Q2 2024 Open Lending Corp Earnings Call
www.openlending.com
Operator: Good afternoon, and welcome to Open Lending's second quarter 2024 earnings conference call. As a reminder, today's conference call is being recorded. On the call today are Chuck Yehl, Chief Financial Officer, Chief Operating Officer, and Interim Chief Executive Officer, and Cecilia Camarillo, Chief Accounting Officer. Earlier today, the company's Portrait is second quarter 2024, awning through release and supplemental slides to its investor relations website. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call.
Speaker Change: Good afternoon and welcome to Open Lending second quarter 2024 earnings conference call. As a reminder, today's conference call is being recorded.
Speaker Change: On the call today are Chuck Yale, Chief Financial Officer, Chief Operating Officer, and Interim Chief Executive Officer, and Cecilia Camarillo, Chief Accounting Officer.
Speaker Change: Earlier today, the company posted its second quarter 2024 earnings release and supplemental slides to its investor relations website. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call.
Operator: Before we begin, I would like to remind you that this call may contain estimated and other forward-looking statements that represent the company's view as of today, August 8, 2024. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our findings with the SEC for more information concerning factors that could cause actual results to differ from those expressed or implied in such states. Now, I will pass the call over to Mr. Chuck Kiel.
Speaker Change: Before we begin, I would like to remind you that this call may contain estimated and other forward-looking statements that represent the company's view as of today, August 8, 2024.
Speaker Change: Open landing disclaims any obligation to upgrade these statements to reflect future events or circumstances.
Speaker Change: 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.
Speaker Change: And now I will pass the call over to Mr. Chuck Kiel. Please go ahead, sir.
Chuck Yehl: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's second quarter 2024 earnings conference call. I am pleased to report that in the second quarter of 2024, we were near or above the high end of our guidance range for certified loans, revenue, and adjusted EBITDA, excluding the negative change in estimate associated with our profit share. For the quarter, we certified nearly 29,000 loans, which represents approximately 3% sequential growth compared to Q1, 2024, and we delivered total revenue of $26.7 million and adjusted EBITDA of $9.9 million.
Chuck Kiel: Thank you, operator and good afternoon everyone. Thank you for joining us today for Open Landing's second quarter, 2024 earnings conference call.
Chuck Kiel: I am pleased to report that in the second quarter of 2024, we were near or above the high end of our guidance range for certified loans, revenue, and adjusted EBITDA, excluding a negative change in estimate associated with our profit share.
Speaker Change: For the quarter, we certified nearly 29,000 loans, which represents approximately 3% sequential growth compared to Q1 2024, and we delivered total revenue of $26.7 million and adjusted EBITDA of $9.9 million.
Chuck Yehl: As I mentioned, our results for the second quarter of 2024 were negatively impacted by a 6.7 million profit share change in estimate. It is important to note that this downward revision is primarily due to elevated delinquencies and defaults associated with Vennages originated in 2021 and 2022, the time of peak vehicle value.
Speaker Change: As I mentioned, our results for the second quarter of 2024 were negatively impacted by a $6.7 million profit share change in estimate.
Speaker Change: It is important to note that this downward revision is primarily due to elevated delinquencies and defaults associated with vintages originated in 2021 and 2022, the time of peak vehicle values.
Chuck Yehl: Lower performance from these vintages represents an industry-wide headwind and is not unique to Open Lending or our lending customers. As it relates to our more recent advantages, we are encouraged by the early performance of these certified loans due to actions we have taken to tighten our underwriting standards. The initial data reflects a decrease in 60-plus-day delinquency rates from a peak of over 2% during the middle of 2022 to a range of 1% to 1.5% currently.
Speaker Change: Lower performance from these vennages represents an industry-wide headwind and is not unique to open lending or our lending customers.
Chuck Kiel: As it relates to our more recent advantages, we are encouraged by the early performance of these certified loans due to actions we have taken to tighten our underwriting standards.
Chuck Kiel: The initial data reflects a decrease in 60-plus day delinquency rates from a peak of over 2% during the middle of 2022 to a range of 1% to 1.5% currently.
Chuck Yehl: With three consecutive quarters of delinquency rate improvement within our portfolio, we are optimistic about a return to normalcy as it relates to delinquency. As you may recall, the actions we took over the past 18-24 months principally include increased insurance premiums to appropriately price for the risk we take, and implemented a newly enhanced Lenders Protection Proprietary Scorecard, which has further improved our ability to predict the probability of default and The new scorecard has now decisioned over 1.8 million applications, raised our minimum score cutoff to tighten our credit aperture, and initiated targeted price optimization by leveraging our new enhanced scorecard and historical performance data to increase prices on lower-performing segments of our business.
Chuck Kiel: With three consecutive quarters of delinquency rate improvement within our portfolio, we are optimistic about a return to normalcy as it relates to delinquencies.
Speaker Change: As you may recall, the actions we took over the past 18 to 24 months principally include increased insurance premiums to appropriately price for the risk we take,
Speaker Change: Implemented a newly enhanced lenders protection proprietary scorecard, which is further improved our ability to predict probability of default and price risk. The new scorecard is now decisioned over 1.8 million applications.
Speaker Change: Raised our minimum score cut off to tighten our credit aperture and initiated targeted price optimization by leveraging our new enhanced score card and historical performance data to increase prices on lower performing segments of our business.
Chuck Yehl: In this period of challenging macro and economic conditions, we are committed to protecting the profitability of all stakeholders in our ecosystem by appropriately pricing for the risk and selectively saying no to loans that put unnecessary risk on open lending, our insurance carrier partners, or our lenders. As we continue to navigate past these lower performing venues, we anticipate that Open Lending's aperture revenue performance should be less volatile.
Speaker Change: In this period of challenging macro and economic conditions, we are committed to protecting the profitability of all stakeholders in our ecosystem by appropriately pricing for the risk, and selectively saying no to loans that put unnecessary risk on open lending, our insurance carrier partners, or our lenders.
