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Upstart provided guidance for Q1.2023 in their press release of 02/14/2023. Their numbers
only makes sense to me if we're in for some nasty surprises in Q1.

Is there a huge write-off coming in Q1?

For Q1 they've guided for $100M in revenue and a GAAP net loss of -$145M. If that happens,
then expenses by definition would have to total $245M in Q1. However, some of that expense
in Q1 can be accounted for by one-time charges related to planned layoffs. In a 01/31/2023
press release, Upstart stated they expect to incur $15M in cash restructuring charges offset
by $3M from a one-time, non-cash reversal of stock-base compensation. If we deduct the one-time
restructuring charges and the SBC reversal, we would expect expenses to increase by $31M, or
+15% in Q1, based on their guidance for revenue and GAAP net loss.

Here's what that looks like in tabular form:

                              (in thousands)
                           Actual     Guidance
                           Q4.2002     Q1.2023       Diff
                           -------     -------     ------- 
Total Revenue              146,913     100,000     -46,913  -32% 
Expenses                   202,176     233,000     +30,824  +15%
Restructuring Charges            0      15,000
SBC Reversal                     0      -3,000
                          --------    --------
GAAP Net Loss              -55,263    -145,000

Does it make sense that revenue is expected to decline 32% but expenses are expected to
increase by 15%? Consider that expenses have declined sequentially in lockstep with revenue
every quarter since the beginning of 2022.

                                                 Based on
             -------------- Actual ------------  Guidance
             Q1.2022  Q2.2022  Q3.2022  Q4.2022   Q1.2023
             -------  -------  -------  -------   -------
Expenses     277,444  258,033  213,456  202,176   233,000
                          -7%    -17%      -5%       +15%

What all this tells me is we can probably expect a write-off of $30M or more in Q1.

What's happening with stock-based compensation?!

They've guided for an Adjusted Net Loss of -70M in Q1. This is a non-GAAP number and
the calculation is straightforward: Adjusted Net Income (Loss) = GAAP Net Income (Loss)
minus Stock-Based Compensation and associated payroll taxes and acquisition-related
costs. Because associated payroll taxes and acquisition-related costs are minor or nil,
the equation really comes down to Adjusted Net Income (Loss) = GAAP Net Income (Loss)
minus Stock-Based Compensation. Let's again compare actuals from Q4 to expected results
in Q1 based on guidance.

                                  (in thousands)
                                           Based on
                                Actual     Guidance
                               Q4.2002     Q1.2023
                               -------     -------
GAAP Net Income (Loss)         -55,263    -145,000
Stock-Based Compensation        34,316      75,000 
Adjusted Net Income (Loss)     -20,947     -70,000

Based on their guidance for GAAP Net Loss and Adjusted Net Loss, we can expect stock-based
compensation to be approximately 75M in Q1. That's an astonishing number! For perspective,
it's 3/4 of revenue. Tech companies are considered outliers when their stock-based comp
approaches 20% of revenue. It's more than twice as much as Q4 and about 60% of all of 2022.

Ears <long UPST>

Hi Ears, nice post!

Thanks for writing that up with nice formatting and all. Very helpful.

I do question your assumption that the totality of the adjustment between GAAP and non-GAAP net income will be stock based compensation. I would instead expect most of that $70m to be 'everything but the kitchen sink' 'one time' adjustments/write-offs we'll be seeing.

That said, I am concerned with how much the company uses SBC. Actual compensation in Q4 of $34m seems way too high. I guess that will be coming down some in following quarters after Q1, thanks to the layoffs, but it'll still be too high for my tastes.

I do question your assumption that the totality of the adjustment between GAAP
and non-GAAP net income will be stock based compensation. I would instead expect
most of that $70m to be 'everything but the kitchen sink' 'one time' adjustments/
write-offs we'll be seeing.

Much appreciate your comments. I probably wasn't clear enough about how they
calculate non-GAAP Net Income (Loss). There is nothing to be assumed about it.
Their calculation is very clear and straight-forward (from their 10-K or 10-Q).

We define Adjusted Net Income as net income (loss) attributable to Upstart
Holdings, Inc. common stockholders exclusive of stock-based compensation expense
and certain payroll tax expenses and acquisition-related costs.

If you examine the totality of the adjustment between GAAP and non-GAAP net income
for the year 2022, acquisition-related costs were zero, payroll tax expenses were
2% of the total, and stock-based compensation was 98% of the total. There are no
other adjustments accepted in this calculation by Upstart. Because acquisition
costs are zero and payroll tax costs are so tiny, for all practical purposes the
equation is as follows:

non-GAAP Adjusted Net Income (Loss) = GAAP Net Income (Loss) - Stock Based Compensation

They've given us two of these numbers in their guidance -- Adj Net Income (Loss) and
GAAP Net Income (Loss) -- so the calculation of Stock Based Compensation is just math
and not an assumption.

Of course as my family likes to point out, if I say the sky is blue it will turn green.

Ears

Sorry, typo with a minus sign, that equation should read...

non-GAAP Adjusted Net Income (Loss) = GAAP Net Income (Loss) + Stock Based Compensation

Okay, thanks, ears. I appreciate the explanation.

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