Open Lending Corporation

Please stand by, your program is about to begin. If you need assistance during your conference today, please press star zero. Good afternoon and welcome to the Open Lending First Quarter 2025 Earnings Conference Call. As a reminder, today's conference is being recorded. On the call today are Jessica Buss, Chairman of the Board of Directors and Chief Executive Officer, as well as Chuck Yell, Interim Chief Financial Officer and a member of the Board of Directors, and Matthew Sather, Chief Underwriting Officer, who will both be available for the Q&A section of the call. I would now like to pass the call over to Ryan Gardella, Chief Investor Relations, to read the Safe Harbor Statement. Please go ahead.

Thank you. Appreciate you joining us. Prior to the start of this call, the company posted their first quarter 2025 earnings release supplemental slides 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 would 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 7, 2025. 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 from those expressed or implied in such statements. And now, I'll pass the call over to Jessica to give an update on our business and financial results for the first quarter of 2025.

Thank you. Good afternoon, everyone, and thank you for joining us today. After a disappointing fourth quarter, I am pleased and eager to walk through our results for the current quarter. which we believe reflect the progress we've already made on our concise, actionable plan for the business going forward. Our early initiatives are already working and demonstrating tangible progress, and we're focused on our goal of continued profitable growth for our shareholders. Before we move on to the financial details, I first want to say a few words about myself, where Open Landing stands today, and the future of our organization. First and foremost, I am firmly committed to open lending and the incredible team we have built here. I have decades of experience leading insurance companies, and at the end of the day, what we are selling at open lending is an automotive loan underwriting solution with credit default insurance protection while delivering on our mission to serve the underserved. Our value proposition is derived from our lender's protection program, our customers, and our insurance carrier capacity, which I believe are as strong as ever. That being said, I want to assure everyone that I am focused not just on the bigger picture of where we can be in the medium and long term, but also on optimizing the day-to-day blocking and tackling that moves the needle in the short term. I have nothing but confidence in this team and our business model, or quite frankly, I would not be in the seat talking to you all here today. We intend to come through this difficult time as a stronger, leaner, more agile organization. I've also heard from many of you in the financial community, including our investors. The management team and the board take all of your feedback into consideration, most of which we will address in my remarks. I strive to keep lines of communication open and look forward to the continued dialogue. Now, let's talk about what open lending is and where we are today. At its core, open lending and our signature Lenders Protection Program is an auto loan enablement platform that combines the power of sophisticated risk-based pricing techniques, financial and credit modeling, and automated underwriting, combined with credit default insurance. This, in turn, generates value for our customers by going deeper into the credit spectrum and extending favorable loans to borrowers who would not otherwise qualify, thus increasing their loan volumes and, by extension, the lender's profitability in serving more members. With regard to this core product and mandate, we believe we are in a strong position and are actively generating value for our customers. We have strong relationships with both our insurance carrier partners as well as over 400 active customers. We have had transparent conversations with many of our partners, and we believe they remain committed to our product and our mission. We also have a passionate, loyal employee base who cares deeply about our customers and our mission to serve the underserved. And lastly, we have a strong balance sheet with $236 million in unrestricted cash that provides us financial and operational flexibility focused today on stabilizing the foundation and gives our customers confidence in our ability to service them. I want to be as direct and clear about this as possible. Open lending as a business is here to stay. We believe our value proposition and financial strength remains strong, and we believe we are positioned to execute on our strategy. Insurance products have volatility, and while we aim to reduce that, one quarter does not define us. Next, I want to discuss where open lending is going. On our last call, I discussed some of my operational priorities. I've only been in this position for just over a month now, but we've already made considerable progress on my key priorities. Our first and most important priority is to increase profitability of our insurance offering while reducing volatility in our profit share revenue. By improving segmentation and our ability to predict risk with expanded use of data and insights, We anticipate pricing loans more dynamically and enhancing our premium pricing where appropriate. We further refined our estimate of profit share revenue at origination based on recent historical results, which we believe will result in less volatility in the future. We're also focused on enhanced pricing, which we expect will reward higher performing loans with lower pricing and discourage poorly performing loans by raising rates. By the end of the year, we will begin