Speaker Change: As we continue to navigate past these lower performing vintages, we anticipate that Open Lending's profit share revenue performance should be less volatile.
Chuck Yehl: Turning to market conditions, we continue to be encouraged by the trends we are seeing in the automotive industry, specifically improvement in inventory levels, retail sales volumes, and affordability, all of which have shown modest year-over-year improvement. However, our core credit union customers continue to be challenged with elevated loan-to-share ratios, low share or deposit growth, and low loan growth. First, on the automotive industry.
Speaker Change: Turning to market conditions, we continue to be encouraged by the trends we are seen in the automotive industry, specifically improvement in inventory levels, retail sales volumes, and affordability.
Speaker Change: All of which have shown modest year-over-year improvement. However, our core credit union customers continue to be challenged with elevated loan-to-share ratios, low share or deposit growth, and low loan growth.
Chuck Yehl: New Vehicle Inventory Levels continue to improve and are up 52% year over year, while used vehicle inventory levels have stabilized at approximately 2.2 million units. Both new and used inventory levels remain 20% to 25% below pre-COVID levels, leaving room for continued recovery. Used retail sales volumes are up 4.1% year-over-year, which, as a reminder, makes up approximately 85% of Open Lending certified loan volumes historically. That said, new retail sales volumes have decreased 7.6% year over year. June showed some weakness in new auto retail sales compared to May. We believe June retail numbers for both new and used cars were negatively impacted by the CBK dealer management system software outage.
Speaker Change: First, on the automotive industry, new vehicle inventory levels continue to improve and are up 52% year-over-year, while used vehicle inventory levels have stabilized at approximately 2.2 million units.
Speaker Change: Both new and used inventory levels remain 20% to 25% below pre-COVID levels, leaving room for continued recovery.
Speaker Change: Used retail sales volumes are up 4.1 percent year-over-year, which is a reminder makes up approximately 85 percent of Open Lending certified loan volumes historically. That said, new retail sales volumes have decreased 7.6 percent year-over-year.
Speaker Change: June showed some weakness in new auto retail sales compared to May. We believe June retail numbers for both new and used sales were negatively impacted by the CDK Dealer Management System software outage.
Chuck Yehl: Affordability improved on a year-over-year basis, primarily driven by declining auto prices. Both new and used auto prices realized a year-over-year decline, with new transaction prices down 0.6% and used list prices down by approximately 7%. However, average auto loan interest rates remain near recent highs, with new vehicle loans at nearly 9% and used vehicle loans at over 14%. These rates continue to significantly impact consumer affordability. Lastly, the Manheim Use Vehicle Value Index, a measure of wholesale used vehicle prices, is down nearly 9% from a year ago and down for the fourth month in a row in 2024. However, per Cox Automotive, the index is projected to be down only approximately 2% at the end of 2024 compared to 2023.
Speaker Change: Affordability improved on a year-over-year basis, primarily driven by declining auto prices. Both new and used auto prices realized a year-over-year decline, with new transaction prices down 0.6% and used list prices down by approximately 7%.
Speaker Change: However, average auto loan interest rates remain near recent highs with new vehicle loans at nearly 9% and use vehicle loans at over 14%. These rates continue to significantly impact consumer affordability.
Speaker Change: Lastly, the Mannheim Used Vehicle Value Index, a measure of wholesale used vehicle prices, is down nearly 9% from a year ago and down for the fourth month in a row in 2024.
Cox Automotive: However, per Cox Automotive, the index is projected to be down only approximately 2% at the end of 2024 compared to 2023.
Chuck Yehl: Now let's turn to our core credit union customers. Preliminary Q2-2024 data from Calahin and Associates, a leading third-party data provider within the credit union industry, suggests that the industry average loan-to-share ratio, a measure of lending capacity, has declined from its recent peak to approximately 84%. To put this in perspective, historically, the industry average has never exceeded 86%, so it is encouraging to see the industry loan-to On a long-term growth rate, loans across asset classes in the credit union industry grew at 3.8% year over year.
Speaker Change: Now let's turn to our core credit union customers.
Speaker Change: Preliminary Q2 2024 data from Callahan & Associates, a leading third-party data provider within the credit union industry, suggests that industry average loan-to-share ratio, a measure of lending capacity, has declined from its recent peak to approximately 84 percent.
Speaker Change: To put this in perspective, historically the industry average has never exceeded 86%. So it is encouraging to see the industry long-to-share ratio beginning to decline.
Speaker Change: On loan growth, loans across asset classes in the credit union industry grew at 3.8 percent year-over-year. Notably, this is the lowest level of loan growth since 2013, indicating our customers continue to face a challenging lending environment.
Chuck Yehl: Notably, this is the lowest level of loan growth since 2013, indicating our customers continue to face a challenging lending environment. On share or deposit growth, we are encouraged by the third consecutive quarter of improvement. Deposit growth of 2.9% was nearly 170 basis points higher than the lowest seen in Q3 of 2023.
Speaker Change: On share or deposit growth, we are encouraged by the third consecutive quarter of improvement. Share growth of 2.9% was nearly 170 basis points higher than the lows seen in Q3 of 2023.
Chuck Yehl: To put this in perspective, prior to 2023, credit union share growth had never been below 3%. As we look ahead, we're encouraged by both the improvement in the auto industry and the positive signs that credit unions are well into the recovery process. As we have seen in prior cycles, we anticipate that credit unions will once again have healthy loan-to-share ratios and increase their lending activity to fulfill their mission to serve their members.
Speaker Change: To put this in perspective, prior to 2023, credit union share growth had never been below 3%.
Speaker Change: As we look ahead, we're encouraged by both the improvement in the auto industry and the positive signs that credit unions are well into the recovery process.
Speaker Change: We have seen, as we have seen in prior cycles, we anticipate that credit unions will once again have healthy loan to share ratios and increase their lending activity to fulfill their mission to serve their members.
