Upstart Holdings, Inc. Q3 FY2024 Earnings Call

Good day and welcome to the Upstart Third Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alice Berry. Please go ahead.

Good afternoon and thank you for joining us on today's conference call to discuss Upstart's third quarter 2024 financial results. With us on today's call are Dave Girouard, Upstart's Chief Executive Officer; and Sanjay Datta, our Chief Financial Officer. Before we begin, I want to remind you that shortly after the market closed today, Upstart issued a press release announcing its third quarter 2024 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, ir.upstart.com. During the call, we will make forward-looking statements, such as guidance for the fourth quarter of 2024 relating to our business and our plans to expand our platform in the future. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties and assumptions. Actual results may differ materially as a result of various risk factors that have been described in our filings with the SEC. As a result, we caution you against placing undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information or future events, except as required by law. In addition, during today's call, unless otherwise stated, references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables. To ensure that we can address as many analyst questions as possible during the call, we request that you limit yourself to one initial question and one follow-up. On November 22nd, Upstart will be participating at the Wedbush Disruptive Financial Virtual Conference. Now, we'd like to turn it over to Dave Girouard, CEO of Upstart.

Good afternoon, everyone. I’m Dave Girouard, Co-Founder and CEO of Upstart. Thanks for joining us on our earnings call, covering our third quarter 2024 results. We know there's a lot going on this week, and we appreciate you making the time to be with us. I'm happy to report that we continue to strengthen Upstart's position as the FinTech leader in artificial intelligence. With our Q3 results, it's clear that our team's efforts are driving improved financial performance today, as well as a stronger foundation for the quarters and years to come. With 43% sequential growth in lending volume and a return to positive adjusted EBITDA sooner than expected; we're pleased that Upstart's comeback story continues to play out as we anticipated. When I look across Upstart I see improvements in so many areas that are important to our future. Our core product is growing quickly, has exceptional economics, and is delivering increasingly competitive rates across the credit spectrum. Our newer products are gaining traction, with both our auto and home lending products expanding nicely quarter to quarter, and our funding supply has never been more durable with more committed capital than ever, powered by truly innovative partnership structures. Overall, credit performance continues to strengthen and gives us confidence that we're well calibrated to the macro. And finally, our velocity at delivering AI wins has never been better. Consistent with last quarter, these improvements weren't primarily driven by improvements to the macro economy. While the 50 basis point reduction in the Fed rate provided a modest boost of platform volume at the end of September, rates overall continue to be quite elevated in the Upstart macro index, while stable, continues to be well above the historical average. This is all to say that we believe any substantial macroeconomic wins remain in our future. Today, I'd like to share some details about the third quarter and the progress that we made. In our core personal loan product, we continue to innovate on our ability to rapidly launch increasingly sophisticated models. Model 18, which I described in some depth last quarter, drove large conversion improvements in Q3, which translated to much of the growth we're reporting today. We also continue to solve machine learning infrastructure and scaling challenges related to training frequency, process automation, and inference speed. We've set aggressive goals regarding data freshness for our machine learning team, which is critical to proper calibration in a volatile macro environment. We're also working hard to reduce model latency, even in the face of deploying more technically sophisticated models. In Q3 alone, we reduced model inference latency by 13%. I believe that our model training and deployment represent the state-of-the-art in the industry, where most have yet to discover the power of predictive AI. Q3 was Upstart's largest quarter on personal loan origination volume in two years, despite the significantly elevated rates I mentioned earlier. Our goal is to offer the best rates and best process to all Americans, and we're making significant strides in this direction. This means not just having the best models and highest levels of automation, but feeding them with the most efficient fuel, capital, so that the end product, the loan, is consistently the best available. While this is a goal we can never 100% achieve, a constant, urgent, and determined effort to offer the best rate and the best process to everybody will make Upstart a formidable brand and a sustainable leader in the industry. Our T-Prime program, which we announced just a couple of weeks ago, takes a giant leap toward this goal by expanding our reach to the super prime end of the credit spectrum. By working closely with our lending partners, we're creating offers of credit that shine in comparison to anything in the market and bring us closer to our brand that can resonate with all Americans. Originations of Upstart auto loans increased 46% sequentially, to $26.5 million. On the retail side, we signed our 11th certified digital retailing OEM agreement in October. This agreement increases Upstart's