Open Lending Corporation

Good afternoon and welcome to Open Lending's second quarter 2022 earnings 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, Ross Jessup, President and COO, and Chuck Jell, CFO. Earlier today, the company posted its second 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, August 4, 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 with such statements. And now, I'll pass the call over to Mr. Flynn. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thanks again for joining us today for Open Lending's second quarter 2022 earnings conference call. I will briefly discuss the highlights of our results for the quarter and how we are performing given the current industry and economic conditions. Ross will then discuss current auto industry trends and Open Lending's relative performance in prior cycles. And then lastly, Chuck will go over the financials and thoughts for the remainder of the year. For the second quarter, our results were in line with our expectations, despite continued challenging economic and industry headwinds to our business, with our results modestly growing quarter over quarter. The industry is still facing low levels of dealer inventory due to the continued global semiconductor chip shortages and the supply chain challenges. In addition, an equally significant our inflated used car values impact on affordability to the near and non-prime consumers. When we began the second quarter of 2022, there were indications that fundamentals were beginning to stabilize and an expectation that the second half of the year would lead to higher auto transaction volume compared to the first half of the year. Instead, continued lockdowns in Asia and the effects of Russia's invasion of Ukraine collectively dampened the supply to fuel a recovery. Even more notable has been the impact of 40-year high-record inflationary conditions and the impact on consumers' budgets and the Federal Reserve's monetary tightening response of 75 basis point hikes in both June and July. The results of high inflation and higher borrowing costs have pushed consumer sentiment to the lowest level seen in our company's history. Despite these industry headwinds, our business has performed well. Our current expectations for full year 2022 auto originations at open lending are projected to be in line with full year 2021, while the current run rates at many of the universal banks implies auto lending originations will be down over 20% year over year. So we remain focused on what we can control, including investing in our go-to-market sales strategy to capture more of our significant and growing TAM. In the first half of the year, we increased our sales and account management teams by 23%. The individuals we've hired have deep experience in the auto loan origination space, in particular with credit unions and banks. While some players in our ecosystem are holding flat or even reducing their employee base during this period of economic uncertainty, we are actively hiring high-quality talent and positioning ourselves to take market share. Although early, we have seen good tractions on these investments. It is worth noting that during the second quarter, our non-OEM business, primarily credit unions, grew certified loans 27% year over year. During the quarter, we signed 18 new customers and had 10 lenders certify their first loan in the quarter. We also further grew our existing customer base with our top 10 non-OEM customers increasing their certification volume by 33% in the second quarter of 22 as compared to Q2 21. Another area of focus has been on enhancing lenders' protection by continuing to invest in the platform and the infrastructure to support our growth, as well as improving lender onboarding, reporting, and claims administration capabilities, and investing in development resources. Early indications support improved onboarding and cycle times from contract signing to our first certified loan and revenues. These initiatives and associated investments are all to support our large growing TAM, which according to a recent assessment prepared for us by a third party, now totals approximately $270 billion for auto loan origination, which is up 8% from the study prepared prior to our public listing. In addition, there is approximately $40 billion in TAMs related to the auto refinance opportunity, which represents 32% of our search this quarter and is expected to continue to perform well, even with the current macroeconomic backdrop. Based on the recent TAM analysis, we have penetrated less than 2% market share, leaving a significant room for growth. As you know, we bring together the various players in the auto retail ecosystem, offering a very compelling value proposition to each. We enable lenders to make loans to consumers they would otherwise not make, deepening their relationships with other existing customers and helping forge relationships with new customers. The loans made through our Lenders Protection Program provide yields that often exceed that of our customers' prime portfolio with lower risk to the lender. The ultimate beneficiary is the underserved near and non-prime consumer who receives access to credit from a larger range of lenders with higher loan amounts, better rates and appropriate down payments, which is even more important in today's environment where consumers affordability is being squeezed. The benefits we offer are needed now more than ever. In addition to the massive underserved and growing TAM, and our mission to help both lenders and consumers, we have considerable moat around our business with over 20 years of proprietary data, a five-second underwriting decision, and our exclusive relationships with four A-rate of insurance partners. This moat continues to widen as we make strategic investments in new data, technology, and talents. We believe our value proposition to the various players in the auto retail ecosystem supports our confidence in the resiliency of our business through any cycle and gets us even more excited about our long-term opportunities. A few reminders about our business as we head into potentially slower economic growth. First and foremost, we will maintain our discipline and rigor at all times in our underwriting process during this economic contraction, and in the second quarter, we adjusted our underwriting models to optimize for the health of our portfolio from a risk perspective. As you are all aware, we do not take balance sheet risk, and we will continue to prudently manage our balance sheet to ensure we maintain financial flexibility. In the end, we will continue to target growth rates in excess of industry growth rates. but never at the expense of our commitment to managing risk. Our business fundamentals and our long-term outlook are strong. I would now like to turn the call over to Ross, who will provide more details on what we are currently seeing in the auto lending industry, as well as a comparison to how the industry performed during the recession of 2008 to 2009. Ross? Thanks, John. As John stated,