Chuck Yehl: We continue to believe there is significant pent-up demand among consumers for the transportation they need to carry on with their lives. Recent third-party research shows that over 70% of consumers had a stated intent to purchase a vehicle, but almost one-third of consumers were putting off the purchase due to high interest rates and affordability.
Speaker Change: We continue to believe there is significant pent-up demand among consumers for the transportation they need to carry on with their lives.
Speaker Change: Recent third-party research showed that over 70% of consumers had a stated intent to purchase a vehicle, but almost one-third of consumers were putting off the purchase due to high interest rates and affordability.
Chuck Yehl: Additionally, senior lending officers have chosen to shift their focus towards Prime and Super Prime consumers, as demonstrated by the retail vehicle registration data. Since interest rate increases began, the retail vehicle registration data shows a 12 percent growth for borrowers with a 750 plus credit score, while the near and non-prime borrowers we serve have experienced a 12 percent decline. As inventory levels continue to improve, vehicle prices continue to moderate, and with a Federal Reserve interest rate cut more likely, we believe we are not far from seeing a more meaningful increase in vehicle sales activity.
Speaker Change: Additionally, senior lending officers have chosen to shift their focus towards prime and super prime consumers as demonstrated by the retail vehicle registration data.
Speaker Change: Since interest rate increases began, the Retail Vehicle Registration data shows a 12% growth for borrowers with a 750 plus credit score, while the near and non-prime borrowers we serve have experienced a 12% decline.
Speaker Change: As inventory levels continue to improve, vehicle prices continue to moderate and with a Federal Reserve interest rate cut more likely, we believe we are not far from seeing a more meaningful increase in vehicle sales activity.
Chuck Yehl: While we have been paying close attention to the challenges facing the auto lending industry, we have also taken thoughtful steps to maximize our eventual capture of the pent-up demand when market conditions inevitably recover. We aligned our sales and account management team's incentives to drive new customer acquisitions and certified loan growth from both new and existing customers. We are already seeing positive results from this aligned strategy. In the second quarter of 2024, we signed 13 new credit union customers.
Speaker Change: While we've been paying close attention to the challenges facing the auto lending industry, we have also taken thoughtful steps to maximize our eventual capture of the pent-up demand when market conditions inevitably recover.
Speaker Change: We aligned our sales and account management teams incentives to drive new customer acquisitions and certified loan growth from both new and existing customers.
Speaker Change: We are already seeing positive results from this alliance strategy. In the second quarter of 2024, we signed 13 new credit union customers. Year to date through the end of the second quarter, we have signed 24 new customers, including one new bank.
Chuck Yehl: Year-to-date through the end of the second quarter, we have signed 24 new customers, including one new bank. I'm pleased to report that of the 13 new customers signed in the second quarter of 2024, four of them were larger customers and, in aggregate, have almost $7 billion in combined total assets. As a further testament to our enhanced go-to-market strategy and our sales and account management team members' execution, we have already signed 10 new customers in the third quarter.
Speaker Change: I'm pleased to report that of the 13 new customers signed in the second quarter of 2024, four of them were larger customers and an aggregate have almost 7 billion in combined total assets.
Speaker Change: As a further testament to our enhanced go-to-market strategy, and our Excel's and account management team members execution, we have already signed 10 new customers in the third quarter.
Chuck Yehl: We continue to believe the Lenders Protection Program can help all lenders serving near and non-prime borrowers minimize lenders' risk and optimize their yield. We've also focused on further strengthening our partnerships with credit union leadership. We recently announced that Dan Berger, former president and CEO of the National Association of Federally Insured Credit Unions, or NAFCU, had joined Open Lending as a strategic advisor.
Speaker Change: We continue to believe the Lenders Protection Program can help all lenders serving near and non-prime borrowers to minimize lenders' risk and optimize their yield.
Speaker Change: We have also focused on further strengthening our partnerships with credit union leadership.
Speaker Change: We recently announced that Dan Berger, former president and CEO of the National Association of federally-insured credit unions, or nephew, had joined open-linearistic strategic advisor.
Cecilia Camarillo: The partnership is off to a solid start as we are further driving customer engagement and expansion of relationships with credit unions across the country. Turning now to our product and technology, we are actively working on developing solutions that improve the experience of our lender customers and their borrowers. We are focused on assisting and providing solutions to our lenders to help mitigate day-to-day operating challenges, including increasing lenders' ability to automate decisioning, which allows our lenders to speed up the decision process, increasing their probability of capturing the loan, exploring solutions that automate proof of income processing and other tools to minimize dealer and borrower friction, assisting lenders with capital markets' efforts to provide lending capacity throughout economic cycles by accessing alternative sources of capital and evaluating opportunities to improve the value of our lenders' protection product by expanding insurance coverage.
Speaker Change: The partnership is off to a solid start as we are further driving customer engagement and expansion of relationships with credit unions across the country.
Speaker Change: Turning now to our product and technology, we are actively working on developing solutions that improve the experience of our lender customers and their borrowers.
Speaker Change: We were focused on assisting and providing solutions to our lenders to help mitigate day-to-day operating challenges, including increasing lenders' ability to automate decisioning, which allows our lenders to speed up the decision process, increasing their probability of capturing the loan.
Speaker Change: Exploring solutions that automate proof-of-income processing and other tools to minimize dealer and borrower friction.
Speaker Change: Assisting lenders with capital markets' efforts to provide lending capacity throughout economic cycles by accessing alternative sources of capital and evaluating opportunities to improve the value of our lenders' protection product by expanding insurance coverages.
Cecilia Camarillo: As I previously noted, we have taken multiple credit and pricing actions with the expectation of optimizing results for our lenders, our insurance carrier partners, and ultimately, open lending. Looking ahead, we will continue to leverage the capabilities of our enhanced proprietary scorecard to implement targeted opportunities to drive improved performance and results. Now turning to our insurance carriers, we're excited to add Securian Financial Group as an insurance partner for our Lender Protection Program in the second quarter of 2024.
Cecilia Camarillo: As I previously noted, we have taken multiple credit and pricing actions with the expectation of optimizing results for our lenders, our insurance carrier partners, and ultimately open lending.
