Open Lending Corporation

Good afternoon, and welcome to Open Lending's first quarter 2022 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 Yell, CFO. Earlier today, the company posted its first quarter 2022 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, May 5, 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 Mr. Flynn.

Thank you, Operator. Good afternoon, everyone. Thanks again for joining us for Open Lending's first quarter 2022 earnings conference call. I'd like to start today by reviewing our first quarter highlights and the progress we've made on our growth objectives. Then Ross is going to provide an update on the auto manufacturing and lending landscape, discuss some recent underwriting program enhancements, and provide an update on our insurance partners. And then finally, Chuck is going to review our Q1 financials and outlook for the full year 2022. Now to our high-level financial review of the first quarter results. We're very pleased to report another strong quarter at open lending. Q1 2022 certified loans increased 32% to $43,944 as compared to Q1 2021. We reported revenue of $50.1 million, which was an increase of 14%, and adjusted EBITDA of $33.8 million which was an increase of 11% as compared to the first quarter of 21. We're also very encouraged by the continued growth in our credit union and bank line, where we achieved a 76% year over year increase in certs for Q1 22. This was driven in part by a few things. The addition of new accounts, including some that are preparing for CECL compliance by the end of the year, the continued strength of our refinance program and further penetrating our existing customers through wallet share. Let me first turn to the new customer side. We signed 18 new accounts in the first quarter and five of these were tier one accounts classified as over 1 billion in assets. Momentum has also continued into April with seven new contracts signed since quarter end and 20 active implementations underway. Now I'd like to turn to the refinance program and expand on our success with this channel. We continue to add new and existing credit unions and banks to the refinance program during the quarter, which has been an enhanced focus of ours to help lenders and consumers offset the temporary headwinds associated with affordability due to the inflated car values and inventory shortages. We added two new refinance channel partners in Q122 with our volume reaching nearly 40% of our total search. 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 in a challenging environment. Our value proposition for refinance will remain strong regardless of the rising rate environment, due to the fact the credit union's cost of capital remains very low relative to other lenders, and they always seem hungry for auto loans, which was proven in the previous rising rate environments that we've seen. Moving on to the existing customer expansion, our top 10 customers, excluding OEMs, have increased their certification volume by 166% and Q122 as compared to Q121. And we continue to focus on expanding our wallet share with our existing customers, which is a key initiative of ours in 22. Now I'd like to update you on our other long-term growth initiatives and strategic investments to support our mission, which is to serve the underserved by using our technology and valuable data to empower consumers to get the best loan rates that their risk status will allow while satisfying the return goals of our lending customers. First, the one big area of investment this year will be our go-to-market sales strategy with additional dedicated sales team members to capture more of the significant $250 billion TAM. Secondly, we will be growing our account management staff to continue focusing on expanding wallet share with our existing customers. We've already made several key hires within our sales and account management staff in the first quarter, and we're seeing good early traction with these investments. We've also recently made a key hire to support our OEM captive and large institution opportunities to ensure that we are well positioned to grow and capture the flood of pent-up demand that will ultimately come when the inventory headwinds subside. We'll also be making some key hires with core experience in bank and auto originations and underwriting to further penetrate the bank space. And then finally, we're investing in technology to further enhance the lender's protection platform for our lenders by modernizing the platform and infrastructure to support our growth improving lender reporting and claims capabilities, and investment and development resources. I'd like to now turn it over to Ross.

Thanks, John. Today, I will highlight the current and near-term U.S. automotive market conditions and outlook, recent underwriting program enhancements made to Lenders Protection, commercial activities with our industry-leading OEM customers and prospects, and progress with our insurance partners. First, on the current and near-term U.S. automotive market conditions and outlook. As we enter 2022, we began to see incremental improvement in a variety of leading indicators for production. We remain optimistic that the toughest headwinds facing the industry are mostly behind us as we navigate through the remainder of the year. As we reported last quarter, dealer networks across the country are reporting modest improvements in inventory pre-sold orders, velocity, and overall demand conditions. Entering the second quarter, North American vehicle production industry forecasts for the full year 2022 have been updated to reflect the impact of the renewed first quarter lockdowns in Asia and subsequent production shutdowns. The industry is now expecting 2022 total production to be roughly in line with the total units delivered in 2021 or close to 15 million units. As for demand and pricing, with the production run rates 2 million units below levels prior to the pandemic, demand remains strong. We continue to closely monitor vehicle affordability as average used vehicle pricing was up double digit year over year in the first quarter. Specifically, in the last 12 months, on average, we have seen monthly payments for used car segments increased 18% year-over-year to approximately $488 per month. When reviewing the last 24 months of data, it does appear that pricing peaked in February. We are monitoring the tightening supply in March and April as we execute our go-to-market strategy for the quarter. Our expectation for a gradual return to affordability that will enable the near-prime and non-prime consumers to return to the dealerships over the next 18 months. It's our understanding and belief, given what we've experienced in prior cycles, that claim severities will increase gradually in a predictable fashion as we revert to normalized conditions. Moving on to our recent underwriting program enhancements. Over the past two months, we rolled out two major enhancements in our product offerings. For indirect lending, we expanded our loan limits by approximately 30%. The last time we changed these limits was approximately six years ago. In reviewing the potential impact, we found that over one-third of our applications were requesting larger loan amounts than we allowed. Additionally, early in April, we expanded term offerings to 84 months for certain model years and lower mileage vehicles. The potential impact is also significant As approximately one-third of our applications received were asking for terms longer than our previous limits. Both changes were enacted while maintaining our discipline and rigor in underwriting. We are very encouraged by the early results and believe we are well positioned in the future to capture a large portion of these applications. For purposes of historical comparison, during the period of 2009-2011, the average term for a used car increased from 57 months to 64 months. Most importantly, the average delinquency rate declined 150 basis points from 4.5% to 3%. Next on commercial activities with our industry-leading OEM customers. We continue to have strong partnerships with two of the most powerful automotive brands as they are powering through the market challenges globally. For 2021 and Q1 of 2022, 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 proportionally. In fact, there should be even more opportunity for us since the near and non-prime consumers were notably underserved over the last year. We continue to engage weekly with top leadership at our OEM captive customers and prospects so that we are well positioned as the market recovers. Lastly, as you know, expanding our insurance partner relationships is a key initiative. We are excited to announce that we signed an agreement with Arch Specialty Insurance Company, our fourth insurance partner, to be an additional provider of credit default insurance policies for our Lenders Protection Program. This is another important strategic initiative for us, and we are thrilled to be working with such a great team at Arch. We believe that there is more than enough volume to support all of our insurance partners while continue to deepen our value relationship with our existing partners. The terms of this agreement and the financial arrangements are substantially similar to the others. Although capacity has not been an issue to date, we are excited to have Arch on our team based off our significant TAM and growth plan in front of us. I now turn this over to Chuck to discuss our Q1 financials and outlook for 2022. Thanks, Ross.