Good afternoon, and welcome to Open Lending's First Quarter 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are Keith Jezek, CEO; and Charles Jehl, CFO. Earlier today, the company posted its first quarter 2023 earnings release 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. Before we begin, I'd like to remind you that this call may contain estimated and other forward-looking statements that represent the company's view as of today, May 9, 2023.

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 from those expressed or implied with such statements. And now I'll pass the call over to Mr.

Keith Jezek. Please go ahead..

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's First Quarter 2023 Earnings Conference Call. For the first quarter, our results were ahead of our expectations despite the economic and industry dynamics impacting our business.

We faced continued liquidity constraints at a majority of our credit union customers and the impact of rising interest rates on our business. We continue to experience demand-side challenges, specifically affordability, as near and non-prime consumers are being hit disproportionately by rising interest rates, resulting in lower disposable income.

Consumer sentiment remains below its historical average. In addition, the used retail market for the past 2 years is as low as it has been in over a decade. However, we are seeing modest signs of improvement in the new auto market since we last spoke in February. Now let me turn to our Q1 highlights.

During the quarter, we certified 32,48 loans, generated total revenue of $38.4 million, gross profit of $32.9 million, and adjusted EBITDA of $21.2 million. We exceeded the high end of our Q1 guidance range for all metrics, certified loans, revenue, and adjusted EBITDA.

I would like to thank all the team members at Open Lending for their contributions to these positive results. As I mentioned, the pandemic-related new automobile supply constraints are slowly improving. Specifically, semiconductor chip shortfalls have been mostly replenished.

OEMs are running their plants with improved efficiency, transportation bottlenecks have eased, fleets have rebuilt their stock, and dealers are intelligently growing their new inventory. Taking a closer look at the new auto retail market.

At 16 million units, the new light vehicle in April was up 13.5% sequentially as compared to December and up 10% over April 2022. New vehicle inventory continues to expand, and in many instances, inventory is up nearly 70% year-over-year.

Fleet sales also increased and are up 50% year-over-year and at 21.7% of total volume, the highest share since the pandemic. While improving new automobile dynamics are welcome news in the used retail market, sales declined 8% in April from March and were down 8% from a year ago.

The recovery in new supply has been nonlinear and has fluctuated month-to-month. You supply is currently estimated at an average of 40 days, down from 49 days in January 2023. The used auto retail market continues to show signs of pent-up demand due to affordability factors facing near and non-prime buyers.

Consumers are holding on to their autos longer, but eventually, the increased maintenance and repair costs will be outweighed by the benefit of getting into a newer vehicle. We have seen this dynamic in prior cycles and note that the average age of a used vehicle on the road is over 12 years old, an all-time high.

This pent-up demand will create an opportunity for open lending as used vehicle values moderate and interest rates decline. Like other consumer credit categories, auto loan delinquencies have continued to increase as a result of current economic conditions.

Accordingly, we tightened our underwriting and in late March, increased our vehicle value discount factor. This action effectively increases our credit default insurance pricing to reflect and compensate us appropriately for the potential additional risk we are taking.

With this incremental adjustment, our average credit default insurance premium has increased by an additional 5%. Recall that this incremental premium is in addition to the 12% premium increase in the second quarter of 2022.

As always, we will continue to monitor risk and portfolio performance, and we have the flexibility and ability to make additional adjustments. Now turning to other program underwriting changes we made in 2022 and early 2023, along with brief updates on each.

In the second quarter 2022, we made changes to expand loan limits and extend the term of qualifying vehicles to 84 months. As of the first quarter of 2023, 84-month term loans comprised 15% of our volume, and importantly, claims to date are lower than expected since our initial rollout.

Their performance has yielded stronger unit economics based on higher credit default insurance premiums and better-than-expected performance due to lower claims than modeled. As you may recall, we put in place tighter payment to income or PTI constraints at the onset of the pandemic.

And in the second quarter of 2022, we initiated our new PTI pricing program, where loans with higher PTI ratios are charged a higher premium and conversely loans with lower PTI ratios receive a discounted premium. Early performance shows this enhancement has better-aligned loss ratios across our program and is having a positive impact on volume.

Earlier this year, we increased our allowable vehicle age from 9 to 11 years. I would point out that we did not increase the knowledge factor as this is the most significant driver of the depreciation of a vehicle.

This change provided a small increase to certified loan volume, but most importantly, reduced counter approvals, improved closure rates, and provided flexibility to our customers with the all-time high average age of used vehicles on the road without taking on much incremental risk.

