Open Lending Corporation

Good afternoon and welcome to Open Lending's fourth quarter 2020 earnings conference call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman and CEO, and Ross Jessup, President and COO, and Chuck Yale, CFO. Earlier today, the company posted its fourth quarter 2020 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 estimates and other forward-looking statements that represent the company's view as of today, March 9th, 2021. Open lending declaims 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 information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. And now, I'll pass the call over to you. John, for your opening remarks.

Thank you, operator. Good afternoon, everyone. Thanks again for joining us for the fourth quarter 2020 earnings conference call. I'd like to start today by reviewing our fourth quarter and our full year 2020 highlights, as well as the progress we've made on our growth objectives. Then Ross is going to provide an update on our OEM opportunity. And finally, Chuck is going to review our Q4 financials in greater detail. and discuss our outlook for 2021. During the fourth quarter, we certified 26,822 loans, which was an increase of 19% as compared to the fourth quarter of 2019. We reported revenue of $39.6 million, which was an increase of 52%, and adjusted EBITDA of $24.8 million, which was an increase of 37% as compared to the fourth quarter of 2019. The fourth quarter was a great end to a very productive year for open lending. For the full year, we reported a 20% increase in certified loan growth, a 17% increase in revenue, and a 7% increase in adjusted EBITDA. We also added 55 new customers in 2020, including large partnerships with several billion-dollar institutions. We experienced strong OEM captive cert growth, despite COVID-19, which Ross is going to discuss shortly. We also enhanced our focus on direct lending and refinance channels, and also made progress on our initiative to provide CECL relief to our OEM, bank, and credit union customers. And of course, in 2020, we went public, which was an incredible milestone for us after building the business for the past 20 years. And with that came a strong board as well, and an expanded management team, which has positioned us well for many years to come. Now I'm going to spend a few minutes on our fourth quarter 2020. Our lending partners continue to be very resilient during this time. A combination of a recent influx of deposits as a result of COVID, in addition to a low interest rate environment, has led lenders to search for higher risk adjusted yields. This has led to growth in auto loan originations further down the credit spectrum. During the quarter, we added 16 new customers, and we currently have approximately 355 active customers on our platform that are generating certified loans this year. We continue to bring in additional resellers as well. We announced some new large partnerships in the fourth quarter as well, including OE Federal Credit Union, a $1.2 billion institution based in Livermore, California, Members First Federal Credit Union, a $5.3 billion institution based in Mechanicsburg, Pennsylvania, and Interra Credit Union, a $1.3 billion institution based in Goshen, Indiana. Our integration into the FIS Originate platform is going well as well. We're currently live with one bank partner on the platform, and we continue to believe that this partnership is going to open up doors for us to market this to other banks that use that platform. Our enhanced focus on the refinance program to drive additional certified loan volume continues to be a great additional growth channel. During the quarter, we grew our business with existing channel partners, and we signed eight new credit unions and banks to the refinance program. We've also been working on other funding sources with third parties to expand our funding sources outside the banks, credit unions, and the OEMs that we currently partner with. And then lastly, on the insurance partner side, our current insurance partners include CNA and AmTrust. We are in active discussions with various top insurance carriers to potentially partner with as a third insurance relationship, as we now feel there's enough volume to support three insurance carriers without jeopardizing our relationship with our two existing partners. And we'll provide an update on that when we have more details. So with that, I'm going to go ahead and turn it over to Ross so he can jump into the OEM opportunity that we currently have in front of us.

Thank you, John. OEM captive certification originations were strong in the fourth quarter, which demonstrates tremendous growth despite the COVID-19 pandemic. As we laid out before, the OEM captive market is substantial, with each captive opportunity representing a $30 to $100 million annual revenue opportunity and collectively more than a billion annual revenue opportunity. As of today, we currently serve two OEM captives, which we expect to continue to ramp and will be key drivers of growth in 2021. Starting first with OEM number two, which came back online in October, they have begun to ramp production back up, and we are encouraged at the number of applications being submitted, loans booked and certified, and the opportunity ahead with this OEM. Moving on to OEM number one. We experienced certification growth of over 200% from April to December, and are currently seeing applications from over 100% of their nationwide dealerships. We also officially launched our expanded credit score offering for them. In addition to the 560 to 619 credit scores in all regions, they are now utilizing our platform for 560 to 679 credit scores in one of their four regions they service and look to expand to the other three over the next few months. This is a great example of how our customer has expanded their usage and saw tremendous benefit from our product. Subvention will also increase the opportunities at both current OEMs. We launched a submission at OEM number two in January and are very encouraged by the opportunity ahead. In addition, we took our findings from the seasonal relief that the OEM number two received from the SEC as well as their independent auditors and created a white paper on the topic. We only recently published the paper and have gotten many inquiries on how we can help others. Lastly, on OEMs, we have been very active in discussions with others and continue to build our pipeline and work together on data studies and the value proposition we offer our platform. Again, we do not have any additional OEMs in our 2021 guidance. We continue to focus on this significant opportunity. With that, I would like to turn it over to Chuck to discuss the financials in greater detail.

