All right, we're gonna keep rolling here at the Canaccord Conference. I'm Joe Vafi, equity research analyst here, focused on fintech. And up next, we're pleased to have with us again this year, management team from Open Lending, COO and interim CEO, Chuck Jehl. We view Open Lending's flagship product, the Lenders Protection program, as having one of the most innovative and disruptive value propositions across the greater fintech landscape. Open Lending's unique solution for auto lenders has enabled the company to continue to gain share over the past couple of years in a challenging auto market. Inevitably, the auto industry should normalize, and which in turn will provide a nice tailwind on top of continued new logo wins, for Open Lending.
Open Lending's got some terrific, operating margins, some of the best across the fintech landscape, and that doesn't hurt either. So with that quick intro, thanks for being with us here again, Chuck.
No, thanks for having me.
Yeah, great.
Yeah, it's great to be back.
So, maybe you kind of, you know, we'll just start off with you introducing Open Lending in your own words to people who may not be super familiar with the story.
No, sure, glad to do it. Open Lending was founded almost 24 years ago. We went public in 2020 on the Nasdaq. I joined the company about that time to help take it public. And, you know, we're in the lending enablement, risk analytics, and decisioning business. Open Lending, we're not a lender, but we represent lenders, credit unions, primarily today, you know, OEM captives, as well as banks and finance companies. And what we do is we decision risk-based pricing and decision auto loans for near and non-prime consumers, which is the 560-700 credit spectrum today that we serve. If you think about our business, we have a relationship with four A-rated insurance carriers.
So not only do we decision near-prime and non-prime auto loans on behalf of financial institutions, we actually have a credit default insurance wrapper that comes with each loan to insure it against default and have great relations with four A-rated carriers. And you know, it's been a... Again, I've been in business through cycles and most recently, you know, in auto, you know, we're seeing improvements. But that's what we do today. Our revenues streams are, you know, we get a technology or program fee for... It's success based only, transaction fee to decision the loan.
We participate in the profit share with the carriers, and which then aligns us to obviously write and underwrite, you know, good credit as well as we all can in these times. And then we also, our third revenue stream is claims adjudication-
Mm-hmm.
-which we provide those services on behalf of our carriers. So, yeah, been in business many years and have served about 400+ financial institutions today and growing, so.
Great. Yeah, so the Lenders Protection program, on one side, you're providing the credit algorithm to the-
Mm.
-to the lender, to say yes or no to a loan.
Right.
Right? And then on the other side, you have insurance partners that actually insure these loans, giving the lenders a little extra peace of mind.
Right.
You're generating revenue from both sides because there is, there's a lot of mispricing in the market.
Mm.
in, you know, in the below-prime market, right? So there's enough margin to go around for yourselves, for the lenders, as well as-
Absolutely
... for the insurance carriers, and it's still cheaper for the consumer versus what is a kind of typical below-prime loan rate.
Absolutely, and great, great points. You think about most lenders, you know, are in prime and super prime, which are, you know, lower yielding assets, lower risk, as Joe pointed out. But the yield and opportunity in near and non-prime with our credit default insurance is really higher, and it allows institutions to go deeper in the credit spectrum. And credit unions, which is our largest customer base, their mission is to serve their members, and they wanna serve all members, not just super prime and prime.
Right.
So our program allows them to do that, and it's all embedded in the rate. So the cost of the insurance as well as the program fee is embedded in the rate that's delivered back to the institution. That, and as Joe pointed out, for the inefficient space for near and non-prime lending, you usually have to go to a subprime lender to get that loan. We can not only save the consumer money, the institution is, again, a higher-yielding asset. The consumer has a lower rate and more affordability during these challenging times. So it's a win-win for all in the ecosystem.
Sure. That's great. Maybe we kind of stay at a high level for a minute, Chuck, here, and talk about some of the dynamics in the current auto industry, right? It's not great, but maybe it's starting to get a little bit better here, a little bit. Maybe there's a little bit of a light at the end of the tunnel. You know, maybe where are we, you think, in the cycle and some of the data points, and what are some of the data points pointing to here at this point?
