AI lending platform Upstart (NASDAQ:UPST) reported Q1 FY2023 results topping analyst expectations, with revenue down 66.9% year on year to $102.9 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $135 million at the midpoint, 6.94% above what analysts were expecting. Upstart made a GAAP loss of $129.3 million, down on its profit of $32.7 million, in the same quarter last year.
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Upstart (UPST) Q1 FY2023 Highlights:
- Revenue: $102.9 million vs analyst estimates of $99.7 million (3.19% beat)
- EPS (non-GAAP): -$0.47 vs analyst estimates of -$0.81
- Revenue guidance for Q2 2023 is $135 million at the midpoint, above analyst estimates of $126.2 million
- Free cash flow was negative $81.2 million, compared to negative free cash flow of $254.6 million in previous quarter
- Gross Margin (GAAP): -6.94%, down from 84.4% same quarter last year
“I’m pleased with the progress we made in Q1 against the objectives I set out last quarter,” said Dave Girouard, co-founder and CEO of Upstart.
Founded by the former head of Google's enterprise business Dave Girouard, Upstart (NASDAQ:UPST) is an AI-powered lending platform that helps banks better evaluate the risk of lending money to a person and provide loans to more customers.
Businesses have come to use data driven insights to stratify their customers into more granular buckets that enable more personalized (and profitable) offerings. Lending software is a prime example of fintech democratizing access to loans in a still-profitable manner for financial institutions.
Sales Growth
But this quarter Upstart's revenue was down 66.9% year on year, which might be a disappointment to some shareholders.
Upstart is guiding for revenue to decline next quarter 41.4% year on year to $135 million, a further deceleration on the 17.9% year-over-year decrease in revenue the company had recorded in the same quarter last year. Before the earnings results were announced, Wall St analysts covering the company were estimating revenues to decline -5.28% over the next twelve months.
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Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Upstart's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was actually negative in Q1, if we consider engineering and product development as part of the cost of sales (which is the methodology we have used previously, as Upstart doesn't report Gross profit separately.
That means that for every $1 in revenue the company lost $0.07. This would be of course considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
Key Takeaways from Upstart's Q1 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Upstart’s balance sheet, but we note that with a market capitalization of $1.11 billion and more than $386.9 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We were impressed by the very optimistic revenue guidance Upstart provided for the next quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin and free cash flow. Overall, we think this was a strong quarter. The company is up 40.2% on the results and currently trades at $19.77 per share.
Upstart may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.