franchise dealer market opportunity by 14%. In October, we also began the rollout of a complete redesign of Upstart's in-store software product that improves usability and information access as we continue to modernize the technology stack used by dealerships across the country. On the refinance side, we recently upgraded the loan application experience, reducing the average time to fund from 19 days to 9. Car owners who refinance with Upstart now save an average of $800 per year, and we're optimistic that we can increase the amount saved by our borrowers in the months ahead. Our home equity business continues to scale like you'd expect from a fast-growing startup, with originations more than doubling on a sequential basis. And I'm also happy to report that with more than 600 HELOCs originated to date, we still have zero defaults. Growth in the HELOC product was driven predominantly by conversion rate improvements, a common theme if you followed Upstart for long, better targeting, and higher qualification rates, combined with a 50% increase in close rates led to these strong results. We exited Q3 with an instant approval rate for HELOC applicants of 49%, up from 42% in Q2. This means we're able to instantly verify applicants' income and identity without the need for tedious document uploads. We're now live in 34 states and Washington D.C., covering 55% of the U.S. population. We expect to expand to more states with our HELOC product this quarter. We continue to invest heavily in servicing and collections, and as I've said before, we're particularly focused on leveraging machine learning to customize the borrower experience and improve repayment rates, and this effort is beginning to pay off. I'm increasingly confident that loan servicing and collections will become another area where we have a unique and sizeable competitive advantage over time. In Q3, we launched multiple personalization efforts, including optimizing the time of day to call and the time of day to send emails. We don't have concrete results for these initiatives yet, but they're part of our broader push to use machine learning and data to create a materially differentiated loan servicing experience. We also expanded support coverage to include Sundays without adding headcount to the team. And finally, we began exploring the use of large language models to reduce our spending even further. Our work to improve operational efficiency, combined with machine learning, means we believe we can continue to improve roll rates, even while reducing the cost of servicing each loan. Last quarter, we continued to see strong loan performance with roll rates from one day delinquent to charge-off, down 13% year-over-year. Even more compelling is that 30-day delinquency rates have trended down sequentially through Q3, despite the fact that the third quarter has traditionally been a seasonally worse quarter for loan servicing. We're confident that there are many more wins in this part of our business in the coming quarters. On the funding supply of our business, we continue to strengthen our position quarter to quarter. A few weeks back, we announced a partnership with Blue Owl whereby their Adalia affiliate will purchase up to $2 billion in loans from the Upstart platform over 18 months. Similar to last quarter, I'm happy to report that in Q3, well over half of our loan funding was in the form of longer-term committed partnerships. Today, I want to highlight the incredible work done by our capital markets team who have risen to the challenge of developing important and innovative partnerships with several of the market leaders in private credit. Innovation on the funding side of our business is a trend I expect to continue throughout 2025. Banks and credit unions continue to increase their funding on the Upstart platform as their liquidity improves, and they ramp up their lending. This year we signed 24 new lenders, which is already more new lenders and new capital than was added in all of 2023. In addition, more of our existing bank and credit union partners are expanding their lending programs with us, bringing more low-cost capital with more attractive rates to Upstart borrowers. The T-Prime program I mentioned earlier is one important way they're doing this. I'm also pleased that loan funding has kept pace nicely with our regrowth of originations. The volume of loans on Upstart's balance sheet continues to trend down, even while loan originations have accelerated. We're also in a stronger cash position as a result, keeping supply and demand in balance while we regrow our core business will continue to be a challenge, but we're in a strong position to manage this important dynamic. Last quarter, I told you that Upstart was turning a corner. Now we can say that we're clearly gaining momentum; even without a significant boost from the macro economy, we're in growth mode, and our credit is performing well. Our core business is expanding again, and our newer businesses are making fast progress. We're hopeful that we'll see macroeconomic wins in the quarters to come, but we're not waiting around for them. Upstart's mission is simply to improve access to credit, and our strategy to accomplish this goal is to provide the best rates and best process to everybody. This isn't AI for AI's sake; it's because more than a decade ago we recognized that it's the right tool to accomplish this ambitious goal. We believe that success in this regard will result in a generational company with immeasurable impact on American families and the U.S. economy. We're making rapid progress against this goal, and as a brilliant leader in our industry once said, 'It's day one here at Upstart.' Thank you. And now, I'd like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q3 2024 financial results and guidance.