Yeah, as we think about the auto markets, I mean, obviously, we've been through a few years here with, you know, with chips and inventories to, you know, affordability. I mean, we kinda think about it, you know, inventory levels, as well as affordability, interest rates, you know, used vehicle prices. You know, we're primarily 85% used loans today at Open Lending versus 15 new. So obviously, the Manheim and the, you know, the.
Manheim Index, which is-
The Manheim Index
... index of car-
Yeah
... used prices.
For used vehicle-
Yeah
... wholesale used vehicle prices. And, so we monitor the Manheim very closely. But as you think about inventories, new inventory year- over- year is up 52%, which is definitely headed in the right direction. You know, we're primarily used. Used inventories are about 2.2 million units right now annually. And that's pretty stable with last year, so not up as much as new, but definitely heading in the right direction. You know, with the Manheim, the Manheim Used Vehicle Value Index is down about 9% year-over-year through June. It actually ticked back up a little bit in July. So we believe vehicle prices have moderated, which is good for Open Lending. It's good for, you know, as we think about the back book of business that we'll talk about.
But vehicle values have moderated and come down, and then most importantly, the rate environment. You know, it's been a challenging rate environment. I mean, new vehicles' average rate and portfolio is about 9% and used is about 14%. Those are high rates for consumers. So, you know, we monitor that as it relates to affordability, but signs of improvement in the auto market, in both new and used, so which is encouraging.
Right. And I think for Open Lending's model, I think the best thing would be to see used car prices trend down, but gradually.
Yes.
Right? And then obviously, the interest rate environment. So we just, earlier today, we had, you know, another one of our fintech companies up here that is involved in the home mortgage-
Okay
... business. You know, that refi market has just lit up in the last couple weeks here, actually.
Okay.
You know, given the fact that, you know, affordability is tough, if, you know... and things are tight out there, if the consumer can save $100 a month on their mortgage now, they may just go ahead and do it.
Absolutely.
And then there'll be a multiple refi process there, which is good for their model, but you know, I think refi at one point was a big chunk of your business, too, and you know, it should rebound as well, if we get some change in the rate environment. So how is the rate environment looking, and has it moved with this expectation of like a rate cut at this point?
Yeah. Excuse me. Yeah, the rate environment, yeah, definitely, I mean, your point about refi for our business, you know, we had a record year in 2021. 2022, we were down slightly. Refi was 40% of our cert volume in February 2022. Big, big, big piece of our business and, you know, most recent quarter, Q2, I think we were as low as 3% of our volume was refi business and auto. So, I mean, definitely, a declining rate environment will help our business there. You know, but I will tell you, the one thing we didn't talk about is we kind of monitor auto. I think it's important to talk about is, you know, inventory levels, you know, annual sales forecast are improving, affordability, you know, prices, and then, of course, rate coming down. Is our core credit union customer-
Yes. Yeah, we need to get to that. Yeah.
... is you know, liquidity constrained, and I'll tie it back a little bit to refi. Refi's got a huge opportunity for us in the future again. You know, won't speculate on what percent of the book it'll be, but it'll be more meaningful than it is today-
Yep
... because there's so many mispriced loans out there. And, you know, we did a TAM study a year or so ago, and the annual refi in a normal market, so about a $40 billion annual market of refi volume. So there's mispriced loans that we believe have an opportunity to be refinanced today. Our channel partners that we talk to about rates don't really need rates to come down-
Yeah
... need them to stabilize, which we've seen since July of last year. But what we've seen, and why refi hasn't picked back up for us yet, is our credit union customers are lent out. And, you know, their loan-to-share ratios, and it's just loan to deposits, have reached almost near, you know, historic highs at, you know, recently at 85% loan to share. And we've seen positive improvements there, where that's come down to about 84 and trending in the right direction, and more importantly, share growth or deposit growth is, for 3 consecutive quarters, we've seen that. All of those are indications that the market's recovering for our credit unions, and they will begin lending again. I tie it back because if we have a rate action as early as next month-
Yeah
... it, you know, how quickly will our customers react to taking rates down? And more importantly, as they work through their balance sheet constraints that they're working through. We believe, you know, we've seen in prior cycles, it's 18-24 months, share growth begins building again. We've seen the three consecutive quarters of that. Loan to share comes down, then loan growth follows. You know, we think we're 9-12 months into that cycle.