incorporating more real-time data in an effort to identify delinquencies faster and adjust our pricing models as needed with a shorter feedback loop. Second, we will focus on growing revenue and increasing certs by improving our customer retention and further demonstrating the strong value to our customers throughout the lifecycle of the loan. The initiatives to drive increased retention is our lender profitability reporting, making it easier for lenders to see the direct financial operating profitability of working with open lending with simplified dashboards and automated performance reporting. Our key focus here is twofold. First, we will align commission incentives to drive certified loan growth, which should fuel credit union retention. And the second is to deliver real-time lender profitability data discussed above that quantifies the value of our product instantly for customers. Third, we are committed to operational excellence and streamlining, eliminating unnecessary costs and spending from the business while refocusing our investments on our core capabilities and employees. After the beginning of the second quarter, we executed a 10% reduction in our headcount compared to fiscal year 2024 year-end headcount. However, we are investing in mission-critical functions to ensure enhanced product pricing and profitability, such as key insurance roles, such as expanding our actuarial team. Additionally, we have already made significant progress in identifying and implementing efficiencies across our business, such as our claims process and further expense reductions across many categories of our operations. Going forward, we will continue to right-size our expense structure as we conduct a thorough review of our expenses across the business. Fourth, we intend to enable a culture of accountability and empower our talented employee base to deliver and execute on our strategic priorities. We need to do a few things 100% right. This improvement and focus involve a revised organizational chart, eliminating siloed work streams, and clarifying accountability for each and every employee. I believe we've made significant progress on all four of these fronts in the past weeks, and we are just getting started. My confidence in the business and its people is higher now than it was before I stepped into the CEO seat, and I'm looking forward to providing you all with an update on our progress on our next call. I also want to reiterate that I am committed and passionate about my role and this company. Before walking through the financials, there are three additional points I want to touch on to ensure that everyone is receiving the right information. First, last quarter's negative profit share change in estimate, or CIE, was an adjustment due to several factors we discussed in our last earnings call and in our 10-K on our back book of loans. As a result of the CIE, we currently have a $57 million excess profit share receipts liability on our balance sheet, which is based on our current forecast of future losses and which we anticipate will fluctuate quarter over quarter. I want to make a few points clear. One, there is generally no contractual obligation to return the excess funds while an insurance partner is actively participating in our profit share program. we receive a percentage of the earned insurance premium, less loan losses. In period where loan losses exceed the earned premiums, no profit share payments are received and future receipts are reduced until the earned premiums exceed the accumulated loan losses. Two, not all of our insurance carrier partners are in a liability position. which means that we will continue to receive cash flows from these insurance carrier partners, and even the ones that have an excess liability could have positive cash flows until the forecasted losses are incurred. Three, none of this impacts our value proposition going forward, nor does it impact or reduce our current cash on hand. To put a fine point on it, the CIE was strictly related to our back book of business with no immediate direct impact on cash. On our forward-looking book, we've already begun implementing changes to our scorecard and refining our forecast model assumptions used to estimate the value of profit share revenue booked at origination, which we believe will result in less volatility in our revenue recognition for the current and future vintages. Lastly on this issue, I want to recognize that this is a complex insurance issue, so we will continue to be as transparent as possible on all components of the profit share. Second, I want to discuss our capital allocation priorities. We fully understand that a healthy balance sheet is a fundamental strength and necessity in this business. My focus is on the fundamentals in generating positive future cash flow, even in the short term. Our intent is to utilize our balance sheet to invest in our organic business in a controlled and measured manner to fuel profitable growth. As we announced today, we believe that our stock is undervalued, and for that reason, our board has authorized a $25 million stock repurchase program, which we believe represents the best investment we can make at this time. While we routinely evaluate our options regarding our cash, for now, the cash interest expense on our debt has been about equal to the amount of interest income generated on our cash and cash equivalents on a quarterly basis. And as such, we currently believe we will be better served with the flexibility provided by having the cash on our balance sheet. We are also currently in compliance with all of our covenants under our credit agreement and expect to remain in compliance based on our internally projected performance throughout 2025. We have also met with all four of our banks and have strong relationships there as well. Finally, on