Open Lending Corporation

Good afternoon and welcome to Open Lending's fourth quarter 2021 earnings 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 Gilles, CFO. Earlier today, the company posted its fourth quarter 2021 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 views as of today, February 24, 2022. 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.

Thank you, Operator, and good afternoon, everyone. Thanks again for joining us for Open Lending's fourth quarter 2021 earnings conference call. I'd like to begin today by reviewing our fourth quarter as well as our full year 2021 highlights and the progress we've made on our growth objectives. Then Ross is going to discuss the auto manufacturing and lending landscape. And then finally, Chuck is going to review our fourth quarter financials and discuss our outlook for full year 2022. So I'd like to start with our high-level financial review of the fourth quarter and full year results. We're very pleased to report another very strong quarter at Open Lending. Q4 21 certified loans increased 59% to $42,639 as compared to the fourth quarter of 20. We also reported revenue of $51.6 million, which was an increase of 30%, and adjusted EBITDA of $36.6 million, which was an increase of 47% as compared to the fourth quarter of 2020. We also saw incredible growth in 2021. with an 82 percent increase in certified loan growth, a 98 percent increase in revenue, and a 123 percent increase in adjusted EBITDA for the full year 2021 compared to 2020. We also added 71 new customers in 21, which was up from 55 new accounts in 2020, and the average size of the lenders that signed up in 2021 exceeded $1.2 billion in total assets. I think this demonstrates the value proposition of our platform and our continued momentum as we head into 2022. We're also very encouraged by the continued growth on our credit union and bank lines, where we achieved an 82% year-over-year increase in certs for the fourth quarter of 21. This was driven in part by the addition of new accounts, including some that are preparing for CECL compliance by year end, further penetrating existing customers through wallet share, and continued expansion of our refinance program. First, on the new customer side, we signed 18 new accounts in the fourth quarter, and three of these were Tier 1 accounts classified as over $1 billion in assets. Of the 71 new accounts signed in the full year 2021, 19 institutions have total assets over $1 billion. Momentum has also continued into 2022 with seven new contracts signed to date and approximately 15 active implementations underway so far this year. Many of the inbound calls that we're getting from larger credit unions are related to the fact that they have less than one year to comply with CECL. And for those of you not familiar with CECL, it stands for Current Expected Credit Losses and is a GAAP accounting standard which is applicable to many of our lenders, which will require adoption during 2022. As a reminder, Lenders Protection can provide lenders with a preferential approach to CECL compliance. Earlier this month, we hosted an Executive Steering Committee meeting where we had executives from our largest credit union customers come to Austin to discuss how open lending can help them further grow their respective auto portfolios with a real focus on prime decisioning and the importance of CECL. It became very clear from these discussions that our lending partners are looking for new ideas on how to grow their auto portfolios through expansion of their offerings in the face of chip shortages and depleted new car inventory. We're working on a few initiatives that we plan to roll out this year to assist them in these efforts. We are also in the process of setting up another webinar with KPMG which is similar to the one we hosted last year, which will discuss CECL compliance and the approaching compliance timeline for credit unions. Now I'd like to move on to our existing customer side. Our top 10 customers, excluding OEMs, have increased their certification volume by 193% in 2021 as compared to 2020. During the quarter, we continued to add new credit unions and banks to the refinance program. During Q4, we onboarded four new accounts to the refinance program with our volume reaching nearly 35% of our total search in the fourth quarter of 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. This program is one way we've been able to help offset the temporary headwinds that's associated with the affordability due to inflated used car values and inventory shortages, which are continuing to impact auto sales, both new and used. Ross will touch more on this topic in a few minutes. Our credit union funding sources will continue to have the lowest cost of capital, allowing them to offer much lower rates than your typical near and non-prime lender in the marketplace. We continue to see consumers saving as much as $100 to $150 per month by reducing their interest rates by approximately 400 to 500 basis points. I'd finally like to provide with an update on our other long-term growth initiatives. First, we're sitting on an unbelievably valuable data asset, which makes us very unique to our clients compared to peers in the marketplace. Secondly, the market we target is massive, and we've only scratched the surface at this point. Third, we've delivered strong results in 2021, highlighting our resilient business model. Due to all of these points, we're making strategic investments to further capitalize on the market potential once things normalize. Some of these are areas of investments this year will be our go-to-market sales strategy with new dedicated sales team members to capture more of the TAM and expanding our account management staff to continue focusing on expanding wallet share with existing customers. We're going to dig into the bank space with key hires with core experience in bank, auto originations, and underwriting. We're exploring other markets for geographic expansion like Canada. And then finally, we will be investing in technology, further enhancing lenders' protection platform for our lenders. And with that, I'd like to go ahead and turn it over to Ross and have him give you his update.

