Open Lending Corp

NASDAQ:LPRO

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, and welcome to the Open Lending Third Quarter 2024 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are Chuck Jehl, Chief Executive Officer and Interim Chief Financial Officer; and Marissa Vidaurri, Vice President of Investor Relations and Corporate Communications. To get us started, I will pass the call over to Marissa Vidaurri. Please go ahead.

[Marissa Vidaurri, executive]

Thank you. Appreciate you joining us. Prior to the start of this call, the company posted the third quarter 2024 earnings release and supplemental slides to its Investor Relations website. In this 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 estimates and other forward-looking statements that represent the company's view as of today, November 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 from those expressed or implied with such statements. And now I will pass the call over to Chuck to give an update on our business and financial results in the third quarter.

[Charles Jehl, executive]

Thank you, Marissa. I would like to officially welcome you to the Open Lending team, and good afternoon, everyone, and thank you for joining us today. Before we get into our update on the business, I would like to say how grateful I am for the Board's trust and confidence in me as the next CEO of Open Lending.

I'm extremely honored to carry on the legacy built by our founders, proud to lead our talented team of professionals and to continue to work with our lenders, insurance carriers and other partners to serve the near and nonprime consumers who need us and our lender customers now more than ever.

As we and the industry continue to navigate through challenging market conditions, we are focused on taking prudent steps to maximize the opportunity ahead. Specifically, we are focused on driving new customer acquisitions and certified loan growth from both new and existing customers, optimizing results from our lenders, our insurance carrier partners and ultimately Open Lending, and making targeted investments to improve the experience of our lender customers and their borrowers and bring more value to the Open Lending market. 

With these actions and the inevitable recovery in the Open Lending market, I believe we are positioned well to return the business to growth in the near term. I am pleased to report that in the third quarter 2024, we were near or above the high end of our guidance range for certified loans, revenue and adjusted EBITDA, excluding the negative change in estimate associated with our profit share. For the quarter, we certified 27,435 loans. We delivered total revenue of $23.5 million and adjusted EBITDA of $7.8 million. 

As I mentioned, our results for the third quarter 2024 were negatively impacted by a $7 million profit share change in estimate. It is important to note that this downward revision is primarily due to elevated delinquencies and defaults associated with vintages originated in 2021 and 2022, the time of peak vehicle values.

Lower performance from these vintages continues to represent an industry-wide headwind and is not unique to Open Lending or our lender customers. As we continue to navigate past these lower-performing vintages, we anticipate that Open Lending's profit share revenue performance should be less volatile. 

That said, we have been focused on optimizing the performance of loans that we are underwriting and certifying on behalf of our lenders. As previously mentioned, we have taken numerous pricing and credit tightening actions over the last 2 years that we believe will improve the performance of the loans in our portfolio.

As a reminder, these actions included increased insurance premiums to appropriately price for the risk we take, implemented a newly enhanced lenders protection proprietary scorecard, which has further improved our ability to predict the probability of default and price risk, raised our minimum score cutoff to tighten our credit aperture and implemented targeted price optimization, leveraging our new enhanced scorecard and historical performance data to increase prices on lower-performing credit bands. 

As part of our ongoing review of credit performance, we review and analyze internal and external data to identify pockets of incremental risk within our model. Through this calibration cycle, the net impact has been an additional level of credit tightening in late third quarter 2024.

We expect these actions to lower our overall approval rates and have a negative impact on our certified loan volume. 

As we have adjusted our credit and pricing metrics throughout this challenging and volatile cycle over the past several years, we are committed to optimizing our unit economics and volume while minimizing volatility for our lenders, carrier partners and ultimately Open Lending. 

Turning to market conditions. We continue to be encouraged by the trends we are seeing in the automotive industry, specifically improvement in inventory levels, retail sales volumes and affordability, all of which have shown modest year-over-year improvement.

However, our core credit union customers continue to be challenged with elevated loan-to-share ratios, low share or deposit growth and low loan growth.

First, on to the automotive industry. Inventory levels on both new and used vehicles have stabilized. New vehicles have been trending at 2.8 million units, up 25% year-over-year, while used vehicles have stabilized at approximately 2.2 million units.

That said, there is still room for improvement as both new and used inventory levels remain 20% to 25% below their pre-COVID levels. Affordability improved on a year-over-year basis, primarily driven by declining auto prices. For new vehicles, average transaction prices are down 0.4% compared to this time last year, while used vehicle average list prices were down 5% year-over-year. 