I would like to focus on two topics today. First, let me turn to auto industry trends. Mannheim used vehicle value index prices in June decreased 1.3% from May 2022, but we're still noticeably up 9.7% compared to June 2021, and for the year remain at historical 25-year highs. Wholesale use prices Vehicle prices continue to increase in the first half of the year. Average used car price is now 28,000 versus 19,000 pre-pandemic, an increase of 47%. New vehicle inventory is building at a more measured rate compared to expectations we began this year. The 2022 new vehicle SAR industry estimates have been revised downward three times and by 1.6 million units this year. clearly an indication of continued supply side challenges. Average incentive dollars per vehicle, a leading indicator of inventory availability, are noticeably below historical levels. In June 2021, OEMs were offering $2,700 per vehicle in incentives as compared to approximately $1,200 per vehicle in June of 2022. While these are headwinds currently facing our industry, The number of new vehicle sales is forecasted to grow 5.2% per annum over the next five years, but could clearly grow more quickly considering the new vehicle SAR has been running at two to three million units below historical levels. And finally, the average age of a vehicle on the road is as high as it's ever been at over 12 years old, further adding to the number of units of pent-up demand and the opportunity for us ahead. Now to move on to my second topic, we continue to compare and contrast current economic conditions against prior recessions, specifically 2008 and 2009. During that time, credit unions grew deposits and loan volumes each year in the last recession, suggesting that volumes can continue to grow through a downturn. And while the value of used vehicles declined and used auto sales decreased in the last recession, both returned to pre-crisis levels within a year. Given the tight supply, our current belief is that price levels will not decline as precipitously as it did during the great financial crisis. 90% of the lenders using Lenders Protection reached their targeted goals. The lessons learned from the remaining 10% have enabled the company to improve its risk-based pricing model, thick versus thin versus normal, and LP score. Some prime customers will fall into the near prime market due to the economic conditions creating growth in our total addressable market. We expect the carrier appetite and capacity will not be an issue as defaults need to increase two times the levels in the great financial crisis to create an economic loss for our insurers. Auto lending has typically performed better than other consumer asset classes, as cars and car payments are prioritized over other consumer discretionary spending. There's an industry adage that you can sleep in your car, but you can't drive your house to work. Accordingly, we are optimistic about our core competencies in the auto lending space. With that, I would like to turn the call over to Chuck to review Q2 in further detail, as well as to provide updated thoughts on the full year 2022 outlook. Chuck?

