Q3 2022 Open Lending Corp Earnings Call

November 3, 2022

[music].

Good afternoon, and welcome to ultimately landing.

2022 earnings conference call.

As a reminder, today's conference call is being recorded on the call today are John <unk>, Chairman, he tezak CEO and CFO .

Already today the company posted its third quarter 2022 are Ya Li Investor relation 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 it's made it and other forward looking statements that represent the company's view as of today November 22.

<unk> disclaims any obligation to update these statements to reflect future events or circumstances.

Please refer to today's earnings release, and all filings with the SEC.

For more information or any 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. John Flint.

Please go ahead.

Thank you operator, and good afternoon, everyone.

Again for joining us today for opened London 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 'twenty, two we certified 42186 loans.

Total revenue was $50 7 million.

Gross profit was 45 five.

And adjusted EBITDA was 29 4 million.

I'm going to turn the remainder of the prepared remarks over to Keith and Chuck.

Before I do that I want to again emphasize how confident and excited I am and the appointment of Keith Johnson our CEO .

Through a robust national search process.

There's no one that possess such a deep knowledge and experience in the retail automotive and technology industry and a proven track record of success.

He is an.

Optional leader and the right executives at the right time to lead the company into the next phase of growth.

Keeps the expertise within the auto retail technology industry.

<unk> shareholders, while overtime as we prepare for an improvement of the challenging economic and industry dynamics.

Currently impacting our business.

Typically <unk> experienced a cox automotive building and managing software.

Are the retail automotive eco system.

And 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 dealer track auto trader Kelley Blue book, the auto and dealer Dot com among others.

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 cheap folks 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 fun.

The metals recovery.

It's been an incredible honor to lead up in lending and I'm extremely excited to continue working with 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 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 business plan with you as chairman and Ross as a trusted advisor.

Since this is my first earnings call as CEO I thought I would start off by 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.

On the board from 2012 to 2020, while the company was private.

Our transition to an advisory role as the company entered the public markets and have served in that role for the last two years. During my tenure 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.

So impacted open lending both companies develop technologies that provide insights and innovative decision, making tools for their 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 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.

<unk>, a profound competitive advantage and significant barriers to entry and three our 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 was approximately $40 billion in total addressable market related to the auto refinancing opportunity, we have captured less than 2% market share this year.

We have 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 eight rated insurance partners.

Deep lender relationships and regulatory Knowhow.

We believe we have the strongest balance sheet in unit economics of any pure play participant in the marketplace and we do not take balance sheet credit risk.

Finally open lending as a business model that takes advantage of both this large and growing underpenetrated 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're watching a cross section of economic and industry data and company metrics, yes.

Yes, 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, and the great financial crisis, 2008, and economic contraction and subsequent expansion from 2020 to 2021 do offer some parallels and insights.

And the prior recessions that I just referenced the new vehicle Saar fell as much as 40% in risk free rates for five year treasuries declined in a range of 200 to 400 basis points at the same time after Oems pull back on production.

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 in inventory the new light vehicle Saar was $13 7 million units as of October for approximately 3 million units below the historical trend line.

Inventory is improving as production continues to ramp and supply chain challenges EES. However, the rate of recovery is still been slower than expected due to the ongoing semiconductor chip shortages.

At $42 six weeks up 8% from a year ago.

Affordability is at a record 15 year high level.

Although the Mannheim price index was down 15% from the recent peak whats most meaningful is that 20% average increase in the rate of a five year automotive blown since the beginning of the year as the Feds Fund has increased six times and 375 basis points the fastest rate of increase in 35 years.

For all these reasons, we are expecting a continued moderation in auto pricing is inventory grows.

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 takeaways, where many of our credit union customers are managing their liquidity and deposits and 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 are even more passionate about our ability to help those that are hoping to purchase a car or 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 origination 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 ourselves disciplined 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 and 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've added R&D team members and have continued to invest in our technology and the enhancement of lenders protection and.

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 Brian updated thoughts on the full year of 2022 outlook Chuck.

Thanks, Keith during the third quarter of 2022, we facilitated 42186 certified loans compared to 49332 certified loans in Q3 of 'twenty one.

And 44531 certified loans in Q2 of 'twenty two.

Total revenue for the third quarter of 2022 was $50 7 million as compared to $58 9 million in the third quarter of 2021.

Total revenue was down 14% year over year.

However, excluding ASC 606 change in estimate associated with our profit share revenue was down only 5% year over year.

To breakdown total revenues in the third quarter of 2022 profit share revenue represented $26 5 million program fees were $21 8 million.

And claims administration fees and other were approximately $2 3 million.