Thanks, Dave, and thanks to all of you who are joining us today on what I'm sure has been a distracting week for everyone here in the U.S. The macro environment continues to be an influential factor in our business, though with respect to consumer credit, it has, in our view, remained relatively stable since our last report a quarter ago. As anticipated, this has allowed our risk models the freedom to continue improving borrower selection and driving conversion gains. Our belief is that inflation is largely behind us, a remnant trace from a historically large increase in the money supply that occurred between 2020 and 2021. The enduring strength of our labor market also continues to astonish, and in our view, the U.S. economy now suffers from a structural shortage of workers, making the odds of significant near-term unemployment, in our estimation, remote in any scenario short of an economic meltdown. Consumers in the U.S. have continued their remarkable spending spree, perhaps even a little too remarkably for our taste, but Americans did enjoy a surge of disposable income entering 2024 that provided some support for the ongoing spend levels, as well as some welcome breathing room in savings rates. Consequently, consumer defaults on unsecured credit have stabilized over the course of the year, easing down from their peak to a lower, but still elevated level of stress, as reflected in our Upstart macro index. Taken as a whole, the macro currents around us have become much less choppy and in their current state, no longer appear to represent a direct headwind to our business. With all of this as context, here are some financial highlights from Q3 of 2024. Revenue from fees was $168 million in Q3, up 28% sequentially from the prior quarter, and 8% ahead of guidance, as various model accuracy enhancements continue to produce improved conversion. Net interest income was negative $5 million, less than half of the net interest income loss we experienced in the same quarter a year ago. Taken together, net revenue for Q3 came in at $162 million, $12 million above our guidance, and up 20% year-on-year. The volume of loan transactions across our platform in Q3 was approximately 188,000 loans, up 64% from the prior year, and up 31% sequentially, representing over 118,000 new borrowers. Average loan size of $8,400 was up from $7,700 in the prior quarter, driven higher by the model wins that allowed more borrowers to qualify for full personal loans at the expense of the smaller relief loans that they otherwise would have been presented with. Our contribution margin, a non-GAAP metric, which we define as revenue from fees minus variable costs per borrower, acquisition, verification, and servicing as a percentage of revenue from fees came in at 61% in Q3, up 3 percentage points sequentially and 4 percentage points above our guidance for the quarter. Our margins benefited from higher conversion rates on personal loans, as well as improved automation and efficiency in the borrower onboarding process. Operating expenses were $207 million in Q3, up 13% sequentially from Q2. Expenses that are considered variable relating to borrower acquisition, verification, and servicing were up 20% sequentially, less than the growth of the corresponding fee revenue base. Fixed expenses were up 12% as the improved trajectory of the business triggered some catch-up accruals for expenses that were not being incurred earlier in the year at our lower volumes, some of which will be temporary in nature. We continue to pursue tight expense management as a core principle and have implemented some further streamlining of operational headcount since the end of the quarter. Altogether, Q3 GAAP net loss was $7 million, significantly ahead of guidance and due in large part to gains made on the refinancing of some of our outstanding convertible debt. Adjusted EBITDA was positive $1 million, also comfortably ahead of guidance, and accomplishing our goal of breaking through the positive adjusted EBITDA one quarter ahead of schedule. Adjusted earnings per share was negative $0.06 based on a diluted weighted average share count of 90.1 million. We ended the third quarter with loans on our balance sheet of $537 million before the consolidation of securitized loans, down from $686 million in the prior quarter, continuing the progress we've made over the past year in reducing the size of the balance sheet and establishing strong relationships with a handful of strategic capital partners. Of that loan balance, loans made for the purposes of R&D, principally auto loans, stood at $399 million. In addition to loans held directly, we continue to consolidate $119 million of loans from an ABS transaction completed in 2023 from which we retained a total net equity exposure of $18 million. We ended the quarter with $445 million of unrestricted cash on the balance sheet, up almost $70 million from the prior quarter. In Q3, we also completed the refinancing of roughly half of our outstanding convertible debt with a new issuance that pushes the maturities on this tranche out to 2029. On the funding side of our platform, we see encouraging signs that the markets are becoming increasingly constructive. Liquidity in the banking and credit union sectors continues to improve, and increasing numbers of lenders are dropping their required rates of return on our platform. On the institutional side, the large amounts of money that have been raised under the banner of private credit, initially earmarked mainly for corporate lending, are now increasingly finding their way over to consumer assets. In our return to the ABS markets this past month, we saw high levels of over-subscription and significant tightening of spreads for each class of bonds. These are the signs that the capital markets are returning to their core function, and once again embracing risk in the pursuit of yield. As we look ahead to Q4, we continue to presume a roughly stable macro environment with minimal change to credit trends in either direction. We expect the September 50 basis point rate cut from the Fed to work its way into our marketplace pricing over the course of this quarter, providing some modest lift to volumes. Beyond that, much of the growth we are anticipating this quarter will be driven by continuing improvements to our models and marketing campaigns, which we expect will generate higher application volumes and borrower approval rates. Expanded availability of funding is not perceived to be a driver of growth in this quarter, but we are assuming that it will also not constrain it. On the expense side, we will continue to pursue optimized margins and frugal fixed expense management. With this as context, our guidance for Q4 is total revenues of approximately $180 million, consisting of revenue from fees of $185 million, and net interest income of approximately negative $5 million; contribution margin of approximately 59%; net income of approximately negative $35 million; adjusted net income of approximately negative $5 million; adjusted EBITDA of approximately positive $5 million; and a diluted weighted average share count of approximately 91.7 million shares. Thanks to all once again for joining us on this call. And now, Dave and I will be happy to open up the lines for any questions.

