Open Lending Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Open Lending's First Quarter 2024 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are Chuck Yale, Chief Financial Officer and Interim Chief Executive Officer, Cecilia Camrio, Chief Accounting Officer. Earlier today, the company posted its Q1 2024 earnings release and supplemental slides to its Investor Relations website. In the release, you will find reconciliations of non GAAP financial measures to the most comparable GAAP financial measures discussed on this call.

Operator

Before we begin, I would like to remind you that this call may contain estimated or other forward looking statements that represent the company's view as of today, May 7, 2024. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ materially from those expressed or implied with such statements. And now, I'll pass the call over to Mr. Chuck Yale.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's Q1 2024 earnings conference call. Before I discuss our quarterly highlights, I want to take a moment to thank our Board of Directors and our team members at Open Lending for their confidence and trust in me. We have an experienced executive leadership team across functions. And joining me today on the call is Cecilia Camarillo, our Chief Accounting Officer, who will discuss the Q1 financial results in more detail.

Speaker 1

With that, let's review the Q1 financial highlights. I'm pleased to report that in the Q1 of 2024, we exceeded the high end of our guidance range for both certified loans and revenue and exceeded the midpoint for adjusted EBITDA despite the continued impact of elevated interest rates, automotive industry specific challenges and credit union lending capacity constraints. We certified 28,189 loans during the quarter, which was a 7% sequential increase compared to Q4 of 2023. We generated total revenue of $30,700,000 and adjusted EBITDA was $12,500,000 Looking forward, we're encouraged by the trends that we're beginning to see in the auto industry and the signs that our credit union customers' lending capacity challenges are improving slightly. First, let's turn to the automotive industry.

Speaker 1

Cox Automotive recently increased their 2024 sales forecast for new and used autos. The latest forecast anticipates a 1.6% and 3.2% year over year growth in new and used retail SAAR, respectively, compared to flat for both metrics in the original forecast for 2024. Affordability has also improved as inventory levels continue to build with new autos seeing a 47% increase and used auto inventories realizing an 8% increase year over year. As a result, vehicle prices moderated with new auto transaction prices decreasing by 2.7% and used auto prices decreasing by 2.5 percent year over year. To put this in perspective, the Cox Moody's affordability index, a measure of weeks income needed to purchase a new light vehicle declined to 36.9 weeks in March, down from its peak of almost 42 weeks in Q4 of 2022.

Speaker 1

While this is the 3rd consecutive month of decline, we still remain above the pre COVID average of 33 to 34 weeks. For used vehicles, Cox revised its forecast for the Manheim Used Vehicle Value Index, which is now expected to decline a modest 0.7% by the end of 2024 compared to 0.5% increase previously. This should lead to continued moderation in used vehicle prices, which should further improve consumer affordability. We're encouraged by the improvement of these key metrics, but recognize the auto market conditions are still transitioning towards a return to normalcy. Inventory levels are improving but remain more than 20% lower than pre COVID averages, while transaction prices in the Manheim remain over 30% higher.

Speaker 1

Additionally, interest rates remain elevated at 23 year highs and are likely to be higher for longer based on the latest outlook from the Federal Reserve. This translates to a lower SAAR than pre COVID averages with 2024 total use SAAR forecasted to be 36,600,000 units and 2024 total new SAAR forecasted to be 15,700,000 units. While growing relative to 2023, both are approximately 10% lower than pre COVID levels. Let's turn to our credit union customers. Preliminary Q1 2024 results from Callahan, a leading third party data provider within the credit union industry, reflected a 78 basis point gain or almost 40% increase in share or deposit growth from 1.99% in the Q4 of 2023 to 2.77% at the end of the Q1 of 2024.

Speaker 1

We are encouraged by the fact that we have observed 2 consecutive quarters of improvement in share growth across the credit union industry. That said, loan to share ratios remain at approximately 85 percent near pre COVID highs. This indicates that credit unions continue to experience lending capacity challenges. We closely monitor these 2 key metrics that serve as leading indicators of credit union loan activity. Specifically, we are looking for sustained improvement in share or deposit growth, which would subsequently lead to a decline in loan to share ratios.

Speaker 1

As seen in prior cycles, when this occurs, there is a corresponding increase to credit union lending capacity. Now I'll provide an update on our 2024 strategic priorities. We remain focused on optimizing our core credit union and OEM businesses, while expanding our penetration into bank and finance companies. 1st, on optimizing our credit union and OEM businesses, where our expectation is to excel as trusted profit margins. We have and continue to enhance the capabilities of our account management and sales efforts to deliver superior service to our existing customers in order to expand our wallet share and to more efficiently acquire and onboard new customers.