Speaker Change: Looking ahead, we will continue to leverage the capabilities of our enhanced proprietary scorecard to implement targeted opportunities to drive improved performance and results.
Speaker Change: Now, turning to our insurance carriers, we're excited to add Securian Financial Group as an insurance partner for our Lenders Protection Program during the second quarter of 2024.
Cecilia Camarillo: With high financial strength ratings and a long history and familiarity with credit unions and other lending institution customers, Securian Financial is a great addition to our program and helps us expand our premium capacity in anticipation of our return to growth. Meanwhile, while we have been focused on enhancing our product and operations to position us for future growth, we have also taken measures to control and reduce costs. We are taking a measured approach as it relates to our cost structure and are focused on only adding incremental costs that drive near-term revenue growth.
Speaker Change: With high financial strength ratings and a long history and familiarity with credit unions and other lending institution customers, Securian Financial is a great addition to our program and helps us expand our premium capacity in anticipation of our return to growth.
Cecilia Camarillo: While we have been focused on enhancing our product and operations to position us for future growth, we have also taken measures to control and reduce costs. We are taking a measured approach as it relates to our cost structure and are focused on only adding incremental costs that drive near-term revenue growth.
Cecilia Camarillo: Our expectation is that we will be well positioned to expand our profit margins as the business grows again by leveraging our existing cost structure. Before I turn the call over to Cecilia to go over our second quarter of 2024 results in more detail, I wanted to personally thank our entire team at Open Lending for your continued support and dedication to our company and for delivering these positive results despite continued challenging market conditions.
Speaker Change: Our expectation is we will be well positioned to expand our profit margins as the business grows again by leveraging our existing cost structure.
Cecilia Camarillo: Before I turn the call over to Cecilia to go over our second quarter 2024 results in more detail, I wanted to personally thank our entire team at Open Lending for your continued support and dedication to our company and for delivering these positive results despite continued challenging market conditions.
Cecilia Camarillo: I am encouraged by the early signs of improvement in market conditions and remain confident in the long-term opportunities ahead of us. The underserved, near, and non-prime consumers need us and our lender partners now more than ever. With that, I'd like to turn the call over to Cecilia.
Cecilia Camarillo: I am encouraged by the early signs of improvement in market conditions and remain confident in the long-term opportunities ahead of us. The underserved, near and non-prime consumers need us and our lender partners now more than ever.
Cecilia Camarillo: Thanks, Chuck. During the second quarter of 2024, we facilitated 28,963 certified loans compared to 34,354 certified loans in the second quarter of 2023. Total revenue for the second quarter of 2024 was $26.7 million, which included an ASC 606 negative change in estimate related to historic vintages associated with our profit share of $6.7 million. This compares to $38.2 million in revenue in the second quarter of 2023, which included a negative change in estimate of $1.2 million.
Cecilia Camarillo: With that, I'd like to turn the call over to Cecilia. Cecilia?
Jezek: Thanks Jezek
Cecilia Camarillo: During the second quarter of 2024, we facilitated 28,963 certified loans compared to 34,354 certified loans in the second quarter of 2023.
Cecilia Camarillo: Total revenue for the second quarter of 2024 was 26.7 million, which includes an ASC 606 negative change in estimate related to historic ventages associated with our profit share of 6.7 million.
Cecilia Camarillo: compared to $38.2 million in revenue in the second quarter of 2023, which included a negative change in estimate of $1.2 million.
Cecilia Camarillo: To break down total revenues in the second quarter of 2024, program fee revenues were $14.8 million, profit share revenues were $9.3 million, net of the previously mentioned negative change in estimate, and claims administration fees and other revenue were $2.6 million. As a reminder, profit share revenue comprises the expected earned premiums less the expected claims to be paid over the life of the contracts and less expenses attributable to the program. The net profit share to us is 72%, and the monthly receipts from our insurance carriers reduce our contract asset.
Cecilia Camarillo: To break down total revenues in the second quarter 2020-4, program B revenues were 14.8 million. Profit share revenues were 9.3 million. Net of the previously mentioned negative change in estimate and claims administration fees and other revenue were 2.6 million.
Cecilia Camarillo: As a reminder, Profit Share Revenue comprises the expected earned premiums, less the expected claims to be paid over the life of the contracts, and less expenses attributable to the program. The net profit shared to us is 72% and the monthly receipts for more insurance carriers reduce our contract asset.
Cecilia Camarillo: Profit share revenue in the second quarter of 2024 associated with new originations was $16,000,000 or $552,000 per certified loan as compared to $19,000,000 or $553,000 per certified loan in the second quarter of 2023. The $6.7 million negative profit share change in estimate recorded in the current quarter is associated with cumulative total profit share revenue previously recognized of approximately $394 million for periods dating back to January 2019, the ASC 606 implementation date, and represents over 411,000 insured in-force loans in the portfolio.
Cecilia Camarillo: Profit share revenue in the second quarter of 2024 associated with new regulations with 16 million or $552 per certified loan as compared to 19 million or 553 per certified loan in the second quarter of 2023.
Cecilia Camarillo: The 6.7 million negative profit share change in estimate recorded in the current quarter is associated with cumulative total profit share revenue previously recognized of approximately 394 million. We're a period stating back to January 2019.
Cecilia Camarillo: The ASC-606 implementation date and represents over 411,000 insured in-force loans in the portfolio. The cumulative profit share change in estimates since 2019 is a negative $2.2 million.
Cecilia Camarillo: The cumulative profit share change in estimate since 2019 is a negative $2.2 million. Operating expenses were $17 million in the second quarter of 2024 compared to $16.3 million in the second quarter of 2023. Operating income was $4 million in the second quarter of 2024, compared to operating income of $15.7 million in the second quarter of 2023. Net income for the second quarter of 2024 was $2.9 million, compared to a net income of $11.4 million in the second quarter of 2023.