Along with the vehicle age update, we have reinstated our pre-pandemic policy for the loan approval exploration menu from 30 days to 45 days for our direct and refinance channels. This change offers our customers and partners sufficient time needed to complete their respective funding processes.

Although we don't have any direct exposure to the recent banking crisis, I wanted to take a moment to address the current banking landscape and, specifically, how it relates to smaller banks and more importantly, to our core customer credit unions.

The deposit outflows experienced by some of the recent regional bank failures have not been seen in credit unions.

Furthermore, credit unions continue to lend to high-quality consumers, their members, and given that they fundamentally operate more conservatively when it comes to managing their balance sheet with very little leverage, they are not pressured to engage in the type of investment activity seen recently by some of the failed institutions as they are mandated to serve their members, not maximize returns.

The type of loans underwritten by credit unions are more conventional in nature. In addition, it is more common for credit unions to have deliberate strategies when it comes to loan pricing from an asset and liability matching standpoint, which further strengthens their position through lending cycles, as evidenced during the great recession.

In fact, during that time, credit union deposits actually grew since they were viewed as a safer place by consumers to keep their money. On our last call, I shared our 2023 focus areas that we believe position us effectively for the current environment and market improvement as it comes.

These are areas that support and strengthen our long-term competitive advantages and include further refining and optimizing our sales channels, enhancing our technology offering, and attracting and retaining talent. First, on sales, operations and marketing, we are seeing good progress from the investments we made in 2022.

While we added 8 new accounts in Q1 of 2023 as compared to 18 in Q1 of 2022, we achieved our goal of shifting our results to closing larger volume accounts with a higher targeted share of the business to open lending.

The new accounts added during the quarter represent a 100% increase in average target share to us per financial institutions signed up as compared to Q1 of 2022. In addition, we continue to enroll financial institutions to operate loan origination systems for which we already have existing successful technology integration.

As a result, we anticipate continued further improvement in streamlined workflow and onboarding processes to reduce the number of days to first revenue.

Our marketing team has been instrumental in supporting our sales team with a strong lead generation program, including increased media presence in both earned and paid channels, thought leadership based on proprietary research, targeted personalized outreach to institutions, robust industry event participation to generate leads as well as the production of shareable campaign assets and other enabling sales tool.

We believe that we have the right resources in place to continue executing our go-to-market sales strategy that will position us well as the industry recovers. Our account management team remains focused on engagement and collaboration with our existing customer base to both solidify and expand their use of our program.

During these uncertain economic times, our team members continue to work with our clients to reinforce the risk mitigation value our program offers, especially as it relates to the runoff of existing auto loans. One additional area of focus is assisting individual accounts and growing their lending footprint in their respective markets.

We have also made strong progress on the technology front. In Q1, we completed the major milestone of deploying a new internal platform for claims adjudication. This platform not only brings notable efficiencies to our adjudication process but also allows us to collect additional data needed for enhanced reporting and analytics.

We're in the process of completing a transition to the public cloud, which will allow us to grow in a cost-efficient manner, bring enhanced security to our framework, and offer access to services and technologies not readily available in our existing on-prem environment.

To date, we have achieved all major internal milestones for this important initiative. Finally, a significant program design change was introduced in the quarter that will streamline workflows and significantly increase efficiencies for our partners and clients.

As interest rates stabilize and our refinance channel volume returns, our lender partners will be positioned to support the expected larger volumes with lenders protection. Lastly, on talent. We remain focused on building a strong people strategy to support and expedite Open Lending's long-term growth objectives by hiring and retaining top talent.

We will continue driving company culture centered on creating a diverse and collaborative environment to unlock value and foster growth for individuals, teams, and the business. That said, we will be measured and thoughtful as we add team members throughout the remainder of 2023.

Having managed scaled businesses in the auto sector through the great recession, I continue to be encouraged by the response of our team and in our ability to manage through the current environment. I remain confident about our position in 2023 and beyond as we execute on our mission to help both lenders and underserved consumers.

I believe our value proposition to the various players in the auto retail ecosystem is as strong as ever. We remain committed to our goal of gaining market share by signing new accounts and expect to be well-positioned to meet pent-up demand as the industry continues to recover.

Now with that, I would like to turn the call over to Charles to review Q1 in further detail as well as provide our thoughts on the outlook for Q2.

Charles?.

total certified loans to be between 29,000 and $33,000, total revenue to be between $33 million and $37 million, and adjusted EBITDA to be between $16 million and $20 million.

In our guidance, we have taken the following factors into consideration, the affordability index of our target credit score borrower due to the continued elevated used car values, inflation, elevated interest rates compared to a year ago levels, and the financial condition of the near and non-prime borrower.

