Q4 2022 Open Lending Corp Earnings Call

February 23, 2023

Good afternoon, and welcome to the open lendings fourth quarter and full year 2022 earnings conference call.

As a reminder, today's conference call is being recorded.

On the call today are Keith Jessica CEO , and Chuck <unk> CFO .

Earlier today, the company posted its fourth quarter and fiscal year 2022 earnings release, and Investor supplement to its Investor Relations website.

In the release, you'll find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call.

Before we begin I'd like to remind you that this call may contain estimates and other forward looking statements that represent the company's view as of today February 23 2023.

Open lendings 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 with such statements.

And now I'll pass the call over to Mr. Keith Jessica. Please go ahead.

Thank you operator, and good afternoon, everyone. We appreciate you joining us today for open lemmings fourth quarter and full year 2022 earnings conference call.

Before we begin I would like to express my continued confidence in the long term opportunities before us the actions and behaviors of consumers auto lenders Oems and dealerships and the corresponding pricing dynamics, we have experienced are not without precedent.

However, what's notably different in this cycle is the impact of the velocity and the magnitude of the federal reserve rate increases to the auto industry and more specifically to consumer affordability and lender liquidity.

<unk> managed scaled businesses in the other sector through the great recession as well as serving on the open lending board during this time.

Courage by the response of our team and I'm confident in our ability to manage through the current challenges I'll speak more about how we are positioning the company to continue to gain share given our financial strength, our value proposition and our competitive position. After reviewing our results for the year, we certified over 165000 loans a slight decrease from.

Previous year total revenue for the year was $180 million down 17% and at the lower end of our guidance adjusted operating cash flow for the year was $143 million, which was near the high end of our guidance.

Now I will spend a few minutes on recent industry trends and expectations for 2023 first on inventory as many of you know used vehicle sales in 2022 tumbled to their lowest levels in nearly a decade supply chain and chip shortage constraints have improved year over year, but sales for new auto's remained well below historical levels as well.

Second on affordability. We believe this will remain the most significant challenge for us in the near term the intended consequences of the federal reserve's rate increases in 2022, and 2023 are impacting the auto sector and our current addressable market near and non prime consumers, who are being hit disproportionately by rising rates.

<unk> and lower disposable income.

As the fed continues a path to reduce inflation, a more expensive auto payment driven by higher rates is dampening demand for example, the weighted average auto loan rate for both new and used vehicles and sub segments is up 200 to 300 basis points.

Next on loan originations and speaking with the Treasury teams at credit unions and other financial institutions. They currently have alternatives for balance sheet capital and short term duration instruments as well as risk rebuilds notes and bonds in the treasury market.

To the extent these alternatives are more attractive liquidity within the auto origination pool of capital is reduced.

Callahan data shows total loan originations were about $160 billion in the fourth quarter of 2022 down 21% from a year earlier and down 19% sequentially from the third quarter of 2022 and.

And the peak of the pandemic when liquidity was high and federal stimulus relief was running rampant.

Credit unions hold about 12%, 13% of their assets as cash which was easily available to fund new loan demand now credit unions on average are down to approximately 6% of their total assets in cash some of our largest credit unions have a loan to share ratio in excess of 100%.

This reduction in liquidity has impacted the borrowers who are most in need and have been hit hardest by inflationary pressures to their rent food energy and transportation.

Finally, our refinance business made up 43% of our certified loan volume at its peak in February of 2022, but has declined to 11% in December 2022.

This business has been severely impacted by the unprecedented federal reserve actions throughout 2022, and now into 2023 again this constitutes a significant impact on affordability of our near and non prime borrowers based on prior cycles. It's our sense that when rates begin to stabilize we should begin to see improvement in this part of our business.

Ms.

In summary, the industry backdrop for the auto loan sector is experiencing historic challenges that said, we believe these challenges will be temporary we remain committed to our goal of gaining market share.

Expect to be well positioned to meet pent up demand.

As the industry recovers.

With that in mind I want to discuss our areas of focus as we move throughout 2023 to position us well for this year and beyond areas, which I believe will support and strengthen our long term competitive advantages first we look to further refine and optimize our sales channels.

Second we will continue to enhance our technology offering.

And equally as important we are laser focused on attracting.

And retaining talent.

Now to go into each area and a little bit more detail.

First sales operations and marketing.

To power our go to market efforts, we increased our sales marketing and account management teams by nearly 30% in 2022, and we plan to continue to thoughtfully invest in these areas throughout 2023.

We will keep a watchful eye on these investments measure performance and ensure that they delivered the expected returns.

To strengthen our teams future success, we're going to ask our team into one group dedicated to selling while the other focuses solely on account management in short we've aligned our efforts to maximize our sales efficiency.

Our experienced sales team, we will continue to work primarily on closing new accounts their efforts will be aided by our expanded marketing team, which is supporting sales with a robust lead generation program to help secure new business. We are early in this initiative, but you may have already seen our earned media coverage in the Wall Street Journal.

<unk> News auto Remarketing Auto Finance news credit Union times and payments Dot Com. These are publications that decision makers read daily. So we believe this will further support our sales team to lead. These efforts we've added a new senior Vice president of marketing to our leadership team.

We are encouraged by our strong December sales as well as other recent wins, including the addition of Crescent Bank, a top 50 bank auto lender in the U S.

Our account management team will center their attention on continued engagement and collaboration with our customers with the simple priority of building our base of business from existing customers by expanding their use of our program. We've launched various targeted customer promotions via multiple channels and we have produced a number of thought leadership pieces, including a highly.

Attended National Association of Federal credit unions webinar on loan securitization we.

We have improved our implementation process and shorten the time to go live for a new institution. We've also added a senior vice president of operations to improve client retention and drive operational best practices. While still early we have seen significant progress from these investments for the full year 2022, our non OEM business, primarily credit Union.

<unk> was up 16% driven by strong refinance volumes earlier in the year. While in contrast, the large universal banks reported auto loan originations down 25% to 30% year on year.

Now, let me turn to our technology, we continue to have a distinct competitive advantage with significant barriers to entry given our 20 plus years of proprietary data sophisticated technology, including five second underwriting decisions exclusive relationships with a rated insurance partners deep lender relationships and regulatory Knowhow and we will continue to strategic.

<unk> invest in our lenders production technology to remain best in class risk based solution for lenders seeking to serve non prime customers.

Car ownership more accessible for those in near and non Prime credit segments, we increased our allowable vehicle age from nine to 11 years, one of the criteria. We set forth in conjunction with this modification was very specific mileage caps as determined by a proprietary data set of auto evaluations with the average age of finance vehicles jumping from five four.

To six four years for FICO scores below 640, this change allowance financial institutions to grow their portfolios, while minimizing risks through open lendings default insurance and risk management program equally.

Equally as important vehicles 10 years in orders comprise some 8% of all used car purchases.

To support our go to market strategy enhancements and streamline on boarding of new customers. We've recently expanded our integration to three new technology partners.

And lastly, as we strive to lower delivery cost and improve integration timelines, we continue to modernize our infrastructure with cloud computing technologies, we welcomed our new Chief information Officer in November to focus on our migration to the cloud as well as on driving security data integrity Dev ops and it operations he joins us from <unk>.

Our first home mortgage and brings a wealth of industry and technical experience.

We are confident that our technology investments allow us to improve our time to market for developing testing and developing secure applications that enhance customer satisfaction.

Lastly, we are also committed to attracting and retaining talent training at best in class organization to lead. These efforts late last year, we announced the appointment of a chief Human Resources Officer focused on building a strong people strategy to support and expedite opened lendings mission, we expect to continue driving company culture centered on creating a diverse.

And collaborative environment to unlock value and foster growth for individuals teams and the business.

To wrap up I couldn't be more excited about our opportunity now having almost five four months in the CEO seat. This is driven by the fact that we continue to have a large and growing total addressable market.

Profound competitive advantage and significant barriers to entry with our people and technology as well as a business model that leverages. Both of these points. We are focused on areas that we are confident will position the company for success for years to come.

With that I would like to turn the call over to Chuck to review Q4, and the full year in further detail as well as to provide our thoughts on 2023 outlook Chuck.