Our first question is coming from Peter Christensen with Citi.

Good evening. Thanks for the question here. Dave, Sanjay, I’m just curious if you could talk about underlying use cases on the personal loan side, if you've seen any changes there. There's this notion that the debt consolidation wave could help you on the volume side quite a bit, certainly on the demand side. Just curious if you're seeing any mixed changes in use cases for personal loans? Thank you.

Pete, this is Dave. I don't believe there's been any significant change. Personal loans have always been a versatile tool that consumers use for various purposes, such as funding weddings, paying off debt, or making large purchases. That utility remains, but we haven't noticed any major shifts in the use cases.

Our next question is coming from Ramsey El-Assal with Barclays.

This is John Coffey on the call for Ramsey. I just had two questions for you. I think Sanjay, in the past couple of earnings calls, you spoke quite a bit about some of the slower recovery in your prime customers. So I was wondering if you could tell me what that recovery looks like again, your prime base. Are we close to the middle, the beginning or the end? And then, I guess my second question is just on the trajectory of EBITDA. I know we have a positive number this quarter where you're expecting another one next quarter. Should that be a pretty smooth runway in future years, just generally speaking, or are there any one-offs we should keep in mind?

Regarding the second question about EBITDA, we have achieved positive EBITDA this quarter and are projecting continued growth for the next quarter. If we manage to keep enhancing our models, improving conversion rates, and expanding our operations, we anticipate that EBITDA will continue to rise. Also, could you remind me what your first question was?

Yes. Regarding the Prime customer status, I understand you mentioned they were somewhat late to the weekend, but they are also starting to return. However, you noted that the return of the Prime customer, particularly the subprime segment, experienced some delays. I believe you discussed this in detail during the last couple of calls.

Thank you for the question. Regarding the trend of consumer repayments and defaults across different segments, we noted that lower prime consumers faced challenges earlier than higher prime consumers, which began back in late 2021. While the lower prime consumers have started to stabilize and improve, the prime borrowers took longer to do so, even until a quarter or two ago. Currently, we are observing a convergence toward stability across all segments. When looking at our macro index as a broad indicator of consumer repayments, we no longer see significant differences among segments. This is why, in a recent announcement, we expressed our increased confidence in focusing on the prime segment with the T-Prime program.

Our next question is coming from Arvind Ramnani with Piper Sandler.

I want to revisit some of the comments you made in your opening remarks. You mentioned that much of your performance is driven by inherent improvements in your model rather than by the lower interest rate cuts. Could you elaborate on that and provide some metrics? Additionally, could you explain how the lower interest rates might contribute to the positive trends you're experiencing?

Sure, Arvind. We received a bit of assistance from interest rates with the changes made by the Federal Reserve in September, although it wasn't particularly impactful over the quarter. Looking ahead, we certainly hope to see more support from that. However, the growth in the third quarter was primarily driven by upgrades to our AI models. We're consistently upgrading these models, and while we occasionally achieve modest gains, there are times when we see significant improvements. Model 18, which I introduced during our last call, was one of the most substantial upgrades we've implemented in a while. This upgrade has resulted in a better separation of risk, which typically leads to higher conversion rates. Essentially, it allows us to identify riskier borrowers and exclude them from the pool, enabling us to lower rates and approve more borrowers. Additionally, we've reached an all-time high in automation, with over 90% of loans being fully automated. Both of these factors contribute to our growth and help to streamline the process for more individuals, which is crucial for the positive numbers we've reported.