As a result of improving new vehicle inventory levels, OEM incentives have increased to over 7% of the average transaction prices and are approaching pre-COVID levels of 10%. This is a positive sign that new vehicle market is returning to some level of normalcy, which should drive an increase in new vehicle sales that will eventually turn into improved used vehicle inventories.

However, affordability continues to be a challenge for consumers. While the Fed funds rate decreased by 50 basis points in September, the average auto loan rate through October remains near recent highs, 14% for used and 9.5% for new. Interest rates will eventually come down, but this will take time as lenders try to maximize returns in the face of challenging market conditions and elevated delinquencies.

The Cox Automotive October forecast increased used car sales by 0.5 million units and updated its Manheim forecast to be effectively flat between December of 2023 and December of 2024. 

New retail sales are in line with prior forecast and 2023 sales at 12.7 million units. The Manheim Used Vehicle Value Index, a measure of wholesale used vehicle prices, which serves as a leading indicator of retail used prices, increased in mid-October to 203.5, up almost 4% compared to full month June 2024 of 196.1. In addition, Cox is projecting 2024 to end at 202.7. 

Now, let's turn to our core credit union customers. Across the industry, loan-to-share ratios remain elevated, which continues to constrain credit union lending capacity and ultimately, our volume at Open Lending as they are our largest customer base.

Preliminary data from Callahan & Associates, a leading third-party data provider within the credit union industry, suggests that industry average loan-to-share ratio, a measure of lending capacity has declined to 84.2% as compared to a recent high of 85.2%. Share growth has increased 4.5%, up from a low of 1.2% in Q3 of 2023. 

This now represents the fourth consecutive quarter of share growth improvement, which will translate into lower loan-to-share ratios and improved lending capacity. Historically, it takes 18 to 24 months of consecutive share growth improvement to see a meaningful lift in loan growth within credit unions.

Based on the data, we believe we are now 12 months into this recovery. Importantly, we are seeing early signs of stabilization in loan growth with preliminary Q3 2024 data coming in at 3.9%, relatively flat compared to Q2 2024. 

We continue to focus on enhancing our product, our technology and our operations. While we continue to pay close attention to the challenges in the auto lending market, we are executing on the priorities that I previously highlighted in order to drive new customer and certified loan growth, optimize results and make targeted investments.

On driving new customer acquisitions, we signed 21 new customers in Q3 2024 compared to 8 in the same quarter of last year. This represents an all-time record for new customer acquisitions at Open Lending and demonstrates the value of the Lenders Protection program even in low light of ongoing market challenges. 

Additionally, this is a testament to the strategic changes we made to our go-to-market strategy earlier in the year, where we aligned sales and account management teams incentives. On a year-to-date basis through the end of September, we have signed 45 new customers compared to 29 last year. I am pleased to report that over 50% of the customers signed year-to-date have already produced a certified loan with Open Lending. 

We recently hosted our annual Executive Lending Roundtable in Austin, Texas, welcoming over 250 attendees. This event provided a fantastic opportunity to engage in meaningful conversations, better understand customer challenges and demonstrate how our technology investments can transform these challenges into opportunities.

Additionally, it provided valuable networking opportunities, allowing attendees to connect with peers and industry experts, fostering innovative solutions and improve business outcomes. Overall, the conference highlighted Open Lending's dedication to supporting our customers' success. 

Now, turning to our product and technology. As previously highlighted, we are actively developing solutions to improve the experience of our lenders and their borrowers by enhancing our technology, too, increase lenders' ability to automate and speed up decisioning, increasing the probability of capturing a loan, explore solutions to minimize dealer and borrower friction, facilitate access to alternative sources of capital for our lenders to increase their lending capacity through all economic cycles and evaluate opportunities to improve the value of our lenders protection product by expanding insurance coverages. 

As an example of our execution, we recently announced a partnership with Point Predictive, experts in predictive science. We are leveraging Point Predictive industry-leading technology and data to automate the proof of income verification process.

This is a key pain point for many of our lenders as the current process requires pay stubs, W-2s or other similar tax forms from the borrower while at the dealership, where a dealer may be receiving multiple offers from different lenders.

The dealer likely chooses a lender who is not making a similar request. By automating the proof of income process, we can eliminate this friction while the consumer is at the dealership and increase the close rate for our lenders.

Our expectation is by leveraging data and insights to quickly and automatically validate income and employment, our lenders and ultimately Open Lending should win more of the approved loans.