Thanks, Keith during the fourth quarter of 2022, we facilitated 34550 certified loans compared to 42639 certified loans in the fourth quarter of 2021.

And 42186 certified loans in the third quarter of 2022.

Total revenue for the fourth quarter of 2022 was $26 8 million, which includes an ASC 606 negative change in estimate of $12 8 million associated with our profit share compared to $51 6 million in the fourth quarter of 2021 when.

When excluding the impacts of ASC 606 change in estimate from both periods revenue during the fourth quarter of 2022 was only down $5 5 million or 12% year over year.

To break down total revenues in the fourth quarter of 2022 profit share revenue represented $6 1 million program fees were $18 3 million in claims administration fees and other were $2 4 million.

It is important to note that while our certified loan volume was down in the fourth quarter of 2022 from the fourth quarter of 2021.

Our program fee revenue only decreased slightly due to mix of business certified which resulted in higher unit economics.

Turning to profit share I want to remind everyone that profit share revenue is comprised of the expected earned premiums less the expected claims to be paid over the life of the contracts less expenses attributable to the program.

The net profit share to us is 72% and the monthly receipts from our insurance carriers reduce our contract asset each period.

To further discuss the $6 1 million in profit share revenue in Q4, the profit share associated with new originations in the fourth quarter of 2022 was $18 9 million or $546 for certified loan as compared to $24 7 million or $580 per certified loan in the fourth quarter of 2021.

As mentioned previously we recorded a negative $12 8 million change in estimate as a result of an expected decrease of profit share in future periods due to higher than anticipated claims frequency and severity of losses.

Notably this was partially offset by lower anticipated prepaid due to the elevated interest rate environment.

The manheim used vehicle value index, which tracks the prices car dealers pay wholesale at auction for used cars is one of the macroeconomic factors, we consider in evaluating our change in estimate each period end.

This index fill nearly 15% year over year.

Thats the largest one year decline in the history of the index.

However, it's worth noting that it remains highly elevated compared to prior 10 year trailing levels and therefore continues to impact auto affordability.

In comparison during the fourth quarter of 2021 revenue included a positive $6 5 million change in estimated future revenues on certified loans originated in historical periods.

This was primarily due to a positive realized portfolio performance attributable to lower frequency and severity of claims.

Gross profit was $21 9 million and gross margin was approximately 82% in the fourth quarter of 2022 as compared to $46 9 million and gross margin of approximately 91% in the fourth quarter of 2021.

For the quarter gross margin, excluding ASC 606 negative change in estimate would have been 88%.

Selling general and administrative expenses were $17 2 million in the fourth quarter of 2022 compared to $11 7 million in the fourth quarter of last year.

The increase year over year is primarily due to additional employees to support our growth with a focus on our go to market sales strategy and investment in our technology as previously discussed by Keith.

Operating income was $4 8 million in the fourth quarter of 2022 compared to $35 2 million in the fourth quarter of 2021.

Net loss for the fourth quarter of 2022 was $4 2 million.

This was driven by the $12 8 million negative adjustment to our profit share contract asset.

Compared to net income of $27 8 million in the fourth quarter of 2021.

Basic and diluted earnings per share was a loss of <unk> in the fourth quarter of 2022 as compared to 23.

In the previous year quarter.

Adjusted EBITDA for the fourth quarter of 2022 was $8 5 million as compared to $36 6 million in the fourth quarter of 2021 Theres.

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 $33 million as compared to $38 million in the fourth quarter of 2021.

We exited the quarter with $380 million and total assets of which $205 million was an unrestricted cash $75 million was in contract assets and $65 million and net deferred tax assets.

We had $167 million and total liabilities of which a $147 million was outstanding debt during the fourth quarter, we announced the authorization by our board of directors to repurchase $75 million of our common stock through November of this year.

This program reflects the confidence of our board and the management team and our business model free cash flow profile and the overall strength of our balance sheet during the quarter, we repurchased two 6 million shares for approximately $18 million at an average price of $6 80 per share.

We expect to continue to be opportunistic and open market purchases under the current authorization throughout the year.

Before I touch on guidance I would like to update you on a change within our insurance partner relationships.

<unk> a partner of ours since 2017 has decided not to renew their agreement with lenders protection. When their term concludes on December 31, 2023, due to a shift in cna's capital allocation priorities.

We would like to thank them for their partnership over the years and their support as we work through and manage the runoff of existing policies over the coming years.

As a reminder, one of our key initiatives over the past few years has been to minimize concentration risk by bringing additional a rated insurance carriers into our program.

We have successfully executed on this initiative as we have strong relationships with our three other insurance carriers to provide credit default insurance coverage for our auto lender customers.

Amtrust, which is under contract through fourth quarter of 2028 American National Insurance company under contracts through second quarter of 2026, and arch insurance North America under contract through second quarter of 2027.

We are working with all three of these carriers to transition our lender customers, who had been insured with CNA to them all of whom are interested in absorbing additional business from the lenders protection program.

Now moving on to guidance.

If inflation were to persist through 2023. It appears the federal reserve will stay the course and keep rates higher for a longer period.

While the bond market at times has appeared to be indicating a more favorable rate environment. Later in 2023 recent forecast from the federal reserve or more conservative with current indications that the terminal fed funds rate will be in the 6% range.

These factors as well as other macro and auto industry lending specific indicators are ever changing and more specifically it is difficult to have visibility into financial institutions future liquidity and a corresponding pace of auto originations.

So for these reasons at this time, we feel it's prudent to take a more measured approach by providing only a quarterly outlook.

Guidance for the first quarter of 2023 is as follows we expect certified loans to be between 28030 2000.

Total revenue to be between 30 million and $34 million.

And adjusted EBITDA to be between $13 million and $17 million.

And our guidance, we have taken the following factors into consideration.

Portability index of our target credit score borrower due to the continued inflated used car values inflation rising interest rates and overall consumer sentiment.

An important driver in estimated profit share is the manheim used vehicle value index, which we expect will continue a path of moderate declines over the next year also as Keith outlined earlier, we will continue to invest this year. While this impacts our margins we have a strong balance sheet and will be well positioned as the overall macro in auto retail.

Industry challenges subside.

We would like to thank everyone for joining us today and we will now take your questions also joining us on the call will be John Flint open lineage chairman of the board.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

I'd like to ask a question you May press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

Press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

Hi, good afternoon. Thanks for.

Thanks for taking my questions.

I wanted to dig in a little bit about.

Profit sharing.

Going forward as it relates to your carrier relationships.

Can you can you kind of remind us.

72%.

The portion that you keep has always been very generous in my understanding has been.

Because the carriers like the product on their end because you provide all the customer acquisition costs.

And underwriting it ultimately.

Fault insurance their underwriting is very high Roe.

Given cna's decisions.

Should we be thinking about whether you are.

Other three partners.

Kevin.

The credit performance of the portfolio now.

Whether they're rethinking that 70 228 mix I mean are they are there any discussions about.

The kind of returns that they.

Require and whether they want those modified at all.

Hi, David its Chuck.

Good to visit with you it's a great question.

We've got the three carriers that will remain in one C&I has been a great partner for a long time and I would tell you that the business has been very profitable for them.

This is more of a capital allocation change for them in an underwriting decision.

Different products and not everybody can do everything so it's been very profitable them and very profitable for our other three carriers. So we have strong relationships with the other three Keith and I have met with him John Ross had a great hand off to us of those relationships and I built them over the last couple of years as well.

The appetite is very strong for our business at the current terms in unit economics.

Economics.

Got it.

And maybe just as a follow up kind of the same topic.

Obviously kind of not surprised to see the contract asset.

<unk> written down a bit.

Non prime auto probably deteriorated more than most other consumer credit asset classes, but.

After after the write down how should we think about that.

Maybe a more kind of normalized level of profit share per load.

Throughout 2023.

Given all the affordability issues that are going to persist.

Another great question, David what I would tell you is.

As we analyze that the contract asset and our profit share every quarter. The biggest driver for obviously the $12 eight negative change in the quarter and I'll tell you year to date, that's like five seven for the year negative.