It is important to note that while our certified loan volume was down year over year. Our program fee revenue increased slightly due to the mix of business certified resulting in higher unit economics related to our program fees year over year.

Now to further break down the $26 $5 million in profit share revenue in Q3.

Profit share associated with new originations in the third quarter of 2022 was $24 9 million or $589 per certified loan.

As compared to $27 9 million or $566 per certified loan in the third quarter of 2021.

Also included in profit share revenue in Q3 of 22 was $1 7 million and positive change in estimate of future revenues from certified loans originated in previous periods.

Primarily as a result of positive realized portfolio performance due to lower severity of losses.

Change the estimated future revenues was $7 5 million in the third quarter of 2021.

Gross profit was $45 5 million and gross margin was approximately 90% in the third quarter of 2022.

As compared to $52 5 million and gross margin of approximately 90% in the third quarter of 2021.

Selling general and administrative expenses were $17 7 million in the third quarter of 2022 compared to $11 8 million in the previous year quarter.

There were approximately $3 5 million in one time expenses during the current quarter.

The increase year over year, excluding one time expenses was primarily due to additional employees to support our growth with a focus on our go to market sales strategy and investment in R&D technology.

Operating income was $27 8 million in the third quarter of 2022 compared to $40 7 million in the third quarter of 2021.

Net income for the third quarter of 2022 was $24 5 million compared to $29 4 million in the third quarter of 2021.

Basic and diluted earnings per share were <unk> 19 in the third quarter of 2022 as compared to 23 in the previous year quarter.

Adjusted EBITDA for the third quarter of 2022 was $29 4 million as compared to $42 1 million in the third 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 $35 9 million.

As compared to $38 8 million in the third quarter of 2021.

We exited the quarter with $399 million and total assets of which $201 8 million was an unrestricted cash $99 9 million was in contract assets and $73 4 million in net deferred tax assets.

We had $165 7 million and total liabilities of which a $148 3 million was in outstanding debt.

As Keith mentioned, we believe the most significant factor weighing on unit growth and originations for the auto retail sector in the near term is affordability for the end consumer.

As the year began industry forecast called for a slow and steady improvement of inventory and pricing moderation as represented in the Manhattan price index. However, the new vehicle Saar has now been revised downward in each of the last two quarters and is currently at a run rate of $13 7 million units. In contrast of 15 million units as we began the year.

<unk>.

In addition, with the OFC Press conference. This week, we have now seen the fastest rise in federal funds rate and over 35 years and a communication by the federal reserve chairman that rates could potentially stay high for longer than previously anticipated.

For those reasons, we are tightening our guidance for full year 2022 accordingly.

Based on year to date 2022 results and trends into the fourth quarter. We are tightening our previous guidance range for total certified loans to be between 160000 and 170000 <unk>.

Revenue to be between $180 million and $190 million.

Sam Please press the Star then two.

At this time.

Pause momentarily to assemble our roster.

Yeah.

And on the first question comes from David Scharf with J M T.

Hi, yes. Good afternoon. Thanks for thanks for taking my questions.

And congrats on.

On the new role the formal first earnings call for you.

Hey.

Two things one is more maybe just some context around the Q4 guidance a little more granular question.

Theres typically some pretty steep seasonality in the auto industry.

With a slowdown sequentially from Q3 and Q4 I'm just trying to gauge as we think about.

What's implied by the full year guidance, what's implied for the fourth quarter sort of how much of that sequential decline in the topline as normal seasonality and how much of it.

There's maybe some incremental caution versus three months ago in your macro outlook.

Yeah, Hi, David its Chuck.

As we thought about the guide you know obviously there are lot of factors that went into it the inputs.

The fed monetary policy that came out.

Ongoing but.

Fed chairman, Pat will talk to yesterday and it definitely seasonality for Q4 that that's out there.

Historically lower volume, but really this affordability issue.

There are non prime consumer is really whats driving a lot of what we've taken into consideration.

The rising rates I mean.

375 basis points increase in the past five months and the fed funds rate and even since our last call in August 150 basis points. Since then your point about the three months.

Transpired since we last talked so.

And really no. This is really aggressive manner on the on the fed and it's difficult to anticipate the lag effect of the federal policy. So we think it's prudent to be conservative.

Got it got it and maybe.

Following up on the affordability.

Challenges.

To the extent that you're extending some loan terms to 84 months.

And loan limits for qualified borrowers I would imagine that the premium that the cost of default insurance would go up as well coincident with.

Those types of revisions.

Are the carriers.

This dynamic sort of insistent on maintaining their own return requirements and does that therefore potentially impact.

Yeah.

The average profit share we should expect from a search.

Yes.

Yeah.