Based on our pilot results, we are encouraged by the early data and increasing our capture rate and ultimately our volume. Last week, we launched the technology across our customer base. We are excited about this partnership and the value it provides to our lender customers, their borrowers and Open Lending.

We are continuing to look for other opportunities to drive innovative enhancements for our customers. Additionally, we have made early progress towards assisting lenders with accessing alternative sources of capital to increase their lending capacity through economic cycles.

While some of our lenders with above-average lending capacity are delivering increased volumes year-over-year, others continue to look for ways to improve capacity. We have been in dialogue with customers on how to best facilitate capital market transactions that will increase their Lenders Protection volumes.

Specifically, we are committed to using our capabilities to assist our customers in forward flow agreements, loan participations and sales of seasoned loan portfolios. We are pleased to report that during the quarter, certain of our credit union customers have completed participation transactions of lender protection loans.

Most importantly, these pools of seasoned loans were transacted at price levels above par, thereby resulting in a gain on sale of assets. This is especially notable since the pool of loans included vintages originated during the period of 2021 to 2023.

We continue to look for opportunities to utilize automation to improve the way our credit union customers serve their members, and I personally continue to believe that the Lenders Protection Program can help all auto lenders serving near and non-prime borrowers to minimize risk and optimize their yield.

Now, an update on our financial results for the third quarter of 2024. During the third quarter of 2024, we facilitated 27,435 certified loans compared to 29,959 certified loans in the third quarter of 2023.

Total revenue for the third quarter of 2024 was $23.5 million, which includes an ASC 606 negative change in estimate, related to historic vintages associated with our profit share of $7 million compared to $26 million in revenue in the third quarter of 2023, which included a negative change in estimate of $8 million.

To break down total revenues in the third quarter, program fee revenues were $14.2 million, profit share revenues were $6.8 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 comprises the expected earned premiums less the expected claims to be paid over the life of the contracts and less expenses attributable to the program. The net profit share to us is 72% and the monthly receipts from our insurance carriers reduces our contract asset.

Profit share revenue in the third quarter of 2024 associated with new originations was $13.8 million or $502 per certified loan as compared to $16.1 million or $537 per certified loan in the third quarter of 2023. The $7 million negative profit share change in estimate recorded in the current quarter is associated with cumulative total profit share previously recognized of approximately $403 million for periods dating back to January 2019, the ASC 606 implementation date and represents over 411,000 insured in-force loans in the portfolio.

The cumulative profit share change in estimate since 2019 is negative $6.2 million. Operating expenses were $15.5 million in the third quarter of 2024 compared to $16.1 million in the third quarter of 2023. Operating expenses were down about 4% in Q3 2024 as a result of our measured and controlled approach to only incurring incremental costs that drive near-term revenue growth.

Operating income was $1.9 million in the third quarter of 2024 compared to operating income of $4.5 million in the third quarter of 2023. Net income for the third quarter of 2024 was $1.4 million compared to net income of $3 million in the third quarter of 2023. Basic and diluted net income per share was $0.01 in the third quarter of 2024 as compared to $0.02 in the third quarter of 2023.

Adjusted EBITDA for the third quarter of 2024 was $7.8 million as compared to $10.3 million in the third quarter of 2023. Excluding profit share revenue change in estimate, we generated $14.8 million in adjusted EBITDA in the third quarter of 2024.

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 third quarter with $395.7 million in total assets, of which $250.2 million was in unrestricted cash, $39.9 million in contract assets and $65.6 million in net deferred tax assets. We had $175.2 million in total liabilities, of which $141.5 million was outstanding debt.

Moving to our fourth quarter 2024 guidance. The following factors were considered in our fourth quarter 2024 guidance: Continued elevated auto loan interest rates despite the Fed funds rate cut and the anticipation for additional cuts later this year.

Lower than pre-COVID inventory levels and higher than historical vehicle prices continue to present affordability challenges for consumers. Near historic high loan-to-share ratios that continue to limit credit unions lending capacity.

Additional credit tightening actions taken in the third quarter of 2024. Implementation of automated proof of income, which should drive improvement in closure rate and volume and continued ramp of customers signed and went live in 2024. Additionally, we accounted for normal course of seasonality that we see between the third and fourth quarter.

Accordingly, guidance for the fourth quarter of 2024 is as follows: total certified loans to be between $20,000 and $24,000, total revenue to be between $22 million and $26 million and adjusted EBITDA to be between $7 million and $10 million.

