Open Lending Corporation

And welcome to Open Lending's 3rd Quarter 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman, Keith Dezek, CEO, and Chuck E. L., CFO. Early today, the company posted its 3rd Quarter 2022 Earnings release to its Investors 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 estimated and other forward-looking statements that represent the company's view as of today, November 3, 2022. Open lending displaying an obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our filing with the CSAC for more information concerning factors that could cause actual results to differ from those expressed or implied with such statements. And now I'll pass the call over to Mr. John Flynn. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thanks again for joining us today for Open Lending's third quarter 2022 earnings conference call. For the third quarter, the company's results were in line with our expectations, despite continued challenging economic and industry dynamics impacting our business. During the third quarter of 22, we certified 42,186 loans, Total revenue was $50.7 million. Gross profit was $45.5 million. And adjusted EBITDA was $29.4 million. I'm going to turn the remainder of the prepared remarks over to Keith and Chuck. But before I do that, I want to again emphasize how confident and excited I am in the appointment of Keith Jezik as our CEO. Through a robust national research process, there was no one that possessed such a deep knowledge and experience in the retail automotive and technology industry and a proven track record of success than Keith. He's an exceptional leader and the right executive at the right time to lead the company into the next stage of growth. Keith's expertise within the auto retail technology industry is going to serve shareholders well over time as we prepare for an improvement of the challenging economic and industry dynamics currently impacting our business. Specifically, Keith's experience at Cox Automotive, building and managing software products for the retail automotive ecosystem, including consumers, OEMs, auto lenders, and the largest and most prominent dealer networks in the nation. These service offerings totaling multi-billions in revenue were provided through companies including DealerTrack, AutoTrader, Kelley Blue Book, V-Auto, and Dealer.com, among others. His executive relationships and knowledge will be complementary to our existing and prospective credit union and OEM partnerships. I'm very confident that our collective continued underwriting vigilance, along with Keith's focus on our go-to-market sales strategy and technology roadmap, will provide open lending the right balance of downside protection in the immediate term and allow us to capture significant upside as industry fundamentals recover. It's been an incredible honor to lead open lending, and I'm extremely excited to continue working with Keith, the leadership team, and the board as we embark on the next chapter of growth and continuing to execute our mission of serving the underserved. So with that, Keith, I'll turn the call over to you.

Well, thank you for the kind words, John. I look forward to collaborating with you and Ross closely and continuing to execute Open Lending's business plan with you as chairman and Ross as a trusted advisor. Since it's my first earning call as CEO, I thought I would start off with my relevant experience and the reason why I joined Open Lending. As many of you are aware, I've been involved with Open Lending for over a decade. Initially, I served on the board from 2012 to 2020 while the company was private. I transitioned to an advisory role as the company entered the public markets and have served in that role for the last two years. During my 10-year affiliation with the company, I've witnessed firsthand the company's strong product adoption and market-leading profitable growth. Many of the secular trends that affected Cox Automotive have also impacted open lending. Both companies develop technologies that provide insights and innovative decision-making tools for the respective clientele. In the case of Cox Automotive, we help dealers, OEMs, and financial institutions decide how best to deploy capital, manage inventory, and optimize pricing and sales functions. At open lending, I will continue to draw from my market knowledge and grow our client base that use our technology to analyze risk while connecting borrowers and lenders. Now, let me turn to why I found the CEO opportunity extremely compelling. To begin with, I believe all great companies have the following characteristics. One, a large and growing total addressable market or TAM. Two, a profound competitive advantage and significant barriers to entry. And three, a business model that leverages both one and two. Open lending exhibits all of these attributes. That is what attracted me to the company over 10 years ago and what led me to the decision to take on the CEO role a few weeks ago. So first on TAM, as we shared during our last earnings call, our TAM is large and growing and now totals approximately 270 billion for auto loan originations. In addition, there is approximately 40 billion in total adjustable market related to the auto refinancing opportunity. we have captured less than 2% market share this year, leaving significant room for growth. Second, as it relates to the competitive advantage and significant barriers to entry, open lending