I'll, let Chuck speak to the profit share, but from a carrier standpoint, you're right. We've tried to maintain that Messrs John answering the question.

If we sell them.

Right now being a mountain to value on a FICO score.

We have a matrix if you will.

Getting to about a 60% loss ratio.

Appointing the rest.

A greater risk 84 months hired long about the.

Premium is going to be a little bit higher but.

Because youre extending that out against the payment to income and to a much better situation for the consumer meaning fewer defaults, but you've hit the nail on that from my standpoint.

The premiums are going to be a little bit more.

And hopefully be reflected in the profit share, but Chuck do you want to expand on the profit share and part of that.

You bet, David Yes, I can John and you can see it.

Q3 results.

New originations, we booked $599 for certified loan over last year. It was $5 66, and you may recall in our underwriting changes and some of the things. We did earlier. This year. We had an addition to the higher premium on the the loan amounts as well as the extended term vehicle.

Vehicle valuation discount, which also is an increase to the premium so we feel like it's the right decisions on the underwriting.

Where we are in this challenging backdrop, but I think more importantly, your comment about the underwriters theyre part of the decision. It's a partnership and we're all working together with the premium increases or or any of the changes.

Got it thanks very much very helpful.

Thank you.

The next question comes from Peter Heckmann with D. A Davidson.

Hey, good afternoon, thanks for taking the question.

It looks like if I'm reading my model right nine quarters in a row, where you've had a positive adjustment to profit share.

The smallest of those nine and.

Certainly looking into the tea leaves here I guess what would you.

What would be driving that more is it the increasing severity of loss per claim due to the drop in used car values are you actually seeing a little bit of an uptick in AR and potential defaults.

Yes, how are you doing pizza Chuck yes.

You're absolutely right I mean, do you think back last year, I think 2021, I'd like 30, almost $31 million of positive changes in.

That was primarily driven by obviously the liquidity in the consumers' hands and lower defaults claims and severity than what.

We've continued to model in this challenging time going forward.

22 in the last couple of quarters and also into the future is increased severity because we've modeled the manheim index price index coming down moderately.

Our prepared comments I think 15% year to date.

In that and as well as defaults normalizing to normal levels and even past that we've stressed the future portfolio.

As it relates to defaults defaults and severity, so and with little benefit to prepay speeds due to the rising rate environment and the loans being in our portfolio longer. So it's kind of a combination of all of that.

Okay, Alright, that's helpful. And then just to add just from a housekeeping perspective, how many lending.

Many customers did you end the quarter with an.

I know you got the one notable add but if I remember correctly. There are couple of relatively larger that we're onboarding.

Brian Yes American first obviously was largely Keith talked about but we had about 400 active institutions at Q3 end.

Okay, I'll follow up offline on that one and I'll get back in the queue. Thank you.

Okay. Thanks Pete.

The next question comes from.

With Deutsche Bank.

Yes, hi, thank you.

I wanted to ask about refinancing volume.

I think historically, that's something that you've disclosed and unless I missed it I haven't.

Yeah, So just give us some color on.

How that has trended and.

What's your expectation is for that going forward.

Sure Yeah, Yeah, a little better.

The slowdown the Pentagon has caused.

The refinance channel.

It's slowed down a little better.

Second Pizza bar, our volume for sure.

Thank you we will continue to be going forward.

Talked about in our comments with credit Union.

Retooling trying to say.

Where to find some cash some of our larger one.

It has slowed down a bit.

And we have found too.

I think Pete alluded to that.

With our cost of funds some of our larger funding sources, there are still taking app.

But the App.

Simply down we're just not seeing the app.

That we are seeing leading into this quarter.

I think the percentage of.

Approval.

No way up there, particularly in that channel.

Simply the application of our commentary.

Quick as their work.

So it's still a significant piece of our business.

We think well continue to grow as.

As we talked about you know what.

Cost of funds rising all over some of our funding sources have raised our yield targets ISI and 300 points.

Credit unions have already raised it by 60 basis points, but I think theres still some significant room for growth there.

Okay, Okay understood.

And then can you talk about sort of has that been some churn on the on the customer side I think previously like last quarter, you talked about 463 active lenders.

It sounds like it's the same issue that you were just you've been describing John but give us a bit more color in and maybe on the new new partners that you've signed.

Sort of how significant of a benefit could that be and when will that start kicking in.

Sure.

Even though I think Peter are there now.

Not the total number of accounts, but what have we signed approximately 50.

55, or 60, new accounts this year.

That's right John .

About 50 353 year to date.

Yes, I Wouldnt say that theres been any significant churn I mean, we've not had people.

Actually canceling.

When we determine what are the active account versus.

Funding store, sometimes you get some credit Union.