It basically the manheim went down 15%.

2022, which is the largest single decline in the history of the index and as we thought about this at Q3, just give you a little bit more history, we anticipated that it would be down about 11% full.

Full year 2002, so the accelerated decline in the fourth quarter as we put the Q4 originations on the books at the $546, we took that into consideration as long as well as stress into 'twenty three.

On defaults, increasing as well as the severity of loss due to the manheim coming down so as we put that on we booked at $5 46 per loan at about a 62% loss ratio and I will tell you.

As we think about that at a baseline of about 50% loss ratio, which is kind of historical averages that we that we will look to we put about 23% stress on the Q4 originations, which got it down to the $5 46, which had started at about a call. It a 788 profit share for <unk>. So we feel good about the $5 46 per share.

But obviously as we kind of navigate through these volatile times in the economy and the auto industry specific <unk> and delinquencies will continue to review that but we feel good about our book at 12 31.

22, and we will continue to monitor that.

Got it got it sounds like in Manhattan excellent.

Schumer payments.

Thank you, yes, Yes go ahead, John I've got.

One more comment to the insurance players.

Yes, yes, yes, Mark note and keep in mind.

Because this is Britain surplus line policy.

And then every loan.

Targeting a 60% loss ratio.

If it ever got out of whack and if it started declined way beyond that.

A 72%.

Okay percentage of X.

Premium, but we can adjust the premium going forward and maintain the loss ratio.

Areas that are looking for.

I don't think they've been negotiating.

Percentages down at the matter.

As rates are rising everywhere in the country.

The rate increase might do is increase the rate to the consumer.

Easy to cover.

Understood very helpful. Thanks, so much.

Thanks, David and thanks, John .

Our next question comes from the line of Joseph <unk> with Canaccord. Please proceed with your question.

Hey, guys.

Good afternoon, and thanks for taking our questions I know Keith you mentioned, a lot of hires and a lot of.

Investment in the business were there some other moving parts in <unk>.

G&A line debt.

Drove it up.

So materially here in Q4, and then another follow up on that.

Hey, Joe I'll tell you I'll start this is Chuck go to visit with you if you think about <unk>.

SG&A throughout 2022, we hired.

Several folks in 'twenty two to help as we grow our go to market sales strategy and our enhanced our technology. So that's kind of been throughout the year the year over year.

Q Q4 to Q4, 11% $12 million to call it $17 million that $5 million has progressed throughout the year sequentially from Q3 were actually down slightly from Q3 about $500000. So I wouldn't say, it's up sequentially, but year over year is just the head count adds to kind of support our investment in the business is as we wait for the spin.

Demand that will be there is as we know the industry recovers.

Sure Fair enough and then.

On the ads I know you mentioned crescent being added here.

In the quarter.

Maybe we could get a higher level view of appetite from new logos now I mean, obviously, there's a lot of headwinds in everything from.

The credit unions, having.

Lower cash balances to just inventories being down.

The board.

Sure our perspective clients moving forward now.

Maybe six months ago, and then if you could mention what those new tech partner integrations might needs of the business that would be helpful. Thanks, guys.

Yes, sure and as we mentioned in the comments and this is Keith Joe was mentioned in the comments you know December was a really really strong sales month for us so thats very encouraging, especially kind of given the end of the year and as we step off into 2023, just encouraged with the pipeline.

A lot of the efforts of the new and.

And expanded go to market strategies have been around segmentation and prioritization of the pipeline and we really want to go after lending partners.

Number of various segments, but first and foremost just kind of categorize them by first and foremost there are potential for volume.

Whether or not they opened all three channels. So they view that indirect direct a refinance.

Their current loan to share or their liquidity balance.

For most of them the type of LLS that they have the loan origination system to make sure that we are already integrated with it and then finally and most importantly, do they have the appetite to lend to this segment and what I will tell you is that the.

The pipeline is robust for 2003, as we start the year and in the value proposition is still the same as it's ever been there is the need to serve the folks that perhaps they haven't historically served.

Fair enough and then on those integrations.

Yes, Joe This is Chuck from a tech partners perspective, integrating with additional losses that make our time to first revenue quicker. So integrated for example, with X pass project with the <unk> solutions as well as added on.

<unk> partner with get Jerry So so a lot of things that we're working on there to be ready and also gross search as we can and control what we can.

Alright, Thanks, a lot guys.

Thank you Joe Thank you Jeff.

Our next question comes from the line of Peter Heckmann with D. A Davidson. Please proceed with your question.

Hey, good afternoon. So the cash flows for the company were very strong and I assume that is a reflection of slowing.

The business and just cash collections on.

The existing loan book of business.

I guess when you think about that.

And.

The volatility that we've seen it acknowledging this has been a very very unique.

And dynamic environment for auto sales auto pricing.

Interest rates, but the dynamic around really significant changes in profit sharing under ASC 606 are really just make it.

Very very difficult for a public company and the expectations for a public company given the underlying cash flow.

Hi.

Do you feel that open lending needs to remain a public company and or would this business be more appropriately held within either a larger business or help as a private company or at the quarter to quarter volatility in earnings.

Was it wasn't really going to be that big of an issue.

Well, maybe I'll beat on that last question.

We don't want to speculate on that we are a public company today, and we're working very hard for our shareholders to maximize value.

Your question around ASC 606, the volatility I mean.

Yes, So we had a lot of positive performance in 2021, and a good ways into 'twenty two and.

The changes in the industry and the macro obviously impact us, but we provide transparency there and good disclosures, we feel but I will tell you that from a cash perspective, obviously the cash flow statement, we generate about $90 million in cash and in 2022, and we've got a healthy cash balance at year end at $200 million in.

It's obviously, we started the share buyback program and invested there so.

And the volatility that's out there and which is why we thought it was prudent to go to quarterly guidance. This time, just because of the the precision and visibility into our customers' liquidity as well as auto loan originations. So.

But we will continue to generate a free cash free cash flow in this business. It's a great cash business and if you think about maybe instead of adjusted operating cash flow metric, maybe even a free cash flow metric at about call it 85% to 90% of adjusted EBITDA.

What we target.

Yes, no I hear what you're saying and I sympathize with you.

If you are having a hard time forecasting it is just that much more difficult.

For us so I guess I'll continue that the lift in AD and think about some of those factors driving the.

Reversal here this quarter.

Okay. Thank you.

Our next question comes from the line of Vincent.

With Stephens. Please proceed with your question.

Hi, Thanks for taking my question. Good afternoon wanted to go back to the profit share. So wondering if you could kind of go into more detail about.

In the fourth quarter kind of what the big changes in assumptions were plus.

What gives you comfort that.

What you built into the expectations for profit share now.

Sure.

Or where they should be or could you give us sensitivity around.

Used car prices are different things move around.

Profit share do thank you.

Yes.

I think I said earlier when David asked the question around profit share maybe I'll start with what changed in the fourth quarter.

It was an accelerated decline in the manheim unprecedented 15% for the year.

And when we were at Q3, we projected the Mannheim to be down about 11%. So used car values as a direct drive of our estimate of future claims and severity of loss. So it had a significant impact on us in the quarter and as you may recall.

Earlier in the year Cox was forecasting the Mannheim to be down in Q1, and Q2 only 3% for the year. So so it was a significant change here in the later part of the year.

As we think about sensitivities around it.

The $546.

We discussed earlier when we put the Q4 originations on the books and we stressed that call. It about 23% from from what we call the baseline, which is a 50% loss ratio.

And Thats distressed fund defaults, increasing as well as severity of loss. So that's our estimate at this point in time and if you think about it that $546. If you think about sensitivity around it for example of every 5% maybe an incremental loss ratio our claims going up that could be about $100.

And unit economics in our profit share just from a just an average unit.

Sensitivity.

Okay. That's helpful. Thank you.

And then on the insurance company. So I appreciate you gave us.

I guess how long each.

Each companies' contracts goes up into but I'm sort of wondering if before.

And it's going to insurance company change anything so they slow down approvals or change akamai to change things.

It affects the volume all else being equal thank you.

Yes.

Great relationships as we said earlier and it's a partnership with our carriers.