Chuck? Thanks, Ross. Now let's move to our solid Q4 and full-year financial results before I review our outlook for full-year 2021. We are pleased to report 2020 financial results that largely beat our expectations for the year. For the full year, as compared to 2019, total certified loans increased 20%, total revenue increased 17%, gross profit increased approximately 17%, and adjusted EBITDA increased 7%. In 2020, we signed 55 new contracts with auto lenders compared to 77 new contracts signed in 2019, with a focus on larger institutions in 2020. During the quarter ended December 31, we facilitated 26,822 certified loans and 16 new contracts were executed with new lenders. In addition, we have 14 active implementations with go-live dates in the next 60 days. Total revenue for the fourth quarter of 2020 increased 52% to $39.6 million as compared to fourth quarter 2019, with profit share making up $25.9 million, including $7.5 million from performance obligations that were satisfied in previous periods as a result of improved macroeconomic conditions and the continued overall portfolio performing better than we expected in the fourth quarter of 2020. Program fees were $12.4 million and claims administration fees were $1.3 million in the fourth quarter 2020. Gross profit was $36.7 million in fourth quarter 2020, an increase of 54% due to higher levels of loans certified as compared to fourth quarter 2019 and the ASC 606 change in estimate discussed above. Gross margin was 93% in fourth quarter compared to 91.2% in the same period of 2019. Selling, general, and administrative expenses were $12.4 million in the fourth quarter of 2020 compared to $6.4 million in the previous year quarter. The increase in SG&A cost is a result of incremental costs related to becoming a public company as we continue implementing the internal control and compliance procedures required of public companies. Operating income was $24.3 million in fourth quarter 2020 compared to $17.4 million in the previous year quarter. The increase is primarily driven by a 19% increase in certified loans as compared to the fourth quarter of 2019 and the recognition of the $7.5 million in profit share related to historical vintages as a result of better-than-expected performance of the portfolio due to our enhanced underwriting standards and corresponding lower-than-expected defaults and claims. Net income for the fourth quarter of 2020 was $15.2 million compared to $17.4 million net income in fourth quarter 2019. The decrease was primarily due to one-time transaction costs associated with the merger and the incremental cost of becoming a public company. Adjusted EBITDA for the fourth quarter of 2020 was $24.8 million as compared to $18.1 million in fourth quarter 2019. The reconciliation from GAAP to non-GAAP financial measures can be found at the back of our press release. We exited 2020 with $294 million in total assets, of which $101.5 million was unrestricted cash and $89.3 million was contract assets. We had $267.4 million in total liabilities, of which $157.7 million was in debt and approximately $92.4 million associated with our obligations under the tax receivable agreement associated with the merger. On December 9, 2020, we announced the pricing of an upsized underwritten public offering of 9.5 million shares of our common stock at an offering price of $28 per share. Open Lending did not sell any shares, and we did not receive any proceeds from the offering. Upon closing the offering on December 14, 2020, we purchased from the selling stockholders approximately 1.4 million shares of our common stock for $37.5 million. Also, I wanted to briefly give you an update on our share count. post the offering, we had approximately 126.8 million shares outstanding at December 31, 2020. We posted an updated investor presentation in fourth quarter 2020 earnings supplemental to our investor relations site, which includes a slide that lays out our current share count. Now moving to our guidance for 2021. Based on fourth quarter results and trends into March, we are reaffirming our previously announced guidance ranges as follows. Total certified loans to be between $161,000 and $206,000. Total revenue to be between $184 million and $234 million. Adjusted EBITDA to be between $125 million and $168 million. And adjusted operating cash flow to be between $81 million and $111 million. Now, with that, we'll turn it back over to the operator, and I'm happy to take some questions from the group. Thank you.

And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Because of the amount of questions in the queue, we do ask that each participant ask only one question and one follow-up question. And our first question is from Ashish Subhadra with Deutsche Bank. Please proceed with your question.

Thanks for taking my questions. Good results. I was wondering if you can provide any update on OEM number three. You had talked about the data study that you had conducted for that OEM. Any progress on signing up the OEM number three? Thanks.