We have a strong balance sheet, which has allowed us to thoughtfully invest in our business and repurchase our common stock at attractive prices. While maintaining financial flexibility that will position us very well as demand fundamentals improve. We would like to thank everyone for joining us today, and we will now take your questions..

[Operator Instructions] The first question comes from the line of David Scharf with JMP Securities..

Keith, I wanted to start out on revisiting just the landscape at the core credit union funding sources. So I appreciate the color on sort of deposit trends there.

But I'm looking at kind of my notes from last quarter, and I know at the time, you had mentioned, particularly with the rise in rates, that they obviously have probably more alternatives in terms of asset classes to invest in now.

Can you just provide an update on what you're seeing in terms of kind of the overall origination pool out there? Just another way of saying just how competitive auto loans or attractive are they relative to other asset classes over the last few months..

Yes, I certainly appreciate the thoughtful question. Credit unions have been wonderfully resilient. For the first quarter of 2023, they maintained their leadership in loan originations producing 35% of all new loan originations out there. So they've maintained their first place position over banks than captives.

So they are continuing to do very, very well. As you know, the way they're sourced for them to replenish liquidity is through deposits, through the runoff of existing loans and through securitizations.

And I know firsthand through conversations with principals at some of our large customers that they're working diligently on progressing on all 3 of those fronts. And I just have to say that they've been incredibly resilient.

If you look at our numbers for Q1 back out the refi channel and look at credit unions only, we're actually up 13% quarter-on-quarter from the same time last year for our core credit union customer base. So the credit unions have been very, very resilient and are doing a wonderful job..

Got it. No, that's helpful. And as a follow-up, maybe staying on sort of the same general topic. When you effectively increase the premiums on default policies, can you talk about, I guess, number one, I assume the credit union assumes that added expense.

Just based on what you're seeing from competitors, how does that impact the competitiveness of your product when you implement another premium increase?.

Yes, for sure. One of the enduring value propositions that we have is that all of the cost of the program are, first and foremost, success-based only. And then secondly, they're all rolled into the contract rate with the consumer. And so none of these costs are borne by the credit union themselves. They're flowed through to the end consumer.

And so when we raised the premium, it doesn't have the effect at all of increasing the expenses of our credit union partners or any of our partners for that matter at all.

Now, of course, we take into account the competitiveness of the resulting rate and model in decreases or increases in volume accordingly and have been very pleased with the performance of this most recent initiative..

The next question comes from the line of Bob Napoli with William Blair..

This is Spencer James on for Bob Napoli.

I was wondering if you could maybe talk through some of the swing factors within the guidance that might lead you to land at the higher end or the lower end of your TAT range?.

Yes, yes, sure. This is Chuck, Spencer. As we think about the guidance, obviously, the overall macro environment in auto industry leading indicators that we look at. And the elevated used car values, obviously, the Manheim in the prepared comments, you saw where it actually unseasonably went up, not seen since '08.

The continued consumer sentiment where it's at, inflation, as well as interest rates and the unprecedented rate environment over the last, I guess 10 actions now over the last year, which is about 500 points in rates.

So all of those things, the timing of that and maybe as affordability, which we talk supply is improving a bit, but that's on the new front. And if you think about our business being primarily used, affordability is still the demand impact.

So as affordability for the near and non-prime consumer improves, that will help us get to the high end or to the midpoint or exceed that is just more improvement there around the overall macro..

Okay. And would you maybe say I'm hearing you correctly that the midpoint of guidance assumes some incremental improvements in affordability.

Is that fair?.

Yes. I think the midpoint -- we feel good about the midpoint of the guide based on current conditions. And we were really proud of the efforts of our collective team in this environment in Q1. And as Keith pointed out in the call, we exceeded SERT revenue and adjusted EBITDA on all fronts.

And we're going to do everything we can to execute and run the business and control what we can..

The next question comes from the line of Joseph Vafi with Canaccord..

Maybe an update first on our insurance carrier partners. Given the news last quarter on CNA, how that is going relative to the existing ones and volumes to each? And any other comments on the carriers? And then I have a follow-up..

Joe, this is Chuck. Good to hear from you. Yes. As you mentioned, CNA gave us the notice last quarter of notice to not write new business after this year. I'll tell you, it's been a very good transition so far with CNA. They're still writing new business. We're transitioning it over time, but they'll write that through the balance of the year.

But keep in mind, they'll still be an insurance carrier for many loans that they've written that are in the pool since 2017 when they came on. So it's orderly, it's a good relationship, and we feel really good about that transition. I think the key is with our 3 carriers that we have today.