That will not be as active on the platform simply because of liquidity issues.

But we continue to see a lot of a lot of inbound call.

We've got a very active sales force.

We continue to see a lot of interest from some of the larger credit unions looking to get onto the platform. So yes.

Yes.

Not familiar with any major accounts that have fallen off from a standpoint of actually shutting down the program.

Yes, John I'll jump in.

Thank you and others last quarter, we actually put a new disclosure in the 10-Q. So the way we had previously defined an active account was one active sort within the trailing 12 months, we still provide that and we exited the quarter that was about 430 okay.

Customers.

Then what we did is added in the periods presented Q3, and then nine months to date for 2022, we actually show new lenders added and then anybody that might have been inactive in the quarter. It doesn't mean they are gone inactive when they left the business with the company. They just didn't have a certain in the quarter and one of the disclosures this quarter when we file our Q tomorrow as we had two.

One new lenders in Q3.

Peter first certified loan with open lending.

Got it very helpful. Thank you.

But.

Okay.

The next question comes from Jonathan Bottomley with Canaccord.

Hey, guys.

Good afternoon, once again well see.

Maybe just start with one for you Keith I know, you're really focused on go to market and I mean, the macro is.

You know what to say the least.

Dynamic.

But do you see any you know without giving away any secret sauce, any kind of tweaks or opportunities on the go to market.

Now that you're CEO , and then I'll have a follow up.

Well I appreciate the question and good afternoon.

Certainly the vision that I have for the company is to continue the great work that John and Ross have set in motion, but my idea is to kind of bring a series of refinements to the go to market model that I've kind of worked on and best practices that I've developed in my career, both in founding the auto and growing that to hundreds.

Millions of revenue and then a series of acquisitions that we did at Cox automotive so developing best practices and now utilizing those at those acquisitions and then utilizing those here. The great News is obviously <unk> had 10 years to kind of study up on open lending as opposed to like 90 days due diligence on the acquisitions together.

A little bit more specific it's developing new practices and refinements to our marketing and lead Gen sales.

Account management implementations in product development.

But the key ingredient being to test new hypothesis, and kind of new in a little bit different ways to go to market and then once we find the right. The right mix and then just to scale that as rapidly as we can.

Got it that makes a lot of sense and then.

Just.

A question about kind of the medium to long term and I'm going to try to.

Kind of phrase it as best I can but we've got we've got some longer term.

Loan products out I think to 84 months.

We clearly have still an affordability issue with the price of cars and especially used cars.

The one thing that I think about from time to time as you know.

If prices on used cars come in that's going to be.

Good for your volumes, obviously, because affordability gets better.

The consumer.

It comes back and your search go up but then when you think about residual.

A residual value of the existing loan book.

No.

If prices come down on used cars materially.

What does that mean, maybe relative to loss provisions a couple of years ago and how do you think.

Think about that and account for that in your underwriting model. Thanks, a lot guys.

Yes, Thanks, Joe It's Chuck.

Yes.

My comments earlier about the profit share we have a robust quarterly process.

We've got a really experienced risk team that are auto finance.

Experts a lot of experience and what we do on a quarterly basis, we subscribe to Moody's economic forecast quarterly.

The inputs that go into our model.

We've got the manheim coming down moderately through the through this year as well into next year and then beyond.

We feel like we've got stress on the portfolio.

It takes that into consideration we've had.

A period. These inflated prices, we've had positive change in estimate under under the accounting.

Primarily due to the severity of losses being lower than historical averages, but as you may recall, we model historical averages and then stress that higher so.

We don't have a crystal ball, but I think we have a really great process that we follow quarterly that.

Obviously I'm involved in our executives on the risk team, John and Ross Historically and now Keith with his experience. So we're already involved in that and I feel like we've got that modeled in but.

It just depends on how fast.

It moderates.

We've got default severity as well as prepay speeds into our econometric model.

Great. Thanks for that extra color Chuck.

Yes sure.

Next question comes from Jean.

Martin Currie.

Hi, This is sandeep <unk> on for James.

More of a question for Keith but for all of you guys as well how are you thinking about capital allocation priorities and I'm thinking, particularly as it pertains to M&A.

Just given obviously.

In addition in leadership, obviously, you all you all still working together, but.

Any updates on that thought process would be helpful.

Yeah go ahead, yeah, how about I start Sandy and then Keith can jump in.

Obviously, we feel very strongly still about our value proposition to our customers. Obviously, there is the challenges and the dynamic of the industry.

We maintain a very flexible financial profile, we've got a strong balance sheet $200 million in cash at quarter end.

We refinanced and amended our credit facility, we've got great liquidity under that so.