We review all changes underwriting changes together with our approval as long as well as theirs.

I mean again, it's a strong appetite for our business and it's been very profitable for Amtrust in particular, as well as arch and Anika going forward and they're excited to get more flow of our business.

CNA exits and changes their priorities. So we continued origination volume.

As for this.

This year was $4 7 billion for us in.

Obviously with our.

Going into 'twenty three.

There's going to be down, but theres plenty of capacity not only for 2023, a lot of growth into the future with our three carriers.

Okay. That's helpful. Thank you.

Yes.

No ordering that one carrier can make a change all three have to agree to it so it's not like one.

Side, they wanted to slow down by changes in underwriting rule.

Yes, Great point, John Thank you.

Our next question comes from the line of John Davis with Raymond James. Please proceed with your question.

Good afternoon. This is Madison on for J D.

I wanted to start on Opex I think it will step down again in <unk> based on the guide but is there a way you can help us think about the right Opex run rate just given the current macro backdrop and some of your comments around retention and investments throughout the year.

Yes, I mean as you pointed out with the midpoint of the guide for Q1 since we just went to a Q1 outlook I think slight downtick there from obviously Q4 levels.

But again as we think about our investments in 2023 as we invest in the business.

Measured thoughtful investments in we can slow those down if we need to.

The pace of those investments.

Our business. So I'd, just say in that range of Q4, but probably slightly down a bit just on the Q1 guide on Opex.

Okay. That's helpful. And then I understand near term margins are under pressure a lot given the macro headwinds, but just as we think about the longer term model is there anything structurally that's changed that would limit your ability to get back to that 60% plus EBITDA margin over time.

As we think about margins, we want to grow our business and obviously, there's headwinds today or in challenges that as we invest.

If you think about the Q1 outlook.

The margins are so 43% EBIT margins to 50 from a low to the high we think that's temporary as we invest in the business now as you know as others are retrenching and not we look at this as an opportunity to really be positioned well for the pent up demand as the industry in auto specific recovers. So we believe our margins will.

Improve as our revenues go up and we can leverage the SG&A that's on the books today.

Madison. This is Keith Thanks, Chuck I will just add on those investments and why we feel it's the right time.

As Chuck mentioned these are all measured and prudent investments that are based on through the lens of data and analytics to make sure that the right investments at the right time and they fall into two very simple camps. The first is increasing our capacity and number of lender partners as capacity per lender customers down it's important to.

ROE overall capacity so when the market comes back it will rise it will rise together and then the second one is an attack.

Technology investment and product and Thats simply to help our application volumes flow as best they can through through our funnel, especially when the time on applications are down so theyre around.

Increased.

Market penetration and there are around increasing volume of outflows given the current given the current environment.

Okay got it I appreciate the color and thanks for taking the questions.

Thanks, Matt Thanks, Matt.

Our next question comes from the line of Faiza.

Ali with Deutsche Bank. Please proceed with your question.

Yes, hi, thank you.

So firstly I wanted to follow up on the point I think John made around premium increases.

To account for that ASC 606 or to offset some of those ASC 606 headwinds.

Curious if you've if there have been any premium increases to date and if that's included within our <unk>.

Adjustments this quarter and if not sort of how quickly do you think those premium increases.

It can happen.

Good morning, John .

Yes, you want to start and then I'll kind of jump in as well.

Yes.

And we've never had a premium increase and all of the year, we've been doing business we've had one.

Reduction in premium of 15% on that one.

Significant time ago.

If you remember and following us over the last few years.

One of the things we have done.

It affects you wait.

What looked like a premium increase.

We have reduced.

The advance rate on alone if you remember how we price loans.

95% LTV, 100%.

105, and so on.

We're only doing in advance of 90% of the value that.

That would appear to be a higher premium to ensure that long.

Did that twice.

I think north of 5% back when Covid first half and then two and a half not that long ago.

Yes to answer the second part of your question how quickly could it happen if we feel the need to increase premium.

30 day notice and short.

We could send one notice out.

To all of our insured.

Union Bank funding sources, and within 30 days and have that premium increase in place.

Got it. Thank you and then just a follow up question broadly on the macro environment.

I'm curious in terms of what do you need a four.

For a recovery or really for normalization in your business because obviously there have been a number of headwinds over the last call.

Call. It three years and it seems like the headwinds have been shifting and coming from different angles and at this point. It seems like you're there is obviously supply chain headwinds that have been continuing there seem to be.

I see.

<unk> be multiple headwinds as it relates to whether its affordability.

And then some of the issues that you were talking about as it relates to.

Defaults things like that.

And then it seems like there is an issue with the credit Union funding sort of what do you need to happen from a macro perspective for things to normalize.

Yes.

Keith I think you articulated it pretty well I mean, it is the conundrum of our wonderful automotive retail industry that <unk>.

Supply chain was buffeted in supply was hurt during COVID-19 and right after COVID-19 and once as an industry. We've started to figure that out a little bit, albeit manufacturer specific now we have this demand shortage. So we've kind of got supply figure it out and now we have this demand dynamic and it's captured I think Beth.

And the Cox, Moody's affordability index, which as I'm sure everyone on the call is aware there is now at 44 weeks on average to pay for the median used car. So that's at an all time high. So that's the key factor what do we need to make that affordability go away. It's very straightforward. We've got to have used car prices come down which.

Were forecasting that they are going to happen in 2023, and we need rates to stabilize them come down. So that's one of the most of that is one of the most important things for the business.

I think one of your follow on questions is just liquidity, our thought and thinking John and Chuck. Please jump in is that especially as it relates to credit unions that that liquidity in the balance sheets are going to get better in the second half of the year for the very simple reason of one they have more deposits coming in as they've raised rates to attract those deposits and secondly, just as they are.

Current loan auto loan portfolio starts to roll off.

I mean, John or Chuck anything to add great well, the one thing I would add to that Keith.

And one of the things you don't find credit Union.

<unk> talked about the low interest rate loans on longer term loan.

Yes that makes some gun shy to go out there and do the seven year 10 year 15 year mortgages.

Rather and then Chile is a real proponent of a shorter duration average like two and a half that.

And a half years, our allowance at a decent return.

I think youre going to see a credit union, particularly get back to their to their core business as much as helping those near prime consumers. The Henderson, our people and I know on the affordable car to get to work come back.

While being able to generate a decent yield with a short duration loan.

Understood. Thank you so much.

One thing I'll follow up as John mentioned that we have not.

Had a formal actually price increase or I guess not many when we put in the vehicle value discount as John referenced and in 2020, and then also again in 2022.

That $2, five 2.5% nickel value discount kind of equates to about a 10% to 11% effective premium increase and that's still in effect that we put in April of last year.

Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, guys.

And my date on that.

Any update on the two OEM and any outlook on any future OEM customer.

Okay.

Well, Mike This is Keith happy to take that just on the future OEM customers. Let me just say that really encouraged currently by the frequency of our engagement with what's in the pipeline and then based on relationships that I've had just in the past throughout my career, the introduction of two or multiple new low.

It goes into that sales pipeline.

Further encouraged by just the activity there is that a number of the prospects have pass through quantifiable stage gates and kind of the flow of from prospect to close now to be clear. These are very very large accounts.

They're closing is unpredictable, but but just to repeat very encouraged by the frequency of interaction and then the formal passing through of stage gates too to get to get to the ultimate relationship.

And Michael I'll jump in on the OEM wanting to obviously you can look at our key performance indicators in our supplemental deck down year over year quarter as well as full year, but we're encouraged that Q3 to Q4 that stabilized in that business is actually going up a bit so where it was good to see that momentum and OEM.

I wanted to.

Got it.

Good to hear on the future.

Did you guys disclose like what percentage of your volumes CNA was.

No, we haven't and they've been with us.

The year since 2017, but theyre not theyre not our largest carrier.

Got it Okay, Hey, thank you yes.

Thanks, Mike.

Our next question comes from the line of Spencer James with William Blair. Please proceed with your question.

Hi, Thanks for taking the question. This is Spencer on for Bob Napoli.