Mm-hmm.
As you think about rate cuts maybe beginning in September, in the, you know, balance of this year and the next year, the timing of credit unions' health returning and the rate environment coming back is gonna be good for our business.
Right. So currently-
Try to tie that back together.
Right. Yeah, yeah, it's an important point 'cause-
Yeah
... you know, refi doesn't exist-
Right
... you know, by itself. We need the lenders to have capacity to lend.
But your point about the saving $150 a month, that's, you know, for the near-prime and non-prime consumer that we serve, that's meaningful. And that opportunity to help them and, you know, also grow our business again is there, and it's an opportunity in the future here.
Yep. No, we've seen the war for deposits go on out there-
Yeah
... in the last year, and I think unfortunately, credit unions have kind of been fighting hard.
They're fighting hard for it. Yep, absolutely.
Yeah. Yeah. So we had some Q2 results come out-
We did.
-last week. We've got the CFO and the CEO up here. So, maybe kind of walk us through some of the highlights of the quarter.
Sure, sure. Yeah, yeah, we, we reported last Thursday, you know, we just about 29,000, you know, certs, just, just under 29,000, for the quarter. About $27 million in, in revenue for the quarter, and about $10 million in Adjusted EBITDA for the quarter. And, you know, that, that was all after, you know, we talk about kind of front book, back book, and the profit share, that maybe we'll get into here in a second a little more. But if you think about we took an adjustment of our contract asset that was about $6.7 million. Those results were net of that.
Mm-hmm.
Excluding that adjustment to the back book, which was almost entirely or primarily related to the 2021 and 2022 vintages, that not only is Open Lending working through, the entire industry is working through, is kind of the lower performing assets that were put on at that peak of the Manheim. So, you know, we're not any different than anybody else in this space in auto that are working through those. Excluding that $6.7 million negative adjustment, we would have exceeded, you know, certs to the high end of the guide, revenue, and Adjusted EBITDA. So obviously, that's...
It impacted our financial results, but excluding that, as we work through those vintages, and believe the underwriting changes that we've taken over the last 18-24 months, and some of the credit tightening that we've done, we are encouraged that the 2023 and 2024 vintages, you know, months on book, compared to that 2021 and 2022 vintages, are performing better.
Mm-hmm.
you know, from a delinquency perspective, just to put it in perspective, you know, those 2022, some of those vintages came out at, you know, six months on book, 2% plus-
Yeah
... delinquent. And, you know, our 2023 vintage and 2024s are, you know, in that 1%-1.5% delinquent range.
Right.
So we're seeing, you know, better performance out of our most recent vintages and are hopeful... You know, we're working through the worst of the back book on those worst-performing vintages. So really pleased with the results for the quarter, despite the, you know, that backdrop and the impact on the contract asset.
Sure. Yeah, and we've definitely seen some of that 2022 vintage stuff in some of the other companies we follow-
Okay
... as well.
Yeah, yeah.
Too.
I agree.
Yeah. And it seems like, you know, your insurance partners kind of understand this dynamic pretty well themselves, right?
Mm-hmm. And-
They're still making money, even in this-
And-
even through this tough cycle
Absolutely.
Right? Right. Yeah.
Yeah, yeah, strong relations there. And, and, yeah, I mean, you know, in our largest carrier, you know, AmTrust, and, you know, and even in some of the newer carriers, it's this is a long, you know, term business and in play, and, and we all know that we go through cycles in the economy, as in, you know, being single product and auto today, you know, that definitely impacted us. But yeah, it's a top-performing ROE business with the long-
Mm-hmm
... haul for, for many of our carriers, and-
Okay
... and performing well over the long term.
Well, I mean, I think there's an indication, I mean, you have four carriers right now.
Yeah.
Volumes-
J- Signed, signed 2 this year.
Right, and volumes aren't super high, right? And there is a cost for them to maintain the program with you-
Mm
... right? But they're committed, right? They're keeping the, this investment going, even if volumes right now are kind of like-
A-absolutely.
Yeah.