Thanks, Ross. During the second quarter of 2022, we facilitated 44,531 certified loans compared to 46,408 certified loans in Q2 of 21 and 43,944 certified loans in Q1 of 22. In addition, as John stated earlier, we executed contracts with 18 new customers during the quarter and had 10 new lenders certify their first loan in the quarter. Total revenue for the second quarter of 2022 was $52 million as compared to $61.1 million in the second quarter of 2021. I would like to point out that if you exclude the ASC 606 change in estimated revenues associated with profit share from each quarter, Q2 of 22 revenue is flat year over year on a lower number of certified loans as a result of our focus on higher average unit economics and quality of credit in our portfolio. To break down total revenues in the second quarter of 2022, profit share revenue represented $29.2 million, program fees were $20.7 million, and claims administration fees and other were approximately $2.2 million. Now, to further break down the $29.2 million in profit share revenue in Q2, Profit share associated with new originations in the second quarter of 2022 was $26.3 million, or $591 per certified loan, as compared to $27 million, or $582 per certified loan in the second quarter of 2021. Also included in profit share revenue in Q2 of 22 was $2.8 million change in estimated future revenues from certified loans originated in previous periods primarily as a result of positive realized portfolio performance due to lower claims and lower severity of losses, which was partially offset by higher prepaids and increasing severity of losses expected in future periods. Change in estimated future revenues was $11.8 million in the second quarter of 2021. Gross profit was $47 million and gross margin was 90% in the second quarter of 2022, as compared to $57 million and gross margin of 93% in the second quarter of 2021. Selling, general, and administrative expenses were $14.1 million in the second quarter of 2022 compared to $12.1 million in the previous year quarter. The increase is primarily due to additional employees to support our growth with a focus on our go-to-market sales strategy and investment in our technology, both of which John mentioned earlier. Operating income was 32.8 million in the second quarter of 2022 compared to 44.9 million in the second quarter of 2021. Net income for the second quarter of 2022 was 23.1 million compared to 76 million in the second quarter of 2021. As a reminder, second quarter of 2021, we recognized a one-time gain on the extinguishment of the tax receivable agreement of 55.4 million. Basic and diluted earnings per share was 18 cents in the second quarter of 2022 as compared to 60 cents in the previous year quarter. Adjusted EBITDA for the second quarter of 2022 was 34 million as compared to 46.1 million in the second quarter of 2021. There is a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. Adjusted operating cash flow for the quarter was 34.6 million as compared to $30.5 million in the second quarter of 2021, a 13% increase year-over-year. We exited the quarter with $366.8 million in total assets, of which $167.7 million was in unrestricted cash, $106.7 million was in contract assets, and $66.5 million in net deferred tax assets. We had $159.3 million in total liabilities, of which $144.9 million was in outstanding debt. Now moving to our guidance for 2022. Based on the first half of 2022 results and trends into the third quarter, we're revising our guidance ranges for full year 2022 as follows. Total certified loans to be between $155,000 and $185,000. Total revenue to be between $175 million and $205 million. adjusted EBITDA to be between 110 million and 135 million, and adjusted operating cash flow to be between 115 million and 145 million. Despite the industry headwinds, we remain confident in the resiliency of our business and our ability to navigate through the supply and affordability constraints. However, these industry and economic challenges have impacted our growth outlook in the near term. In our guidance, we took the following factors into consideration. We adjusted program underwriting with a focus on optimizing the health and quality of our portfolio from a credit perspective, continued disruption in transportation networks and raw material shortages, the global semiconductor chip shortages, low levels of dealer inventory and dealer sentiment, the investments we are making in the business, continued strength of our refinance program and the value proposition it offers consumers, the rate of growth for an index of public auto lender financial institutions, which peaked in the second quarter of 2021 at 21% and contracted to negative 2% in the second quarter of 2022, the affordability index of our target credit score due to continue inflated used car values, and finally, inflation and rising interest rates and overall consumer sentiment which perhaps has had the most significant weighting on our guidance considerations. While we model and analyze the industry, supply chain, and in-market field conditions, the visibility on Federal Reserve policy can be less clear. As the Fed's guidance has changed from a view that inflation would be transitory to tighter monetary policy, consumer and dealer sentiment dropped considerably. With consumer spending slowing dramatically, the Fed noted that it will likely become appropriate to slow the pace of increases as they assess how cumulative policy adjustments affect the economy and inflation. We will continue to keep a watchful eye on the FMOC policy in addition to the fundamentals that matter most to our sales outlook. Now, in closing, I'd like to note that the midpoint of our revised guidance is in line with last year as it relates to certified loans, which grew 82 percent, and revenue, which grew nearly 70 percent in full year 2021. excluding any impact from ASC 606 change in estimated revenues. We provide a true value proposition to our customers. We have limited near-term capital investment requirements and no near-term maturities on our debt. We will continue to maintain financial flexibility with a strong balance sheet and cash position and an overall conservative financial policy while investing in our business during a challenging economic time, and we stand ready to capitalize on the pent-up demand. We want to thank everyone for joining us today, and we will now take your questions.

All right, and ladies and gentlemen, if you would like to register for a question, you can do so by dialing 1-4, that's 1 followed by the 4, on your telephone keypad right now. Now you're going to hear three tones to acknowledge your request, and if your question hasn't been answered, you'd like to withdraw, you can dial 1-3. Okay, so once again, to queue up for questions today, it's 1-4, 1 followed by the 4 on your telephone keypad right now. All right, our first question comes from the line of Napoli from William Blair. You may now proceed. Thank you.

Good afternoon, John, Ross, and Chuck. Appreciate the question. All right. Hope you're doing well. So I guess just, I mean, obviously it's a difficult environment in the auto space right now. So no huge surprise, I think, on the guidance adjustments. But what are your thoughts on how you're doing from a market share perspective? And as we lap a tougher year, as you look into 2023 and ongoing, what is your feel for what the right growth rate should be for your company?

Yeah, thanks, Bob. This is Chuck. Go ahead, John.