Terrific. If I understood correctly, you mentioned that approximately half of your loan volume is now sourced from committed capital. As we look towards the next few years and enter a more normalized rate environment, how do you see the balance between committed capital and opportunistic capital? I remember that before this challenging environment, you didn't have much committed capital, but now it's around half. How do you anticipate this trend will evolve in the coming years?

Sure, Arvind. Well, we'll say this, we certainly love having a significant portion of the capital being committed today, and it may even be more than we would like, historically, to win back of a couple of years. The funding on the platform was entirely at will, month to month, by design. And then, as you know, we decided a couple of years ago we wanted to start to have much more committed capital. Think of it more like a supply chain of capital than a little less like just a pure marketplace. And that's really helped, and that's what's really supplying a lot of the fuel for growth today, is that well over half of it is committed capital. Having said that, I think there is a place for kind of a spot market, if you will, where capital can come and go. There’s capital that will come in and will ultimately take loans to securitization when the ABS markets are functioning. So, I don't think we ever want 100% committed capital because there's this kind of market creation, it happens with at will capital as well. So a healthy balance will be good, but certainly we like today, having a lot of committed capital, a lot of long-term partners that we can create a lot of value for and they can create value for us as well.

Our next question is coming from James Faucette with Morgan Stanley.

It's Michael for James. Thanks for taking our question. I just wanted to ask on the small dollar loans, obviously reaching breakeven economics here. Like, how should we be thinking about incremental variable cost reduction there? And sort of the impact on approval rates broadly?

Sure, Michael. This is Dave. The small dollar product essentially is really kind of a way to get somebody into the system who wouldn't be approved for a larger loan. Generally speaking, and it is generating positive economics; it's actually not a drain in the U.S. whatsoever. They're very short-term loans; they turn over super quickly, so I don't think we see that as any kind of drain on the system. They are, you know, as I said positive economics; it's really expanding the boundary of who we can improve. A lot of those small dollar borrowers will come back later and get personal loans or maybe refinance an auto loan, etc. So for us, it's really helpful. It's also helping train our AI models on a lot of borrowers that it would not have otherwise seen. So it kind of keeps pushing the boundaries of what we can improve. I don't know, Sanjay, if you want to add anything to that?

No, I think that's a pretty good description.

Okay, great. And maybe just one sort of question on the impact of a change in administration broadly. I know it's obviously tough to prognosticate about the direction of the overall unemployment rate. But if we are in this world in which the unemployment rate is lower, credit is generally better; how are you thinking about, sort of like, run-rate origination trajectory that we should be cognizant over for the next call it 12 to 18 months?

Regarding the administration, I believe the market tends to respond positively to a business-friendly Republican administration, which is not surprising. However, our business has thrived through four different administrations, maintaining strong relationships with regulators regardless of which party is in control, so we don't view the political landscape in D.C. as a crucial factor for our operations. We've made significant progress working with regulators, especially concerning AI, fairness in lending, and similar issues, and we're confident in that progress. Generally, our growth has predominantly been driven by internal factors rather than external ones. This includes enhancing our models and expanding our funding capabilities, which allow us to assist more individuals. The new products, especially the T-Prime program, are now offering more competitive options for prime borrowers. These factors contribute to our ongoing growth potential. Moreover, as consumer risk decreases, indicated by the Upstart macro index, alongside declining benchmark rates, we see this as advantageous for us. Nonetheless, as I mentioned earlier, we're not merely waiting for federal rates or the UMI to fall; we are committed to maintaining consistent growth through continuous model improvements each quarter.

Our next question is coming from Rob Wildhack with Autonomous Research.

I wanted to ask about T-Prime and your expansion into super prime. Can you just fill us in on how you get paid in that business; is it any different? And then, how do the take rates and contribution margins compare to the core business?