We feel really good about the strength of our balance sheet in the position of the company and we're investing.

In our go to market and our technology roadmap et cetera, as Keith mentioned, so that's first and foremost from capital allocation and then obviously.

M&A is something we can look at.

Over over time, but we're very focused on the white space ahead in the Tam and we're less than 2% penetrated today and that's still a great opportunity for us to get market share in our business. So.

There are other opportunities that are out there that we will consider but keith's been here I think this is the third or fourth week in and.

It's been great and these are things, we're going to talk about it and come back in and talk further about it at the year end call.

Thank you Chuck and this is Keith that's a great question I mean, the only color that I would add is that certainly using the strength of the balance sheet not to go too far afield at all but to continue to provide additional services and products to our current installed base and future future customers.

Got it Super helpful.

And then one follow up just just mindful of the trajectory on on revenue into into <unk>, and then even into <unk> into 'twenty. Three how are you thinking about the reaction function and.

Operating leverage just from an adjusted EBITDA margin perspective.

I'm, just cognizant of the sequential trends here and obviously the macro impacts as well.

Right No. Good question and it's Andy I'll point out in Q3, we had some one time cost that if you normalize that out we were still in that call it $63, 64% EBITDA margin.

In the business.

Longer term and for full year 'twenty, two and the guide for full year, we still feel we have strong EBITDA margins and in.

Call it 60% to 62% range. So if you look at the midpoint of the guide and kind of where that goes but but strong strong margins and we plan to continue investing in the business and our go to market and our technology and while others are not so this is kind of where.

Were proceeding through these times.

Got it thank you.

Thank you.

The next question comes from John Hecht.

Jeffrey.

Afternoon, guys and welcome Keith.

I can't remember if it was Keith or Chuck, but one of you guys talked about the concept of affordability.

The issue tied to affordability and I think you even mentioned that kind of a.

Statin or index tied to it so I'm wondering.

How do you define.

Sure.

<unk> affordability and then and then.

Like what factors.

Come into play to kind of release. This is a headwind, which I think would maybe allow for kind of quarter to quarter growth going forward and I'm not asking for guidance in that regard, but you're sort of thinking trying to think about given these issues when do they when do these.

Headwinds become tailwind in order for growth to reoccur.

Yes, yes, it's a good question and I think the stat, Jon that maybe you were thinking of is in our prepared comments was what it takes to for a consumer to buy a car.

$42 six weeks I think as is which is above I think norm is more like 30 weeks.

In the past so what didn't help we already had the inflated cars per paycheck, and let $42 six weeks.

We got the inflated values.

Early in January the Mannheim price was $2 36, whatever it got too in the peak and then if you think about what's happened over the last five months with rate increases.

8% inflation 50.

<unk> 50 year.

Low employment unemployment.

Tight labor market all of these things.

Wayne and.

Affordability is going to come down I think obviously when rates.

Can normalize again in <unk>.

Right now the near and non Prime consumer that we target is there are payment buyers and it's very hard to afford a vehicle right now.

And Chuck the plane that add to that.

Question, what are we doing to combat it.

I think coming out with the 84 month term yes.

Yes.

The point that as things get <unk> in line.

So that the payment is affordable by the consumer to be able to stay in the loan long term.

The more we can accommodate that.

Yes, the payback worked for them.

<unk> alone are less likely to default the payments.

Over their budget.

Things like that are what we're working on.

To help combat that affordability issue.

Okay. Thank you gentlemen.

Sorry, yeah yeah.

Keith I was just going to say and this is Keith.

And I would just add that combating.

The affordability issue as you know the Manheim index has been drifting down over the last couple of months, so that would be something on the positive side of the equation for affordability that and lowering gas prices.

Yes, all of that makes sense.

And then anything to think about.

Call it near to intermediate term.

In terms of the profit share per share or the fee per search.

Yes.

John one of the in the quarter, we had $589 and average profit share for the new originations and in our program fees were $518, which program fees were actually if you look at it year over year.

About 18% and the profit share was up about 4% a lot of that obviously the higher loan amounts.

We will increase the program fee as well as mix of business.

Sold so so I think longer term.

Profit share it's hard to give.

An exact number there, but that $5 50 range and then the program fees longer term.

475 to 500, I think is just but it does depend on mix.

Okay Super helpful guys, Thanks very much.

Thank you.

Yeah.

The next question comes from.

That's right.

Thanks, Good afternoon, Thanks for taking my question and Keith.

Welcome aboard and look forward to working with you, especially with your decades of auto Tech experienced.

First question.

On the guidance.

Just looking at the updated certification guidance and what it implies for the fourth quarter I think it's down for quarter over quarter.

But just wanted to understand if theirs.