the corporate side, we plan on taking several actions that we believe will be beneficial to all of our shareholders. First, we have shrunk the size of our board to seven to reflect what we believe is the appropriate for the company and the size. Second, we are evaluating the benefits of separating the CEO and board chair role to be consistent with best-in-class governance. And finally, while we conduct regular self-assessments of our board of directors, we plan to take a fresh look at our board in an effort to optimize for different skill sets and independence that fosters a healthy variety of opinions and voices. We are also diligently searching for our next CFO to lead our financial organization. We've got some promising candidates in the pipeline right now and hope to have more information for you there soon. Before moving on to the numbers, I want to address our outlook for the second quarter of 2025. Currently, we expect total certified loans to be between $25,500 and $27,500 in the second quarter of 2025. We plan to provide additional outlook metrics as soon as reasonably practicable. Now I'd like to provide an update on our financial results for the first quarter of 2025. During the first quarter of 2025, we facilitated 27,638 certified loans compared to 28,189 certified loans in the first quarter of 2024. Total revenue for the first quarter of 2025 was $24.4 million and includes a $900,000 reduction in estimated profit share revenue for the change in estimate related to business and historic vintages. and a lower unit economics constraint for the current quarter vintages as discussed above. To break down total revenues in the first quarter of 2025, program fee revenues were $15.2 million, profit share revenue was $6.7 million, net of the negative change in estimate, and claims administration fees and other revenue was $2.5 million. We have also added 18 new logos in the quarter compared to 11 new logos in the first quarter of 2024. As a reminder, profit share revenue comprises the expected earned premiums plus the expected claims to be paid over the life of the contracts and less expenses attributable to the program. The net profit share to us is 72%, and any losses in the net profit share are accrued and carried forward for future profit share calculations. When the cash consideration previously received is in excess of the expected profit share revenue, the amount of the excess funds and the forecasted losses are recorded as an excess profit share receipts liability. Profit share revenue in the first quarter 2025 associated with new originations was $7.7 million, or $278 per certified loan, as compared to $15 million, or $533 per certified loan, in the first quarter of 2024. The decrease in the unit economics per the certified loan is due to our current estimates of loan performance based on our recent historical results. In addition, and as I have already mentioned, one of our steps to reduce the volatility of future quarter-to-quarter change in estimates is booking initially lower unit economics at the time of origination. At this unit economic, this is equivalent to a 72.5% loss ratio, and with our current pricing actions, we would expect current vintage to ultimately perform closer to a 65% loss ratio. The 900,000 negative profit share CIE recorded in the current quarter is associated with cumulative total profit share revenue previously recognized of approximately $337 million for periods dating back to January 2019. And the ASC 606 implementation date represents over 411,000 insured-enforced loans in the portfolio and mostly attributable to 2021 and 2022 vintages. We also expected a reasonable CIE variance as the model absorbs new information. Operating expenses were $17.5 million in the first quarter of 2025 compared to $17.7 million in the first quarter of 2024, representing a decrease of 1% year-over-year. As I mentioned earlier, we have made the controlling of operating expenses a priority going forward, and the reductions we made will have a full financial benefit in 2026. We'll continue to monitor expenses, right size where needed, and find efficiencies in our own spending as well as in third-party spending going forward. Net income for the first quarter of 2025 was $0.6 million, compared to $5.1 million in the first quarter of 2024. Diluted income per share of one cent in the first quarter of 2025 as compared to four cents per share in the first quarter of 2024. Adjusted EBITDA for the first quarter of 2025 was $5.7 million as compared to $12.5 million in the first quarter of 2024. There is a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. We exited the first quarter with $304.2 million in total assets, of which $236.2 million was in unrestricted cash and $29.8 million in contract assets. We had $224.4 million in total liabilities, of which $137.9 million was outstanding debt. In summary, we are moving quickly and believe we've already made positive steps towards reorienting the business to profitable growth. We believe our business model and our value proposition are strong. We have over 400 active lenders, customers, and three insurance carrier partners. Our balance sheet is strong, with $236 million in unrestricted cash, providing us with the flexibility needed to invest in organic growth. We have taken action in an effort to address customer retention, which we believe is already yielding positive momentum. And lastly, we are reviewing our corporate governance practices and policies. I believe in open lending, our business model, our ability to execute, and our strong balance sheet position that enables us the flexibility to make operational changes. We have a concrete plan in place to get the company back to a place of greater strength and eventually grow search and revenue. We will now take your questions.