You bet, Ashish. This is Ross. Yeah, so when we did a data study, we presented it to them. late in 2020, it was kind of a one-sided study because at that point in time, they had not given us the statuses of whether they had approved or declined that. Well, they actually did provide that to us. About two weeks ago, we finished that side of it and presented that study back to them last week. The results were fantastic. Basically, of the applications they sent us, we provided them a 51% lift in approvals. 41% of those were actually as requested approvals, meaning that there were no counters in that. So we're very pleased with that, and we presented that back to them. They are meeting this week on the results of that. In the meantime, they've actually asked us for a sample program agreement and insurance policy so that they can review that internally from their accounting side, basically from their interest in getting their arms around the CECL relief benefit.

That's great news. Thanks for that color, Ross. And maybe just my follow-up question would be on the CECL relief. You talked about the white paper that was published. Can you just talk about the opportunity there, any conversation with regional banks, and how do you think about the Cecil relief opportunity on the bank front? Thanks.

You bet. Really, it has resonated with quite a few institutions we've talked about. We have another OEM captive that wanted to actually specifically ask some questions, and we brought our advisors in to that call. and basically they were helping with the questions. They also asked for a sample copy of the program agreement and insurance policy last week. We provided that to them, and hopefully those discussions will continue, which we definitely foresee that happening. We've also provided that document back to OEM number one as well as the other ones we're talking to. And, of course, we actually are doing a – webinar. You want to talk, John, about that?

Yeah, and I think you had asked, too, on the bank side what impact it's had. We've got probably the most active or the highest number of bank prospects that we've had since we started the company. I think it's resonated well. We've got a number of these larger banks that have reached out looking for that CECL document that we've put together. We've provided that to a few of them. We do have two or three of them now asking for what data is necessary to do that same data study that Ross just alluded to from a standpoint of what impact we could have for these different banks. So, I think it's been very positively received. And to Ross's point, we're in the process of putting together a webinar where we're going to host, you know, the do's and don'ts of CECL. Our advisors are going to do about a 30-minute presentation on what they need to be doing to prepare for CECL. And then we're going to fill in some backdrop information about how we feel this product fits that need. So I think it should be very well received.

That's very helpful, Color. Congrats once again. Thank you.

Thank you. Our next question is from Peter Heckman with Davidson. Please proceed with your question.

Good afternoon, gentlemen. Thanks for taking my question. Could you give us a little bit of maybe a percentage, a relative percentage of thirds by the two OEMs in the quarter? And then maybe talk about any change in your relative expectations of where those OEMs may be able to ramp to by the end of this year when they're fully ramped.

Yeah, how you doing this, Chuck? In our supplemental filing that we have on the website, we actually have the OEMs in total there. so we don't actually break out the actual OEM 1 and 2. So in fourth quarter, we had a little under 8,000 certs of our 26,822 that were related to OEM 1 and 2. So how they're ramping, as we think about 2021 and OEM 2 came back on in October and Ross can jump in, but we're encouraged by the ramp that OEM has done through into 2021 even. But we think the full ramp for OEM 2 to be back to the 8,000 to 10,000 that we've talked about is a later part of the year in the ramp. And OEM 1, as we talked about, had 200% growth from April through December and continues to grow into 21. And we feel like they'll soon be at the 1,000 search per month level and growing by the end of the year to call it 1,200 to 1,500 towards the late year.

Got it. Got it. Okay. And then with some unusual comparisons with last year, anything that's worth calling out just in terms of cadence of quarterly earnings in the first half? I guess to the extent that you've reviewed the consensus, does it appear to be approximately in the right range or any additional color you'd like to give as regards to that issue?

Obviously, March's seasonality is a great month for the company, and we're encouraged by where we're heading into the year. December and January was really good for us. And then I'll tell you that just like everybody in the United States, Texas got hit really hard on weather in February, about a week there. It was very difficult, and so that will impact us a bit in the February period. But I'll tell you that as we reaffirmed our guidance today, You know, we feel good about full year 21, which is why we reaffirmed it in the ranges. So, you know, you think about our growth. I mean, on the low end of the range, it's 70% year-over-year growth. On the high end of the range, it's 120% growth. So we feel good about where we're heading for the year. And, you know, in apps, you know, app flow is really high and coming in strong. And, you know, I had a record at the company this month for apps in coming in. So we feel encouraged. You bet.

Our next question is from Randy Benner with B Riley. Please proceed with your question.

Hey, thank you. I want to just focus on the expense line a little bit. You mentioned in your script that there was some public company expenses, but it's like GNA was a little bit higher. And then there was kind of an other expense item of 4.4 million. So just wanted to clarify, you know, why each was elevated. If you, if the GNA was just elevated to map higher revenue and then where the public company expense fit into that?