I was just going to say you can answer the percentage, Chuck, but I think we kind of tried to point out how excited we are about not just the growth ahead of us, but the numbers that we're hitting given the status of all these other lenders. The credit unions are continuing to be excited about what we have to offer, how we offer it. There's their funding rates are always going to be way below everybody else. And I think given the new TAM that we had gone out and asked to get done from the same company that did it when we took the company public, I was thrilled to see that it's actually grown. It's up to $270 billion just on the purchase side and $40 billion on the refinance side. Those two numbers combined takes it about 60 million, 60 billion greater than what the TAM was when we started this, uh, you know, public, uh, path here. So I, I think that there's a huge runway ahead of us. There's a, and again, that, that was primarily in the credit union space, the bank space, the refinance space. I think with the, uh, Cars starting to come back out. I think we're going to see a lot of growth.

Yeah, I'll just add. Go ahead, Bob.

No, go ahead.

I was going to say, what we believe and we have been forecasting is that, you know, if you track used car values and how we see them declining slowly, but we see them, you know, not being into this, you know, We think we're pretty conservative on our forecast and realistic as well that it's going to be in late 23, early 24 before they're down to a level that will result in the change in the affordability making our loans a lot more attractive. I believe the near non-prime folks are on the sidelines. There's going to be a pent-up demand and as soon as supply increases, we're going to be taking advantage of that. I think in the meantime, we have the ability to pivot and keep going after our lenders to help refinance and put these consumers in a better state.

What do you think on the credit quality side? I'm sorry.

No problem. Our average score in our portfolio is about 640. With that in mind, I don't consider us to be in the in the subprime and the non-prime. When we're looking at, we're seeing, first of all, on the default and the delinquency side, we are seeing an uptick, but it's in line with our expectations, and still it's even our, you know, just this past month and quarter, our expected defaults are actually higher than we actually are seeing. So, you know, it is shoring up. On the claim side, we're still at record lows. And that's just because people are still, you know, yielding, you know, much more at the auction than we have forecasted. So, you know, it was kind of have a head, you know, a headwind on that.

Thank you. Bob, just real quick on your growth rate, you know, all the things John and Roth both said, you know, the production, the SAR obviously has been a big impact in the prepared comments. in the inventory and restocking. But as things normalize and we get back to, as Ross said, the affordability comes down a bit, values come down a bit, as well as inventory restocks. I mean, this business has performed well through challenging times. And as things normalize, we feel historically it's been, if you look past three years before the pandemic, a 30% revenue CAGR business. And we feel like we can get back to significant growth rates as things normalize.

Thank you very much.

Thank you.

All right. Our next question comes from the line of David Scharf from JMP Security. You may now proceed.

Great. Thanks for taking my question in the afternoon. You know, you actually, Chuck, I believe when you went through the guidance, you know, you I think you answered what I was prepared to ask, which was, is the updated outlook on affordability, is this more a function of elevated used car prices, which have been so stubbornly high, or is it a function of consumer sentiment? And it sounded like it was the latter. I just wanted to confirm, as we think about Wow, it looks like $29,000 was the average size loan this quarter, which is much higher than I think any of us are used to seeing for a 640 average FICO. As we think about your comfort level and visibility and how you're thinking internally about trends over the next few quarters, is it more inflation, broader consumer credit? trends in Fed actions that we should be thinking about more than just supply chain issues? Because there seem to be a lot of inputs here.

Yeah, I know that there are. Thanks for the question, David. But yeah, definitely a lot of inputs here. And as we work through it from a bottoms-up perspective, I'd just kind of like to point to maybe just three real big drivers that went into our input is the geopolitical environment has changed notably. you know, since we were last on the phone. And, you know, the war in Ukraine has disrupted the energy sector. You know, oil prices are, you know, at highs and gas prices. And, you know, as you mentioned, inflation at 40 years high, you know, the consumer price index at 9%. That's a big impact. And then, you know, Asia was locked down in containment and, you know, in the chips. So that is definitely still a macro chip issue there and getting the auto dynamic back in good order. So, you know, in the auto sector, it really hasn't improved like what we thought, you know, when we were last on the phone. So, you know, it's the industry chips, it's supply, it's affordability, you know, it's the SAR. It's just many inputs and, you know, much outside of our control. So, you know, what we're really focused on is executing and running the business through this and, you know, generating a lot of cash flow for the, you know, shareholders in the company and, you know, continue focusing for the pent-up demand when it comes back and it's ready. But, But, yeah, it's really a blend of all of it. But probably the biggest, you know, factor on the range of the guidance is really the Fed's action and what's the Fed going to do over the next, you know, several months here. You know, are we going to ease on the rate or, you know, the rate increases and sentiment from the consumer is going to get better and affordability is going to come down as prices, you know, normalize on the Mannheim. That's really the biggest factors, I think, in the range of that. So, yeah, just supply in general just has to improve in the auto space. So I know it's a long-winded answer, but it's a lot of inputs to what we thought about here.