Sure, Rob. That's a good question. Essentially, we don't engage in any loans that don't have positive unit economics, so we would never approach this in a way that results in a loss on the loan. They are positive. However, throughout the spectrum, the more prime you are, the thinner the margins tend to be due to increased competition among consumers. What we managed to accomplish with our lending partners is to create a product that offers a low loss rate, which is advantageous for our credit union and bank partners. It provides a decent yield, although we earn less from it; we still maintain a very positive contribution margin. If you assess our business today, contribution margins are significantly higher compared to historical levels, around 60%, while in the middle of 2021, they were in the mid-40s. We anticipate our contribution margins will normalize as our volumes grow. We don't believe that T-Prime will disrupt this significantly. It’s also important to note that this is a segment of the market we historically haven’t engaged with. So, regardless of the percentage of contribution margin, these contribution dollars are additional gains we wouldn’t have had otherwise, and that's our perspective on it.

Thank you. I’d like to hear your perspective on the overall competitive landscape. With T-Prime, you’re entering the super prime segment, and you have competitors like Sofi who are launching their own loan platform aimed at your primary demographic. What are your thoughts on this? How strong do you perceive the competition to be at this time? Additionally, how do you navigate this competition to safeguard your targeted cash flows moving forward?

Yes, we have always functioned in a highly competitive market. From the consumer's viewpoint, a loan is simply a loan. Our proprietary underwriting has been central to our strategy, allowing us to serve more people at lower rates while avoiding less desirable borrowers. With our T-Prime initiative, we are increasingly able to compete across the entire credit spectrum. While competition will always be present, we are confident in our model. A loan can be originated and retained by a credit union or bank with minimal yield and low risk. Additionally, we have strong relationships in the private credit market and have succeeded in asset-backed securities. This gives us a platform capable of swift movement. Controlling various aspects, such as data collection, model training, and loan servicing, supports our healthy approach. Many competitors have different models, whether they are banks or other fintech companies, but we believe in our strategy. The market is extensive, and there is certainly space for multiple players.

Our next question is coming from Kyle Peterson with Needham.

I'm going to start off on the rate cut commentary. You guys mentioned in your prepared remarks that the September cut is expected to work its way through into the fourth quarter. If there's further easing and we had to cut today, should we think about these as being potential tailwinds, like a one to two quarter lag, or is there another way to kind of incorporate that into our own assumptions?

It’s Sanjay, I'll take that one. Yes, I think that's roughly right. A rate cut by the Fed first requires warehouses and other financing mechanisms to adjust. Then, we will begin to reflect that in our core pricing. I think a lag of one to three months is probably reasonable.

Okay, that's helpful. Switching gears, I know you mentioned that the average loan size has increased, partly due to model improvements. Do you have any thoughts on whether this affects the progress of your small dollar product initiatives, or does it mean that those consumers who were taking smaller loans can now qualify for larger ones? It would be helpful to understand how this fits into your near-term growth strategy.

Yes. I guess in the grand scheme of things, when either risk is lower or required returns are lower, and more people can qualify for larger loans, it does mean that fewer of them are taking what they otherwise would have been offered, which is maybe a smaller dollar loan. I think that overall is good for the ecosystem and for the borrowers. It may have obviously impacts on average metrics like loan size, etc. But I think overall, we would view that as a positive on the environment.

Our next question is coming from David Schwartz with JMP.

Thanks for taking my questions. Most have been answered, but just two quick follow-ups. First on the expense side; Sanjay, I think you said there was some catch-up accruals in the third quarter. And I'm wondering if you could quantify how much of Q3 expense levels might be non-recurring? And how much specifically in the fourth quarter we should think of for marketing?

I believe there is approximately $5 million in excess expenses that were not captured earlier in the year, which has now been accounted for as a one-time adjustment this quarter.

In the fourth quarter marketing spend, is the customer acquisition cost similar to the levels seen in the third quarter?

Yes. I don't perceive there to be any large changes coming.

Okay. And then, just lastly, on the funding side, I think earlier in the year, correct me if I'm wrong. I think the Castle Lake arrangement included some form of risk sharing or mandated risk retention. Is that the case with the recent Atalia deals or are these just strict flow arrangements?

Yes. The Atalia deal has a version of co-investment where we are investing alongside them.

Our next question is coming from Simon Clinch with Redburn Atlantic.

I was wondering, Dave or Sanjay, could you talk a bit about the conversion rates and how we should think about that progressing as Model 18 really starts to drive through? And I asked this because while you delivered some great upside to numbers this quarter, I thought the conversion rate would have been higher to deliver that, and it only went up 100 basis points. So just curious as to how to think about that going forward?

