Open Lending Corp

NASDAQ:LPRO

Earnings Call Transcript 2024-Q1

[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 Jehl, Chief Financial Officer and Interim Chief Executive Officer, Cecilia Camarillo, Chief Accounting Officer. Earlier today, the company posted its first quarter 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. 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 different materially from those expressed or implied with such statements. And now I'll pass the call over to Mr. Chuck Jehl. Please go ahead.

[Charles Jehl, executive]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's First Quarter 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. With that, let's review the first quarter financial highlights. I am pleased to report that in the first quarter 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 fourth quarter of 2023. We generated total revenue of $30.7 million and adjusted EBITDA was $12.5 million. Looking forward, we're encouraged by the trends that we are 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. 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 seen 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% 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 fourth quarter of 2022. While this is the third 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. 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 36.6 million units and 2024 total new SAAR forecasted to be 15.7 million units. While growing relative to 2023, both are approximately 10% lower than pre-COVID levels. Let's turn to our credit union customers. Preliminary first quarter 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 fourth quarter of 2023 to 2.7% at the end of the first quarter of 2024. 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% 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. 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. First, on optimizing our credit union and OEM businesses, where our expectation is to excel as trusted partners for both our customers and insurance carriers, while controlling our costs and optimizing 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. During the first quarter of 2024, we added 11 new accounts compared to 8 in the first quarter of 2023, a 40% increase year-over-year. Important to note of these 11 accounts, approximately 1/3 were larger accounts with combined total assets of over $8.5 billion. In addition, I am pleased to report that 30% of these 11 new accounts have already produced their first certified loan, which is a testament to the efforts of our sales and account management team's execution of our strategy of getting a new account to revenue generation faster by focusing on institutions with loan origination systems for which we already had integrations. An example is OneAZ Credit Union, which is headquartered in Phoenix, Arizona, with over $3.4 billion in total assets and has a healthy loan-to-share ratio. Through our partnership, OneAZ will utilize our Lenders Protection platform in their market under their recently launched Credit Flex 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. Turning now to our product. We continue to be encouraged by the results of our new enhanced Lenders Protection proprietary scorecard launched in the fourth quarter of 2023. The new Scorecard has decisioned over 1.2 million 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 million detailed transactions, over 170 million 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. 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 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&P consumer finance sector in the non-prime credit spectrum. Based on the age of our back book, where the worst vintages 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 first quarter of 2022 as well as early validation of our new scorecards ability to better predict defaults and lowering frequency. Furthermore, we continue to modify our program to yield better results for our lenders, our insurance carrier partners and ultimately Open Lending. In the first quarter 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. 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. It was a great opportunity to discuss our underwriting strategies and our priorities and gather feedback to ensure full alignment. We are 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 second 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 to 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. 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, we 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 first quarter 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 in your execution to deliver these positive results despite the current market backdrop. 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 non-prime consumers need us and our lender partners now more than ever. With that, I'd like to turn the call over to Cecilia.

[Cecilia Camarillo, executive]

Thank you, Chuck. During the first quarter of 2024, we facilitated 28,189 certified loans compared to 32,408 certified loans in the first quarter of 2023. Total revenue for the first quarter of 2024 was $30.7 million, which includes an ASC 606 negative change in estimate of $1.1 million associated with our profit share compared to $38.4 million in revenue in the first quarter of 2023, which included a positive change in estimate of $0.7 million. As Chuck mentioned, Q1 certified loans and revenue both exceeded the high end of our guidance range. To break down total revenues in the first quarter 2024. Program fee revenues were $14.3 million. Profit share revenues were $13.9 million, net of the previously mentioned negative change in estimate and claims administration fees and other revenue were $2.5 million. As a reminder, profit share revenue is comprised to the expected earned premiums less the expected claims to be paid over the life of the contract and less expenses attributable to the program. The net profit share to us is 72% and the monthly receipts from our insurance carriers reduced our contract assets. Profit share revenue in the first quarter of 2024 associated with new originations was [ $15 million ] or $533 per certified loan as compared to $17.9 million or $552 per certified loan in the first quarter of 2023. The first quarter 2024, $1.1 million negative change in estimate is associated with cumulative total profit share revenue recognized of approximately $395 million 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 $4.4 million. Operating expenses were $17.7 million in the first quarter of 2024 compared to $15.8 million in the first quarter of 2023. Operating income was $7.3 million in the first quarter of 2024 compared to operating income of $17.1 million in the first quarter of 2023. Net income for the first quarter of 2024 was $5.1 million compared to a net income of $12.5 million in the first quarter of 2023. The Basic and diluted net income per share was $0.04 in the first quarter of 2024 as compared to $0.10 in the first quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was $12.5 million as compared to $21.2 million in the first quarter of 2023. Excluding profit share revenue change in estimate, we generated $13.6 million in adjusted EBITDA in the first quarter 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. We exited the quarter with $380.6 million in total assets, of which $247 million was in unrestricted cash, $31.9 million in contract assets and $68 million in net deferred tax assets. We had $169.1 million in total liabilities, of which $143.2 million was outstanding debt. I would like to turn the call back over to Chuck to discuss our guidance for the second quarter. Chuck?

