September 30, 2025, compared to a loss of $47.8 million in the prior year.
• The Percentage of Loans Fully Automated remained stable at 91% for both the three and nine months ended September 30, 2024 and 2025.
• Loans held on the balance sheet (at fair value) increased to $1.23 billion as of September 30, 2025, from $806.3 million as of December 31, 2024, with 71% for R&D purposes.
• Total borrowings increased to $1.86 billion as of September 30, 2025, from $1.40 billion as of December 31, 2024.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial recovery with significant revenue growth, a return to profitability, and increased transaction volumes. Operational metrics like conversion rate also improved. However, ongoing macroeconomic uncertainties, intense regulatory scrutiny on AI lending and bank partnerships, and a multitude of active legal proceedings present notable risks that temper the overall positive sentiment.

Positives

• Achieved net income of $35.0 million for the nine months ended September 30, 2025, reversing a significant loss from the prior year.
• Total revenue increased by a robust 79% year-over-year for the nine-month period, indicating strong market demand and operational execution.
• Transaction Volume in dollars more than doubled, growing by 104% to $7.8 billion, demonstrating substantial scaling of the AI lending marketplace.
• The Conversion Rate improved to 21.2%, reflecting enhanced efficiency in the borrower acquisition funnel and more competitive loan offers.
• Adjusted EBITDA showed a strong recovery, moving from a negative $28.2 million to a positive $166.8 million, highlighting improved operational leverage.
• Core personal loans originated in the second quarter of 2024 or later are forecasted to deliver returns in line with target yields, indicating improved underwriting performance for recent vintages.
• Successfully diversified loan funding capacity through committed capital and co-investment arrangements, providing stability to the platform.

Negatives

• Cash and cash equivalents decreased to $489.8 million as of September 30, 2025, from $788.4 million as of December 31, 2024.
• Contribution Margin decreased to 57% for the nine months ended September 30, 2025, from 60% in the prior year, suggesting increased variable costs relative to revenue.
• Quarterly vintages of core personal loans originated from Q3 2023 through Q1 2024 are forecasted to underperform relative to their target returns, impacted by macroeconomic conditions.
• Sales and marketing expenses increased by 89% for the nine months ended September 30, 2025, outpacing total revenue growth as a percentage of revenue.
• Interest income, interest expense, and fair value adjustments, net, for consolidated securitization entities showed a decrease in interest income and continued unrealized losses on loans.
• Other income, net, decreased by 53% for the nine months ended September 30, 2025, primarily due to increased interest expense from convertible notes.
• Gain on debt extinguishment decreased by 78% due to a smaller amount of 2026 Notes repurchased at a higher price relative to the prior year.