Thanks, John. Clearly, our powerful industry-leading credit union customers and exclusive insurance carrier partners continue to power performance through temporary bottlenecks and ever-changing financial conditions in the industry, a testament to the strength of our business model since 2000. Today, I will highlight three things. One, the current and near-term U.S. automotive market conditions and outlook. Two, commercial activities with our industry-leading OEM customers and prospects. And three, progress with our current insurance partners. In regards to current and near-term U.S. automotive market conditions and outlook, as we ended the quarter and entered 2022, we began to see signs of incremental improvement in a variety of indicators. Based on our assessment of in-market conditions, we remain optimistic that the toughest headwinds facing the industry are behind us as we begin navigating through the upcoming year. More specifically, dealer networks across the country are reporting improving inventory, pricing, pre-sale orders, velocity, and pin-up demand conditions. In terms of inventory, for illustration, a representative dealership that carries 500 vehicles on hand before the pandemic began saw their inventory decline almost 80% at their low point, leaving as few as 100 vehicles on the lot. In comparison, while still notably below the typical historical average, dealerships of this size are seeing an improved rate of restocking and almost a doubling of vehicles off the bottom that may now have closer to 200 vehicles in their inventory. In terms of pricing, at the peak of the inventory shortage, dealers were reporting that vehicles coming off lease after three years were selling above their original MSRP 36 months later. In comparison, While still very much elevated, we are now seeing a moderation in the rate of increase in pricing. This is a dynamic that we at Open Lending have witnessed in prior cycles, namely, as inventory rebuilds, pricing will begin to moderate. As for pre-sold orders, over the past 20 months, as showroom stock was depleted, many dealers adjusted to satisfying the buyer behavior with pre-sold orders. In fact, at the inventory trough, Pre-sold orders could have made up anywhere from 80% to 90% of all orders. In comparison, our sense is that while pre-sold orders are still well above historic levels, they now make up less than 50% of order flow at the dealerships. Another item is velocity. It's a metric that we monitor as the rate at which the dealers are turning over their inventory monthly as a measure of in-market strength. While historically many dealers would drive toward a 50% to 70% range, in comparison, many are currently above 150%, further evidence of the market forecast over 5 million of pent-up demand. Now continuing for pent-up demand, what matters the most of the lending is which segments of the consumer auto buying market that were underserved during this period of lean supply. With inventory down 60% year-over-year, Based on our data, it is clear that the limited supply vehicles available for sale are being sold to cash and prime buyers, as many dealers delivered their highest profit margins in history. This shortage not only affected new vehicles, but used as well. The average used vehicle is the sales price is over 40% year over year. This results in making even used cars less affordable, particularly impacting the near and non-prime borrower, which our Lenders Protection Program traditionally serves. In addition, the incentive spending per unit in January was $1,479, much less than the $3,450 it was in January 2021. For open lending during this period of unprecedented low incentives, the utilization of our subvention offering can be less impactful until the pricing moderates further. Now for commercial activities in regards to our industry-leading OEM customers, partners, and prospects. In terms of industry-leading OEM captive customers, we are very proud to have two of the most powerful automotive brands as our top customers as they are powering through the market challenges globally. Of course, our customers are not immune to the shortage and have seen their loan volumes decrease in 2021. We track our volume as compared to theirs in similar credit tiers, For 2021, our volume as a percentage of theirs has remained at a consistent level. We look at this as a positive sign that as the supply continues to ramp towards normal levels, our volume should increase proportionately. In fact, there should even be more opportunity for us since near and non-prime customers were notably underserved over the past year. We continue to engage weekly with top leadership at our OEM captive customers and their partners on strategic growth operational issues and opportunities so that they are well positioned as the market recovers. Now for our insurance carriers. In an effort to improve affordability for borrowers and after getting feedback from our clients, we are expanding our program offerings for both loan amount and term limits while maintaining our discipline and rigor in underwriting. The increase in loan amount and the new 84-month term should have a positive impact on our funding capture rate. For example, in 2021, we countered twice as many applications asking for a larger loan amount than we did pre-pandemic. Additionally, more than one third of our applications requested terms in excess of 72 months last year. The likelihood of capturing an application on a counter is much less than one as requested. The additional term offering will effectively result in lower monthly payments for qualified borrowers, which should also positively impact our capture rates without increasing our exposure. We plan to roll this out in the next 45 days and believe this will help drive continued growth in certs. As you know, expanding our insurance partner relationships has been a key growth opportunity for us. As reflected in our recent press release, we expanded the term on the AmTrust agreement by adding five years to the existing term, now through 2028. We continue to make solid progress with the fourth insurance period and look forward to providing more details in the near future. As far as loan origination systems, we recently announced an expanded partnership with DeFi Solutions, a loan origination software for captive consumer finance companies, banks, and credit unions. The integration is currently available to finance companies on the DeFi LOS platform, And the expansion includes an integration with our Lenders Protection Platform for CAPTAs via the DeFi xLOS Originations product, which will become available in the second quarter. This means that essentially one click of a button, any DeFi client can start using Elpro. We believe this accelerates our opportunities to grow for both our OEM and non-OEM business. Now I'll turn it over to Chuck to discuss our Q4 financials and outlook for 2022.