Q1 2024 Open Lending Corp Earnings Call

Participants

Charles Jehl; Interim Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Treasurer; Open Lending Corp

Cecilia Camarillo; Chief Accounting Officer; Open Lending Corp

Joseph Vafi; Analyst; Canaccord Genuity

Kyle Peterson; Analyst; Needham & Company

Zachary Oster; Analyst; Citizens JMP Securities, LLC

Presentation

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 investors 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 estimates for other forward-looking statements that represent the company's view as of today, May seventh, 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 Jehl.
Please go ahead.

Charles Jehl

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 can Rio, 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'm 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 are 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. 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 prospectively 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 realized in 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 Q4 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, comps 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 sorry than pre-COVID averages with 2024 total use are forecasted to be 36.6 million units in 2024 total news are forecasted to be 15.7 million units, while growing relative to 2023, both were approximately 10% lower than pre-COVID levels.
Let's turn to our credit union customers. Preliminary First Quarter 2024 results from Callaghan, 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 2.77% at the end of the first quarter of 2024. We're encouraged by the fact that we've observed two consecutive quarters of improvement in share growth across the credit union industry. That said, loan to share ratios remain at approximately 85% new pre-COVID highs. This indicates that credit unions continue to experience lending capacity challenges. We closely monitor these two 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 eight in the first quarter of 2023, a 40% increase year over year. Important to note of these 11 accounts, approximately a third 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 teams, 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 have integrations. An example is one easy 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. One AZ. 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 are 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 three new alternative data sources, providing us access to 350 million detailed transactions over 170 million consumer checking accounts, an 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'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&P consumer finance sector in the nonprime 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 modestly 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 two 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 lower 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 events 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 an 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 priced 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'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 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 are 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 search 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'm 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

Thank you.
Took 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 six oh six 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 of 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 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. 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. six oh six 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. 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 check.

Charles Jehl

Thanks, resilience. Now move into 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 in new saw 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 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 dollars and adjusted EBITDA to be between $10 million $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.

Question and Answer Session

Operator

(Operator Instructions) Joseph Vafi, Canaccord.

Joseph Vafi

Hey, guys, good afternoon and nice to see the steady results here in the quarter. Just some wanted to drill down into the sequentially up starts a little bit on 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 to to the backdrop. And then I'll have a follow-up.

Charles Jehl

Yes, just Chuck, yes, I think 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 the app volume and what we're seeing into the second quarter as well. And so at the March was a good month, though, for us to do about due to the tax season.

Joseph Vafi

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

Charles Jehl

You bet.
Yes, if you think about the bank initiative, we've hired the team there onboard. They bring strong relationships to us. They're in the process of getting fully licensed and all that and at speed on our products. So there will be some obviously some ramp time once those actually go live in their comp, more complex integrations with their LOS as we've stated. But yes, we think we think we can get, you know, some of those wins to maybe begin to sort of find loans later this year.

Operator

Kyle Peterson, Needham.

Kyle Peterson

Good afternoon, guys. Thanks for taking the question. And I wanted to touch a little bit on you guys mentioned some of the credit tightening initiatives that you guys took and I guess can you clarify, I guess one in the quarter you guys took those actions and any estimate on kind of what percentage of the book or like loans are volume and that applied to?

Charles Jehl

Yes, we'll call 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 enhanced scorecard and the credit tightening that we took in the quarter was more around our score, a score cut off, raising it from 475 to 575 cutoff. So we're just taking less risk on those more risky credit bins. And it's about a 5% reduction in our in our volume. But as we said in the prepared remarks, in this environment, what we want to do is it is with the enhanced scorecard will be ability to predict default, more ability of 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 that we've processed underwritten and the ability to do that and execute. So 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% less than Q2 of last year and about 13% in Q2 of 22. And those are also been benefiting from those and actually cutting off higher risk premiums for that and actually pricing some of those loans out that more risky, and we'll be in better capture rate of 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 our profit share as well as we will see that over time.

Kyle Peterson

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

Charles Jehl

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. You know, consumer sentiment has been it's been it's been a tough spot. And as you think about the used and new retail, so store is forecast for improving. So all those are positive signs that 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, you know, the bottoming process of any, you know, market, you know, 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 which has that improved 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 but we believe that maybe we're close to that bottom and making it making a recovery, but it does take time.

Operator

Zachary Oster, Citizen JMP.

Zachary Oster

Thank you for asking my question. We were working through the 2Q guidance, and we kind of 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?
Thank you.

Charles Jehl

Yes, if you think about the profit share we book, we put the current vintage, you know, the Q1 on it about little over 530, a unit economics for circa 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, you know, in this environment, you know, we've actually stressed there's three components to a profit share. As you know, that go into the revenue model. It's the 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 that in that range of, call it 500 to 5 50 is a good range for to think about for profit share.

Operator

John Davis, Raymond James.

Hi, this is Taylor on for JD. 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, Sundi bank or credit union side and then just any additional commentary on how OEM conversations are progressing as you called out multiple large prospects in the pipeline recently?

Charles Jehl

Yes. Yes, EBIT so on in the quarter, the a lot of the 11 accounts that we signed. 10 of those were credit unions in the quarter, and one was a bank or finance company that we're targeting under our 24 priorities and initiatives. We've got, as we've talked about, we've got a robust pipeline and a new team there pursuing those bank customers. So weakness underpenetrated, and we want to we'll do more in that space. And I was answering Joe's question earlier about the bank, and it is a more complex integration and a cycle. So we're hopeful we'll have search later this year, but we also know 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 of about a third of those actually got integrated online and had their first search in the quarter, which is pretty phenomenal by the team and the work there. So So we're really focused there on getting the first revenue faster.

Got you. Good to hear. And then maybe just as a follow-up, just any update on your expectations for refi starts throughout the year look like 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 some commentary?

Charles Jehl

Yes, yes. And real quick, I'll make it part of the 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 opportunities is still is out there is the pipeline is as strong as ever and the conversations and and we continue to sell into that, that channel as well and very excited about that.
So So what we've done in the past is we were talking about OEM.s 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 it. Can you repeat the back end of that?
(multiple speakers)
Yes, yes, your refi, as you know, 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 units like a six, call it four to six month stabilization, which we've now seen in our volume was call it less than 4% in Q1, down from, call it, 8% last year, Q1. So we've seen a stabilization, but the bigger issue is what I was on the previous question is really through our credit unions are 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

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 and thank you.

Operator

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