Certainly. A higher conversion rate is beneficial as it directly contributes to growth. However, it's not the sole factor influencing growth; it depends on various aspects like acquisition strategies. You can expect that with model improvements and increased automation, the conversion rate will rise. Nonetheless, there is a trade-off where at some point, it may make sense to increase spending on marketing or other expenses, which can potentially lower the conversion rate. Therefore, the conversion rate doesn’t continue to rise indefinitely since we will always have an interest in investment when it reaches a certain level.

Right. And if I go back in time, I remember in the earlier days, I think we used to talk about a conversion rate of 22% being sort of optimal. So has that changed?

Hey Simon, this is Sanjay. So, maybe one additional consideration that's ignored in this multi-product world than you know, in the old days when we were really largely a single product, is that, for example, we were converting some people into small dollar loans, and as the model accuracy improves, more of those are being converted into full personal loans. And so that's not an improvement to conversion, per se, because each one of those is counted as a convert; it's just a much more lucrative conversion. So I think maybe what we can try to do over the next couple of quarters is give you guys more insight into product level conversion, where it'll be more meaningful to the economics.

And it looks like our last question is coming from Giuliano Bologna with Compass Point.

Congratulations on the continued progress in securing committed funding arrangements. It appears that the co-invest capital, or assessed value, has increased by about $100 million compared to the previous quarter. I would like to know, moving forward, how quickly you expect that to grow quarter-over-quarter, especially as volumes continue to improve. Is there a limit to how high you would want that to be in relation to capital or cash? Additionally, I am interested in where the percentages stand regarding the outstanding amount relative to that co-invest as of the third quarter.

Hey Giuliano, this is Sanjay. I hope you're doing well. A rough framework you can use to think about this is that in these specific deals, we anticipate a co-investment in the mid to high single digits. This has generally been true and remains the case. In quarters where we sign significant deals, like the Blue Owl deal, they often also involve large back book transactions to establish the relationship and enhance the use of the financing facilities. This can lead to a notable one-time increase in the committed capital dollars, as has happened this quarter due to the Blue Owl deal. These are more related to deal signings than ongoing investments. Overall, a mid to high single digit percentage of the flow, which is committed, should be the right target for us to scale on. The total amount we're comfortable with depends on the size and scale of our platform. As our business generates more funds, we're able to invest more in dollar terms into these arrangements. Overall, as a percentage of the total volume we're handling, it should remain in the single-digit range.

From an exposure perspective, should we consider that the $334 million represents something in the mid to high single digits? Or can you provide a rough estimate of what the principal exposure looks like at this point?

Yes, that $334 million represents a mid-single digit percentage of the total amount of origination dollars that it was used to generate.

I find this very helpful. I'm curious if you have any insight into the take rate movement for this quarter. We will obtain the data from the 10-Q, but I'm interested in understanding how the growth in the take rate might be affected by slightly increasing the number of prime loans. Ideally, this is a constructive way to approach it. Can you provide a rough estimate of whether some of the higher prime loans are being issued with a low single-digit take rate, a mid-single digit take rate, or some indication of where the high prime loans are coming in?

Yes. Sure, Giuliano. I think that the take rate is in roughly the same ballpark as in prior quarters. I think in this particular quarter it may be very slightly down. Some of it has to do with the mix between, you know, institutional funding and LP funding. Some of it is maybe a function of this T-Prime program that we're scaling, which, as Dave said, has, you know, smaller but still positive margins. And some of it is, frankly, experimentation. As we scale, we're always trying to find the optimum elasticity or the optimum price given elasticity in different segments, since that, you know, allows us to experiment a little bit with some percentage of our traffic. And I think the combination of those three create a bit of push and pull with take rates, but net, net, I think they're, they're in the same ballpark, maybe, maybe marginally lower than last quarter.

That's very helpful. I appreciate the time, and I'll jump back in with you.

And there are no further questions at this time. I will now turn the conference back to Dave Girouard for any additional or closing remarks.

Just want to say thanks to all for joining us today. We're excited about our position and our velocity toward the future. We think our business is really beginning to hit on all cylinders again. We appreciate you joining us, especially during this super busy week, and we look forward to talking to you again in the new year. Thanks.

Thanks for joining you. This concludes today's call. Thank you for your participation. You may now disconnect.