In closing, we believe we are well positioned for when the market recovers and remain optimistic that market conditions are trending positive. Delinquency rates are stabilizing in the near term. Lending capacity is showing improvement and inventory levels are increasing, and we will continue to make intentional investments in our technology to improve the experience of our lender customers and their borrowers.

We have strong conviction that the near and nonprime consumers and their lenders need us now more than ever as evident by the record level of new customers added in the third quarter of 2024.

I want to personally thank our entire Open Lending team for their dedication to our company and thank our customers and our partners for their support. I'm also grateful for their support as I begin my new role as Chief Executive Officer of Open Lending. I believe we have a bright future ahead, and I am excited to move forward together. We will now take your questions.

[Operator]

[Operator Instruction] And we move first to Joseph Vafi with Canaccord.

[Joseph Vafi, analyst]

Congratulations on the new roles to both to you. You mentioned some tightening of some of your underwriting standards and how that may kind of affect certain volumes. Can we kind of drill down on that a little bit and perhaps what you may expect to see in terms of kind of approval rates as a result of that tightening? And then I'll have a quick follow-up.

[Charles Jehl, executive]

Thanks for the question, Joe. If we think about the factors that went into the Q4 guide, particularly, as we mentioned, normal seasonality, I mean, Q3 to Q4 normally is 8% to 10% down. So, you think that's there, and the midpoint of where we're guiding for Q4 is down a little below 20%.

So, what we saw, our risk team, in credit performance and obviously keep a close eye on that, and what we had seen over the last few quarters is an increase in thin credit files and thin files, they just don't have a deep credit history and are higher exposure and higher risk.

So, as we've continued through the last 2 years, as we've tightened, we're looking for quality loans in the portfolio and looking to limit the higher risk. So, we felt it was prudent to go ahead and tighten there this quarter and definitely will impact our Q4 volume.

But, the right thing to do, if you think about on the Point Predictive partnership, and that's a positive and that's going to eliminate some of the friction and risk that consumers see at the dealership, as we said in the prepared remarks.

So, that's going to be a positive uplift there as well, more driving into '25 on that as we kind of move forward because we just launched that. We basically increased pricing on those 10 files that I discussed. So again, it's the right thing to do. Approval rates on that are probably going to be down about 4% is what we're estimating.

[Joseph Vafi, analyst]

And then nice to see some business model expansion with the alternative sources of capital you mentioned, Chuck. Maybe kind of just drill down on that. What kind of demand you think you may see from some of your lending partners there and how potentially that alternative sources of capital may change your unit economics on certs and whatever else you think may be relevant there?

[Charles Jehl, executive]

Thanks for the question. As we've kind of seen through this cycle, Joe, one, our credit union customers loan-to-share ratios have been near historic highs on a loan-to-share.

So, as we kind of looked at that and as we looked into the future and future cycles, we've got a team in place that, on the capital markets, Steve Mahay is heading that up for us and doing a good job and getting that kicked off.

And we're looking at ways that we can help our customers, not just with our technology, our platform and all we do with our core product is also then help them through cycles. And if it's the loan participations and we've got deep relations across the credit union industry and some institutions have healthy loan-to-share and then some of our larger customers are a little higher. So, our capability to help them facilitate those participation transactions definitely helps us, helps them and ultimately, Open loans back in flow for that institution that may have been lent out.

So, really excited about the work we're doing there and look forward to expanding that is around if it's forward flow transactions or whole loan sales. So, that's kind of where we're at. As it relates to unit economics on that, it's more of a service that we're providing to our customers. And at this point, I wouldn't see a change in our unit economics, just more of an opportunity for volume.

[Operator]

We'll take our next question from John Davis with Raymond James.

[Unknown Analyst]

This is Taylor on for JD. Maybe just to start with the profit share revision during the quarter of $7 million. I heard your commentary on mostly still being driven from the problem cohorts. But I think you've mentioned in the past that the peak claim period should be passing later this year or early into 2025. I just wanted to get your updated thoughts on if you think this is still the case or if expectations have changed at all?

[Charles Jehl, executive]

Thanks, Taylor, for the question. Yes, as we think about '21 and '22, those are worst performers in recent history, 18 to 24 months is definitely the peak of claims. What we've seen with these vintages is that they're not necessarily coming down at that point on a typical cycle.