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for just a moment to allow questions to queue. Thank you. Our first question will come from John Hecht with Jefferies. Your line is open.

Yeah, afternoon, and thanks for all that context. Very, very helpful. First question is just call it, you know, for lack of a better term, the overall environment. I mean, we saw the Mannheim edged up this morning. There could be some more pressure, I guess, if tariffs get enacted as potentially expected. And how do those elements affect your ability to structure deals just given the likelihood that costs of used cars go up to your consumers?

Yeah, thank you, John. This is Jessica. Yeah, as you mentioned, we are closely monitoring the overall macro environment. The increase to the movie index for our MacBook is actually significant. something that we view as positive that will increase collateral values and could potentially, you know, again, one quarter, does that make a trend, could potentially have a positive impact on our CIE. We're also taking active steps on monitoring tariffs. Matt Sather can talk a little bit more about what we're doing in terms of rate increases that we're implementing in anticipation of, again, the increase of both new and used cars. And I believe we're taking about a 10% rate increase that will go into effect in the next couple of months. The overall credit union environment is actually improving with loan-to-share actually coming down at 81.8%, and actually share growth has actually increased 40% quarter-over-quarter to 6.4%. So we believe that the environment is actually getting better on the credit union side and that, again, because of our enhanced pricing and our better feedback loops and our, I think, more awareness to the environment and what we're taking in terms of rate with the tariffs, that we're better positioned than we've ever been to be able to react to sort of the changes in the environment. Certainly, you know, it's an insurance product and we can't predict 100% the cost of goods sold, but we're in a much better position with the data that we have and the actions that we've already taken. And I don't know, Matt, if you'd like to add anything on the tariffs.

Yeah, I think on the tariffs, the issue isn't just the prices going up. It's the volatility, which is something that we're gauging for the future. The prices go up and stay up. It wouldn't have a major impact on our book. What we're concerned about is the uncertainty around the tariffs. There are two tariffs put in place already for the auto industry, one on April 3rd and the one this past weekend on auto parts. and the deal structure changes and has been changing week by week. And so we're continuing to monitor that. We're working with our insurance carrier partners so we have complete alignment on our action steps, and we'll continue to monitor that.

And, John, maybe one other data point I would add to that is that the originations in the first quarter, we actually saw a 15% increase in originations from our credit unions, which we see is a good sign. We've also seen a decrease, obviously, with no super thinns, a decrease in our open security card approval rates. So overall, we believe that our mix shift in our book and our risk profile has decreased while we've actually achieved rate increases in our current vintages.

Okay. And then maybe talk about other, like, aspects of the business that may present some opportunities over time and, you know, what might catalyze those. And that would be the refi side. portion of the business as well as the OEM portion of the business?

Yeah, I'm happy to. So as we announced a few quarters ago, we have implemented the current phases of a pilot with OEM 3. That could be a very sizable opportunity for us. We're still In the initial phases of that, it has not gone active live as, again, we're still on the pilot. That pilot is rolling out. We've had great conversations with them, and I think they're very happy with the product. You know, the refi market, we're ready. When that market comes back, we're also talking to a few larger credit unions that have big refi books and looking at a way to potentially help fund those loans. Again, that's, you know, we're in initial conversations, but certainly our product is adapted and well-suited for the refi market. At the height of, you know, sort of a high cert volume, we were doing like 40,000 refi certs. So, again, that's an area that we love, and that book has performed very well for us.