No, no, no, that's very helpful. Maybe just as a follow-up, this is more sort of a structural question. Within the profit-sharing arrangements with the carriers – Does their portion of the profit share that they keep, does that change at all based on any absolute levels of profit share per cert? You know, as we think about potentially, you know, not just credit normalization, which we're seeing now at pre-pandemic levels, but if we were to actually fall into a true unemployment-driven recession and saw loss rates become higher, significantly elevated in the lower profit share per loan, maybe under $500. Does that trigger any changes in terms of how the splits are calculated? No, sir.

It does not.

Okay. Terrific. Thank you.

Thank you, David.

All right. Next question comes from the line of Joe Vaffey from Canaccord Genuity. You may now proceed.

Hey, guys. Good afternoon. I know you mentioned that you may have tweaked your underwriting model a bit in the quarter. I'd be interested to get a little more detail on that. And then it does sound like the credit unions and basically the non-OEMs kind of still grew in the quarter. And I just want to confirm if that's a lot of refi activity there that's kind of keeping things really high and I guess to finish that equation off, it does sound like probably the OEM channel is the one that's clearly down the most at this point. And then maybe one quick follow-up.

Yeah, Joe. As far as underwriting, in April when we just tried to address things that we can't control, we launched 84 months. We expanded our loan amounts for indirect loans. I was just looking, and the uptick has been definitely in line with our expectation. It's growing. We're actually seeing improved capture rates, which was our overall intent as well. So instead of countering and basically not getting that opportunity, our capture rate continues to improve, and we expect that to continue to improve from here on out because it takes a while for some of our institutions to adopt our larger underwriting box. And so, yeah, we are excited about it. And when we continue to look at other potential underwriting changes that we can help navigate through this. As far as the refi, and John can speak to it, is, you know, it's still, you know, we have new accounts that are coming on that are, You know, we're expanding our kind of wallet share with how we serve and new refi opportunities. We have accounts that just have signed up and launched doing refi only initially before they look at other channels. So, you know, and I think that's just what's great about our business model is the ability to pivot when origination because of supplies is limited. We're able to still help the consumer out by getting them in a payment that fits their credit quality.

Yeah. And Joe, I'll jump in. On the refi, it was 32% of our quarter. So, you know, about 14,000 certs of the 44,500 we generated. So still strong performance there. And then the core credit union business was actually, or actually was up about 27% or early back up the non-OEM business. So, you know, your point about the OEMs being down, yeah, they're down the most, you know, as you look at the customers and, but, you know, to be expected with supply and and where things are with incentives and inventory. So that's where it kind of rounded out, but the core business performed very well.

Yeah, just the cost of capital. You know, when you look at some of our funding sources that may be running out of a little bit of liquidity, we've got some new funding sources lined up that are totally interested in the refi channel And the fact that they're sitting there waiting to get some of the volume, I think, is awesome. I don't think we're going to see a huge downtick in refinance at all. I think, if anything, those applications are going to continue to come in stronger than they even did in the past because of what's going on with the economy. And I think it was David that asked the previous question about the – I forget how it was worded. with the economy and the things we're thinking about with unemployment and things like that. You know, if you look at, we recognize some of those things are happening, you know, the unemployment rates, all these different things, delinquency, but we have over 2 million unique risk profiles that we look at. And as these consumers' scores fall, or as their, you know, performance gets a little worse, all they're going to do is fall into a higher priced bucket, if you will, from a premium standpoint, they're still going to be able to help them. We'll still get the loan, but it's going to, it might perform a little differently, but we're collecting enough premium to make sure that the profit share stays where it needs to. But even though those outside factors are happening, we're pricing for that in every category.

That makes a lot of sense. Thanks, John. Do we have an update on new OEMs at this point? Has this macro changed their view on a timeline here on adopting the lender protection program?

Thanks, guys. We still have a lot of activity going on, discussions going on. There's really not a lot of change from the last quarter, except What we are seeing is some folks are starting to see some losses, which actually, ironically, is a good thing as far as showing the value prop of ours. And so I think with the used car index where it is now and the new originations that are out there, they have a lot more risk because of the decline that's going to happen compared to the timing when losses are going to happen. And so, you know, we look forward – we continue – to pursue the ones we've been talking to, and there's still a level of interest. We're trying to get on the radar, but we're pleased where we are at this point.