You bet. How you doing, Randy? It's Chuck. Yeah, so if you think about, you know, Q4, 20 over 19, and really, you know, we've hired, you know, 27 people in 2020 as we've, you know, navigated to become a, you know, public company going public in June. So it's, you know, it's really comp and benefits increase of hiring the 27 folks, accounting and legal associated with, you know, taking the company public and getting ready for Sarbanes-Oxley and compliance and that kind of thing, and then some insurance-related costs in the public domain, in particular D&O. So that's really what I was referring to in the prepared remarks about increased costs in the SG&A line. In the other expense line, the $4.3 million that you're referring to, and we'll file our 10-K later in the week, What that is, it's a non-cash charge basically related to a change in the measurement of our tax receivable agreement that was part of the merger transaction. So we had a change in the state apportionment rate for state taxes in the fourth quarter that drove that up, and we adjusted that out of EBITDA. Once you look back at the reconciliation in the table, that's just kind of a merger-related transaction cost associated with that change, that rate change.

Okay, and that's one time. That's caught up.

That's right. All right.

Thank you.

You bet. Thanks, Randy.

Our next question is from Joseph Affey with Canaccord. Please proceed with your question.

Hey, guys. Good afternoon. It's great to see all the continued progress. Just circling back on the OEMs, Is it fair to say, do you think that after OEM number one ramps those increased FICO score ranges across those three extra regions that you'd say kind of OEM number one at that point kind of fully ramped, other than their own organic growth in their business? And is there any OEM number four discussions that's worth talking about right now? And then I'll have a quick follow-up.

Yeah, Joe, good to catch up here. Yeah, OEM number one, basically, I do not think that they're capped after the rollout of the three different markets. There's still a lot of opportunity that we are in discussion with for them to consider adopting and, you know, subvention and the way we use it. And we're Having those discussions, we provided them some information, actually a document to show them what data points we would need to have sent through our API from them to us so we could render back submitted approvals. And so they're digesting that now, and we are going to have those discussions here soon. OEM number four, there's one that, you know, we've talked to for a while, and we're pleased to announce that, you know, they're back, they're engaged. They want us, you know, we've asked them about a data study. We actually received that information from them yesterday, and so our RISC team is going to be crunching through the numbers to see what kind of lift we can give them And so this is kind of very current news, and it's an opportunity that we believe really fits the wheelhouse of what makes sense from our product standpoint.

That's great. That's really exciting. Looking forward to hearing more on that. And then just secondly, just, you know, I know this was a very different year, clearly, and, you know, also your first as a public company. And, you know, maybe, Chuck, if you could kind of walk us through, you know, if if things kind of normalize kind of on an economic basis and, you know, performance-related revenue normalizes and other things, how should we think, you know, in any year how revenue tracks to cert growth? Because, you know, I mean, it looks like, you know, some quarters, you know, certs are up more and revenues up less and vice versa. So kind of as a business, you know, if we get to, you know, a normalized world, How should we think of CERT growth versus revenue growth? Thanks.

You bet. Yeah, I'll start, Joe. So the one thing I'd tell you is, you know, when we file our 10-K, we've got a really good disclosure in the back where we break out what's truly originations on new business for a particular profit share versus what is, you know, the change in estimate based on, you know, better than expected performance like we had in Q4. So I'd tell you it's pretty linear as you go. You know, search will grow with revenue, and you'll just need to kind of focus on that disclosure in the MD&A that kind of backs out the adjustments related to historical vintages. So I think you can think about that. They grow together, you know, pretty linear growth.

Great. Great results, guys. Thanks.

Thanks. Thank you.

Our next question is from John Davis with Raymond James. Please proceed with your question. Hey, afternoon, guys.

First, just wanted to touch on OEM number two and the ramp, I guess, relative to your expectations. Are they kind of where you thought they would be by now, given the October ramp or just any kind of color there would be helpful?

Yeah, John, I would say that the relaunch is definitely – on track like we thought it would be as far as getting them back live with the division that operates outside of their dealerships. The rollout to the inside of their dealerships for the used that took place is on schedule and I think ramping over the next two or three months to where we think it will be. But the subvention rollout is more of a control rollout. They've got the one market that's active. Even in the second market they targeted was here in Texas, and it was targeted during the storm that we just experienced. And so that got delayed a little bit, but it's ongoing. The good news is it seems like everything is going like we wanted it to from not getting any negative from the dealer feedback and it's just a progress that they are rolling this out and very involved but I hoped it would be a little bit further along than it is but I'm still very pleased about where it's going to be as soon as that ramp continues.

Okay, that's great color and then If I look at the 4Q profit share, it was a good bit better than what we were expecting. I'm guessing that credit across all asset classes is pretty phenomenal right now. It was more stimulus on the way. So as I look at that 21 guide, obviously it's reiterated. All else equal, should better profit share for better credit drive potential upside, or are there any kind of moving pieces that maybe offset that as we look out into 21? Refine drive.

