Open Lending Corporation

Good afternoon. Welcome to Open Lending's second quarter 2021 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 Gell, CFO. Earlier today, the company posted its second quarter 2021 earnings release to the 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 views as of today, August 10th, 2021. 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 by such statements. And now I'll pass the call over to John for opening remarks. John?

Thank you, Operator, and good afternoon, everyone. Thanks for joining us for our Open Lending Second Quarter 2021 Earnings Conference Call. I'd like to start today by reviewing our second quarter highlights and the progress we've made on our growth objectives. Then I'm going to turn it over to Ross, and he is going to provide an update on our OEM opportunity. And then finally, Chuck is going to review our Q2 financial and our outlook for the full year 2021. Very pleased to report another record quarter at Open Lending. June and Q2 of 2021, we generated record levels of certified loan volume and the momentum has continued into the third quarter. Q2 2021 certified loans increased 148% year over year to 46,408 certs. Our core credit union and bank business generated 87% certified loan growth year over year in Q2 21. Our two OEMs combined have grown 136% year to date in 2021. We also reported revenue of $61.1 million, which was an increase of 177% and adjusted EBITDA of 46.1 million, which was an increase of 199% as compared to the second quarter of 2020. In addition, we signed an agreement with the third insurance partner, American National, a strategic accomplishment for us. These results were driven by strong execution by our team, signing new customers and further penetrating our existing lender customer base, as well as growth of the underserved market that we target. It's a tremendous opportunity of over $250 billion worth of loans originated annually by borrowers that are classified as near prime. We've only penetrated about 1% of this massive market. Traditionally, Near prime consumers, and these are consumers with FICO scores between 560 and 699, cannot obtain loans from prime lenders. As a result, these borrowers often get credits from subprime focused lenders that come with higher interest rates and lower approval amounts than what is appropriate for their credit score. What we do is enable lenders to make loans to consumers they would otherwise not make. deepening relationships with their existing customers and helping forge relationships with new customers. During the quarter, 22 contracts were executed with new lenders, and we currently have over 380 active lenders on the platform that have generated certified loans in the past 12 months. Of the 22 signed accounts in the second quarter, seven were Tier 1 accounts, classified as over $1 billion in assets, and one was a large regional bank with assets over $9 billion. We are focused on the Tier 1 accounts and believe they are the greatest opportunity to continue accelerating our growth. Momentum has also continued into July with five activations and six new contracts signed with over 15 live implementations underway. In certain cases where permissible, we will announce the names of these large new customers once they've gone live on our lender's protection platform. Our top 10 lenders, excluding OEMs, have increased their certification volume by 140% year-to-date 2021 as compared to 2020. And six of them have hit an all-time monthly cert volume record in June. During the quarter, we added five new credit unions and banks to the refinance program and now have over 20 financial institutions that are acting as funding sources behind these refinance channel partners. Our refinance volume was nearly 20% of our total search in the second quarter of 21, hitting record volume during June. As a result of our flexible business model, our refinance channel has accommodated consumers by allowing them to modify their existing terms and lower their payments. We also continue to explore third-party funding sources to purchase these loans as part of our long-term growth strategy. I just want to clarify that Open Lending is working with third parties on this effort, and we will not have any ownership or take any balance sheet risk. While the initiative is early, we are encouraged by the progress to date of these third-party funding institutions utilizing our lender's protection platform to underwrite and decision these loans. As you know, we provide a tremendous value to our lending partners as well as our insurance carrier partners. We provide a consistent flow of unique and profitable business, and the product is a completely turnkey operation for the carrier. The returns generated for the insurer, we believe, are well in excess of other lines of businesses due to the high underwriting profitability and the low capital charges. I mentioned earlier, We recently announced that we had signed a third insurance partner agreement with two affiliates of American National Group, enabling them to be additional providers of credit default insurance policies for open lending lender protection programs. This has been an important strategic initiative for us, and we're thrilled to be working with such a great team at American National. We do believe that there is more than enough value to support additional insurance carriers while continuing to deepen our valued relationships with our three existing carriers. So we're extremely pleased with the quarter, our progress growing our business, and the value we bring to our lending and insurance partners. But we're even more proud that we can provide the underserved near prime consumer access to a credit from a larger range of lenders with higher loan amounts, better interest rates, and appropriate down payments. So with that, I'm going to turn it over to Ross to review our OEM business and our progress on that front. Ross?

Thanks, John. As we have spoken previously, the OEM captive market is substantial and a major growth opportunity for us. As of today, we serve two OEM captives, which we expect to continue to ramp up and take advantage of more of our services. We are also in active discussions with other large-scale OEMs. As previously discussed, the typical sales cycle for these partnerships take time given their scale, but ultimately, we believe we'll be able to penetrate a substantial portion of the $1 billion addressable OEM captive market. John mentioned the benefits we provide to lenders and insurance partners associated with the underserved consumer. We also provide these benefits to the OEM. They can facilitate new car sales by expanding credit to near-prime consumers where they are not competitive today. They are also able to support car values by increasing financing availability for used vehicles. In addition, continued efforts around subvention functionality for OEMs unlock a much larger opportunity as lenders protection will be applicable to the new car market. The global chip shortage has been affecting all OEMs this year and their ability to keep up production of new cars. With the lack of new cars, OEMs are spending less on incentives than in the past. We expect this shortage to ease eventually and production levels to normalize. When this happens, car values should return to normal levels and create more inventory in our target markets. This shortage is simply creating a timing shift, but not a change to our eventual certification expectations and growth. To further expand on this, higher vehicle pricing means higher payment to income ratios and in turn increases the required insurance premium associated with the risk. Based on our experience, this correlates highly with default risk. This leads to higher interest rate offers and increased counter offers for near prime consumers. Accordingly, this has resulted in lower capture rates than in past quarters. Again, this is also timing and will normalize with the inventory levels return. The OEM captives also receive similar benefits other lenders realize from Lenders Protection, like higher yields, expanded offerings to non-prime customers, and risk mitigation from default insurance. They also experience credit loss relief under decisional standards, offsetting 70% to 80% of the expected losses. Additionally, by partnering with us, they increase repeat buyers and keep consumers in the captive customer ecosystem by increasing customer loyalty base. With that said, let me provide an update on OEM number one. In the second quarter 2021, we experienced certification growth of approximately 185% compared to Q2 of 20 and sequential certification growth of 33% compared to Q1 21. We are awaiting the expansion to other regions on our expanded loan terms from 72 to 75 months. but initial results have been favorable, and we expect this to be underway very soon. 75-month terms only represents 5% of their originations. As later discussed with OEM number two, this will grow with expansion. I mentioned the chip shortage earlier. This is impacting new car volumes as well because a significant portion of their volume is new vehicles. For OEM number two, certification loan growth was significant. up 42% Q2-21 compared to Q1-21. As a reminder, OEM number two was offline from April to October 2020 due to the COVID-19 pandemic. The chip shortage is also impacting this OEM, but we are excited our ramp is working as designed and will be a major part of our growth plan when the chip supply returns to normal levels. We expanded terms to 75 months in early April 2021. and have seen 75-month loan terms represent about 16% of their origination since April. As you know, we're in discussions with additional OEM prospects. Each of these prospect captives represents 30 to 100 million in revenue opportunity for us and collectively more than a billion in revenue. However, I want to remind everyone these are long sales cycles and require a lot of resources, and these large captives are juggling various projects and resources. We are actively discussing planning, scheduling, and sequencing the IT projects needed to go live at two other large-scale OEMs. Now, turn it over to Chuck to discuss Q2 financials and outlook in more detail.