Good afternoon, and welcome to Open Lending's First Quarter 2024 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are Chuck Jehl, Chief Financial Officer and Interim Chief Executive Officer, Cecilia Camarillo, Chief Accounting Officer. Earlier today, the company posted its first 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. Before we begin, I would like to remind you that this call may contain estimated or other forward-looking statements that represent the company's view as of today, May 7, 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 filings with the SEC for more information concerning factors that could cause actual results to different materially from those expressed or implied with such statements. And now I'll pass the call over to Mr. Chuck Jehl. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's First Quarter 2024 Earnings Conference Call. Before I discuss our quarterly highlights, I want to take a moment to thank our Board of Directors and our team members at Open Lending for their confidence and trust in me. We have an experienced executive leadership team across functions. And joining me today on the call is Cecilia Camarillo, our Chief Accounting Officer, who will discuss the Q1 financial results in more detail. With that, let's review the first quarter financial highlights. I am pleased to report that in the first quarter of 2024, we exceeded the high end of our guidance range for both certified loans and revenue and exceeded the midpoint for adjusted EBITDA. Despite the continued impact of elevated interest rates, automotive industry-specific challenges and credit union lending capacity constraints. We certified 28,189 loans during the quarter, which was a 7% sequential increase compared to fourth quarter of 2023. We generated total revenue of $30.7 million and adjusted EBITDA was $12.5 million. Looking forward, we're encouraged by the trends that we are beginning to see in the auto industry and the signs that our credit union customers lending capacity challenges are improving slightly. First, let's turn to the automotive industry. Cox Automotive recently increased their 2024 sales forecast for new and used autos. The latest forecast anticipates a 1.6% and 3.2% year-over-year growth in new and used retail SAAR, respectively, compared to flat for both metrics in the original forecast for 2024. Affordability has also improved as inventory levels continue to build with new autos seen a 47% increase and used auto inventories realizing an 8% increase year-over-year. As a result, vehicle prices moderated with new auto transaction prices decreasing by 2.7% and…

Thank you, Chuck. During the first quarter of 2024, we facilitated 28,189 certified loans compared to 32,408 certified loans in the first quarter of 2023. Total revenue for the first quarter of 2024 was $30.7 million, which includes an ASC 606 negative change in estimate of $1.1 million associated with our profit share compared to $38.4 million in revenue in the first quarter of 2023, which included a positive change in estimate of $0.7 million. As Chuck mentioned, Q1 certified loans and revenue both exceeded the high end of our guidance range. To break down total revenues in the first quarter 2024. Program fee revenues were $14.3 million. Profit share revenues were $13.9 million, net of the previously mentioned negative change in estimate and claims administration fees and other revenue were $2.5 million. As a reminder, profit share revenue is comprised to the expected earned premiums less the expected claims to be paid over the life of the contract and less expenses attributable to the program. The net profit share to us is 72% and the monthly receipts from our insurance carriers reduced our contract assets. Profit share revenue in the first quarter of 2024 associated with new originations was [ $15 million ] or $533 per certified loan as compared to $17.9 million or $552 per certified loan in the first quarter of 2023. The first quarter 2024, $1.1 million negative change in estimate is associated with cumulative total profit share revenue recognized of approximately $395 million for periods dating back to January 2019, which was the ASC 606 implementation date and represents over 400,000 insured in-force loans in the portfolio. Importantly, to put this in perspective, the cumulative profit share change in estimate since 2019 is a positive $4.4 million. Operating expenses were $17.7 million in the first…

Thanks, Cecilia. Now moving to our second quarter 2024 guidance. While we are encouraged that market conditions appear to be improving, the following factors were considered in our second quarter 2024 guidance, continued high interest rate environment and the possibility of being higher for longer, lower than pre-COVID inventory levels and higher than historical vehicle prices continue to present affordability challenges for consumers, used a new SAAR that remains lower than pre-COVID levels despite year-over-year growth. Near historic high loan-to-share ratio, combined with historically low share growth that continue to limit credit union's lending capacity and senior lending officers continue to weight their portfolios toward prime and super prime as they manage their risk appetite and balance sheets. Accordingly, our guidance for the second quarter of 2024 is as follows: total certified loans to be between 27,000 and 30,000 total revenue to be between $29 million and $33 million and adjusted EBITDA to be between $10 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, which positions us well to capture pent-up demand as market conditions continue to improve. We will 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 questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Joseph Vafi with Canaccord.

