Open Lending Corporation

Good afternoon and welcome to Open Lending's third quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. 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 Jail, CFO. Earlier today, the company posted its third quarter 2021 earnings release to its investor relations website. In the release, you'll 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, November 9, 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 you, John, for opening remarks. John?

Thank you, Operator, and good afternoon, everyone. Thanks for joining us for Open Lending's third quarter 2021 earnings conference call. I'd like to start today by reviewing our third quarter highlights and the progress we've made on our growth objectives. Then Ross is going to discuss the broader car manufacturing and lending landscape and provide an update on our OEM opportunity. Finally, Chuck is going to review our Q3 financials and our updated outlook for full year 2021. Now to our high level results. We're very pleased to report another record quarter at open lending. Q3 21 certified loans increased by 138% to 49,332 certs. We reported revenue of $58.9 million, which was an increase of 98%, and adjusted EBITDA of $42.1 million, which was an increase of 113% as compared to the third quarter of 2020. We're very encouraged by the continued growth in our credit union and bank line, where we achieved a 91% year-over-year increase in certs for the third quarter of 2021. This was driven by the addition of new accounts, further penetrating existing customers, and expansion of our refinance program. First, on the existing customer side, during the quarter, our top 10 customers, excluding OEMs, have increased their certification volume by 185% year-to-date 2021, as compared to the same period in 2020. One way we are growing our existing customer wallet share is by adding new credit unions and banks to the refinance program. During the quarter, we onboarded 11 new accounts and now have over 40 credit unions and banks that are acting as funding sources behind these refinance channel partners. Our refinance volume was nearly 30% of our total certs in the third quarter 21. 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 during these challenging times. We mentioned on our last call that our largest credit union customer had recently implemented our refinance program, lowering the bottom credit score from a 620 to a 560. As a result of this implementation, we're happy to announce that this initiative has been a huge success and they have increased their volume by five times and continue to grow. This is one example out of many of how impactful our partnership can be with our customers. Continuing to grow the refinance channel is one way we'll be able to help offset the temporary headwinds associated with affordability due to inflated values of used cars and the chip shortage, which are in turn impacting car sales, both new and used. Again, Ross is going to touch base on this topic in a few minutes. On the new customer side, we signed 16 new accounts in the third quarter and four of these were Tier 1 accounts classified as over $1 billion in assets and two with assets over $8 billion. Momentum has also continued into the fourth quarter with seven new contracts signed and nearly 20 have active implementations underway. In certain cases, where permissible, we will announce the names of these large new customers once they've gone online on the Lenders Protection Program. Many of the inbound calls that we're getting from the larger credit unions are related to the fact that they're all going to need to comply with CECL in 2023. And based on the recent webinar that we co-hosted with KPMG, these financial institutions all have less than a year to prepare. We will continue to focus on this very important growth opportunity over the next 12 months. We're also focused on three other initiatives that position us for long term growth. First, I know we've touched on this previously, but we continue to explore third party funding sources to purchase loans, what we call a permanent capital vehicle. While the initiative is young, we're very encouraged by the progress to date of these third party funding institutions utilizing our lender's protection platform to underwrite and decision loans. To clarify, we will not have any legal ownership in these funding sources. Second, we are in the early stages of work towards the ability to provide additional products to include better decisioning on prime loans, as well as the ability to insure other asset classes. Third, expanding our business insurance partnership relationships. As you know, we provide a tremendous value to our insurance carrier partners, and we believe the ROEs generated for the insurer are well in excess of other lines of business due to high underwriting profitability and low capital charges. Our current partners are very pleased, and we're in discussions with a few more that will give us even more capacity as well as help us with our initiative to possibly expand into other verticals. As a reminder, these are unique and value-added partnerships which are exclusive in nature. On October 25th through the 27th, we held our annual Executive Lending Roundtable. We had over 200 credit union and bank executives join us here in Austin, Texas for three days of roundtable discussions. This event was the largest attended conference we've hosted since founding the company. It was a clear indication that our lending partners are hungry for new ideas on how to grow their auto portfolio in the absence of chips and new car inventory. Before I turn it over to Ross to review our OEM business, as well as the global semiconductor supply chain's impact to our business, I would like to remind everyone of a few key points. As you've heard us say on previous calls, over 80% of our business is typically used cars. With inflated used car values, it's making it increasingly difficult for our target market, that's consumers with scores of 560 to 680, to be able to qualify for a loan due to the payment to income threshold that we have in place. With that, I'd like to offer a couple insights based on our prior experiences during these types of cycles. For starters, this pandemic-induced recessionary cycle has presented patterns that we're familiar with based on over 20 years of data and history. Heading into recessions, we typically see supply in excess of demand as end market conditions soften. Conversely, once the market troughs, we experience a period of insufficient supply as demand returns. We also see specific metrics that at times can forecast the inflection point. Currently, we are experiencing very low levels of dealer inventory, low levels of incentives offered by dealers, and dealers transacting with the highest quality of buyer from a credit score perspective. In some instances, new vehicles are selling over MSRP and used car inventories are being priced up. While it can be challenging to know when we have precisely turned a corner and reached that inflection point, We do know that in prior cycles, the recovery spans a period of six to 18 months. Over that timeframe, pricing inevitably moderates and consequently volumes increase notably. We do believe that we will be well positioned to capture our share of the estimated 5 million plus units of excess demand that currently are forecasted. It is important to note that we continue to be disciplined in the way we run our business. While others in the market are relaxing underwriting standards, we remain steadfast in our position that we want to set our partners up for long-term success by delivering appropriate risk-adjusted returns on their auto loan portfolios. And with that, I'm going to go ahead and turn this over to Ross.