Speaker 1

During the Q1 of 2024, we added 11 new accounts compared to 8 in the Q1 of 2023, a 40% increase year over year. Important to note, of these 11 accounts, approximately onethree were larger accounts with combined total assets of over 8,500,000,000 In addition, I am pleased to report that 30% of these 11 new accounts have already produced their 1st certified loan, which is a testament to the efforts of our sales and account management teams execution of our strategy of getting a new account to revenue generation faster by focusing on on institutions with loan origination systems for which we already have integrations. An example is 1AZ Credit Union, which is headquartered in Phoenix, Arizona with over $3,400,000,000 in total assets and has a healthy loan to share ratio. Through our partnership, 1AZ will utilize our lenders protection platform in their market under their recently launched CreditFlex Auto program, which will help them expand access to auto loans for the underserved populations of Arizona, while also protecting the assets of its members from the downside risk of defaults on auto loans. Additionally, we recently hosted a client advisory council meeting with several of our top credit union customers to discuss industry trends they're experiencing and gather feedback on new tools and capabilities to ensure Open Lending is positioned to deliver continuous innovation and superior support to our customers.

Speaker 1

Turning now to our product. We continue to be encouraged by the results of our new enhanced lenders protection proprietary scorecard launched in the Q4 of 2023. The new scorecard has decisioned over 1,200,000 applications and is performing in line with our expectations. As you may recall, the new scorecard incorporates 3 new alternative data sources providing us access to 350,000,000 detailed transactions, over 170,000,000 consumer checking accounts and expanded suite of credit report attributes developed and maintained by TransUnion. Our AI and machine learning based model can identify the most predictive credit risk attributes for borrowers.

Speaker 1

With the early data from a full quarter of operating under our new scorecard, we are even more confident in our ability to lower default frequency by better predicting and pricing risk, which we expect will further improve the performance of Open Lending's portfolio. To speak a bit more about performance, while the macroeconomic pressures over the last 18 to 24 months have been challenging, our portfolio has performed in line or slightly better than the average delinquencies for the S and P consumer finance sector in the nonprime credit spectrum. Based on the age of our back book where the worst finages are near the end of their peak default periods, we expect to see our delinquency rates continue to flatten and moderately improve in 2024. Additionally, for the most recent 2023 vintages, we are seeing signs of improved outlook based on early delinquency metrics. This is a testament to the pricing and the credit tightening actions that we took over the last 2 years, including a nearly 20% increase in insurance premiums across our portfolio since Q1 of 2022 as well as early validation of our new scorecard's ability to better predict defaults and lowering frequency.

Speaker 1

Furthermore, we continue to modify our program to yield better results for our lenders, our insurance carrier partners and ultimately Open Lending. In the Q1 of 2024, we tightened our credit and underwriting guidelines by adjusting our score cutoffs to eliminate the worst performing credit bins. In this period of challenging macroeconomic conditions, we are committed to protecting the profitability of all stakeholders in our ecosystem by saying no to loans that put unnecessary risk on open lending, our carrier partners and our lenders. In addition to credit tightening, we commenced targeted price optimization that is calibrated to our new scorecard. This is an ongoing process, but the first change led to a premium decrease in our direct channel, which is our best performing channel from an ultimate loss ratio perspective.

Speaker 1

This is important as all stakeholders can benefit with increased certified loan volume from our lower risk channel. In addition, we implemented a premium increase on lower performing portions of our book within the indirect channel to more appropriately price for the risk. With the launch of the new scorecard, we can be more targeted when pricing for risk. Turning to our insurance carriers. We recently hosted our partners in Austin.

Speaker 1

It was a great opportunity to discuss our underwriting strategies and our priorities and gather feedback to ensure full alignment. We're encouraged that they share our optimism for the future and support the actions that we are jointly taking in our underwriting and pricing. Now let's turn to our 2nd strategic priority for 2024, further expanding our penetration into bank and finance company market, where open lending has historically been underpenetrated relative to the credit union end markets. Based on our conversations date, we believe these lenders have the capacity and the appetite to lend in this environment. We recently hired an experienced team who will bring existing relationships and can sell our unique value proposition into this market.