Core non refi non OEM starts were a bit stronger seasonally than we anticipated could you talk about what customer activity is driving that and.

And maybe how we should think of mix.

Sir it's between Oems refi in core.

For your March quarter Guide.

Yes.

Maybe start with refi I think Keith and in prepared comments, a refi business is down obviously with the seven rate hikes in 'twenty, two and then ill one already in 'twenty, three that's severely impact or a refinance channel.

So it was 43% fell to 22 and as low as call. It 11% in December . So if you think about year over year Spencer the core.

Non OEM business, if you will is up 16%.

Pleased to see.

And fourth quarter, it was down but obviously the when we revise the guide for the year that was taken into consideration in the liquidity constraints on our own.

Our large customers primarily in dollars and as we think about going forward I think the Oems are on track to continue at the pace. They are in and we believe that hopefully trough and youre going to add more to us as we go forward.

But the mix of the business, it's hard to say right now with not given our full year outlook and we're learning each day on kind of where we're heading here but.

Keith has something to add more about the kind of the non core versus core customers. Yes, we're encouraged by the growth of just.

The large majority of our customers and.

And look forward to the continued participation in the program in 2023.

Okay. Thank you for the color and as a follow up.

Average program fee per search.

Can you do improve and it looks like the improvement in program fee per search.

Somewhat lagged the increase in average loan size could you talk about what drives the lag and program fees versus loan side is it a lag or is there. Another there are mix related components.

No I think it's more of a mix related component because it's our program fee is based on a percentage of the loan amount. So there wouldn't be a lag there.

Larger volume customers get a discount there on the program fee expenditures. So it's just really a mix and lower concentration in some of our larger customers.

It did more volume in the past that that brought that down a bit.

Okay I appreciate.

Hit it and there's been a ramp and program 3% over the course of the year do we should we expect that to be primarily correlated with loan size for 23 or are there other factors to consider.

Yes, I think so.

Yeah.

I appreciate it thank you thank.

Thanks, Patrick.

There are no further questions in the queue I'd like to hand, the call back to Keith <unk> for closing remarks.

Well, thank you operator.

Just as we close if I may I'd, just like to share a thought or two on the industry.

As many of you know I've dedicated my entire career the majority of the bioterror and career, serving automotive retail for many reasons, but the most simple as the fact that trillions of dollars automotive retail is the single largest non Harrow health care related consumer retailer on the planet.

93% of households in the U S have at least access to at least one car and that far outpaces, the number of consumers who own a cell phone.

Smartphone it at 85%.

What we're seeing now is an especially strong cyclical cyclicality and what I've observed throughout my career is that automotive and automotive for dance in particular always comes back the manufacturers. The Oems will ramp up production to run multiple shifts will produce cars and then follow those with wonderful incentives for consumers.

Dealers are wildly resilient they always find a way to put people in cars, whether it would be new or used cars and and lenders, especially will regain their appetite for auto loans, which are comparatively short duration and exhibit historically very very low delinquencies and when the industry comes back. It's almost always led by used cars, which is good for.

US because as we all know used cars is the primary source of our business, 85% of our volume comes from US. While 15 is from new and it comes back quickly and used and the reason for that is very very straightforward consumers can defer delay the purchase of a new car, but they can't defer or delay the purchase of transportation and what the average age of the car on the road.

Approaching 13 years, we think there is phenomenal pent up demand and so I just wanted to share my perspective, just over my career in the auto sector and couldnt be more enthused about the future of open lending.

I would like to thank everybody for joining us today.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

[music].

Good afternoon, and welcome to the open Lendings fourth quarter and full year 2022 earnings conference call.

As a reminder, today's conference call is being recorded.

On the call today are Keith Jessica CEO , and Chuck <unk> CFO .

Earlier today, the company posted its fourth quarter and fiscal year 2022 earnings release, and Investor supplement to its Investor Relations website.

In the release, you'll find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call.

Before we begin I'd like to remind you that this call may contain estimates and other forward looking statements that represent the company's view as of today February 23 2023.

Open lendings disclaims any obligation to update these statements to reflect future events or circumstances.

And now I'll pass the call over to Mr. Keith Jessica. Please go ahead.

Thank you operator, and good afternoon, everyone. We appreciate you joining us today for <unk> fourth quarter and full year 2022 earnings conference call.

Of the federal reserve rate increases to the auto industry and more specifically to consumer affordability and lender liquidity.

Having managed scaled businesses in the auto sector through the great recession as well as serving on the open lending board. During this time I am encouraged by the response of our team and I'm confident in our ability to manage through the current challenges I will speak more about how we are positioning the company to continue to gain share given our financial strength, our value proposition and our competitive position.

After reviewing our results for the year, we certified over 165000 loans, a slight decrease from the previous year.

Revenue for the year was $180 million down 17% and at the lower end of our guidance adjusted operating cash flow for the year was $143 million, which was near the high end of our guidance.

Now I'll spend a few minutes on recent industry trends and expectations for 2023 first on inventory as many of you know used vehicle sales in 2022 tumbled to their lowest levels in nearly a decade supply chain and chip shortage constraints have improved year over year, but sales for new auto's remained well below historical levels as well.

<unk> and lower disposable income.

As the fed continues the path to reduce inflation, a more expensive auto payment driven by higher rates is dampening demand for example, the weighted average auto loan rates for both new and used vehicles and sub segments is up 200 to 300 basis points.

Next on loan originations and speaking with the Treasury teams at credit unions and other financial institutions. They currently have alternatives for balance sheet capital in short term duration instruments as well as risk rebuilds notes and bonds in the treasury market.

To the extent these alternatives are more attractive liquidity within the auto origination pool of capital is reduced.

Callahan data shows total loan originations were about $160 billion in the fourth quarter of 2022 down 21% from a year earlier and down 19% sequentially from the third quarter of 2022 and.

And the peak of the pandemic when liquidity was high and federal stimulus relief was running rampant.

Credit unions held about 12%, 13% of their assets as cash which was easily available to fund new loan demand now credit unions on average are down to approximately 6% of their total assets in cash some of our largest credit unions have a loan to share ratio in excess of 100%.

This reduction in liquidity has impacted the borrowers who are most in need and have been hit hardest by inflationary pressures to their rent food energy and transportation.

Finally, our refinance business made up 43% of our certified loan volume at its peak in February of 2022, but has declined to 11% in December 2022. This business has been severely impacted by the unprecedented federal reserve actions throughout 2022, and now into 2023 again this constitutes a significant impact.

On affordability of our near and non Prime borrowers based on prior cycles, it's our sense that when rates begin to stabilize we should begin to see improvement in this part of our business.

Expect to be well positioned to meet pent up demand.

As the industry recovers.

With that in mind I wanted to discuss our areas of focus as we move throughout 2023 to position us well for this year and beyond areas, which I believe will support and strengthen our long term competitive advantages first we look to further refine and optimize our sales channels.

Second we will continue to enhance our technology offering.

And equally as important we are laser focused on attracting.

And retaining talent.

Now to go into each area and a little bit more detail.

First sales operations and marketing.

To power our go to market efforts, we increased our sales marketing and account management teams by nearly 30% in 2022, and we plan to continue to thoughtfully invest in these areas throughout 2023.

We will keep a watchful eye on these investments measured performance and ensure that they delivered the expected returns.

To strengthen our teams future success, we're going to ask our team into one group dedicated purely the selling while the other focuses solely on account management in short we have aligned our efforts to maximize our sales efficiency.

Our experienced sales team, we will continue to work primarily on closing new accounts their efforts will be aided by our expanded marketing team, which is supporting cells with a robust lead generation program to help secure new business. We are early in this initiative, but you may have already seen our earned media coverage in the Wall Street Journal.

Automotive news auto Remarketing Auto Finance news credit Union times and payments Dot Com. These are publications that decision makers read daily. So we believe this will further support our sales team to lead. These efforts we've added a new senior Vice president of marketing to our leadership team.

We are encouraged by our strong December sales as well as other recent wins, including the addition of Crescent Bank, a top 50 bank auto lender in the U S.