Yeah, I mean, you know, listen, I mean, obviously in Q4, you know, we had the seven and a half million change that, you know, lower claims, lower default rates. I mean, you know, back when we earlier part of the 2020 when COVID hit, you know, none of us expected, you know, unemployment to go down so quickly when it when it spiked, you know, the stimulus, none of us had seen a pandemic like this. So, so we really are excited that our book, I mean, it really performed better than we all expected, which is why we've had the change in estimate. So, I would, you know, in our KPIs, we've normalized the KPIs to exclude the change in estimate due to ASC 606 on historical vintages so it doesn't spike the averages on the profit share. But I think if you think about, you know, if you're going into 21, you know, $650 to $700 difference you know, per cert is a good average to use, and that's really kind of, you know, for the three months into December 31, we averaged about $686 on the profit share, and in full year it was $658. So I would think about it that way.

Okay, that's great. Thanks, guys.

You bet.

Our next question is from Bob Napoli with William Blair. Please proceed with your question.

Good afternoon, John, Russ, and Chuck. Pleased to join your call. Hello, Bob. How you doing? Thank you. I guess the growth in CU and bank certs were, you know, flattish, up a little bit year over year, while the OEM certs obviously were up tremendously. Just your thought on the growth rate of the credit union and bank certs in 2021 and the long-term potential.

Sure. I think if you remember some of the conversations, we purposely, if you will, kind of mutated the book-to-look ratio by making some underwriting changes. Remember, we talked about discounting the advance from 100 percent of clean trade down to 95 percent. And we've looked at that right now. And we feel like, again, to the point about profit share, we feel like we were booking better paper by doing what we did and you know, cut back on search a little bit, which is what made that flap. I think, you know, we are currently looking at right now changing that back to taking that advance up to 100% instead of 95%. And we've gone in and done a study that shows that had the book-to-look ratio stayed at what it was prior to that change, there would have been about 11,500 more search done in that same timeframe from the credit unions. So, you know, it was purposely done. I think you'll see that we are signing right now some of the bigger credit unions that we had hoped to go after. I think Chuck alluded to the number of shops that are in implementation right now.

Mr. Fourteen, right.

Mr. Yeah, we had a bunch of them signing up near the end of 2020 that didn't get launched at the end of the year, so they're launching now.

Mr. Yeah, I'll jump in there, Bob. So, you know, the 55 customers that we had that we signed up in 2020, we had, you know, 30 of those. 14 went live in Q4, and then 16 of those are going live in January and February. So, you know, a lot of the implementation delay, you know, COVID-19 and the difficulty there and the challenges, but we're really encouraged by those going live now coming back on and ramping, and, you know, and that will help in our growth going into 21 for the credit union banks.

I think one thing I'd add to that, and you'll see – uh... what we've we've really enhanced the refi channel partners uh... and again i'll just use you've heard me talk about pentagon launching a few of those uh... their volume has doubled in the last two months and that's with only launching one of the six refi channel partners that are on their list to launch so you know we're starting to see a lot of a lot of uptick in the same store sales which i think is going to be a big lift this year great uh...

Good. You used my next question. I was going to be on refi, so I guess I get a third. We do that. You're welcome. Thank you. How do you step back? You're a public company now. You have a pretty slick model generating very attractive returns and cash flows. What are you most concerned? Where do you think competition? How do you think about competition, potential competition? I mean, you have an attractive model that your competitors and your customers can now see. Do you have any, where do you have concerns about competition, and how do you stay in front of that?

I'll certainly let any of these guys add to that, and this is John Flynn, but, yeah, again, we feel like, and I alluded to this in the opening comments, you know, we're a 20-year-old company, and it's taken 20 years to build these models, to build the interfaces, to build the relationships. You know, Ross has always made the comment, you know, if you had a big bank come out with something like we've created to try to get more applications in, you're not going to see 350 credit unions jump on the bandwagon of wanting to run their business through a bank or through somebody, you know, other than, you know, somebody that's agnostic like we are to the channels. You know, we've got 20 years' worth of data We continue to fine tune that data. Our exclusive relationships with the carriers exist. Somebody's going to have to really gather up a lot of what we've spent 20 years gathering to attract another carrier that would be interested in writing something like this. I think we've built a pretty strong moat around the company. Having said all of that, it's a $250 billion market. you know, we've underwritten $2 billion worth of loans last year, and there's a lot of room in this space if somebody were to try to compete.

Yeah, a lot of white space on the TAM. I mean, like John said, about 1% is all we're penetrating and growing, so.

Yeah, I think the main thing is, you know, we're not sitting around, you know, patting ourselves on the back of what our underwriting looks like today without looking at what we can do from an enhancement, bringing in additional alternative data scorecards, you know, the best of of breed underwriting and the latest. And our risk team is all over trying to make sure that we're on top of that.