Speaker 1

The team has built a robust pipeline of opportunities, including ongoing conversations with large national banks, community and regional banks and finance companies. While we're encouraged by the progress we are making, understand these banks and finance companies have longer sales cycles and more complex integrations. But based on our analysis, the average participant represents a meaningfully larger CERT opportunity than we traditionally see from credit unions. Before I turn the call over to Cecilia to go over our Q1 2024 results, I wanted to personally thank the entire team at Open Lending for your continued support and dedication to our company. I am proud of what we have accomplished and your execution to deliver these positive results despite the current market backdrop.

Speaker 1

I remain confident in the long term opportunities ahead of us, and I am encouraged by the early signs of improvement in market conditions. The underserved near and nonprime consumers need us and our lender partners now more than ever. With that, I'd like to turn the call over to Cecilia.

Speaker 2

Thank you, Chuck. During the Q1 of 2024, we facilitated 28,189 certified loans compared to 32,408 certified loans in the Q1 of 2023. Total revenue for the Q1 of 2024 was $30,700,000 which includes an ASC 606 negative change in estimate of $1,100,000 associated with our profit share compared to $38,400,000 in revenue in the Q1 of 2023, which included a positive change in estimate of $700,000 As Chuck mentioned, Q1 certified loans and revenue both exceeded the high end of our guidance range. To break down total revenues in the Q1 2024. Program fee revenues were $14,300,000 dollars Profit share revenues were $13,900,000 net of the previously mentioned negative change in estimate and claims administration fees and other revenue were $2,500,000 As a reminder, profit share revenue is comprised of the expected earned premiums less the expected claims to be paid over the life of the contract and less expenses attributable to the program.

Speaker 2

The net profit share to us is 72% and the monthly receipts from our insurance carriers reduce our contract asset. Profit share revenue in the Q1 of 2024 associated with new originations was $15,000,000 or $5.33 per certified loan as compared to $17,900,000 or $552 per certified loan in the Q1 of 2023. The Q1 2024 $1,100,000 negative change in estimate is associated with cumulative total profit share revenue recognized of approximately $395,000,000 for periods dating back to January 2019, which was the ASC 606 implementation date and represents over 400,000 insured in force loans in the portfolio. Importantly, to put this in perspective, the cumulative profit share change in estimate since 2019 is a positive 4,400,000 dollars Operating expenses were $17,700,000 in the Q1 of 2024 compared to $15,800,000 in the Q1 of 2023. Operating income was $7,300,000 in the Q1 of 2024 compared to operating income of $17,100,000 in the Q1 of 2023.

Speaker 2

Net income for the Q1 of 2024 was $5,100,000 compared to a net income of $12,500,000 in the Q1 of 2023. Basic and diluted net income per share was $0.04 in the Q1 of 2024 as compared to $0.10 in the Q1 of 2023. Adjusted EBITDA for the Q1 of 2024 was $12,500,000 as compared to $21,200,000 in the Q1 of 2023. Excluding profit share revenue change in estimate, we generated $13,600,000 in adjusted EBITDA in the Q1 of 2024. And there's a reconciliation of GAAP to non GAAP financial measures that can be found at the back of our earnings press release.

Speaker 2

We exited the quarter with $380,600,000 in total assets, of which $247,000,000 was We had $169,100,000 in total liabilities, of which $143,200,000 was outstanding debt. I would like to turn the call back over to Chuck to discuss our guidance for the Q2. Chuck?

Speaker 1

Thanks, Cecilia. Now moving to our Q2 2024 guidance. While we are encouraged that market conditions appear to be improving, the following factors were considered in our Q2 2024 guidance: continued high interest rate environment and the possibility of being higher for longer lower than pre COVID inventory levels and higher than historical vehicle prices continue to present affordability challenges for consumers, used a new SAAR that remains lower than pre COVID levels despite year over year growth near historic high loan to share ratio combined with historically low share growth that continue to limit credit unions' lending capacity and senior lending officers Accordingly, our guidance for the Q2 of 2024 is as follows: total certified loans to be between 27,030,000 total revenue to be between $29,000,000 $33,000,000 and adjusted EBITDA to be between $10,000,000 $14,000,000 We have a strong balance sheet with no near term debt maturities and generate positive cash flow, which provides us with the financial flexibility to make targeted investments to accelerate revenue growth, which positions us well to capture pent up demand as market conditions continue to improve. We will focus on optimizing our profitability by both accelerating revenue and controlling cost. We'd like to thank everyone for joining us today, and we will now take your questions.