Okay, wonderful. Thanks very much for the caller.

Thank you. Once again, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from John Davis with Raymond James. Your line is open.

Hey, good afternoon. Jessica, just wanted to start on the CIA score. You know, I realize it was relatively small at 900K, but I guess a little bit surprising to see, you know, another negative revision after the big 4Q1, especially given the movies moved in the right direction. So just curious kind of what drove that 900K revision. And also, you know, was that specific to the 2021, 2022 event and to Jizz or any other color you could give would be helpful.

Sure. So let me just start by saying that, again, we have multiple vintages that are measured each quarter through a process and a model where we update inputs on frequency, severity, and many other factors that go into our scorecard. And so every quarter, we would expect there to be some form of movement in the 606 or the CIE looking backwards. if you sort of look at the prior vintages, you would see sort of ups and downs across all the vintages, meaning that some were positive, some were negative. None of them extremely large either way, netting to the $900,000 negative adjustment. It is true, and I did make the remark in my script, that the most negative did come from the 21 and 22, mostly driven by claims and frequency, offset by a positive, as you mentioned, with increase in movie and severity. But none of the individual vintages were very, very large. And then again, you know, the movie did go up again in April and I think recently today came out at 209? 208. 208. Which we... was not built into our estimate at the time, of course, that was new information that came out today, but we would expect if it continues to stay there and, and, or is the new jumping off point for the future months, that would also be a positive impact to CIE. But again, we would expect quarter to quarter there to be variances.

Okay. No, that's helpful. And then If I look at the profit share kind of X the CIE, I think it was 276 this quarter. Last quarter, you said somewhere around 300 was kind of the right way to think about it. I'm not going to split hairs there, but actually, I want to focus on your comments that I think you were kind of underwriting that 276 at almost a 73% loss, but you expect a 65% percent loss so i guess what i'm just trying to like do the math and like is that mean that that 276 is like 12 percent conservative meaning that like in theory if you're booking to exactly what you expected you would you would book something like 310 just just trying to translate that kind of the loss ratios that you're talking about into what you're booking up front to try and gauge the conservatism that's in that 276

Sure. I think it's exactly what I said in my prepared remarks. So under 606 guidance, even for the current profit share, we want to book a loss ratio or per unit economic that is more likely than not to be reversed. So we have further constrained our profit share for the current quarter based upon the recent volatility of the past historical results. So that is booked at a 72.5% loss ratio, as you mentioned, and I made it in my remarks. That being said, the pricing actions that we've taken to date, including underwriting and pricing both, we believe that if those all have the impact as projected, would perform closer to a 65, including also the book mix shift. We will not write those up and we will not know that until, you know, sometime in the future. And again, under 606, you know, we would have that more built-in conservatism. So you're thinking about it the right way. The timing of when that would occur and, you know, the certainty, you know, again, we're booking it with the more constrained view to be more conservative and to reduce the volatility moving forward so that it's more or less even not that we have positive CIE adjustments and negative CIE adjustments in the future.

Okay, very clear. Thanks, Jessica.

Thank you, ladies and gentlemen. As there are no further questions, I'll now turn the call back over to Jessica for her closing remarks.

We appreciate your interest and support, and I'd like to, again, thank all the team members at Open Lending for your hard work and dedication to our company. I would also like to thank Chuck Gilles, who is our current interim CFO, but has been with the company for five years as both our CFO and our CEO. has done great work with the company. This will be his last official earnings call as interim CFO, but will continue on our board. Thank you, Chuck, for all that you've done. Really appreciate it. He's done great work here. We wouldn't be where we were today without him. And thank you all, and have a great day.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.