We have plenty of capacity for our 2023 and beyond growth of our business as we look forward into '24 and beyond. So we feel really good about the capacity of our 3 carriers collectively..

That's helpful. And then just kind of looking at a high level in this used car market and Keith can provide some insight here. It feels like there's kind of a soft landing, hard landing potential scenarios that could play out.

Obviously, if inventories on the used front improve pretty quickly, we may see more shirt volume, but if it increased quickly, I'd assume that prices would be coming down too.

So how are you thinking about the inputs to your model? I think relative to used car pricing and how that may affect your underwriting if we were to see the used car market kind of recover here with higher inventories rather quickly. And then obviously, we got interest rates and a few other moving parts there. So just any color on that..

Yes. I mean I think you captured it all pretty well and just your question, and this is Keith speaking. Yes, we're certainly looking at volumes being at Lowe's in the used market. And that supply-side problem is then also compounded by problems with affordability, which we have enumerated.

I think on the good side of the equation, that affordability is getting slightly better. The CoxMoody Index, which we track pretty regularly has been up at all-time highs as recently as December, it's ticked down over the last 3 months.

So that's a little sign of relief to affordability and especially affordability hits our cohort of consumers especially hard. So we're seeing a little sign of improvement there, albeit affordability still remains at very elevated levels compared to historical norms..

And one thing I'd add is on the premium increase that we discussed, the collateral adjustment that we put in, in late March, that's obviously is for the environment where the elevated used car values are higher, we felt it was prudent to -- similar to what we did in Q2 of '22 to put an adjustment and to appropriately price our premium for the risk we're taking in this environment.

So that's really a move to preserve and protect our unit economics as well as reward the company for the risk we take..

[Operator Instructions] Your next question comes to the line of Vincent Caintic with Stephen..

First question, we've been tracking the OEM incentive volumes, and it does seem like they've reflected and started to pick back up again. And I was wondering if you're seeing improving discussions or improving volumes with OEMs and if maybe there can be discussions in terms of just new OEMs or maybe some programs with specific vehicles..

Yes. I appreciate the question, and this is Keith. We are very pleased with our current OEM captive customers. They're up sequentially quarter-on-quarter, so Q4 to Q1 of this year, they're up year-on-year, so this quarter compared to last year.

So I think you kind of hit the nail on the head, the little bounce that we're seeing in new SAAR driven by a little lift in incentives is flowing through to our customers, and pleased to see that and always pleased to partner with them.

As it relates to future prospects, I can safely say that we have the largest number of prospects in our pipeline than we've ever had before. That's including OEM captives, very large banks and financing sources.

Our value proposition is as strong as it's ever been, certainly checking the boxes of legislative requirements such as CRA, certainly anticipating depreciation of assets. So we're very pleased. Of course, these sales cycles are longer in nature than others.

And so we want to be very cautiously optimistic but pleased with the progress we're making on that front..

Okay. Great. And just following up on the profit share. So understanding that you are tightening your underwriting for March.

I was wondering if you could talk about what macro assumptions are built into the profit share and you should be expecting that prospective changes that were highlighted in the slides that prospective changes now comes back down or is that maybe just completely volatile..

Yes, this is Chuck. I'll take the question. And we'll kind of dovetail back to what we discussed on the year-end call. What we've done is in the 32,400 search that we originated in Q1, those are at the $552 profit share unit economics. That's booked to a 62% loss ratio.

And I just want to point out that, that's got a 23% stress to our 50% benchmark or target loss ratio. So we feel like we've got adequate stress built into the new originations that we're putting on.

We've put this additional vehicle value discount in place that's going to raise the premium, it will safeguard future periods or originations in the current conditions.

And as we think about kind of a good number to model as you think about and you and the rest of the sell side is a $550 million is a good number for our profit share where we are today. We'll continue at a robust quarterly process with our risk team, very talented risk team, Keith and I are very involved in the process, and there's a lot of inputs.

It's severity of loss, which is tied to obviously, closely to the Manheim as well as predicting default and default frequency as well as prepay speeds.

And what we saw in this quarter is on the profit share as the Manheim went up unseasonably, and that was a positive impact in our change in estimate, but we do stress defaults because the rise in delinquencies as well as defaults that we project into the future.

So that's kind of if you think about that realized in Q1 and then that prospective change, it was a net, call it, 700,000 CIE change in estimate. But as we think forward, we feel like we've got adequate stress into the future on the current vintages that are on the books and feel good about where we are.

But obviously, it's facts and circumstances based, and we'll address it each quarter..

The next question comes from the line of Peter Heckmann with D.A. Davidson..

I didn't hear you comment, and I apologize if you had. But on the OEMs combined actually looks like up 12% year-over-year.