As we're thinking about 2023 and I understand it's probably a little early to provide 2020 guidance but.

For the fourth quarter is there a <unk>.

Seasonally weaker quarter or is there something we should be thinking about or is that a good number when we think about jumping off.

Into 2023 for certifications.

Hey, Vincent it's Chuck Yeah, a little earlier, we got to my question about about the guide in Q4 is as you know is seasonally historically, a lower volume quarter, but really what's changed since last time. We've all talked is it's just really the aggressiveness of the fed action the affordability issue on the consumer that we have.

About.

And also all things being equal our customers, primarily credit unions are being more conservative managing their liquidity and deposits right now. So so it's a combination that went into.

Our tightening of that guide for the year.

Consequently, the fourth quarter.

Okay understood. Thank you and then second question I think for Keith.

I'm just curious if you've been here for a couple of weeks I believe there was a.

Big user group meeting, we were able to meet a couple of your clients.

Kind of wondering what you've been hearing in terms of the opportunities and challenges and what the clients are looking for.

I cover a couple of the other auto lenders and you've got capital one at ally, who are saying that the credit unions are able to take share and able to price things better and so I would.

I'm just wondering if that's a opportunity for you and what what the banks and credit unions and your customers are saying thank you.

Yes happy it was it was a pretty wonderful time to begin with any new company and that is to have 200 customers fly in and be able to talk shop and learn from them.

I would say certainly hats off and congratulations to our credit union customers because over the last quarter. They actually supplanted the captives as the number two source of auto lending in the country. So they've been very very busy at work.

That said however, there was just a little bit of caution around how they're going to manage their deposits and the way they think about their lending portfolio going forward.

But it was a it was a wonderful time to learn from the customers and then also I just have to reiterate the incredible relationships that John Ross on the entire team had developed with each and every one of those customers that was it was very impressive to see.

Thanks, Keith in one thing.

One thing, we don't want to lose sight of.

What got credit unions.

Well I wouldn't say out of whack.

One the share ratios grew significantly.

In the last nine months, primarily because mortgage rates were low.

You were trying to get into houses and they went out and put a bunch of money out mortgage loans.

That's reversed itself, but mortgage rates are at all time highs.

We're going to be looking for an asset class to lend to.

It's going to be a shorter term better rate loan so all the shops.

Kind of went out on a limb and did a lot of mortgage loans are regrouping and looking for that two and a half to three year average life piece of paper, which is auto and it's priced appropriately.

So I think even though it was a short term.

Brian The Cas deal if you will.

They're obviously not going to go paying off.

Shorter term mortgages.

Is there going to be paying down and they need to find a home for that money.

Hello.

Okay perfect. That's very helpful. Thanks very much.

Thanks Vincent.

The next question comes from Bob Napoli with William Blair.

Hi, everyone. This is expensive James on for Bob Napoli. Thank you for taking the question.

I was wondering if you could provide an update.

Close rates and maybe share it if you back out the expanded loan terms you guys have made.

Close rates started to recover or you're not yet seeing that.

When you say, if we backed out the 84.

Because I can tell you that's had a significant impact on close rate.

But.

I'm not sure that I have the exact number right in front of me of what it was if we were to back that number out.

Yes, John I'll jump in.

Maybe the way to think about it as the program under writing changes that we made earlier in the year.

84 month term as well as the loan amount.

The increases that we made were seeing increases in the capture rate of about 8% to 10% on both categories is what we're seeing so obviously that's the direction. We obviously, we're looking for in but that's kind of early early indication.

Okay. Thank you and one follow up.

Kris and premium pricing.

Will that continue to mainly come from the expanded loan terms or.

Or are there other levers you can pull to raise that premium pricing. If you could talk about your willingness to do so.

I need you to do so.

Hey, John .

Got it.

Yes.

Not have any premium increases because we haven't needed them I think to your point the additional premium today is coming from 84 months.

Some of the levers that couldnt be Paul we can change premium with a 30 day notice steady insured if we need to because of the.

Surplus lines policy.

Some of the easier levers if we wanted to do them.

Simply change the advance rate.

I don't know if you remember us talking over the last year or two that we have occasionally gone out and said instead of abusing.

100% of wholesale.

Were pricing off 95% of wholesale.

The advance then bumped them up into a 110 or $1 15 advance.

Based on using a lower dollar figure that would have the impact of more premium coming in.

But at this point, we don't see the need to do so.

Profit share and working well for the carrier and.

There are certainly levers that can be called but we needed to.

Thank you I appreciate it.

Thank you.

The next question comes from John Davis with Raymond James.