Operator

We will now begin the question and answer session. Our first question comes from Joseph Vafi with Canaccord. Please go ahead.

Speaker 3

Hey guys, good afternoon. And I see the steady results here in the quarter. Just wanted to drill down into the sequentially upsurge a little bit. If we could kind of maybe discuss seasonality, if tax season really had anything to do, you think with Q1 or do you think it's just the number of partners growing and maybe some other incremental improvements to the backdrop? And then I'll have a follow-up.

Speaker 1

Yes. Hey, Joe, it's Chuck. Yes, I think Q1, obviously, March, I would say Q1 seasonally is our best quarter. I'd say March is usually one of our best months of the year, and that is driven by the tax season and the uptick there in tax refunds. But we're encouraged by the app volume and what we're seeing into the Q2 as well.

Speaker 1

And so March was a good month though for us due to the tax season.

Speaker 3

Okay. That's great. And then maybe on some of these larger strategic partners and discussions and integrations and the like. Do you think it's feasible to see some of these bank partners kind of go live this year at this point? Or do you think that or are there some other factors that we should consider here relative to the pace of uptake with them?

Speaker 3

Thanks a lot.

Speaker 1

You bet. Yes. And as you think about the bank initiative, we've hired the team. They're on board. They bring strong relationships to us, they're in the process of getting fully licensed and all that and up to speed on our products.

Speaker 1

So there will be some obviously some ramp time once those actually go live and there are more complex integrations with their LOSs as we've stated. But yes, we think we can get some of those wins to maybe begin certifying loans later this year.

Speaker 3

Great. Thanks a lot. Thanks, Chuck. Thanks, Cecilia.

Speaker 1

Yes. Thanks, Joe.

Operator

And the next question comes from Kyle Peterson with Needham. Please go ahead.

Speaker 4

Great. Good afternoon, guys. Thanks for taking the questions. I wanted to touch a little bit on, you guys mentioned some of the credit tightening initiatives that you guys took. I guess, could you clarify, I guess, 1 in the quarter you guys took those actions and any estimate on kind of what percentage of the book or like loan start volume that

Speaker 3

applied to?

Speaker 1

Yes. Well, Kyle, yes, I'll start. We implemented the new scorecard in October, our LP 2.0. So we had a full quarter in Q1 under the new card, the enhanced scorecard. And the credit tightening that we took in the quarter was more around our score cutoffs raising it from 475 to about a 5.75 cut off.

Speaker 1

So we're just taking less risk on those more risky credit bins and it's about a 5% reduction in our volume. But as we said in the prepared remarks, in this environment, what we want to do is with the enhanced scorecard, the ability to predict default, more ability to higher predictability there and then take less risk. So that's what the card is doing and we're pleased with the 1,200,000 apps to date that we've processed under it and the ability to do that and execute. So that's really the main tightening. And as you know, over the last couple of years, we've increased insurance premiums as well, 5% last Q2 of last year and about 13% in Q2 of 2022.

Speaker 1

And those are also benefiting from those and actually cutting off higher risk premiums for that and actually pricing some of those loans out that were more risky. And better capture rate that we're seeing under the new card for the better credits as well. So that's another good result. And that's a positive flow into our profit share as well as we'll see that over time.

Speaker 4

That's helpful. And then maybe just a follow-up on the outlook. It kind of looks like it implies about flattish trends in revenue and search. I guess just kind of thinking about fundamentals, should we expect whether it's loan cert volumes or revenue, is this a good run rate given them if macro kind of stays in this kind of uncertain malaise with where rates are and such? Or just how should we think about the fundamentals if we kind of remain in this environment?

Speaker 1

Yes. I mean, if you think about I'll come back maybe to the outlook. But if you think about the improving conditions that we're seeing in the auto market, inventories are improving for new end use slightly. Affordability is getting a little better for the consumer. Consumer sentiment has been it's been a tough spot.

Speaker 1

You think about the used and new retail SAAR is forecast for improving. So all those are positive signs, but the rate environment is still high, like you said, and the vehicle prices are still 30% above pre pandemic. So it's not there are signs of improvement, but still returning to normalcy over time. So if you think about the bottoming process of any market, we're encouraged to see even with our credit unions, loan to share ratios now for a couple of quarters have remained at that 85% and not gone up loan to share. And share growth, as we said in the report, improving now for a couple of quarters, which is their deposit growth, which as that improves, as we've seen in past cycles, that will ultimately go to more lending activity with the credit unions, and it's just kind of a process.