Thank you. Appreciate it.

Thanks, Bob.

Our next question is from Vincent Cantick with Stevens. Please proceed with your question.

Hey, thanks. Good afternoon. Thanks for taking my questions. First question is actually just a, hey, good afternoon. First, two questions, actually, just a quick follow-up. So on the non-OEM opportunity, could you give how much of, say, how much of 2020 was from refis and then how you think about refis going forward?

Yeah, I think if you think about, you know, full year search for 2020, you know, the refis probably call it 12 to 13% of that, you know, for that, for that, you know, 2020 year. One thing to keep in mind, Vincent is, is the OEMs ramp, you know, there'll be, there'll be, you know, that percent will be diluted by the OEM growth.

Even though, even though the actual.

Right. Right.

And a refi, you know, we didn't really focus on refi until the COVID hit. Yeah. We were, a lot of our business was all indirect and direct. And we really kind of pivoted our sales force to go out and start selling the channel partners that we were in the process of creating relationships with. So I don't think you really started to see any left from the refi side of that before June or July from a standpoint of getting any real volume. So you're really looking at six months out of the year from a standpoint of trying to tie a percentage in there.

Yeah, that's a great point. In our investor presentation, not the supplement, we've got a slide that talks about the refi program. And I think February over February 2020 to 2021, Application up on refi, 51%.

Okay, that's great. Thank you for that. Second, just a quick clarifying thing. So the change in estimates, so I think first quarter you had $12 million decrease to the profit share estimate, and then last quarter you took it up $4 million, and this quarter you're taking it up $7.5 million, so you're kind of you're back to where you were expecting before, and profit share expectations going forward should be about the same. Am I understanding that about right?

Yeah, Vincent, you're understanding it right. I'll tell you that I think it was about $13 million negative. Second quarter had a slight downward adjustment as well. So for the year, like I said, when we file our 10-K, you'll see a table that historical vintages were adjusted downward about 1.6 for the full year. So we recovered, you know, most of the change in estimate from the pre-COVID period or the COVID period. So, you know, we think we've got a robust process on the 606. You know, at the executive level, we're all involved. Our risk team does a great job. I mean, it's a process we go through every quarter, and we've got a great model that we're enhancing. And so, you know, we'll keep you posted. But, you know, as that changes, you know, we'll make changes in the estimates. But But we were very pleased how the book performed in the performance with less defaulting claims.

Okay, great. That's very helpful. Thanks very much.

You bet. Thanks, Vincent.

And our next question is from David Sarf with JMP Securities. Please proceed with your question.

Thank you. Good afternoon, guys.

Hey, David.

Maybe first on the guidance, and this is more a sort of general question slash observation, it's a fairly wide range still from the top to the bottom end of all the guidance metrics, you know, approaching sort of 30% chasm between the low end and high end. And just trying to get a sense, I mean, you've painted a picture of, fairly good visibility into the progress of the OEMs into the go-live roadmap over the next 60 days of a lot of new bank partners and so on and so forth. Is maintaining this 30% gap between high and low end primarily a function of still COVID-related uncertainty, sort of macro issues? Is it related more to You know, industry competitive factors, other unknowns, just trying to get a sense for how we ought to be thinking about what are some of the major factors that would lead one to navigate to the low end versus the high end.

Yeah, Davis, Chuck, I mean, one, you know, it's early, you know, it's early in the year. You know, we were encouraged or are encouraged, you know, from Q4 into March now. You know, you're right. There's unknowns out there with COVID. And, you know, we had the second wave and, you know, the vaccination rollout and all of that. So, you know, we felt like it was prudent to, you know, we reaffirmed and feel really good about where those ranges are. Maybe it's wide, but I'll tell you that 70% on the low end of growth versus The 120 is phenomenal growth at any point in that guidance. I think the midpoint is 95%. So obviously the time period between reporting now for full year 20 to Q1 is pretty short, and we're going to watch March. March is a great month for us, and historically it's from a seasonality perspective, and we'll give more thoughts around full year 21 when we come back in May and talk again.

Got it. No, no, clearly there are a few companies, very few, that would be disappointed with the low end of your growth range, just out of context for the different variables at play.

You bet.

Quick follow-up. On the carrier side, kind of looking at my notes, I believe that you mentioned on the third quarter call that a third carrier was kind of getting close to the short strokes, that they may actually be on board with April, May this year. Is that still the case? It sounded like perhaps you were widening the net in terms of who you're talking with.