There's really been nothing normal about this. But we are seeing delinquencies starting to lower on the newer pools. We're working through those older pools as we think about those vintages. And we are, I guess, in a positive note, starting to see those bend down from a peak claims perspective. So, that is good news, but it's maybe a little early to declare there on where we are, but we're encouraged that we believe we're working through them.

[Unknown Analyst]

And then maybe just one more. So, it was good to hear the elevated client signings during the quarter of 21. So I'm just curious where you're seeing the most success, whether it be with credit unions or banks. And just curious if you could size these clients at all?

[Charles Jehl, executive]

Yes. In the quarter, the 21, obviously, is a record. We're proud of the team and our changes earlier this year that we had implemented. And of those 21, I think all of them were credit unions in the third quarter. We did sign a bank previously in the year. Banks are longer sales cycle.

Obviously, we've talked about that and so are OEMs. But the success this quarter was really in our sales team and their execution, working along with a very talented sales and account management team and really executing. We're focused on larger institutions, and we've talked about that for several quarters.

And I think of these 21, I think we had 10 or 11 were $1 billion-plus institutions, which was really, really nice in asset size. And we've got a great pipeline, a strong pipeline going forward. And I think it's a testament just to Open Lending the value prop and what we deliver and provide to our customers, and it's resonating now more than ever.

[Operator]

[Operator Instructions] We'll move to Peter Heckmann with D.A. Davidson.

[Peter Heckmann, analyst]

Chuck, congratulations on the CEO role. Acknowledging that this has been a dynamic market, and there's been some difficulties with predicting used car prices and the direction of rates and what not. I guess do you think that Open Lending can get to a point where we can kind of resume annual guidance instead of just kind of this 1 quarter forward guidance? I mean, I'm sure you're struggling with the numbers as much as anyone else.

But when we see 6 or 7 quarters in a row of negative revisions to profit sharing, I was under the assumption that many of the variables that had gone into these estimates were very conservative is just frustrating. So, I look at it and I hear what you're saying about a potential turn. And certainly, it's encouraging to hear more financial institutions coming back.

But I guess, is there any probability that Open Lending gets back to some level of normality where we have much, much smaller quarterly revisions to profit sharing and we can have a higher level of confidence in the overall revenue and earnings stream?

[Charles Jehl, executive]

Yes. I mean, I appreciate the question, Pete. And, yes, if you think about the volumes we were producing during those worst performers, '21 and '22 and really the actions we've taken that we've talked about now for a couple of years and the recent actions, we do feel good about where we're heading into '25 and beyond.

I think the tightening that we've done has slowed volume intentionally as everybody in the industry is working through those worst performers. But I do believe there's going to be a point, and I said it in the prepared comments that the profit share is going to be less volatile, and we're going to work through that. You know as well as I do that, back in '21, when things were performing very well, we had multiple quarters of positive adjustments in a row.

So, I think we've just worked through this cycle and continue to work through it. But I think it will be less volatile going forward. I think our new scorecard, I think a lot of things we're doing with our risk and actuarial teams are helping us to be more predictable on the newer vintages and they're performing better.

And we're seeing 6 months on book, for example, for Q1 of '23 vintage is the delinquency rate is down 25% if you compare back. So, I do believe we're going to get to some level of normalcy, and it's going to stabilize.

And your point about getting back to annual guidance, that's the goal. And, yes, it's been frustrating for us as well, but not having visibility to go out a year is the reason we went to quarterly. So, I think as we get the company growing again, and which I believe we will, and we said it in the prepared remarks, and we got some really good things going on that can do that.

So, long answer to your question, but I do think it will stabilize and we'll have the company growing and we're looking forward to 2025.

[Peter Heckmann, analyst]

And again, I'm sorry, I was late to the call. I didn't see or hear anything in the release about a new potential share repurchase authorization. Is that something that the Board is considering? Or would there be something that would prohibit you from doing that?

[Charles Jehl, executive]

Yes. We did not announce a new authorization, and that is our previous authorization expired, as you know. And from a capital allocation perspective, I was buying stock at prices higher than where we are today. So, I think we believe in that is a good use of capital. But it is a Board-level decision and a Board authorization that I currently do not have, but it's something that we work closely with the Board on and evaluate.

[Operator]

Ladies and gentlemen, as there are no further questions, I will now hand the conference over to Chuck Jehl for his closing comments.

[Charles Jehl, executive]

I would like to thank everyone for joining us today. And again, thank you to all of the Open Lending team members and all you do for our company and your dedication and support. And I hope everyone has a good afternoon. Thanks again.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.