Our account management team will center of their attention on continued engagement and collaboration with our customers with the simple priority of building our base of business from existing customers by expanding their use of our program. We've launched various targeted customer promotions via multiple channels and we have produced a number of thought leadership pieces, including a highly.

Attended National Association of Federal credit unions webinar on loan securitization.

<unk> was up 16% driven by strong refinance volumes earlier in the year. While in contrast, the large universal banks reported auto loan originations down 25% to 30% year on year.

<unk> invest in our lenders production technology to remain best in class risk based solution for lenders seeking to serve non prime customers to make car ownership more accessible for those in near and non prime credit segments. We increased our allowable vehicle age from nine to 11 years, one of the criteria we set forth in conjunction with this modification was very.

Specific mileage caps as determined by a proprietary data set of auto evaluations with the average age of finance vehicles jumping from five four to six four years for FICO scores below 640. This.

This change allowance financial institutions to grow their portfolios, while minimizing risks through open lendings default insurance and risk management program.

Equally as important vehicles 10 years in orders comprise some 8% of all used car purchases.

We've also expanded our loan approval exploration window from 30 days to 45 days for our direct and refinance channels. This change offers our customers and refinance partners sufficient time needed to complete their respective funding processes to support our go to market strategy enhancements and streamline on boarding of new customers. We recently expanded our integration to three new <unk>.

<unk> partners and.

First home mortgage and brings a wealth of industry and technical experience.

We are confident that our technology investments allow us to improve our time to market for developing testing and developing secure applications and enhanced customer satisfaction.

And collaborative environment to unlock value and foster growth for individuals teams and the business.

To wrap up I couldnt be more excited about our opportunity now having almost five four months in the CEOC. This was driven by the fact that we continue to have a large and growing total addressable market.

With that I would like to turn the call over to Chuck to review Q4, and the full year in further detail as well as to provide our thoughts on 2023 outlook Chuck.

Thanks, Keith during the fourth quarter of 2022, we facilitated 34550 certified loans compared to 42639 certified loans in the fourth quarter of 2021.

And 42186 certified loans in the third quarter of 2022.

When excluding the impacts of ASC 606 change in estimate from both periods revenue during the fourth quarter of 2022 was only down $5 5 million or 12% year over year.

To break down total revenues in the fourth quarter of 2022 profit share revenue represented $6 1 million program fees were $18 3 million in claims administration fees and other were $2 4 million.

It is important to note that while our certified loan volume was down in the fourth quarter of 2022 from the fourth quarter of 2021.

Our program fee revenue only decreased slightly due to mix of business certified which resulted in higher unit economics.

The net profit share to us is 72% and the monthly receipts from our insurance carriers reduce our contract asset each period.

Notably this was partially offset by lower anticipated prepaid due to the elevated interest rate environment.

This index fill nearly 15% year over year.

That's the largest one year decline in the history of the index.

However, it's worth noting that it remains highly elevated compared to prior 10 year trailing levels and therefore continues to impact auto affordability.

In comparison during the fourth quarter of 2021 revenue included a positive $6 5 million change in estimated future revenues on certified loans originated in historical periods.

This was primarily due to a positive realized portfolio performance attributable to lower frequency and severity of claims.

Gross profit was $21 9 million and gross margin was approximately 82% in the fourth quarter of 2022 as compared to $46 9 million and gross margin of approximately 91% in the fourth quarter of 2021.

For the quarter gross margin, excluding ASC 606 negative change in estimate would have been 88%.

Selling general and administrative expenses were $17 2 million in the fourth quarter of 2022 compared to $11 7 million in the fourth quarter of last year.

Operating income was $4 8 million in the fourth quarter of 2022 compared to $35 2 million in the fourth quarter of 2021.

Net loss for the fourth quarter of 2022 was $4 2 million.

This was driven by the $12 8 million negative adjustment to our profit share contract asset.

Compared to net income of $27 8 million in the fourth quarter of 2021.

Basic and diluted earnings per share was a loss of <unk> <unk> in the fourth quarter of 2022 as compared to 23.

In the previous year quarter.

Adjusted EBITDA for the fourth quarter of 2022 was $8 5 million as compared to $36 6 million in the fourth quarter of 2021 Theres.

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 $33 million as compared to $38 million in the fourth quarter of 2021.

We exited the quarter with $380 million and total assets of which $205 million was an unrestricted cash $75 million was in contract assets and $65 million and net deferred tax assets.

We had 167 million and total liabilities of which $147 million was outstanding debt during the fourth quarter, we announced the authorization by our board of directors to repurchase $75 million of our common stock through November of this year.

We expect to continue to be opportunistic and open market purchases under the current authorization throughout the year.

Before I touch on guidance I would like to update you on a change with within our insurance partner relationships.

We would like to thank them for their partnership over the years and their support as we work through and manage the runoff of the existing policies over the coming years.

As a reminder, one of our key initiatives over the past few years has been to minimize concentration risk by bringing additional a rated insurance carriers into our program.

We have successfully executed on this initiative as we have strong relationships with our three other insurance carriers to provide credit default insurance coverage for our auto lender customers.

Now moving onto guidance.

If inflation were to persist through 2023. It appears the federal reserve will stay the course and keep rates higher for a longer period.

While the bond market at times, it appeared to be indicating a more favorable rate environment. Later in 2023 recent forecast from the Federal reserve are more conservative with current indications that the terminal fed funds rate will be in the 6% range.

So for these reasons at this time, we feel it's prudent to take a more measured approach by providing only a quarterly outlook.

Guidance for the first quarter of 2023 is as follows we expect certified loans to be between 28030 2000.

Total revenue to be between 30 million and $34 million and adjusted EBITDA to be between $13 million and $17 million.

And our guidance, we have taken the following factors into consideration.

The affordability index of our target credit score borrower due to the continued inflated used car values inflation rising interest rates and overall consumer sentiment.

Industry challenges subside.

We would like to thank everyone for joining us today and we will now take your questions also joining us on the call will be John Flint opened lineage chairman of the board.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

You'd like to ask a question you May press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

Hi, good afternoon. Thanks for.

Thanks for taking my questions.

I wanted to dig in a little bit about.

Profit sharing.

Going forward as it relates to your carrier relationships.

Can you can you kind of remind us.

72%.

Portion that you keep has always been very generous in my understanding has been.

Because the carriers like the product on their end because you provide all the customer acquisition costs.

And underwriting and ultimately the default insurance their underwriting is very high Roe.

Given cna's decisions.

Should we be thinking about whether your.

Other three partners.

Given.

The credit performance of the portfolio now.

Whether they're rethinking that 70 228 mix I mean are they are there any discussions about.

The kind of returns that they.

Require and whether they want those modified at all.

Yes, Hi, David its Chuck.

To visit with you it's a great question.

We've got the three carriers that will remain in one C&I has been a great partner for a long time and I would tell you that the business has been very profitable for them.

This is more of a capital allocation change for them in an underwriting decision.

<unk> had a great hand off to us of those relationships and I built them over the last couple of years as well and the appetite is very strong for our business at the current terms in unit economics.

Economics.

Got it.

And maybe just as a follow up kind of the same topic.

Obviously kind of not surprised to see the contract asset prospectively.

Prospectively be written down a bit.

Non prime auto probably deteriorated more than most other consumer.

Credit asset classes, but.

After after the write down how should we think about.

Maybe a more normalized level of profit share per load.

Throughout 2023.

Given all the affordability issues that are going to persist.

Another great question, David what I would tell you is as we.

We analyze that the contract asset and our profit share every quarter.

Biggest driver for obviously, the $12 eight negative change in the quarter and I will tell you year to date, that's like $5 seven for the year negative.

It basically the Manheim went down 15% in 2022, which is the largest single decline.

In the history of the index.

And as we thought about this at Q3, just give you a little bit more history, we anticipated that it would be down about 11% full.

Full year 'twenty two so the accelerated decline in the fourth quarter as we put the Q4 originations on the books at the $546, we took that into consideration as long as well as stress into 'twenty three.

On defaults, increasing as well as the severity of loss due to the manheim coming down so as we put that on we.

We booked at $5 46 per loan at about a 62% loss ratio and I will tell you.