Cecilia Camarillo: Operating expenses were $17 million in the second quarter of 2024 compared to $16.3 million in the second quarter of 2023.
Cecilia Camarillo: Operating income was $4 million in the second quarter of 2024 compared to operating income of $15.7 million in the second quarter of 2023.
Cecilia Camarillo: Net income for the second quarter of 2024 was 2.9 million compared to a net income of 11.4 million in the second quarter of 2023.
Cecilia Camarillo: Basic and diluted net income per share was two cents in the second quarter of 2024, as compared to nine cents in the second quarter of 2023. Adjusted EBITDA for the second quarter of 2024 was 9.9 million, as compared to 20.7 million in the second quarter of 2023. Excluding profit share revenue-changing estimates, we generated 16.6 million in Adjusted EBITDA in the second quarter of 2024. There is a reconciliation of gap to non-gap financial measures that can be found at the back of our earnings press release.
Cecilia Camarillo: Basic and diluted net income per share was $0.02 in the second quarter of 2024 as compared to $0.09 in the second quarter of 2023.
Cecilia Camarillo: adjusted EBITDA for the second quarter of 2024 was 9.9 million as compared to 20.7 million in the second quarter of 2023.
Cecilia Camarillo: Excluding Profit Share Revenue Change and Estimate, we generated 16.6 million in a Justady Bidot in the second quarter of 2024. There's a reconciliation of Gap to non-Gap financial measures that can be found at the back of our earnings press release.
Cecilia Camarillo: We exited the quarter with $382.8 million in total assets, of which $248 million was in unrestricted cash, $33.7 million in contract assets, and $66.3 million in net deferred tax assets. We had $166 million in total liabilities, of which $143.3 million was outstanding debt.
Cecilia Camarillo: We exited the quarter with 382.8 million in total assets of which 248 million was an unrestricted cash 33.7 million in contract assets and 66.3 million in net deferred tax assets.
Cecilia Camarillo: We had $166 million in total liabilities, of which $143.3 million was outstanding debt.
Chuck Yehl: I would now like to turn the call back over to Chuck to discuss our guidance for the third quarter. Chuck. Thanks, Cecilia.
Chuck Yehl: I would now like to turn the call back over to Chuck to discuss our guidance for the third quarter.
Chuck Yehl: Thanks, Cecilia. Now, moving to our third quarter 2024 guidance. The following factors were considered in our third quarter 2024 guidance: continued elevated interest rates and a modestly improving inflationary environment and its corresponding impact on the U.S. consumer; uncertain macroeconomic conditions with a rising unemployment rate and slower new job growth. Lower than pre-COVID auto inventory levels and higher than historical vehicle prices continue to present affordability challenges for consumers, with new and used retail sales volumes that remain lower at pre-coded levels despite year-over-year improvement.
Chuck Yehl: Thanks, Cecilia. Now moving to our third quarter 2024 guidance.
Chuck Yehl: The following factors were considered in our third quarter 2024 guidance.
Chuck Yehl: continued elevated interest rates and modestly improving inflationary environment and its corresponding impact on the U.S. consumer.
Chuck Yehl: Uncertain macroeconomic conditions with rising unemployment rate and slower new job growth?
Chuck Yehl: Lower than pre-COVID auto-inventory levels and higher than historical vehicle prices continue to promote affordability challenges for consumers.
Chuck Yehl: New and used retail sales volumes that remain lower than pre-COVID levels despite year-over-year improvement.
Chuck Yehl: Near historic high loan-to-share ratios combined with historically low share growth that continues to limit credit unions' lending capacity and recent credit tightening actions that Open Lending has taken and the corresponding impact on volume. Additionally, we accounted for the normal course of seasonality that we see between the second and third quarters. Accordingly, our guidance for the third quarter of 2024 is as follows: total certified loans to be between $25,000 and $28,000.
Chuck Yehl: Near historic high loan-to-share ratios combined with historically low share growth that continues to limit credit unions lending capacity and recent credit tightening actions that Open Lending has taken and the corresponding impact on volume.
Chuck Yehl: Additionally, we accounted for normal course of seasonality that we see between the second and third quarter.
Chuck Yehl: Accordingly, our guidance for the third quarter of 2024 is as follows. Total certified loans to be between $25,000 and $28,000. Total revenue to be between $28 million and $31 million. And adjusted EBITDA to be between $11 million and $14 million.
Operator: Total revenue is expected to be between 28 million and 31 million, and adjusted EBITDA is expected to be between 11 million and 14 million. We have a strong balance sheet with no near-term debt maturities and generate positive cash flow, which provides us with the financial flexibility to make targeted investments to accelerate revenue growth and position us well to capture pent-up demand as market conditions continue to improve. Additionally, we continue to focus on optimizing our profitability by both accelerating revenue and controlling costs. We'd like to thank everyone for joining us today, and we will now take your question.
Operator: We have a strong balance sheet with no near-term debt maturities and generate positive cash flow, which provides us with the financial flexibility to make targeted investments to accelerate revenue growth and position us well to capture pent-up demand as market conditions continue to improve.
Operator: Additionally, we continue to focus on optimizing our profitability by both accelerating revenue and controlling costs.
Operator: We'd like to thank everyone for joining us today and we will now take your questions.
Operator: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you'd like to remove your question from the queue. In apartments using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Operator: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session.
Operator: If you would like to ask a question, please best start and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press start and two if you would like to remove your question from the queue.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Operator: Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Kyle Peterson with Needham and Company. Please go ahead.
Operator: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Operator: A first question comes from the line of Kyle Peterson, with Needem and Company, please go ahead.
Kyle Peterson: Great, thanks for taking the questions of good afternoon guys. We don't just start off with the CDK impact. And as I mentioned, it sounds like there was an impact. I just wanted to see it. You know, if there's any way you guys could quantify that, and if that has kind of self-corrected into July, like kind of I guess where there's some just some push out or just any more color there would be really helpful.