Risks

• Business continues to be adversely affected by economic conditions and other uncontrollable factors like interest rates, inflation, and disruptions in the banking sector.
• 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 the impact of economic conditions on borrower credit risk, leading to higher than anticipated losses.
• Inability to approve a significant number of borrowers for loans through the marketplace could adversely affect growth prospects.
• Existing lending partners may cease or limit participation, or new lending partners may not be attracted, impacting business and financial results.
• The Upstart Macro Index (UMI), introduced in 2023, does not have a long history or proven track record, and its risks could adversely affect credibility and financial performance.
• Inability to manage risks associated with loans held on the balance sheet, including R&D loans which are generally riskier, could adversely affect financial results.
• Quarterly results are likely to fluctuate due to various factors, including economic conditions, funding availability, and model effectiveness, potentially affecting stock price.
• Loan funding arrangements, securitization programs, and warehouse credit facilities expose the company to risks, potentially leading to reduced capital supply or more costly financing.
• Heavy reliance on top three lending partners for a significant portion of loan originations and revenue poses concentration risk.
• Damage to reputation and brand due to perceptions of AI, regulatory scrutiny, negative publicity, or misconduct could adversely affect business.
• Subject to a wide range of evolving laws and regulations, and failure to comply could result in significant fines, penalties, and harm to business.
• Inability to manage risks related to loan servicing and collections obligations, including for unsecured personal loans and secured auto loans, could adversely affect financial results.
• Business is heavily concentrated in U.S. consumer credit, making it susceptible to fluctuations in that market.
• Sales and onboarding process for new lending partners can be long and unpredictable, leading to revenue fluctuations.
• New loan products and services may not be successful, or related risks may not be managed effectively, impacting growth.
• Misconduct and errors by employees, former employees, vendors, or service providers could harm reputation and lead to legal liability.
• Inability to compete effectively in target markets could harm business, results of operations, and financial condition.
• Significant disruption in the AI lending platform, including reliance on third-party services like AWS and consumer reporting agencies, could prevent processing and servicing loans.
• Software may contain undetected errors, leading to inaccurate predictions, non-compliance, or negative user experience.
• 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.
• Reliance on strategic relationships with loan aggregators (e.g., Credit Karma) to attract applicants, and loss of these relationships could adversely affect business.
• Reliance on third-party vendors, and their inadequate performance or termination of relationships, could increase costs and harm business.
• Loans originated by lending partners could be found to violate state laws (e.g., true lender challenges, usury laws), making them unenforceable or subject to penalties.
• Counterparty risk with respect to capped call transactions could lead to adverse consequences if counterparties default.
• Litigation, regulatory actions, and compliance issues could subject the company to significant fines, penalties, and remediation costs.
• The CFPB's evolving views and actions, including potential supervisory authority over non-bank entities, could impact the business.
• Federal and state regulatory inquiries regarding business practices could lead to enforcement actions or reputational harm.
• Collection, processing, storage, use, and disclosure of personal information could give rise to liabilities due to existing or new governmental regulations (e.g., CCPA, BIPA).
• The evolving regulatory framework for AI and machine learning technology could adversely affect business operations and increase compliance costs.
• If required to register under the Investment Company Act or Investment Advisers Act, the ability to conduct business could be materially adversely affected.
• Transactions involving institutional investors could be found in violation of the Securities Act or similar state law, leading to private or regulatory actions.
• Anti-money laundering, anti-terrorism financing, anti-corruption, and economic sanctions laws could have adverse consequences if not complied with.
• Securitizations are subject to federal regulation (e.g., Regulation RR, Volcker Rule), and non-compliance could adversely affect funding sources.
• Inability to meet obligations or comply with covenants in warehouse credit facilities and risk retention financing facilities could harm business.
• Corporate and asset-backed debt ratings could adversely affect the ability to support loan funding.
• Ability to use deferred tax assets to offset future taxable income may be limited, impacting results of operations.
• Changes in tax laws could have a material adverse effect on business.
• Taxing authorities may successfully assert that sales and use, gross receipts, or similar taxes should have been collected, leading to additional obligations.
• The trading price of common stock may be volatile, and shareholders could lose all or part of their investment.
• Share repurchase program may not be fully consummated or enhance long-term shareholder value, and could affect stock price or cash reserves.
• Capped call transactions may affect the market price of common stock.
• Certain insiders have significant voting power, limiting influence on key transactions.
• Large number of shares eligible for public sale could depress the market price.
• Common stock does not provide any rights directly related to the loans held.
• Future issuance of additional common stock could dilute ownership interest.
• Transactions relating to convertible notes may dilute ownership interest or depress stock price.
• Sell-to-cover transactions upon RSU vesting could cause stock price fluctuations.
• Delaware law and corporate provisions could make a merger, tender offer, or proxy contest difficult.
• Exclusive forum provisions in bylaws could limit stockholders' ability to choose judicial forum.
• Common stock market price and trading volume could decline if equity or industry analysts publish inaccurate or unfavorable research.
• Requirements of being a public company may strain resources and divert management attention.
• No intention to pay dividends for the foreseeable future.