And I see the steady results here in the quarter. Just wanted to drill down into the sequentially of certs a little bit. If we could kind of maybe discuss seasonality if tax season really had anything to do, you think, with Q1? Or do you think it's just the number of partners growing and maybe some other incremental improvements to the backdrop? And then I'll have a follow-up.

Joe, it's Chuck. Yes, I think Q1, obviously, I would say Q1 seasonally is our best quarter. I'd say, March is usually one of our best months of the year, and that is driven by the tax season and the uptick there in tax refunds. But we're encouraged by the app volume and what we're seeing into the second quarter as well. And so, March was a good month, though for us due to the tax season.

Okay. That's great. And then maybe on some of these larger strategic partners and discussions and integrations and the like. Do you think it's feasible to see some of these bank partners kind of go live this year at this point? Or do you think that -- or are there some other factors that we should consider here relative to the pace of uptake with them?

You bet. Yes. And as you think about the bank initiative, we've hired the team. They're on board. They bring strong relationships to us. They're in the process of getting fully licensed and all that and up speed on our products. So, there will be some -- obviously some ramp time once those actually go live and they are more complex integrations with their [ LOS as ] we've stated. But yes, we think we can get some of those wins to maybe begin certifying loans later this year.

And the next question comes from Kyle Peterson with Needham.

Great. I wanted to touch a little bit on -- you guys mentioned some of the credit tightening initiatives that you guys took. I guess, could you clarify, I guess, when in the quarter you guys took those actions? And any estimate on kind of what percentage of the book or like loan cert volume that applied to?

Yes, Kyle, this I'll start. We implemented the new scorecard in October, our LP 2.0. So, we had a full quarter in Q1 under the new card, the enhanced scorecard. And the credit tightening that we took in the quarter was more around our score cutoffs raising it from [ 475 to about 575 ] cutoff. So, we're just taking less risk on those more risky credit bins. And it's about a 5% reduction in our volume. But as we said in the prepared remarks, in this environment, what we want to do is with the enhanced scorecard, ability to predict default more -- ability to higher predictability there and then take less risk. So that's what the [ card ] is doing, and we're pleased with the 1.2 million apps to date processed under it and the ability to do that and execute. So that's really the main tightening. And as you know, over the last couple of years, we've increased insurance premiums as well, 5% last -- Q2 of last year and about 13% in Q2 of '22. And those are also benefiting from those and actually cutting off higher risk premiums for that and actually pricing some of those loans out that were more risky. And a better capture rate that we're seeing under the new card for the better credits as well. So that's another good result. And that's a positive flow into our profit share as well as we'll see that over time.

That's helpful. And then maybe just a follow-up on the outlook looks like it implies flattish trends in revenue in certs. I guess just kind of thinking about fundamentals, should we expect, whether it's loan cert volumes or revenue? Is this a good run rate given the -- if macro kind of stays in this kind of uncertain malaise with where rates are in such? Or just how should we think about the fundamentals, if we kind of remain in this environment?

Yes. I mean if you think about -- I'll come back maybe to the outlook, but if you think about the improving conditions that we're seeing in the auto market, inventories are improving for new and used slightly. Affordability is getting a little better for the consumer. Consumer sentiment, it's been a tough spot. If you think about the used and new retail SAAR is forecast for improving. So, all those are positive signs. But the rate environment is still high, like you said, and the vehicle prices are still 30% above pre-pandemic. So, it's not -- there are signs of improvement, but still returning to normalcy over time. So if you think about the bottoming process of any market, we're encouraged to see even with our credit unions loan-to-share ratios now for a couple of quarters, have remained at that 85% and not gone up loan to share and share growth, as we said in the report improving now for a couple of quarters, which is their deposit growth, which as that improves, as we've seen in past cycles, that will ultimately go to more lending activity with the credit unions, and it's just kind of a process. But we believe that maybe we're close to that bottom and making a recovery. But it does take time.