Hey, Joe, I'll add one more thing, just kind of your comment about guidance and maybe David's comment. If you think about the most significant impacts to the outlook, the guidance outlook, incentives, as Ross said, in the OEMs have bottomed. The SAR has bottomed. You know, we believe price has peaked. You know, sector dynamics are improving. And, you know, there's 5 million pent-up demand units that, as we said in the script, that we stand ready to capitalize on because our business fundamentals are, you know, we believe are very strong and ready for that when things, you know, normalize. But things are improving. Thanks, guys. Yeah, thank you, Joe.

All right, our next question comes from the line of Pete Heckman from Davidson. Now proceed.

Good afternoon, gentlemen. Thanks for taking the question. Just looking at the implied revenue per loan and your updated guidance, it certainly seems to imply that, you know, you expect that the profit share per loan to continue to run, you know, pretty solid, you know, 570 to 590, something like that. And obviously the origination fee is also going up as the average price of the car goes up. But is that the right way to think about how you're thinking about, you know, uptick in default rates?

Well, yeah, on unit economics, yeah, as you relate to program fees and profit share, yeah, we feel good. And, you know, at that 550 to 600, you know, there's mix at times. You know, not all risk is created equal on the premiums. But, yeah, that 550 to 600, you know, feels good from a modeling perspective. And then program fees, as you pointed out, are up a bit year over year. You know, just do loan amount increases and also mix of business. So, yeah, we feel good about those numbers.

Okay. Okay. And then just thinking about refi, and sorry if someone already asked this, but I think the absolute number of refinance loans was down about 18% sequentially. Did that correspond with a mailing program or maybe a major mailing program that's in the first quarter that's not in the second quarter? Or is that a remnant of perhaps just concern over rates? Any way to think about that?

Yeah, I think it's all driven by a little bit of liquidity issues, not concern over rates, not concern over any kind of mailing or anything. It's simply... One of our largest credit union funding source is taking a two-month pause on finding excess cash to be able to lend out. They were over 100% lent out. So it's just a matter of fine-tuning their balance sheet and getting back into it. I see. All right.

But, John, Chuck, you would agree. I mean, yes, we were a little under 40%, Pete, you know, in Q1, but You know, obviously still strong, you know, almost 32.5% for Q2. So still a strong piece of our opportunity, as John said.

Oh, sure. Yeah. Definitely. I appreciate it.

All right. Move on to our next question. It comes from the line of James Fauchette from Morgan Stanley. You may now proceed.

Hi. Yeah, this is Sandy Bedia. I'm for James. Just a conceptual question here, and maybe you've had conversations with the credit unions that can help in terms of color. Are credit unions more or less interested, or do they use the products more or less into periods like this where, let's just say, expectations for defaults are increasing? Frame differently, how does product demand and usage react just on a cyclical basis, and then even factoring in interest rates and pricing into the equation as well. Any color that you can offer there would be great.

Yeah, I don't think they use us anymore, or I think they've all adopted the program. If you look back in history, credit unions traditionally were prime lenders. Very few of them lent below a 680, a 690. And when they started to adopt our program, they became more in line with realizing that they could safely lend to the near prime consumer with the safety net of our insurance piece tied to every loan so that in the event of default, they were still going to get the yield they wanted. The majority of them, even some of the largest ones, simply didn't have the data. to be able to underwrite these loans appropriately. So they simply denied it or conditioned it to the point where the poor consumer was sent out and subjected to the exiters and the Santanders. So, I mean, I do think that as you start to see delinquencies rise a little bit out there, I think we're going to see some of the shops that we've been targeting that we haven't even gotten into yet be more prone to want to sign up for our program And again, I'll come back to the answer from earlier about, you know, and Ross made the point a few minutes ago, as they start to see more losses and more delinquency, we become a lot more appealing. And the beauty to us is it's priced appropriately from a return standpoint for us to benefit. So I think they try not to be cyclical. They try to stay in the game. You know, one of the things dealers hate And we've seen it with the likes of some of the big banks. You know, one day they're buying 620s, the next day they're not. Well, what we give the credit unions the ability to do is stay in the game with the dealers and become their, you know, their lead source for getting those loans funded.

Got it.

That's helpful. James, I wanted to add something to John's comments. Basically, when John and I could talk about back in 2007 and 2008, our capture rate, nothing but credit union clients then, our capture rate then was double what it is today. So during those times, the demand for our product definitely increased, and we were able to see very, very positive results from that. I think, Chuck, you want to add something?