You know, if you look at the long-term results and that 45%-50% loss ratio, very profitable, like I said, ROE business for them and through cycles, yeah, committed. As we grow the company again, having four carriers and the appetite and capacity-
Plenty of capacity.
... Plenty of capacity.
Yeah, capacity.
For our future growth. So yeah, it's you know just been a period of you know peak defaults. And if you think about an auto loan and the defaults, they kind of peak at 18-24 months in the curve.
Mm.
What is encouraging to us, and again, we're working through the 2021 and 2022 vintages, we're kind of at that point of peak default as we work through those. And again, the actions that we took along the way over the last 18 months, it's good to see the encouraging signs of better performance.
Sure. Fair enough. Then, I guess, you know, we kind of talked a little bit about credit unions and kind of where they stand. You know, I know maybe, you know, looking back maybe a year ago or so, you know, there was an enactment of CECL regulations, right?
Mm.
which is kind of a constraint on lenders' balance sheets, and your product's unique because it provides relief from the CECL reg.
Mm-hmm.
I haven't really heard that much about CECL recently, and, you know what, you know, I mean, I think it's just, you know, the loan to share is kind of just so high right now that this isn't really as relevant right now, but any update on, you know, awareness in the market of, you know, the CECL relief that you're bringing to the table?
No, and a great question. Yeah, credit unions adopted that accounting pronouncement in early 2023, and really the time of lower volumes, as you pointed out, that we've seen. But yeah, the opportunity with the credit default insurance, and for us to cover up to, you know, 80% of their loss for the auto, it helps on their, you know, loan loss reserves. Because under this new accounting pronouncement, you have to estimate the loan loss upfront for the loan, and if they're setting aside capital for that, you know, having the ability to. Our credit default insurance and the backstop from our carriers, to actually have less credit loss reserves established upfront is definitely a benefit.
So it's really more us getting out, you know, educating, working together with our credit unions and then, you know, the value prop that we offer. So it's still an opportunity, absolutely.
And then, you know, you also have two OEM customers. Maybe kind of give us an update on them and, you know, the kind of outlook for, you know, the pipeline, you know, of maybe new logos coming on in that channel?
Yeah. Yeah, we do business with two OEMs, we call them OEM one and two. We don't refer to 'em by name, just for reasons-
Right
... contractual reasons. But yeah, been doing business with us since late, you know, 2019, and both of those OEMs, and, you know, it's good to see them growing again year-over-year.
Okay.
You know, they went through a period there, and just candidly, if you think about where we were in the Manheim-
Mm-hmm
... and the vehicle prices being so elevated, you know, our value prop-
Yeah, it was.
... during that time, you go, you go repo a car and sell it at auction, you're actually making money.
Yeah.
So do you need the insurance? Well, that's moderated, and-
Yeah
... the value prop for OEMs or any customer to be on our platform and our program is strong as ever, and that's even including, you know, the OEMs, as the prices have moderated. And the other thing is OEMs incentives. You've probably seen-
Yep, seen that.
... incentives have gone up.
Yep.
You know, I think they're, last I saw, up about 6% of the loan amount, you know, from really low volumes there during the peak of price, you know, elevated prices and inventory. But, you know, pre-COVID was about 10%.
Mm.
I think all of that, and OEMs have to move metal, right, for their-
Yeah
... for their, you know, for the captives, they have to move the metal. So, as strong as ever, for that value prop and that opportunity and, and, and performing, you know, good to, like I said, good to see OEMs, our, our collective two OEMs, up year- over- year.
Great. I'm just curious. I don't know the answer to this. Is you know, the finance arm, the OEM finance arms and how their balance sheets are looking and their, you know, capacity to lend? I mean, we've kind of talked about where credit unions are now, but, you know, it's different. It's a different lending category.
Yeah, they're. I mean, they seem healthy in lending, and I think, you know, even, you know, you probably saw the reports on earnings, a couple of the large OEMs, I mean, actually taking their forecast up.
Okay.
Yeah, so I think, you know, from a you know volume and as well as, you know, a lending perspective, so I think they're healthy, and actually, you know, credit unions, you know, are overtaken by OEMs and banks-
Mm-hmm
... you know, from a volume perspective. So, they're actually, you know, in this period, lending in healthy capacity.