Future Outlook

Management expects sales and marketing, customer operations, engineering and product development, and general and administrative expenses to fluctuate as a percentage of total revenue, with absolute dollar increases in some areas. Future capital requirements will depend on revenue growth, working capital needs, loan purchase volumes for R&D, and capital expenditures. The company may seek additional funds through equity, equity-linked, or debt financings. The Percentage of Loans Fully Automated is expected to stabilize long-term. There is ongoing uncertainty regarding the CFPB's regulatory priorities and the implementation of new open banking and AI regulations. The company does not anticipate paying dividends in the foreseeable future.

Management Comments

• Our AI models are continuously upgraded, trained and refined and have been for more than ten years.
• We believe the flywheel effects generated by our constantly improving AI models provide a significant competitive advantage both in terms of the increasing sophistication of our algorithms and the range and volume of training data that underpins our systems.
• Long-term, our vision is to become the always-on, everything-store for credit, where we can automatically approve borrowers at the right prices instantly and effortlessly.
• We believe that the macroeconomic environment started to improve in 2024.
• We will continue to utilize our capital to support research and development activities and, at times, as a funding source for core personal loans during periods of marketplace funding constraints.
• We plan to sell loans held on our balance sheet to institutional investors over time in the form of secondary sales or securitizations and pass through issuances.
• We believe that our cash and cash equivalents on hand will be sufficient to meet our liquidity needs for at least the next 12 months.

Industry Context

The company operates in the highly competitive and dynamic AI lending marketplace, which is subject to significant macroeconomic influences such as interest rate fluctuations and inflation. The industry is experiencing increased regulatory scrutiny from federal agencies (CFPB, FTC, DOJ, EEOC, Treasury Department) and state regulators regarding AI usage, consumer protection, and bank partnership models. While the macroeconomic environment showed signs of improvement in 2024, concerns about funding constraints and borrower demand persist. The company's AI-driven approach aims to differentiate it from traditional lenders and other fintech platforms, but it faces challenges from competitors with greater resources and evolving regulatory landscapes.

Comparison to Industry Standards

• Upstart-powered core personal loans originated from Q3 2023 through Q2 2025 are expected to deliver annual returns around 11.3% after servicing fees.
• Quarterly vintages of core personal loans originated from Q3 2023 through Q1 2024 are forecasted to underperform relative to their target returns, reflecting broader macroeconomic challenges.
• Core personal loans originated in Q2 2024 or later are forecasted to deliver returns in line with target yields, indicating a stabilization in performance.
• Upstart-powered consumer loans typically have lower interest rates (less than 36% APR) and longer terms compared to high-interest payday or small dollar loans often subject to criticism.
• The company references legal cases such as *Madden v. Midland Funding, LLC*, Colorado Administrator settlements, *Petersen v. Chase Card Funding, LLC*, *Cohen v. Capital One Funding, LLC*, *Washington, D.C. Attorney General v. Elevate*, *Marlette Funding LLC*, and *Opportunity Financial, LLC (OppFi)*, and a Massachusetts Attorney General settlement, as comparable instances of legal and regulatory challenges to bank partnership models and interest rate exportation.

Legal Proceedings

• A securities class action lawsuit, *Crain v. Upstart Holdings, Inc. et al.*, alleges false/misleading statements and omissions, and violations of Section 10(b) and 20(a) of the Exchange Act. The court certified the class action on March 27, 2025, and a first amended complaint was filed on September 29, 2025, adding certain executives and Third Point entities as defendants. The company believes the claims are without merit and intends to defend vigorously.
• Multiple derivative lawsuits (*OConnor v. Huber et al.*, *Chung v. Huber et al.*, *Hsu v. Girouard, et al.*, *Sornchai et al. v. Girouard, et al.*, *Okhai v. Girouard, et al.*, *Romanyshyn v. Girouard, et al.*, *Agarwal v. Girouard, et al.*) have been filed, consolidated, and largely stayed, alleging similar claims including violations of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste of corporate assets. These actions name current and former directors, officers, and certain Third Point entities as defendants. The company is named as a nominal defendant in these derivative actions.
• The company has indemnification obligations for loan repurchases under agreements with lending partners and institutional investors, with a maximum potential exposure of $12.9 billion as of September 30, 2025, though actual payments have been immaterial.