And you just hit the nail on the head. This is John Flynn. As a result of some inbound calls from our existing carriers, we slowed that down and wanted to make sure that we were going to have the volumes there to be able to feed the different carriers that we did bring on. And as a result of that, With the use of our broker and our independent actuarial firm, we've identified upwards of four or five other carriers that are extremely interested in what we're doing. We're under NDAs with quite a few of them. We're just trying to see which is the right fit, you know, where can they help us grow, what introductions can they make versus us just picking somebody that can write the paper, you know, whether we're looking at geographic growth opportunities different areas like that. So we're in the process of narrowing that down. We do believe we'll have one on board this year, just like we did mention in the previous calls. And, you know, based on the interest that we're seeing and the volumes that we're anticipating seeing coming in from the different OEMs and banks, we might conceivably bring on two of them. So that's not for a lack of interest from insurance carriers. It's been more of us making sure that we're dotting our I's and crossing our T's to make sure we bring on the right partner.

Got it. Thank you. Congratulations.

Thanks, Dave. Thank you. Our next question is from John Hecht with Jefferies. Please proceed with your question.

Absolutely. Thanks for taking my questions, guys, and good afternoon. Circling back a little bit to the profit share, because I understand you've recaptured some of the revenue that you thought you might get when things were really uncertain earlier last year. But you also revised your underwriting fees and so forth, I think, middle of the year to account for increased credit risk. That was obviously logical at the time, but we haven't seen that credit cycle yet. So I guess the question is, are you underwriting to increased risk or less risk, number one? And number two, wouldn't we expect the margins in the profit share to at least remain elevated relative to maybe where they were before until we do see that charge-off cycle occur?

Yeah, John, this is Ross. You're exactly right. Whenever we saw vehicle valuations drop back in April and we went ahead and we took a 5% decrease to the value of the vehicles, and we've left that in place. Obviously, that move made a lot of sense at that point in time, and there still was a risk with the Hertz situation and all that out there. We are definitely looking at, across credit unions and banks, asking our carriers to... you know, look into that and consider moving that, you know, back to where it was pre-COVID. The purpose being, you know, we get our, you know, values at the level that tracks with what's happening from the Mannheim Index. That will cause our interest rates to be lower and our close ratios to be higher. We actually did a study looking at, you know, the top 20 lenders by credit score and what their interest rates did during the last quarter compared to what they were in the first quarter. And almost all of their interest rates decreased in a time where ours were actually increasing. And so we believe it will be a great move from a competitive standpoint to just kind of realign that. Now, what that means from all we have booked is there is future growth. assumptions of that will be affected by a change and removal of that 5%. If we think the values will, you know, normalize, it actually could help, you know, increase future profit share accordingly.

But as we look out into, you know, 21, we still have some stress levels on our profit share, you know, with the unknowns of, you know, with the vaccine and COVID. So, I think that's part of the answer, too, is that those stress levels are still out there just with the unknown. And some of that could free up. It could absolutely free up. Absolutely.

Okay, great. That's helpful context, McCullough. I appreciate that. And second, non-related question, it sounds like you have an active bank that you brought on the platform recently, and you've got a lot of banks in the pipeline. Maybe you Can you just characterize what's the bank that you're – not who is, but what's the characteristics of the bank you're working with and how's that ramp going? And then you mentioned the pipeline. Maybe talk about what does the sales process or sales cycle look like and what's the cadence that we might expect to see other banks coming on the platform?

You may talk about one of them that went live in December. you know, one of our finance company banks that went live, basically, and had a great, you know, came out of the gates, you know, with over 100 loans in the month and is tracking to a 400 level. And that's, you know, just basically in the first four months. And, you know, it just proves out that in the finance side of it. John will talk about some other banks.

When I mentioned one bank live on a platform, that was in reference to, a particular interface that we had built into the FIS platform. It's a bank out of Memphis. And they launched with just a few car dealerships to get started. They've now just taken us back out to, I think, upwards of a few hundred dealerships. So we're anticipating that ramp to take off. But my comment about growing from there was one of the hurdles we always face is making sure the interface is built that any particular bank is currently working on. And in this case, that was the FIS, what's known as the Originate platform. Well, now that that one bank is up and running and all the bugs are knocked off the interface, FIS will actually help us market to 12, 14 other banks that are on that identical platform. So by removing those hurdles, and you've always heard us talk about, you know, doing rev shares instead of going out and hiring big sales force. What we will do now is utilize the FIS sales force to help us open some doors to the banks that are on that other platform, and then they generate back a portion of our program fee in payment for building the interface. So it's been a great model for us over the years. Every interface we built, they then go out and help sell us to the users that are on that platform, and it just saves us a lot of door knocking. So it's It's been a great way for us to open doors.

Great. I appreciate the call. Thanks, guys.

Thank you, John. Thank you. Our next question is from Mike Grondahl with Northland Securities. Please proceed with your question.