Hey, good afternoon, guys. Chuck just a quick one for you took operating cash flow up despite taking EBITDA and some of that stuff towards the lower end of the range. So just just want to understand kind of what's what's driving that.

Kind of up to the higher end of the prior range for operating cash flow.

Yeah, Hey, John how are you doing yeah. It was just more of taking the low end up a bit and the high.

Adjusted operating cash flow through September we're right about $110 million.

Back of the earnings release already so we felt like obviously, it's been a good cash collection strong cash collection year in.

Profit share program fees and all of the three legs to the stool.

Low cash so so that's why just kind of trending into the quarter.

Okay.

And I know the on the profit share I know the economic assumption is has come down.

But it was still positive this quarter, which I guess is good on one hand, but on the other hand, given where were going from a macro perspective.

Why not just kind of keep that in your back pocket.

Maybe you understand a little bit about the methodology is it literally just remember the model spits out as what you guys put it in the numbers.

At some point, it's likely that assumptions are going to go the other way. So just just thoughts on how you guys get to that is it literally just whenever the model spits out. It is what it is or is there any subjectivity to it at all.

No.

We've talked about John we've got a really thorough and robust process with our risk team, but if you think about the $1 $7 million that we booked in Q3 that obviously was lower than any other quarters in the past probably four five or six.

Obviously that has slowed down as we continue to put stress on the portfolio as it relates to severity the manheim coming down gradually severity of loss going up.

Salt normalizing et cetera, so, but what really drove the $1 seven was realized portfolio performance, which means the actual claims through that balance sheet date of 930 that we thought would happen didn't happen as high as we thought so that turns to cash. So so we basically increased the contract asset accordingly for that but prospect.

<unk>, we had more stress out into the portfolio on severity is going up in default is going up. So it's it's a quarterly process that this is a very robust and we monitor it very closely and change our facts and circumstances.

Okay and then just last one for me as we look out I appreciate youre not it's too early for 'twenty three guidance, but if we were to look at the search and <unk>.

Any reason why that's not a reasonable run rate to start out at least the first part of next year as we think about kind of building our models in 'twenty three.

Remember John seasonality in the business in Q1.

Is March is obviously <unk>.

<unk> was a good month for us due to the tax returns and folks getting tax refunds. So obviously take that into consideration in your modeling in in Q.

Q4 is.

Keith and I, both talked about and John obviously, the affordability of the fed action as well as <unk>.

Some of the conservatism in our credit Union customers right now with <unk>.

Their liquidity and deposits and as we've gone into the bonds or work on 'twenty three we will come back and talk to everybody about full year on the February call. So.

And that work now.

Alright, I appreciate it thanks guys.

Thanks, John .

Okay.

If you would like to pose a question. Please press.

One.

Okay. Our question first question I would like to turn the conference back over to Chuck <unk> for any closing remarks.

We'd like to thank everyone for joining us today and your interest in open lending and I. Appreciate your support and want to officially welcome Keith We're excited he is here and in leading our company.

Area of our growth. So we will talk to you soon and thanks. Thanks again have a great day.

The conference has now concluded.

Thank you for attending today's presentation you may now disconnect.

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Good afternoon and welcome.

Landing product line in 2010.

This conference call.

Today's conference call is being recorded.

On the call today are John <unk> Chairman.

Kathak CEO Chuck.

Yes, Paul.

R&D today that Tom Tony Barclay card.

When are you planning to release Investor relation website.

In the release, you will find reconciliations of non-GAAP financial measures.

So the most comparable GAAP financial measures discussed on this call.

<unk>, we begin I would like to remind you that this call may contain and.

Other forward looking statements.

The company as of today November torque plenty volatile.

<unk> disclaims any obligation to update.

To reflect future events or circumstances.

Please refer to today's earnings release.

Right.

Hey, Keith Martin information sorry, Scott.

Actual results.

From those expressed.

Alright.

Okay.

Now I'll pass the call to Mr. John .

Please go ahead.

Thank you operator, and good afternoon, everyone. Thanks again for joining us today for open London third quarter 2022 earnings Conference call.

The third quarter the company's results were in line with our expectations.

<unk> continued challenging economic and industry dynamics impacting our business.

During the third quarter of 2002, we certified 42186 loans.

Total revenue was $50 7 million.

Gross profit was 45 5 million.

And adjusted EBITDA of $29 4 million.

I'm going to turn the remainder of the prepared remarks over to Keith and Chuck.

Before I do that I wanted to again emphasize how confident and excited I am and the appointment of Keith Johnson.

Yes.

Through a robust national search process.

No wonder possess such a deep knowledge and experience in the retail automotive and technology industry and a proven track record of success. Thank you.

An exceptional leader and the right executives at the right time.