Stakeholder Impact

• Shareholders face potential dilution from future equity issuances and convertible note conversions, as well as volatility in stock price due to market factors and ongoing legal proceedings.
• Employees may be impacted by workforce reductions, competition for skilled personnel, and the long-term effects of the Digital First work model.
• Customers (borrowers) benefit from improved access to affordable credit and lower interest rates through AI models, but face risks from macroeconomic conditions affecting repayment ability and potential issues with servicing/collection practices.
• Lending partners benefit from increased loan origination volume and Upstart's AI models, but face risks from potential loan underperformance, regulatory scrutiny on the bank partnership model, and the length of the sales and onboarding process.
• Institutional investors provide significant loan funding and rely on Upstart's AI models, but are exposed to risks of loan underperformance, macroeconomic volatility, securitization risks, and counterparty risk.
• Creditors are impacted by the company's increased borrowings and its ability to meet debt obligations, particularly for convertible notes and warehouse credit facilities.

Next Steps

• Continue to develop and improve AI models and technology to enhance effectiveness and predictiveness.
• Expand loan product offerings, including auto loans, small dollar loans, and home equity lines of credit (HELOCs).
• Attract additional borrowers to the marketplace and new lending partners to increase transaction volume.
• Maintain a diversified and resilient loan funding strategy, including committed capital and co-investment arrangements.
• Manage existing and future indebtedness, including convertible senior notes and warehouse credit facilities.
• Attract, integrate, and retain qualified employees, particularly in engineering and data analytics.
• Effectively manage and expand the capabilities of operations teams and outsourcing relationships.
• Address ongoing legal proceedings and regulatory inquiries, including those related to AI and consumer protection laws.
• Evaluate the impact of recently issued accounting pronouncements (ASU 2023-09, ASU 2024-03/2025-01, ASU 2024-04, ASU 2025-06).
• Utilize capital to support research and development activities for new loan products and borrower segments.
• Plan to sell loans held on the balance sheet to institutional investors over time through secondary sales or securitizations.
• Monitor and maintain pledged collateral levels for the risk retention financing facility.
• The Board of Directors will periodically review and may adjust the terms of the share repurchase program.
• Comply with California Privacy Protection Agency final regulations effective January 1, 2026, and the Colorado Artificial Intelligence Act (CAIA) effective June 2026.
• Engage in transparent dialogue with the CFPB regarding AI models and business practices, potentially involving future rulemaking under Regulation B.

Key Dates

Recommendation

While Upstart demonstrated a strong financial turnaround with significant revenue growth, a return to net profitability, and impressive increases in transaction volumes and conversion rates, several material risks persist. These include ongoing macroeconomic uncertainties impacting loan performance, intense and evolving regulatory scrutiny on AI lending and bank partnership models, and a multitude of active legal proceedings that could result in substantial costs or operational changes. The positive operational momentum is balanced by these significant external and internal challenges, suggesting a 'Hold' stance for investors to monitor the company's ability to mitigate these risks and sustain its improved performance over time.

Keywords

AI Lending, Fintech, Personal Loans, Auto Loans, Home Equity Lines of Credit, SEC Filing, Quarterly Report, Financial Performance, Credit Risk, Loan Origination, Marketplace Lending, Securitization, Regulatory Compliance, Consumer Credit, Artificial Intelligence, Financial Technology, Profitability, Revenue Growth, Transaction Volume, Adjusted EBITDA, Convertible Notes, Risk Management, Corporate Governance, Legal Proceedings, Macroeconomic Conditions, Capital Markets