Kyle Peterson: Great. Thanks for taking the questions. Good afternoon, guys. We're going to start off on the CDK impact. I know you guys mentioned it sounds like there was an impact. I just wanted to see.
Kyle Peterson: If there's any way you guys could quantify that, and if that has kind of self-corrected into July , like kind of, I guess, was there some, just some push out or just any more color there would be really helpful.
Chuck Yehl: Hey Kyle, it's Chuck. You know, as we've kind of watched the CDK outage and kind of that unfold, based on the data we've seen, the outage impacted new auto vehicle sales more, and that was in our prepared comments. It really limited the impact on used cars, and as we said in the prepared comments, you know, we're historically about 85% used, so we didn't see a big impact in our Q2 volume related to that, and don't expect any impact going forward. Maybe on the new front, but not on used since it was mainly impacting new.
Chuck Yehl: Hey, Carl, it's Chuck. You know, as we've kind of watched, you know, the CDK Outage and kind of that unfold.
Chuck Yehl: You know, based on the data we've seen, you know, the outage impacted new auto vehicle sales more, and that was in our prepared comments.
Chuck Yehl: It really limited impact on used auto, and as we said in the prepared comments, we're historically about 85% used, so we didn't see a big impact in our Q2 volume related to that, and don't expect any impact going forward.
Chuck Yehl: Maybe on the new front, but not on used, since it was mainly impacting new.
Kyle Peterson: Okay, that's helpful, and then I guess just follow up on the Outlook in the 3Q Guide, I guess you guys factored in a Fed rate quote in September in the guide, and I guess, please remind us how changes in, you know, Fed funds or, you know, the shape of the yield curve would impact you guys specifically on the refi side of things.
Kyle Peterson: Okay.
Kyle Peterson: That's helpful, and I guess just follow up on the Outlook in the 3Q Guide, I guess. Have you guys factored in?
Kyle Peterson: Fed rate cut in September in the guide, and I guess could you just remind us
Speaker Change: How you know, changes in headphones or the shape of the old curve would impact you guys just going on on the refi side of thanks.
Chuck Yehl: Yeah, you know, we think about the Q3 guide, you know, in the prepared comments, you know, in our input there, you know, continued elevated interest rates is what we've put in there, you know, and a modestly improving inflationary environment, Kyle. So, you know, we're hopeful just like everybody that the Feds will take action in September and begin lowering rates and, you know, I guess the, the dot plot is, you know, falling for a 25 basis point reduction in September.
Chuck Yehl: Yeah, you know, as we think about the Q3 guide, you know, and the prepared comments.
Chuck Yehl: You know, in our inputs there, you know, continued elevated interest rates is what we've put in there, you know, in a modestly improving inflationary environment, Kyle. So, you know, we're hopeful, just like everybody, that, you know, the Fed's going to take action, you know, in September and begin lowering rates, and, you know, I guess the dot plot is, you know, calling for 25 basis point reduction in September , and I think the market's maybe anticipating, you know, two 25 basis point reductions in, you know, Open Lending, and, you know, the consumers we serve would welcome that, and it could be a good opportunity for us as we move forward, as we think about our refi channel and, you know, volumes going forward, but in the guidance we put out.
Kyle Peterson: Okay, that's helpful. Thank you, guys.
Kyle Peterson: You know, it continued elevated rates, to answer your question.
Kyle Peterson: This was helpful. Thank you, guys.
Operator: Thank you. Our next question comes from the line of James Fawcett with Morgan Stanley. Please go ahead.
James Fawcett: Good, thank you.
Speaker Change: Thank you. Our next question comes from the line of James Fawcett with Morgan Stanley . Please go ahead.
Michael: Hi everyone, it's Michael from Fur James. Thanks for taking our question. I just wanted to ask on the profit share side, is there any minimum hold period with profit share, specifically with any of your financial partners, and if so, for how long and by how much?
Michael: Hi everyone, it's Michael on for James. Thanks for taking our question. I just wanted to ask on the profit share side, is there any make-hold period with profit share, specifically with any of your financial partners, and if so, for how long and by how much?
Chuck Yehl: Yeah, I mean, if you think about the make whole on the profit share, you know, there's a period, you know, Open Lending, we don't, we don't write checks if the profit share were to go, you know, say negative for a period of time due to high claims and defaults. But there's basically a recapture of that that comes back to the carriers with us. I hope I have answered your question, but yeah.
Chuck Yehl: Yeah, I mean, if you think about the make whole on the profit share, you know, there's a period, you know, Open Lending, we don't write checks if the profit share were to go, you know, say negative for a period of time due to high claims and defaults. But there's basically a recapture of that that comes back to the carriers with us.
Chuck Yehl: That's helpful. Maybe just on the reef, I sort of take your comments just in terms of, you know, what you embedded into your outlook, but I guess how are you sort of thinking about, you know, refire over the near-to-medium term, particularly given where historical mix was, sort of, in the 2021-22 time frame, you know, sort of conscious of, you know, somewhat constrained credit-union lending demand, which seems to Thanks. Yeah, no, thank you.
Speaker Change: I hope I answered your question, but yeah.
Speaker Change: That's helpful
Chuck Yehl: Maybe just on the refi side, sort of take your comments just in terms of...
Chuck Yehl: You know, what you embedded into the Outlook, but I guess how are you sort of thinking about
Speaker Change: you know, refi over the near to medium term, particularly given where historical mix was sort of in the in the 21-22 time frame, you know, sort of conscious of, you know, somewhat constrained credit union lending demand, which seems to be stabilizing slash improving. Thanks.
Michael: Yeah, I mean, for Q2 of 24, refi was 3% of our volume. And as you pointed out, you know, in 22, I think we, February 22 might have been the peak at like 40 plus percent of our volume. And that was prior to the Fed beginning raising rates that we've seen over the last, you know, call it 18 months. You know, as we kind of look forward, you know, our credit union customers, our core customers, 75% of our volume historically, still, you know, improving signs of loan to share ratios, as we said, are improving, and their, you know, share growth is beginning to build.