Speaker 1

But we believe that maybe we're close to that bottom and making a recovery, but it does take time.

Speaker 4

All right. That's helpful. Thank you.

Speaker 1

You bet. Thank you, Kyle.

Operator

And the next question comes from Zachary Oster with Citizens JMP. Please go ahead. Hi, everyone. Thank you for taking my question. We were working through the QQ guidance and we kind of just wanted to get a better sense of what the profit share may look like for Dynamics in the next quarter and also the next few quarters?

Operator

Thank you.

Speaker 1

Yes. If you think about this profit share, we booked we put the current vintage, the Q1 on it about a little over 5.30 unit economics per cert, 5.33 to be exact. That's again under the new scorecard with our decisioning as well as stress that we've put on the portfolio. We've talked about it on prior calls that in this environment, we've actually stressed there's 3 components to profit share, as you know, that go into the revenue model. It's severity of loss, it's the default frequency as well as prepay speeds.

Speaker 1

And as we think about that, we put those on the books at about a 62% loss ratio in the Q1. So we feel like that's adequately stressed based on these conditions and feel like in that range of, call it, $500,000,000 to $550,000,000 is a good range for to think about for profit share.

Operator

Got it. Thank you. And the next question comes from John Davis with Raymond James. Please go ahead.

Speaker 5

Hi, this is Taylor on for J. D. Maybe just to start on the 11 signed lenders for the quarter. I'm just curious if you're mostly having success in signing new lenders on the bank or credit union side and then just any additional commentary on how OEM conversations are progressing as you've called out multiple large prospects in the pipeline recently?

Speaker 1

Yes. You bet. So in the quarter, the 11 accounts that we signed, 10 of those were credit unions in the quarter and one was a bank or a finance company that we're targeting under our 24 priorities and initiatives. We've got as we talked about, we've got a robust pipeline and a new team there pursuing those bank customers. So we it's under penetrated and we want to do more in that space.

Speaker 1

And I was answering Joe's question earlier about the bank, and it is a more complex integration and cycle. So we're hopeful we'll have search later this year, but we also those things take time. So banks are more active as OEMs increase their market share with incentives today. So that's another opportunity for us under the bank channel. And so yes, I mean, credit unions were 10 of the 11, but I think what we're most proud of in our team's work is of those 11 new accounts or customers, about onethree of those actually got integrated online and had their first cert in the quarter, which is pretty phenomenal by the team and the work there.

Speaker 1

So we're really focused there on getting deferred revenue faster. Got you. Good to hear.

Speaker 5

And then maybe just as a follow-up, so any update on your expectations for refi certs throughout the year? It looks like they declined about 6% year over year and declined sequentially. And obviously, understand it's rate dependent, but just curious to hear what you expect given the higher for longer commentary?

Speaker 1

Yes. And real quick, I'll probably go to refi, I'll answer your OEM question. I don't think I did a good job there on that last part. But the OEM's opportunity still is out there. It's just the pipeline is as strong as ever in the conversations and we continue to sell into that channel as well and very excited about that.

Speaker 1

So as we've done in the past is we're talking about OEMs in past tense as we sign them up and not speculating, but but still a great opportunity for us. And then the follow-up question there was on can you repeat the back end of that?

Speaker 5

Yes.

Speaker 1

On refi? In general? Yes. Refi is we've talked about it. We need rates to stabilize, which they have.

Speaker 1

We've not seen an action, I think, since July or August of last year. And our refi partners, it's like a 6, call it 4 to 6 months stabilization, which we've now seen. And our volume was, call it, a little less than 4% in Q1, down from, call it, 8% last year in Q1. So we've seen the stabilization, but the bigger issue is what I was on the previous question is really through our credit unions, the lending capacity of some of our larger customers that are still having constraints and challenges. When that works through, we'll have an opportunity again in the refi business.

Speaker 1

And it's not if it's when and that will get worked through. But those challenges need to kind of work out first even in a declining rate environment.

Speaker 5

Great. Thanks for taking the questions.

Speaker 1

You bet. Thank you.

Operator

At this time, there are no further questions. I would now like to turn the conference back over to Chuck Yale for any closing remarks.

Speaker 1

Okay. Again, thank you for joining us today and thank you to the Open Lending team for delivering these positive results in the Q1 of 2024. Hope everybody has a great evening. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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