has 20-plus years of proprietary data, sophisticated technology, including five-second underwriting decisions, exclusive relationships with four A-rated insurance partners, deep lender relationships, and regulatory know-how. We believe we have the strongest balance sheet and unit economics of any pure play participant in the marketplace, and we do not take balance sheet credit risk. Finally, open lending has a business model that takes advantage of both this large and growing under-penetrated market and our differentiated business offerings. With that, I'd like to share my view on the current state of the retail automotive lending marketplace. Although the characteristics of each economic contraction are different, there are some common responses by the major participants in the automotive sector. To that end, we are watching a cross-section of economic, industry data, and company metrics. It's been over 40 years since inflation rates exceeded 8%. However, the automotive sector data related to the dot-com recession in early 2000, the great financial crisis of 2008, and economic contraction and subsequent expansion from 2020 to 2021 do offer some parallels and insights. In the prior recessions that I just referenced, the new vehicle SAR fell as much as 40%, and risk-free rates for five-year treasuries declined in a range of 200 to 400 basis points. At the same time, after OEMs pulled back on production, it took anywhere from 12 to 18 months to ramp back up. I would like to point out that in these recessions, auto pricing moderated but did not fall precipitously or below pre-recession levels. On the topic of auto supply and inventory, the new light vehicle SAR was 13.7 million units as of October, or approximately 3 million units below the historical trend line. Inventory is improving as production continues to ramp and supply chain challenges ease, However, the rate of recovery has still been slower than expected due to the ongoing semiconductor chip shortages. At 42.6 weeks, up 8% from a year ago, affordability is at a record 15-year high level. Although the Mannheim Price Index is down 15% from the recent peak, what's most meaningful is the 20% average increase in the rate of a five-year automotive loan since the beginning of the year as the Fed's fund has increased six times and 375 basis points, the fastest rate of increase in 35 years. For all these reasons, we're expecting a continued moderation in auto pricing as inventory grows. If patterns of prior recessions serve as a barometer, the pace of the moderation will be correlated most closely to the production efforts of the OEMs and a resolution of supply chain conditions. So now turning somewhat closer to home, I had the benefit of spending a few days last week with over 200 of our clients at our annual Executive Leadership Roundtable. The key takeaway is where many of our credit union customers are managing their liquidity and deposits in a more conservative fashion versus a year ago. As they work through this challenge, they continue to embrace the value proposition we offer them to go deeper in the credit spectrum, serving their members. Additionally, they recognize that there is a large yield opportunity in the near and non-prime space versus the super prime space due to the higher rate environment. All that said, we're even more passionate about our ability to help those that are hoping to purchase a car or are already paying too high of a rate. And we will continue to target company growth rates in excess of industry auto loan origination growth rates, but not at the expense of our commitment to managing risk. We will continue to maintain our rigorous underwriting standards as John and Ross have taken extreme care to maintain through the pandemic, as well as the current economic slowdown. Now, before I turn it over to Chuck, I want to provide a brief operations update. We have increased our sales, account management, and marketing teams by approximately 20% this year and plan to continue investing through the current economic and industry challenges. The individuals we've hired have deep experience in the auto retail loan originating sector, in particular with credit unions, banks, and OEMs. As an advisor, I was actively involved in the hiring of these individuals and laying out the structure of these teams and our sales disciplines going forward. While early on, we have seen good progress from these investments. In the third quarter, our non-OEM business, primarily credit unions, was essentially flat year over year in certified loans. This demonstrates the strength of our core credit union business, while the large universal banks reported auto loan originations down 30% to 40% year on year. We are pleased to have announced we partnered with America First Credit Union, the seventh largest credit union in the country at $17 billion in assets and 1.2 million members. In addition to those investments, we have added R&D team members and have continued to invest in our technology and in the enhancement of lenders' protections. Importantly, to assist our customers during this period of elevated affordability, we have modified our product with program underwriting changes to expand loan limits and extend the term of qualifying vehicles to 84 months. Now, with that, I would like to turn the call over to Chuck to review Q3 in further detail, as well as to provide updated thoughts on the full year 2022 outlook. Chuck?