As we think about that at a baseline of about 50% loss ratio, which is kind of historical averages that we booked.

Book to we put about 23% stress on the Q4 originations, which got it down to the $5 46, which had started at about a call. It a 788 profit share for <unk>. So we feel good about the $5 46 per share, but obviously as we kind of navigate through these volatile times in the economy and the auto industry specific and Delinked.

<unk> will continue to review that but we feel good about our book at 12 31.

22, and we will continue to monitor that.

Got it got it sounds like it may have had an excellent more than consumer payments.

Thank you, yes, Yes go ahead John .

One more comment to the insurance players.

Okay Alright.

Now again keep in mind.

Because this is written as a surplus lines policy.

And then every loan.

Targeting a 60% loss ratio.

If it ever got out of whack and if it started declined way beyond that.

At 72%.

Okay percentage of X.

The premium, but we can adjust the premium going forward.

Maintaining the loss ratio.

Carriers are looking for.

No I don't think theres been negotiating.

Percentages down at the matter as.

As rates are rising everywhere in the country.

The rate increase might do is increase the rate to the consumer.

Easy to cover.

Understood very helpful. Thanks, so much.

Thanks, David and thanks, John .

Our next question comes from the line of Joseph <unk> with Canaccord. Please proceed with your question.

Hey, guys.

Good afternoon, and thanks for taking our questions I know Keith you mentioned.

A lot of hires and a lot of.

Investment in the business were there some other moving parts in.

G&A line that.

Drove it up.

So materially here in Q4, and then another follow up on that.

Hey, Joe I'll tell you I'll start this is Chuck to visit with you. If you think about the SG&A throughout 2022.

<unk>.

Several folks in 'twenty two to help as we grow our go to market sales strategy and our enhanced our technology. So that's kind of been throughout the year.

The year over year.

Q Q4 to Q4, 11, and $12 million to call it $17 million that $5 million has progressed throughout the year sequentially from Q3 were actually down slightly from Q3 of about $500000. So I wouldn't say, it's up sequentially, but year over year is just the head count adds to kind of support our investment in the business is as we wait for this pin.

Demand that will be there is as we know the industry recovers.

Sure Fair enough and then.

On the as I know you mentioned crescent being added here.

In the quarter.

Maybe we could get a higher level view of appetite from new logos now I mean, obviously, there's a lot of headwinds in everything from.

Credit unions, having.

Lower cash balances to just inventories being down.

The board is.

Yes.

Our our perspective clients moving forward now versus maybe six months ago, and then if you could mention what those new tech partner integrations might mean to the business that would be helpful. Thanks, guys.

A lot of the efforts of the new and expanded go to market strategies have been around segmentation and prioritization of the pipeline and we really want to go after lending partners and a number of various segments, but first and foremost just kind of categorize them by first and foremost the potential for <unk>.

<unk>.

Second whether or not they opened all three channels. So they view that indirect direct a refinance.

Their current loan to share or their liquidity balance.

Fair enough and then on those integrations.

Yes, Joe This is Chuck from a tech partners perspective, integrating with additional losses that make our time to first revenue quicker. So integrated for example, with ex Lowe's.

The project with the <unk> solutions as well as adding.

Our new refi partner with get Jerry So so a lot of things that we're working on there to be ready and also grow starts as we can and control what we can.

Great. Thanks, a lot guys.

Yes. Thank you Jeff Thank you Jeff.

Our next question comes from the line of Peter Heckmann with D. A Davidson. Please proceed with your question.

Hey, good afternoon. So the cash flows for the company were very strong and I assume that is a reflection of the slowing of the business and just cash collections on AR.

The existing loan book of business.

I guess when you think about that.

I mean.

The volatility that we've seen at acknowledging this has been a very very unique.

And dynamic environment for auto sales auto pricing.

Interest rates, but the dynamic around these really significant changes in profit sharing under ASC 606 are really just make it.

Very very difficult for a public company and expectations for a public company given the underlying cash flow.

I guess do you feel that open lending needs to remain a public company and or would this business be more appropriately held within either a larger business or help as a private company or at the quarter to quarter volatility in earnings.

It wasn't really going to be that big of an issue.

Well, maybe I'll have Pete on that last question.

We don't want to speculate on that we are a public company today, and we're working very hard for our shareholders to maximize value.

Your question around ASC 606, the volatility I mean.

Yes, So we had a lot of positive performance in 2021 and.

Good ways into 'twenty, two and the <unk>.

Changes in the industry and the macro obviously impact us, but which we provide transparency there and good disclosures, we feel but I will tell you that from a cash perspective, obviously the cash flow statement, we generate about $90 million in cash in 2022, and we've got a healthy cash balance at year end at $200 million and it's.

We started the share buyback program and invested there so.

But we will continue to generate a freak out a lot of free cash flow in this business. It's a great cash business and if you think about maybe instead of adjusted operating cash flow metric, maybe even a free cash flow metric at about call. It 85% to 90% of adjusted EBITDA, that's kind of what we targeted.

No I hear what you're saying and I sympathize with you.

Yes.

If you are having a hard time forecasting it.

Much more difficult.

For us so I guess I'll continue that go with it and think about some of those factors driving the.

Reversal here this quarter.

So thank you.

Our next question comes from the line of Vincent can you take with Stephens. Please proceed with your question.

Hi, Thanks for taking my question good afternoon.

Wanted to go back to the profit share. So wondering if you could kind of go into more detail about.

In the fourth quarter.

What the big changes in assumptions.

We're plus.

What gives you comfort that.

What you built into the expectations for profit share now are.

Or where they should be or could you give us sensitivity around.

If used car prices are different things move around like could profit share deal. Thank you.

Hi, Vincent.

I think I said earlier when David asked the question around profit share maybe I'll start with what changed in the fourth quarter.

It was an accelerated decline in the manheim unprecedented 15% for the year.

And when we were at Q3, we projected the Manhattan to be down about 11%. So used car values as a direct drive of our estimate of future claims and severity of loss. So it had a significant impact on us in the quarter and as you may recall earlier in the year Cox was forecasting the Mannheim to be down in Q1 and Q2 only.

<unk>, 3% for the year. So so it was a significant change here in the later part of the year as we think about sensitivities around it.

$546 that we discussed earlier when we put the Q4 originations on the books and we stressed that call. It about 23% from from what we call the baseline, which is a 50% loss ratio.

Thats distressed fund defaults, increasing as well as severity of loss. So that's our estimate at this point in time and if you think about it that $546. If you think about sensitivity around it for example of every 5% maybe an incremental loss ratio or claims going up that could be about $100.

And unit economics in our profit share just from a just an average unit.

Sensitivity.

Okay. That's helpful. Thank you.

And then on the insurance company. So I appreciate you gave us.

I guess how long each.

Each company's contract goes up into but I'm sort of wondering if before.

And it's going to insurance company change anything so kind, a slowdown approvals or change dramatic change things that might affect the volume all else being equal. Thank you.

Yes.

Great relationships as we said earlier and it's a partnership with our carriers.

We review all changes underwriting changes together with our approval as long as well as theirs. So I mean again, it's a strong appetite for our business and it's been very profitable for Amtrust in particular as well as arch, an anecdote going forward and they're excited to get more flow of our business.

Exits and changes their priorities. So we've continued origination volume.

<unk>.

This year was $4 7 billion for us in.

Obviously with our going into 'twenty three.

Volume is going to be down.

But there is plenty of capacity not only for 2023, a lot of growth into the future with our three carriers.

Okay. That's helpful. Thank you.

It's also worth noting that one carrier can make a change all three have to agree to it so it's not like one.

Side, they wanted to slow down by changing our underwriting rule.

Yes, Great point, John Thank you.

Our next question comes from the line of John Davis with Raymond James. Please proceed with your question.

Good afternoon. This is Madison on for J D. I wanted to start on Opex I think it will step down again in <unk> based on the guide but is there a way you can help us think about the right Opex run rate just given the current macro backdrop and some of your comments around retention and investments throughout the year.

Yes, I mean as you pointed out at the midpoint of the guide for Q1 since we just went to a Q1 outlook I think slight downtick there from obviously Q4 levels and.