Yeah, thanks, guys. You know, with OEM 3 and potentially OEM number 4, you know, clearly you're working with them, exchanging some data. but everything takes time. What's sort of the odds, or is it practical that they could be delivering certs later this year?

Yeah. How are you doing, Mike? This is Chuck. You know, as I'm learning the business with John and Ross, I mean, these OEMs and these large banks, you know, they're a long sales cycle, and, you know, our 21 guidance just includes one and two, and, you know, we're doing everything we can, and Ross is 100% focused on it and the team, and, you know, we'd rather really just talk about it in past tense and not really and come back to you when that happens and not really try to, you know, give you odds on what might happen, so... But listen, we're focused on it and working every day to do that.

Got it. Got it. And then as a follow-up, you guys, I think, implemented a price increase May of 2020. Any thoughts on keeping that price increase or adjusting for the environment?

Yeah. And, Mike, so the price increase was an indirect – because whenever we decrease the value of vehicles by 5%, what that did is that actually caused a 15% increase in premium. So technically we didn't increase premium by 15%, but by reducing the value of all the vehicles collateral that came through, put it into a higher loan-to-value, and so it tracked to a higher premium. So that is what we're considering now. basically evaluating and seeing if we need to have that 5% discount as it relates to the vehicle values. And certainly it doesn't appear that there's issues with vehicle values in the future like we thought there were back in April.

Sure. To your point, Mike, that was the comment I made about the book-to-look ratio. Should it have stayed? like it was before we made that change, would have represented an additional 11,000 certs last year.

And do you roughly know when you'll make a decision buy on that, or is it just sort of month-to-month look at it?

Yeah, we've had some initial discussions with our carriers, and we've been preparing the data here to look at that. And so, you know, when we get signed off and feel comfortable with that, On our side, we can make an adjustment and have it effective, you know, 30, 45 days after, you know, through technology release.

Got it. Okay. Thank you. And as a quick reminder, if anyone has any questions, you may press star one on your cell phone keypad. Our next question is from Matt O'Neil with Goldman Sachs. Please proceed with your question.

Yeah. Good afternoon, gentlemen. Thanks for excusing me in towards the end here. Just had a couple of sort of nuanced follow-ups and thanks for all the transparency around the business and the update here. So I guess first, could you help us just think through the sort of the constituents or pillars in the decisioning around the remeasurement? And I know we've talked a lot about it so far, but as far as like, What are the kind of one, two, and three biggest factors that you guys look at, whether it's the kind of credit performance, used car prices? I'm just kind of wondering if there's a way to rank order those types of things so that we can think about how the measurement may trend going forward, understanding that we've gotten much of the way back to kind of where we were a year ago.

I think, Matt, I think a lot of it, first of all, is in regards to defaults. Have defaults taken place compared to where we thought they would be? Are we seeing claims being filed, you know, higher than levels that we thought they would be? And so by tracking that first, we're looking at, you know, are we kicking the can down the road and then the defaults will happen? Well, we're just not seeing it. So what we're doing is, you know, we do get data from the bureaus looking at, you know, 30-, 60-, 90-day delinquency trends. And that maps very, very close now to when we're seeing claims possibly come in. And it's much lower than we would have anticipated and certainly what we modeled. The second part of it deals with claim severity. And whatever our prior claim severity level was from a dollar standpoint, we are actually seeing claims at a much lower severity. And that's because a much higher vehicle value which is a cause of a limited number of inventory of new cars out there and the demand. So I think those two are some of the largest, you know, components of that.

And just from the macro, you know, perspective, I mean, you strengthen car sales. You know, you think about, you know, used car values, you know, the Mannheim Index and, you know, unemployment rates and things like that. You know, obviously we're focused on that.

Yeah, that's really helpful. As a follow-up, as you guys are having what sounds like an increased amount of sort of inbound from potential third and maybe fourth and beyond insurance partners, is it safe to assume that the existing economic share that you have contractually with your two primary providers today is effectively table stakes as you would be in discussions with subsequent or additional insurers because otherwise you guys would theoretically be, you know, not kind of economically agnostic as far as, you know, which insurer to kind of pair with a subsequent loan, right, if they weren't in the same kind of economic arrangement as the first two partners. Is that logical?

That'd be identical.

Yeah, okay. Understood. That's it for me. Thanks a lot. Thanks, Matt.

And we have reached the end of the question and answer session. And I'll now turn the call over to John Flynn for closing remarks.

Yeah, guys, we really appreciate you taking the time to listen in and we love addressing these kind of questions. We're very wide open about where we're going with the company and where we've been. So appreciate you following us, appreciate our investors, and looking forward to growing this into the next year. Thanks.

Thanks, everyone, for your time.

And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.