Michael: Yeah, no, thank you. Yeah, I mean, for Q2 of 24, refi was 3% of our volume, and as you pointed out, you know, in 22, I think we, it was, February 22 might have been the peak at like 40-plus percent of our volume, and that's, that was prior to the Fed begin raising rates that we've seen over the last, you know, call it 18 months.
Michael: You know, as we kind of look forward, you know, I think the most important thing to remember, you know, our credit union customers, our core customer, you know, called 75% of our volume historically.
Michael: Still, you know, improving signs of loan-to-share ratios, as we said, are improving there. You know, share growth's beginning to build. All those are great signs that we've seen through past cycles where, you know, the health of the credit union and they begin lending again. The rates coming down is great for our business long-term and even in the short-term, but we also have to have healthy, you know, lending capacity at our credit union customers.
Michael: All those are great signs that we've seen through past cycles where the health of the credit unions improves, and they begin lending again. The rates coming down are great for our business long term and even in the short term, but we also have to have healthy lending capacity for our credit union customers.
Operator: Thank you. Our next question comes from the line of Vincent Caintic with VTIG. Please go ahead.
Vincent Caintic: Appreciate that.
Operator: Thank you. Our next question comes from the line of Vincent Caintic with BTIG. Please go ahead.
Vincent Caintic: Hey, good afternoon. Thanks for taking my questions. First question on profit share and just kind of digging into that 6.7 million adjustment. I'm just wondering if you could maybe talk about since there's been a couple of negative adjustments for the past couple of quarters already, sort of what's baked into estimates now, and I guess what would cause Crocodure Adjustments downwards from here, that it was a big suggestion for this quarter. Thank you.
Vincent Caintic: Hey, good afternoon. Thanks for taking my questions. First question on the...
Vincent Caintic: Profit Chair and just kind of digging into that 6.7 million adjustment. I'm just wondering if you could maybe talk about since there's been a couple of negative adjustments for the past couple of quarters already. Sort of what's baked into estimates now and I guess what would cause
Vincent Caintic: Profit Share adjustments downwards from here. It does seem like there was a big adjustment this quarter. Thank you.
Chuck Yehl: Yeah, hey, Vincent, good to talk to you again, you know, if you think about, you know, kind of the stress we put on the portfolio, you know, we think about it more as a loss ratio approach and interest three components to to profit share obviously severity of loss, which is, you know, driven, you know, by the manheim, I use vehicle value index, you got default frequency, which is claims and, and then you've also got prepay speeds, so all of that goes in the equation, and you know, the the vintage we put on in the second quarter, you know, you had about a 60% ultimate loss ratio, you know, on the new advantages, and feel good about that, and it feel like it's adequate stress, you know, the, the 6.7 million that we booked in the second quarter, as we put in the, in the prepared comments, it was all, you know, mainly you're primarily associated with 21 and 22 advantages, and you know, that's across the industry, anybody in auto lending has, you know, those are lower performing, you know, the advantageous at the time, they were at the peak of the manheim and the use vehicle values, you know, we believe that we're working through those, the typical claim period, you know, for a claim or default is 18 to 24 months out, and, and we're getting to that point and passed on those, those were performing preventages, so, so, you know, that's, you know, the comments, Cox is forecasting manheim to only be down about 2% for the year, and as of June, it was down 9% so, so the, the manheim is, you know, and actually went up on the, on the July print, about 3% I believe, to 201, so, so that, you know, that manheim is, we believe, that's stabilizing out and, and vehicle value values are, are stable and, and that's going to be good for our business.
Chuck Yehl: Yeah, yeah. Hey, Vincent. Good to talk to you again.
Chuck Yehl: You know, if you think about, you know, kind of the stress we put on the portfolio, you know, we think about it more as a loss ratio approach and interest three components to, to profit share obviously severity of loss, which is, you know, driven, you know, by the manheim, I use people value index.
Chuck Yehl: You've got default frequency, which is claims, and then you've also got prepay speeds. So all of that goes in the equation, and you know the the vintage we put on in the second quarter.
Chuck Yehl: You know, we have about a 60% ultimate loss ratio.
Chuck Yehl: and on the new advantages and feel good about that and feel like it's adequate stress. The 6.7 million that we booked in the second quarter.
Chuck Yehl: As we put in the prepared comments, it was all, you know, mainly or primarily associated with 21 and 22 vintages.
Chuck Yehl: And, you know, that's across the industry, anybody in auto-lending has, you know, those are lower performing, you know, venues at the time, they were at the peak of the manheim and the use vehicle values.
Chuck Yehl: You know, we believe that we're working through those, the typical claim period.
Chuck Yehl: You know, for a claim or default is 18 to 24 months out, and we're getting to that point and past on those worth performing advantages, so, you know, that's, you know, we hire claims in default, and then the Mannheim, you know, moved down a little more than we thought in the second quarter.
Chuck Yehl: But, you know, if you also, in the prepared comments, Cox is forecasting Mannheim to only be down about 2% for the year, and as of June it was down 9%. So the Mannheim is, you know, it actually went up on the July print about 3%, I believe, to 201. So, you know, that Mannheim is, we believe, is stabilizing out, and vehicle values are stable, and that's going to be good for our business.
Vincent Caintic: Okay, thank you. And I'll just follow up on that then.
Chuck Yehl: Yeah, and real quick, you know, and we believe, you know, as we work through these vintages that, you know, in our prepared comments, that our profit share, you know, will be less volatile. And, you know, in Cecilia's points about, you know, the cumulative effect, we can't lose sight that, you know, when we adopted this pronouncement in 2019, we had $394 million in total profit share revenue. And yeah, we've had some really good years there.
Speaker Change: Okay, thank you, and just follow me up on that then.
Chuck Yehl: [inaudible]
Chuck Yehl: Yeah, and we believe, you know, as this, we work through these vennages that, you know, in our prepared comment.