And the next question comes from Zachary Oster with Citizens JMP.

We were working through the Q2 guidance, and I kind of just want to get a better sense of what the profit share may look like for dynamics in the next quarter and also the next few quarters?

Yes. If you think about the profit share, we book -- we put the current vintage, the Q1 on at about [ 5 ] -- a little over 530 unit economics for cert 533 to be exact. That's again under the new scorecard with our decisioning as well as stress that we've put on the portfolio. We've talked about it on prior calls that in this environment, we've actually stressed -- there's 3 components to profit share, as you know, go into the revenue model. It's a severity of loss. It's the default frequency as well as prepay speeds. And as we think about that, we put those on the books at about a 62% loss ratio in the first quarter. So, we feel like that's adequately stressed based on these conditions and feel like in that range of, call it, [ 500 million to 550 million ] is a good range to think about for profit share.

And the next question comes from John Davis with Raymond James.

This is [ Taylor ] on for JD. Maybe just to start on the 11 signed lenders for the quarter. Just curious if you're mostly having success in signing new lenders on the bank or credit union side. And then just any additional commentary on how OEM conversations are progressing as you've called out multiple large prospects in the pipeline recently?

Yes. Yes, you bet. So, in the quarter, the 11 accounts that we signed, 10 of those were credit unions in the quarter, and one was a bank or a finance company that we're targeting under our 24 priorities and initiatives. We've got -- as we talked about, we've got a robust pipeline and a new team there pursuing those bank customers. So, it's underpenetrated, and we want to do more in that space. And I was answering Joe's question earlier about the bank. And it is a more complex integration and cycle. So, we're hopeful we'll have certs later this year, but we also -- those things take time. So, banks are more active as OEMs increase their market share with incentives today. So that's another opportunity for us under the bank channel. And so yes, I mean, credit unions were 10 of the 11. But I think what we're most proud of and our team's work is of those 11 new accounts or customers, about 1/3 of those actually got integrated online and had their first cert in the quarter, which is pretty phenomenal by the team and the work there. So, we're really focused there on getting to first revenue faster.

Got you. Good to hear. And then maybe just as a follow-up, just any update on your expectations for refi certs throughout the year. It looks like they declined about 6% year-over-year and declined sequentially. And obviously, I understand it's rate dependent, but just curious to hear what you expect given the [ higher ] for longer commentary.

Yes. Yes. And real quick, I got to refi. I'll answer your OEM question. I don't think I did a good job there on the last part, but the OEM opportunity still is out there. It is -- the pipeline is as strong as ever in the conversations, and we continue to sell into that channel as well and very excited about that. So, as we've done in the past is we were talking about OEMs in past tense as we sign them up and not speculating, but still a great opportunity for us. And then the follow-up question there was on -- can you repeat the back end of that?

Yes, it's all on refi, general refi.

Yes. Refi is -- we've talked about it, we need rates to stabilize, which they have. We've not seen an action, I think, since July or August of last year. And our refi partners, it's like a 6 -- call it, 4- to 6-month stabilization, which we've now seen and our volume was, call it, a little less than 4% in Q1, down from, call it, 8% last year in Q1. So, we've seen the stabilization. But the bigger issue is what I was on the previous question is really through our credit unions, our the lending capacity of some of our larger customers that are still having constraints and challenges. When that works through, we'll have an opportunity again in the refi business, and it's not if it's when and that will get worked through. But those challenges need to kind of work out first, even in a declining rate environment.

[Operator Instructions] At this time, there are no further questions. I would now like to turn the conference back over to Chuck Jehl for any closing remarks.

Okay. Again, thank you for joining us today, and thank you to the Open Lending team for delivering these positive results in the first quarter of 2024. I hope everybody has a great evening. Thank you...

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.