Lead the company into the next stage of growth.

So it's the expertise within the auto retail technology, that's great we're going to serve shareholders well over time.

We prepare for an improvement of the challenging economic and industry dynamics currently impacting our business.

Specifically <unk> experienced a cox automotive building and managing software products are the retail automotive ecosystem, including consumers.

Auto lenders and the largest and most prominent dealer networks in the nation.

<unk> service offerings totaling multi billions in revenue.

Provided through companies, including dealer track auto trader Kelley Blue book.

And dealer Dot com among others.

<unk> had relationships and knowledge will be complementary to our existing and prospective credit Union and OEM partnerships.

I am very confident that our collective continued underwriting vigilance along with key focus on our go to market sales strategy and technology.

The road map.

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 up in land Bank and I am extremely excited to continue working with key.

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 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 lendings business plan with you as chairman and Ross as a trusted advisor.

Since this is my first earnings 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 have been involved with open lending for over a decade. Initially I served on the board from 2012 to 2020, while the company was private <unk>.

A transition to an advisory role as the company entered the public markets and have served in that role for the last two years. During my tenure affiliation with the company I 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 their respective clientele.

<unk>, a profound competitive advantage and significant barriers to entry and three our business model that leverages both wanted to.

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 was approximately $40 billion total addressable market related to the auto refinancing opportunity, we have captured less than 2% market share this year leaves.

Significant room for growth.

Our relationships with four eight rated insurance partners.

Deep lender relationships and regulatory Knowhow.

We believe we have the strongest balance sheet in unit economics of any pure play a participant in the marketplace and we do not take balance sheet credit risk.

Finally opened lending as a business model that takes advantage of both this large and growing underpenetrated 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 and industry data and company metrics, yes.

Yes, 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.

Great financial crisis, 2008, and economic contraction and subsequent expansion from 2020 to 2021 do offer some parallels and insights.

So anywhere from 12 to 18 months to ramp back up I.

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 in inventory the new light vehicle Saar was $13 7 million units as of October for approximately 3 million units below the historical trend line.

Inventory is improving as production continues to ramp and supply chain challenges EES. However, the rate of recovery has been slower than expected due to the ongoing semiconductor chip shortages.

At $42 six weeks up 8% from a year ago.

Affordability is at a record 15 year high level.

Although the Mannheim price index was down 15% from the recent peak whats most meaningful is that 20% average increase in the rate of a five year automotive loan since the beginning of the year as the Feds Fund has increased six times and 375 basis points the fastest rate of increase in 35 years.

For all these reasons, we are expecting a continued moderation in auto pricing is inventory grows yes patterns of prior recessions serve as a barometer.

Pace of the moderation will be correlated most closely to the production efforts of the Oems and a resolution of supply chain conditions.

All that said we are even more passionate about our ability to help those that are hoping to purchase a car or 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.

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.

The individuals we have hired have deep experience in the auto retail loan origination 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 ourselves disciplined going forward.

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 and 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 in another country at $17 billion in assets and $1 2 million members.

In addition to those investments we've added R&D team members and have continued to invest in our technology and the enhancement of lenders protection.

<unk> 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 equals 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 Brian updated thoughts on the full year of 2022 outlook Chuck.

Thanks, Keith during the third quarter of 2022, we facilitated 42186 certified loans compared to 49332 certified loans in Q3 of 'twenty one.

And 44531 certified loans in Q2 of 'twenty two.

Total revenue for the third quarter of 2022 was $50 7 million as compared to $58 9 million in the third quarter of 2021.

Total revenue was down 14% year over year.

However, excluding ASC 606 change in estimate associated with our profit share revenue was down only 5% year over year.

To break down total revenues in the third quarter of 2022 profit share revenue represented $26 5 million program fees were $21 8 million.

And claims administration fees and other were approximately $2 3 million.

It is important to note that while our certified loan volume was down year over year. Our program fee revenue increased slightly due to the mix of business certified resulted in higher unit economics related to our program fees year over year.

Now to further break down the $26 $5 million in profit share revenue in Q3.

Profit share associated with new originations in the third quarter of 2022 was $24 9 million or $589 per certified loan.

As compared to $27 9 million or $566 per certified loan in the third quarter of 2021.

Also included in profit share revenue in Q3 of 22 was $1 7 million and positive change in estimate of future revenues from certified loans originated in previous periods.

Primarily as a result of positive realized portfolio performance due to lower severity of losses.

Change in estimated future revenues was $7 5 million in the third quarter of 2021.

Gross profit was $45 5 million and gross margin was approximately 90% in the third quarter of 2022.

As compared to $52 5 million and gross margin approximately 90% in the third quarter of 2021.