Again, as we think about our investments in 2023 as we invest in the business. These.

These are measured thoughtful investments in <unk>.

We can slow those down if we need to pay.

Pace of those investments.

In our business. So I'd, just say in that range of Q4, but probably slightly down a bit just on the Q1 guide on Opex.

As we think about margins.

We want to grow our business and obviously, there's headwinds today or in challenges that as we invest.

You think about the Q1 outlook.

We'll improve as our revenues go up and we can leverage the SG&A that's on the books today.

Madison. This is Keith Thanks, Chuck I will just add on those investments and why we feel it's the right time.

As Chuck mentioned these are all measured and prudent investments that are based on through the lens of data and analytics to make sure the right investments at the right time and they fall into two very simple camps. The first is increasing our capacity and number of lender partners as capacity per lender customers down it's important to grow.

Overall capacity so when the market comes back it will rise it'll rise together and then the second one is in the <unk>.

Technology investment and product and Thats simply to help our application volumes flow as best they can through through through our funnel, especially when the time on applications are down so theyre around.

Increased.

Our market penetration and there are around increasing volume of outflows given the current given the current environment.

Okay got it I appreciate the color and thanks for taking the questions.

Thanks, Madison Thanks, Matt.

Our next question comes from the line of.

<unk> with Deutsche Bank. Please proceed with your question.

Yes, hi, thank you.

So firstly I wanted to follow up on the point I think John made around premium increases.

To account for that ASC 606 or to offset some of those ASC 606 headwinds. So curious if there has been any premium increases to date and if that's included within it.

<unk> this quarter and if not sort of how quickly do you think those premium increases.

It can happen.

John .

Yes, you want to start and then I'll kind of jump in as well.

Yes.

Alright.

Never had a premium increase and all of the year, we've been doing business. We've had one reduction in premium of 15% on that one.

Significant time ago, if you remember and following us over the last few years one of the things we have done.

<unk>.

Almost what looked like a premium increase.

And we have reduced.

The advance rate on alone if you remember how we price loans.

Got 95% LTV, 100% <unk>.

<unk> and so on.

So if we were only doing in advance of 90% of the value.

That would appear to be a higher premium to ensure that loan.

Did that twice.

Yes, I think there was a 5% back when Covid first and then two and a half not that long ago.

Yes to answer the second part of your question how quickly could it happen if we feel the need to increase premium.

30 day notice to ensure.

So we could send one noticed out now.

All of our insured.

Credit Union Bank funding sources.

And then 30 days and have that premium increase in place.

Got it. Thank you and then just a follow up question broadly on the macro environment and.

I'm curious in terms of what do you need a four.

For a recovery or really for normalization in your business because obviously there have been a number of headwinds over the last.

Call. It three years and it seems like the headwinds have been shifting and coming from different angles and at this point. It seems like your there's obviously supply chain headwinds that have been continuing there seem to be.

Is that it seems to be multiple headwinds as it relates to whether its affordability.

And then some of the issues that you were talking about as it relates to <unk>.

Defaults things like that.

And then it seems like there is an issue with the credit Union funding sort of what do you need to happen from a macro perspective for things to normalize.

And Pfizer. This is Keith I think you articulated it pretty well I mean, it is the conundrum of our wonderful automotive retail industry that supply.

First in the Cox, Moody's affordability index, which as I'm sure everyone on the call is aware there is now at 44 weeks on average.

Pay for the median used car. So that's at an all time high. So that's the key factor what do we need to make that affordably. We go away. It sits very straightforward. We've got to have used car prices come down, which we're forecasting is that they are going to happen in 2023, and we need rates to stabilize them come down. So that's one of the most one of the most important things for the.

<unk>.

Current loan auto loan portfolio starts to roll off.

I mean, John or Chuck anything to add great well, the one thing I would add.

Add to that Keith and one of the things you don't find credit Union.

Some of them talk about these low interest rate loans.

Longer term loan.

Yes that makes some gun shy to go out there and do the seven year 10 year 15 year mortgages.

Rather and then Chile is a real proponent of a shorter duration average like two and a half to three and a half years auto Lal D.

Return thank.

Thank you are going to see credit Union, particularly get back to their core business as much as helping those near prime consumers. The Henderson, our people and I know on affordable car to get to work come back.

Being able to generate a decent yield with a short duration alone.

Understood. Thank you so much.

One thing I'll follow up as John mentioned that we've ever.

I had a formal actually price increase or I guess not many when we put in the vehicle value discount as John referenced and in 2020, and then also again in 2022.

Of that $2, five 2.5% vehicle value discount kind of equates to about a 10% to 11% effective premium increase and that's still in effect that we put in April of last year.

Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, guys.

And my date on that.

Any update on the two OEM and any outlook on any future OEM customers.

Well, Mike This is Keith happy to take that just on the future OEM customers. Let me just say that really encouraged currently about the frequency of our engagement with what's in the pipeline and then based on relationships that I've had just in the past throughout my career the introduction of <unk>.

There are multiple new logos into that sales pipeline.

And Michael I'll jump in on the OEM wanting to obviously you can look at our key performance indicators in our supplemental deck down year over year quarter as well as full year, but we're encouraged that Q3 to Q4, that's stabilized in that business is actually going up a bit. So we're still good to see that momentum and OEM.

I wanted to.

Got it.

Good to hear on the future.

Did you guys disclose like what percentage of your volumes CNA was.

No, we haven't and they've been with us.

The year since 2017, but theyre not our largest carrier.

Got it Okay, hey, thank you.

Yes, Thanks, Mike.

Our next question comes from the line of Spencer James with William Blair. Please proceed with your question.

Hi, Thanks for taking the question. This is Spencer on for Bob Napoli.

The core non refi non OEM since were a bit stronger seasonally than we anticipated could you talk about what customer activity is driving that.

And maybe how we should think of mix of.

Sarah it's between Oems refi in core.

For your March quarter Guide.

Yes.

Obviously, maybe start with refi I think Keith and in prepared comments, a refi business is down obviously with the seven rate hikes in 'twenty, two and then ill one already in 'twenty, three that's severely impact or a refinance channel.

So it was 43%.

The 22 and as low as call it 11% in December So if you think about year over year Spencer the core.

On OEM business, if you will is up 16%, which please.

Pleased to see.

And fourth quarter, it was down but obviously the when we revise the guide for the year that was taken into consideration in the liquidity constraints on our own.

But the mix of the business, it's hard to say right now with not given our full year outlook and we're learning each day on kind of where we're heading here but.

Keith has something to add more about the kind of the non core versus core customers. Yes, we are.

<unk> by the growth of just the large majority of our customers and.

And look forward to the continued participation in the program in 2023.

Okay. Thank you for the color and as a follow up.

Average program fee per search.

Can you do improve and it looks like the improvement in program fee per search.

Somewhat lagged the increase in average loan size could you talk about what drives the lag and program fees versus loan side is it a lag or is there. Another is there a mix related component, but im missing.

No I think it's more of a mix related component because it's our program fee is based on a percentage of the loan amount. So there wouldn't be a lag there.

Larger volume customers get a discount there on the program fee expenditures. So it's just really a mix and lower concentration in some of our larger customers.

Did more volume in the past that that brought that down a bit.

Okay I appreciate it and there's been a ramp and program 3% over the course of the year do we should we expect that to be primarily correlated with loan size for 23 or are there other factors to consider.

Yes, I think so.

Sure.

I appreciate it thank you.

Thanks, Patrick.

There are no further questions in the queue I'd like to hand, the call back to Keith <unk> for closing remarks.

Well, thank you operator.

Just as we close if I may I'd, just like to share a thought or two on the industry.

As many of you know I've dedicated my entire career the majority of them by retiring career, serving automotive retail for many reasons, but the most simple as the fact that trillions of dollars automotive retail is the single largest non Harrow health care related consumer retailer on the planet.

93% of households in the U S have at least access to at least one car and that far outpaces, the number of consumers who own a cell phone.

Smartphone it at 85%.

I would like to thank everybody for joining us today.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Q4 2022 Open Lending Corp Earnings Call

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