Yeah, and just one more thing. If you go to delinquencies for a second, you know, our FICO at 575 and above is only 2%, you know, delinquencies. In defaults, 575 or above are less than 5%. You know, and our FICO score, average FICO score is in the 640 range, as John and Ross said. So it's in line with, you know, 10-year trailing performance.

Got it. Helpful. maybe a little bit more of a high level question, competitive landscape. Um, how has this evolved past three to six months? Obviously the environment changing pretty rapidly, particularly with respect to interest rates, um, refi, obviously, um, an impact there as well. Um, anything that you're seeing competitors pulling back or pushing, obviously you called out market share in the press release. Um, any color there would be great.

When you say competitors, um, I'm not sure we've identified any. Other funding sources, some of the likes of the larger banks, we see their numbers, their loans are way down. I don't know if that's because they've overpriced them or their cost of funds, I'm sure, is rising. But from a competitive standpoint, we've yet to identify a competitor that does what we do the way we do it.

Perfect. That's good to know. Thank you. Thank you.

All right. Next question coming from the line of John Hecht from Jefferies. You may now proceed.

Hey, guys. Afternoon, and thanks for taking my question. Yeah, and this is just, I guess, an extension of some of the other discussions we've had here. But you mentioned that the refi market is pretty resilient right now. But you would expect that, you know, rising rates might have some influence on that over time. I guess the question is, you know, considering rates and considering the direction of used car prices and some of, I guess, your just economic judgments, what happens? And then I guess also on the other side is that's a normalization of production from the OEMs. What happens in your guidance? What do you think happens to mix over the next, you know, several quarters? You mean to make you a reprice purchase? refi purchase and even channels of OEM versus, you know, credit unions and banks and so forth.

Chuck, do you want to?

Yeah, I can start. Yeah, you know, John, I think the way to think about it is the OEMs and there's more inventory and the dealers, you know, as floors, you know, increase, you know, OEMs, OEM one and two will be a bigger piece of our business going forward as that normalizes. And we think the absolute percent of refi you know, the percent of refi may sustain or go down slightly, but we believe the absolute number of certs could continue to rise even through the rising rate environment. I don't know, John, if you want to add anything to that.

No, I would say just exactly that. I think in addition to that, you know, regardless of where the loans are coming from, and I think Ross alluded to it a little bit in his prepared remarks, you know, the economy is going to drive a lot of consumers' scores lower. You know, a lot of people just can't afford to make their payments or they're using credit cards, which is a big factor in your FICO score. And I think what you're going to find is with the economy getting squeezed, people that are making a $500 a month car payment today that weren't considering a refi in the past are now looking at, you know, increased gas prices, you know, food prices are up. that they're going to be looking for ways to reduce their monthly outflow, which I think is going to drive a lot of these 18% and 17% interest rates. You know, we're still coming back with 11s and 12s using credit union funds. So I think it's just going to – I don't see it going away or getting any smaller.

Great. Guys, that's very helpful. Thanks. Thanks, John.

Our next question comes from the line of Faiza Alway from Deutsche Bank. You may now proceed.

Yes. Hi. Thank you. So I wanted to just ask about the EBITDA outlook because you mentioned some investments and data, et cetera. So I'm curious if most of the change in EBITDA outlook is because of revenue impacts or if you're embedding some additional investment spending there too.

Yeah. Hi, Fozzie. How you doing? This is Chuck. Yeah. You know, obviously, as we talked about, you know, we're investing in our go-to-market sales strategy as well as technology this year. And, you know, really the change there that you've seen from the previous guidance to this is really just more revenue top line. You know, we're going to maintain in our guidance, you know, approximately 63 to 65 percent, even a margin. And that's net of the investments we're making in the year for 2022. So that's all baked in. So So that's the margin profile in the guidance.

Okay, understood. And then you mentioned, you know, you mentioned several times sort of maintaining financial flexibility and your strong balance sheet, cash position. Like, how are you thinking about, you know, using that to your benefit during this time?

Well, I think I'll tag on to, you know, the investments we're making right now, first and foremost, in the business and in the go-to-market sales and being ready to capitalize on that pent-up demand as things recover. That's first and foremost. And, you know, we're going to, and when you say maintain financial flexibility, you know, having a strong cash position in certain times is definitely something that we're very focused on and just maintaining that flexibility through these challenging times. You know, we'll look at other opportunities as the business matures and, You know, we look at opportunities from time to time on the M&A front, but obviously just investing back in the business right now is the primary focus.