[Charles Jehl, executive]

Thanks, Cecilia. Now moving to our second quarter 2024 guidance. While we are encouraged that market conditions appear to be improving, the following factors were considered in our second quarter 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 union's lending capacity and senior lending officers continue to weight their portfolios toward prime and super prime as they manage their risk appetite and balance sheets. Accordingly, our guidance for the second quarter of 2024 is as follows: total certified loans to be between 27,000 and 30,000 total revenue to be between $29 million and $33 million and adjusted EBITDA to be between $10 million and $14 million. 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 costs. 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. [Operator Instructions] Our first question comes from Joseph Vafi with Canaccord.

[Joseph Vafi, analyst]

And I see the steady results here in the quarter. Just wanted to drill down into the sequentially [ upsets ] 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.

[Charles Jehl, executive]

Joe, it's Chuck. Yes, I think Q1, obviously, 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 second quarter as well. And so, March was a good month, though for us due to the tax season.

[Joseph Vafi, analyst]

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?

[Charles Jehl, executive]

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

[Operator]

And the next question comes from Kyle Peterson with Needham.

[Kyle Peterson, analyst]

Great. 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, when in the quarter you guys took those actions? And any estimate on kind of what percentage of the book or like loan cert volume that applied to?

[Charles Jehl, executive]

Yes, Kyle, this 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 [ $4.75 to about $5.75 ] cutoff. 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, 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 1.2 million apps to date 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 '22. 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 a 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.

[Kyle Peterson, analyst]

That's helpful. And then maybe just a follow-up on the outlook looks like it implies flattish trends in revenue in certs. 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 the -- if macro kind of stays in this kind of uncertain malaise with where rates are in such? Or just how should we think about the fundamentals, if we kind of remain in this environment?

[Charles Jehl, executive]

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 and used slightly. Affordability is getting a little better for the consumer. Consumer sentiment, it's been a tough spot. If 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. But we believe that maybe we're close to that bottom and making a recovery. But it does take time.

[Operator]

And the next question comes from Zachary Oster with Citizens JMP.

[Zachary Oster, analyst]

We were working through the Q2 guidance, and I kind of just want 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?

[Charles Jehl, executive]

Yes. If you think about the profit share, we book -- we put the current vintage, the Q1 on at about [ 5 ] -- a little over 530 unit economics for [ SE533 ] 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, go into the revenue model. It's a severity of loss. It's the default frequency as well as prepay speeds. And as we think about that, we put those on the books at about a 62% loss ratio in the first quarter. So, we feel like that's adequately stressed based on these conditions and feel like in that range of, call it, [ $500 million to $550 million ] is a good range to think about for profit share.

[Operator]

And the next question comes from John Davis with Raymond James.

[Unknown Analyst]

This is [ Taylor ] on for JD. Maybe just to start on the 11 signed lenders for the quarter. 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?

[Charles Jehl, executive]

Yes. 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, it's underpenetrated, and we want to do more in that space. 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 certs 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 and our team's work is of those 11 new accounts or customers, about 1/3 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. So, we're really focused there on getting to first revenue faster.

[Unknown Analyst]

Got you. Good to hear. And then maybe just as a follow-up, just 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, I understand it's rate dependent, but just curious to hear what you expect given the [ higher ] for longer commentary.

[Charles Jehl, executive]

Yes. Yes. And real quick, I got to refi. I'll answer your OEM question. I don't think I did a good job there on the last part, but the OEM opportunity still is out there. It is -- 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. So, as we've done in the past is we were talking about OEMs in past tense as we sign them up and not speculating, but still a great opportunity for us. And then the follow-up question there was on -- can you repeat the back end of that?

[Unknown Analyst]

Yes, it's all on refi, general refi.

[Charles Jehl, executive]

Yes. Refi is -- we've talked about it, we need rates to stabilize, which they have. 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-month 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, our 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, 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.

[Operator]

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

[Charles Jehl, executive]

Okay. Again, thank you for joining us today, and thank you to the Open Lending team for delivering these positive results in the first quarter of 2024. I 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.