Thanks, John. As John mentioned, I want to spend a few minutes to talk about the general auto lending landscape, first on the chip shortage OEMs are allocating the limited production of chips to the most profitable units, generally the more expensive and less affordable units. Due to this, new vehicle inventory continues to decline, down 67% from a year ago. This has also led to less incentives being offered, which impacts the near-term opportunity for our subvention offering. Average incentive spending per unit in October 2021 is expected to reach a record low of approximately $1,600, which is down from almost $3,500 in October 2020. This will obviously impact our business if the shortage continues for a long time. However, there are a few stats that are suggesting that we may be in a trough and that we should see an inventory recovery in the coming months. As an example, The Vice President of Sales Operations at Kia America recently said that, despite ongoing supply chain issues and chip shortages, we expect our available supply and robust customer interest will help us have a strong finish for the year. In addition, some of the largest OEMs have seemed more optimistic on supply. Ford recently predicted an increased volume in the final months of 2021. GM plans to resume production of the Malibu for the first time since February 2021 as an indication that its chip supplies are stable enough to build even its lowest priority vehicles. Despite all these short-term conditions, we are still seeing a lot of engagement and excitement with the current and prospective OEM partners, similar to the credit unions of Bankspace. As a reminder, there are many benefits to them to partner with us. First, greater earnings in ROAs to captives with credit performance net of default insurance payments comparable to prime loans. Second, they were able to generate low risk revenues by leveraging their existing infrastructure and network. Third, they experienced increased profitability due to credit loss release under the CECL standards. And most importantly, increased repeat buyers by keeping consumers in the captive customer ecosystem. With that backdrop, I want to give you a brief update on OEM number one and two, which combined have grown 205% year to date in 2021. First for the OEM number one, in the third quarter of 2021, we experienced certification growth of approximately 38% compared to Q3 of 20. I mentioned the chip shortage earlier, And this is impacting new car volumes as over 65% of their volume was new vehicles earlier this year. For OEM number two, certified loan growth continues in Q3 of 21. As a reminder, OEM number two came back online in October 2020 after going offline due to the COVID-19 pandemic. The chip shortage is also impacting this OEM. But we are excited by our ramp and it's working just as designed and will be a major part of our growth plan when affordability and the supply of chips returns to normal levels. Fortunately, we've been able to grow our use volumes across all three channels, which has allowed us to continue growing our business during this time. We expanded terms to 75 months in early April 2021, as requested by the OEMs. and have seen the 75-month loans represent about 17% of their origination since April 2021. We continue to work through contractual and IT implementation workflows. We are entering into an SOW with one of these OEMs IT provider to expand our current integration to include the bells and whistles that their clients will need to include, for example, subvention and other dealer-facing enhancements. This work will enable our systems to be ready We continue to make good progress on the IT provider and OEM and we'll keep you updated on our progress. In summary, even though the light vehicle SAR is down nearly 25%, we continue to grow our year over year volumes with our two existing OEMs. We are optimistic that when inventories begin to build and the SAR returns to a positive trend line, we will benefit based on the pent up demand in the market. I'll now turn it over to Chuck to discuss our Q3 financials and outlook in more detail. Thanks, Ross.