Great. Thank you.

Our next question coming from the line of Vincent Siantic from Stevens. You may now proceed.

Hey, thanks. Good afternoon. First, I wanted to talk about or if you could discuss the conversations you're having with your lending partners and with the lending partners you've signed up. I guess even at the midpoint of the guidance, the implied second half, you do have non-OEM volume shrinking. So I'm sort of wondering if you could discuss just broadly what these banks and credit union lenders are thinking. And I know you mentioned one when credit union maybe reached their limits or taking a two-month pause, but are you seeing maybe other lenders, you know, maybe requiring higher returns or wanting to reduce exposure, or how are they thinking about, you know, this current environment and your partnership? Thank you.

Yeah, I don't think they're trying to reduce their exposure or even their cost of funds I don't think is that big of an issue because even if a credit union's cost of funds comes up a half a point, they're still going to be the lowest interest rate in town relative to the refinance market that we're going after. I truly just believe that it's a situation where those that have been really successful in our program, and we've seen this over the years, even going back to 07, 08, where they get so successful with our program that they just need to find additional cash to lend. So what they're trying to do is just kind of reorganize your balance sheet. You know, if you look at where mortgage rates are going and all these other asset classes with the rates climbing on that, they're still not, they don't want to hold on to these long-term loans, not knowing where rates are going to go. A perfect asset liability mix for a credit union is an auto loan. It's got an average life of two and a half to three years with a yield probably four times that of a prime loan. So I think it's just a matter of prioritizing where to get the cash from and where to deploy it.

Yeah, I want to add something, John, is even though we do have a couple of our partners in that situation temporarily, we are actively trying to reallocate that to other partners and having calls and meetings regarding that. So we're Everybody's at work trying to still take those applications, those sources, and place them at one of our other participating customers out there. But the OEM volume was a little – actually, Q2 was a little up from Q1. So I think for the balance of the year, it should be in line with where it's trending right now.

Okay, great. Thank you. And just one kind of a follow up on the balance sheet question earlier. But yeah, your cash position is $168 million, you know, kind of builds very nicely. I know you talked about investing in the business and M&A, but your balance sheet is very capitalized. Just wondering if you've thought about capital return, like share repurchases, since you have bought stock in the past at higher prices than where the stock is now, or Are there any limitations to doing share buybacks? Thank you.

Yeah, thanks, Vincent. No, there's no limitations to doing share buybacks. We don't have a current board authorization to buy stock back. We evaluate that at thoughtful decisions at the board level. for us to think through. But again, you know, building cash and, you know, maintaining that financial flexibility is what we're focused on and investing back in the business right now.

Okay, great. Thanks very much.

Just a quick reminder for everybody, if you would like to register for a question, you can do so by dialing 1-4 on your telephone keypad. We have one more question in queue. It's coming from the line of Mike Grundahl. It's from Northland Capital Markets. You may now proceed.

Hi, this is Michael from Mike Grundahl. Thanks for taking the questions. Hey, Mike. Just a reminder on, I think, last year, early second quarter, you dropped the vehicle value discount. Was that an impact year-over-year comparison on the profit share average there?

Yeah, last, I believe last April of 21, we actually got rid of the 5% discount. Our capture rates did increase from that. But, you know, because basically we dropped it, that reduced premium and reduced the contract rate in place.

But I just point out that higher loan amounts drive higher premium and higher profit share as well.

And the addition of 84 months came at higher premium rates as well.

Got it. And then maybe just on slide three, has there been any vintage to call out on the realized perspective performance on those for that?

Can you repeat that, Michael? I didn't follow your question.

Sure. Just on the contract asset estimates and the property share revenue, has there been any other integer segment to call out there that have been pretty broad-based as far as the realize coming in ahead of expectation?

Yeah. I think the realize was just lower claims and severity of loss than we had originally modeled in that $6.4 million component. And then the negative 3.6 was really just us putting more stress in the forward-looking periods for higher severity of loss with prices, you know, used car values coming down. And then increased prepayments as well as increased, you know, defaults forward-looking. So that's what all that is.

All right. Thank you.

Thank you.

All right, we have no further questions queued up. I'll turn the call back over to our presenters for any closing remarks. Please go ahead.

As you said, thanks, everybody, for your continued interest and support in the company. I think we've got great roads ahead of us here to continue to grow. We're looking forward to doing that. So, again.

Thank you.

All right, ladies and gentlemen, that will conclude the conference call for today. We thank you very much for your participation, and you may now disconnect your lines. Thank you.