Can you talk about some of the dynamics behind that and whether that could be sustainable? Do you think -- I mean I know you're not giving guidance for the year, but I guess, what are you thinking about for the second what's implied in your second quarter guidance?.

Peter, this is Chuck. Yes, we've been pleased the last couple of quarters with the sequential growth in our 2 OEMs. If you think about -- you're absolutely right. Q1 year-over-year is about a 12% increase in OEMs, and sequentially from Q4, it's about 7%. So we were pleased to see that improvement Q4 to Q1.

And then in our Q2 guide that we put out, I'd tell you that we think it'd be comparable in that range where we were at in Q1 and maybe slightly better. But we are encouraged with the OEMs and that volume picking back up as incentives have ticked back in a bit..

That's good to hear.

And then so with that comment, then it would imply that you don't expect your Refi partners really to kick in, in any material way in the second quarter and I guess, do you have any visibility to that?.

Yes. That's a good question. Refi, our supplemental that got posted to the website when the release went out. You can see Q1 of '23 that Refi is 8% of our overall search compared to 1 year ago, right at 40%. So clearly, 1 year is a big change. And we talked about the rate environment and the 500-plus points that the Fed has taken action.

In our current guide, we don't anticipate in the Q2 guide that Refi returns during that time, and we will continue to monitor that, but no big change there for Q2. Especially with the Fed's action this week with 25 bps or late last week, excuse me..

Right. Okay. That's helpful. And then just if I could sneak just one more in. Again, just trying to infer from kind of the average revenue per se implied in second-quarter guidance. It doesn't appear that you -- it seems like the average program fee would revert closer to $500 or at least revert back down from the first quarter high..

Yes, I'd say on the program fee in that 500 plus range for the program fee would be a good estimate..

[Operator Instructions] We now have a question from the line of John Davis with Raymond James..

Keith, I just want -- and I apologize if I missed this earlier, but a commentary on just the financial institutions, liquidity. Any kind of pullback from your banks and credit unions on the willingness to fund these loans, giving liquidity challenges that they may or may not have, obviously, depending on the financial institution.

But just curious on kind of change in behavior from your FIs..

Yes. And this is Keith. I did mention earlier and happy to restate it. Certainly, what we have seen is for our credit union core customer base, ex Refi, and others that the actual number of certified loans quarter-on-quarter is up 13%.

So despite everything that we talk about with liquidity challenges and these restraints, they are still making loans, and they've maintained their #1 position in loan origination generation compared to banks into captives. So they are strong and are doing very well and they're doing well on our program..

Okay. That's helpful. And then as we think about the 2Q CERT guide, obviously, you guys went public via [indiscernible] and there's been a lot of different things that are going on. The guide implies, I think, flat to slightly down certs in 2Q.

Anything from a seasonality perspective? Or is this just kind of your best guess? I don't know if historically, like Q2 is down from Q1. Just any context behind the guide? I heard the Refis are not expected to come back in a meaningful way, but any color there would be helpful..

Yes. Yes, John, it's Chuck. The midpoint of the CERT guide is, call it, 31,000 CERT, so that would be down slightly to the midpoint of where we exited, which was at the high end of the Q1 guide at 32,400. So March, I'd just point out March is seasonally a high month for the company with the tax refunds.

So if we think about trends into the second quarter, April, we felt good about April in comparison to our forecast as well as our guide, and we'll continue to monitor through May and June, but feel good about the guide that we put out there. But I just want to point out, March is seasonally a high month..

And we have a follow-up question from Bob Napoli with William Blair..

This is Spencer again. I'm taking advantage of the busy night for everyone with a follow-up.

Could you maybe just remind us the breakdown in that core credit union and bank channel between credit unions and banks and just clarify if you happen to see any softness with certain bank customers, albeit that's probably a small piece of that total channel?.

Yes. Since are you just looking for the breakdown of the CERTs between credit union and banks of the, call it, 26,362 starts that we did for the quarter? It's primarily credit unions, I'd point out. I'd say 85%, 90% of that is credit unions versus banks. We just roll our regional banks up with that in the supplemental..

Understood. So the 26,400 numbers what I should be looking at, that's 85 to 90..

That's right. That's right. And that's primary credit..

There are no further questions at this time. I'll now turn the call back to you. Please continue with your presentation and our closing remarks..

Well, I want to thank everybody for joining us today. We're pleased with the results that we just exhibited for Q1. And again, I want to send a sincere and heartfelt thank you to all of the Open Lending employees that made it possible. Thank you..

Have a great day. Thanks for joining us..

That does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your line..