Chuck Yehl: that our profit share, you know, will be less volatile and, you know, in Cecilia's points about, you know, the cumulative effect that can't lose sight that, you know, we adopted this pronouncement in 2019, we've had 394 million in total a profit share revenue. And yeah, we've had some really good years there. We're during the pandemic and the stimulus.
Chuck Yehl: We're, during the pandemic and the stimulus, to where we had really positive adjustments. And we've had, you know, a few negative adjustments here lately based on those lower-performing vintages. But still, all in, it's material at $2.2 million negative. So, just don't want to lose sight of that.
Chuck Yehl: to where we had really positive adjustments and we've had, you know, a few negative adjustments here lately based on those lower performing vintages, but still all in, it's material at 2.2 million negative, so just don't want to lose sight of that.
Vincent Caintic: That's helpful. And to your point about these 221 and 222 advantages, you work through them over 18 to 24 months. So, would it be proactive to think that maybe by the end of this year, maybe by the early 225, after we've got through 24 months, we would have already gone past the issues with these advantages? Thank you.
Vincent Caintic: Right, that's helpful. And to your point about, so these 2021 and 2022 vintages, you've worked through them over 18 to 24 months.
Speaker Change: So would it be correct to think that maybe by the end of this year, maybe by early 2025, after we get through 24 months, that we would have already gotten past the issues of these synthetisers?
Chuck Yehl: That's correct. They're mostly, yeah, those are mostly behind it. That's right.
Chuck Yehl: That's correct.
Vincent Caintic: Okay, great. And then just one more for me, switching through the certification volume. Just sort of wondering if you can differentiate what you're expecting in terms of the OEM certification volume versus the banking credit union volume, which looks like the banking credit union group a little bit with this quarter. OEM shrunk a little bit with this quarter. So just kind of wondering if you can expand on sort of what you're seeing with your outlook going forward.
Speaker Change: They're mostly, yeah, those those will mostly behind you. That's right.
Vincent Caintic: Okay, great. And then just one more for me, switching to the certification volume.
Vincent Caintic: Just sort of wondering if you can differentiate what you're expecting in terms of...
Vincent Caintic: the OEM certification volume versus the bank and credit union volume. It looks like the bank and credit union grew a little bit this quarter. OEM shrunk a little bit this quarter. So just kind of wondering if you can expand on sort of what you're seeing with your outlook going forward. Thank you.
Chuck Yehl: Yeah, I'd say, you know, if you think about the guide that we put out there, I'd say a similar mix to Q2 between, you know, the credit unions and the OEMs that you saw in the second quarter.
Chuck Yehl: I'd say, you know, if you think about the guy that we put out there, I'd say a similar mix to cue to between, you know, the credit unions and the OEMs that you saw in the second quarter.
Vincent Caintic: Okay, all right, that's all. Thanks very much.
Vincent Caintic: Okay, all right, that's helpful. Thanks very much.
Operator: Thank you. Our next question is from the line of John Davis with Raymond James. Please go ahead.
Speaker Change: Thank you. Thank you. Our next question is from the line of John Davis with Raymond James. Please go ahead.
Taylor: Hi, this is Taylor on behalf of JD. Thanks for taking the question. Maybe I can just follow up on the last question. Looks like OEM certificates declined year over year for the first time in a while this quarter. So any color you could provide on what drove the year over year decline would be great. Yeah, on the OEMs.
Taylor: Hi, this is Taylor on for JD. Thanks for taking the question. Maybe if I can just follow up on the last question. It looks like OEM starts to decline year over year for the first time in a while this quarter.
Speaker Change: Um, so just any color you could provide there on what drove the uh
Taylor: year-over-year decline, it'd be great.
Chuck Yehl: Yeah, on the OEMs, on the second quarter, 24 to 23, I'd say it's just, you know, maybe the environment itself and a little bit of mix there between the customers, but, you know, the OEM incentives are, you know, coming back, you know, we put in some credit tightening, you know, across some of our tiers and did a premium increase to appropriately price for the risk, and so some of that's probably baking in there on the tightening actions that we took, you know, because as we think about it, you know, we want to put, you know, good loans on the books and, you know, for our partners, lender partners, our carriers, as well as Open Lending, so part of that could just be the tightening actions that we took.
Chuck Yehl: Yeah, on the OEMs, on the second quarter, 24 to 23, I'd say it's just, you know, maybe the environment itself and a little bit of mix there between the customers and, but you know, the OEM incentives are, you know, coming back, you know, we've put in some credit tightening, you know, across some of our tiers.
Chuck Yehl: and did a premium increase to appropriately price for the risk and so some of that's probably baking in there on the tightening actions that we took. You know, because as we think about it, you know, we want to put, you know, good loans on the books and, you know, for our partners, lender partners, our carriers, as well as Open Lending. So part of that could just be the tightening actions we took.
Speaker Change: Great, thanks for the color.
Operator: Ladies and gentlemen, as there are no further questions, I will now hand the conference silver to Chuck Eil for his closing comment.
Chuck Eil: Thank you.
Operator: Ladies and gentlemen, as there are no further questions, I will now hand the conference over to Chuck Yehl for his closing comments.
Chuck Yehl: We'd like to thank everyone, you know, for joining us today. We appreciate your interest and support. And I'd like to again thank all of the employees, the entire team at Open Lending, for your hard work and dedication and all you do for our company. Thanks. Have a great day.
Chuck Yehl: We'd like to thank everyone for joining us today and appreciate your interest and support. And again, thank all of the employees, entire team. It opened lending for your hard work and dedication and all you do for our company. And thanks and have a great day.
Operator: Thank you. The conference of Open Lending Corporation has now concluded. Thank you for your participation. You may now disconnect your line.
Operator: Thank you. The conference of Open Lending Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.
Chuck Yehl: I think the markets may be anticipating, you know, up to 25 basis point reductions and, you know, open lending, and, you know, our consumers we serve would welcome that and, and could be a good, good opportunity for us as we move forward as we think about our rethought channel and, and, and, you know, volume is going forward. But, but in the guidance we put out, you know, it continued elevated rates as tensure a question.