And then, I know you were pursuing some bank,
Mm-hmm
... partners. I don't think we've heard an update on that for a while, so.
Yeah, we are, and you know, we announced that as one of our earlier in the year 2024 priorities, and you know, we're under-penetrated in banks. You know, we do have bank customers today, but obviously, more concentrated with credit unions-
Uh-huh
... and then the two OEMs. But a great opportunity to diversify and, you know, longer sales cycle, Joe, on the banks-
Yeah, sure
... and you know, versus a you know, a normal or you know, average-sized credit union that we do business with. But still an opportunity that we're pursuing and trying to penetrate, and you know, with the longer sales cycle is a more meaningful cert volume. So-
Sure.
So, that's why we're pursuing that, and as we think about diversification. Yeah.
Good.
Yeah.
Good. And then, I've always also been curious about, you know, you've worked, you know, you're working through a lot of channels in auto these days, but then we have all of the Carvanas of the world and all of the online retailers, and I'm sure they have lending partners on their back ends too. But it seems like an interesting channel. They're moving a lot of cars. There's gonna be need for financing, you know, through those-
Yeah
... that channel as well. Yeah.
Yeah, that definitely is something that we look at an opportunity, but, you know, if we think about the TAM and where we are and, and-
Mm
... where we, you know, you can't do everything and any such priority.
Sure.
You know, we're about 1% penetrated in a $270 billion, you know-
Right
... near and non-prime TAM, so, so we've been more focused on that and adding logos and, you know, new, and I hate to call them logos, wins and-
Mm
... and customers and on the credit union bank and the OEM front. So we're really focused there, but you know, longer term out and, you know, strategic partnerships and other opportunities, we definitely would look at and-
Mm-hmm
... you know, one thing I, we didn't talk about was just real quickly is, you know, just the, the period we're in, we're, you know, we're adding, you know, we added 13 new customers, credit unions in Q2, and, even on the earnings call-
Yeah
... we added 10 so far in just the third quarter-
Wow
... you know.
Right.
So it's great interest, and the value prop continues, so we're really focused there-
Good
... on continuing penetrating.
Fair enough.
But yeah, we'll look at, you know, other opportunities as-
Right
... they present themselves, so.
Do you think the traction so far in new logos this quarter is a function of maybe that loan-to-share starting to move, and they kind of are preparing for the future a little bit, or-
It's that
Okay
... and it's also, you know, our sales and account management team and our leadership and some changes in our go-to-market that we did.
Okay.
You know, really aligning our account management sales functions as, as a sales unit.
Okay.
And not only getting the you know targeted wins and customers on board, but also getting that customer to first cert and revenue faster. So all of that are what's driving it, and it's been good. Really really proud of the team's effort there, the sales account management team.
Great, and then we have 1 minute left. I wanna kind of focus on a couple corporate things.
Okay.
You do have a buyback in place, right?
It actually expired recently.
Oh, it did?
Yes.
Okay.
It recently expired, and, you know, we bought under the, that program in 2023-
Uh-huh
... and, so we don't currently have a buyback in place.
Okay.
Yeah.
Have you discussed why you didn't renew the program?
You know, it's no, we've just been investing, you know, controlled and measured through the business, and you know, we're working through. It's a board-level decision.
Yeah, sure.
And I'm working closely with the board on that.
Yeah.
You know, I still think it's a good use of capital-
Yep
... if that helps, and especially at these prices, and-
Mm-hmm
... and, but it's just more of a capital allocation, and as we think about it, and, you know, strong balance sheet, you know, $245 million in unrestricted cash and-
Yeah
... not highly levered, but a lot of financial flexibility-
Fair enough
... as we kinda work through this cycle.
Got it, and then the last thing related to the board and related to you is, you know, you were named interim CEO maybe a quarter ago, no, no, two quarters ago now, maybe.
Yeah, end of March.
In March, yeah, and it'd be great if you... I would love for you to be the CEO. It'd be great, permanent.
Well, I appreciate you-
Yeah
... saying that.
And, uh-
It would work.
... but, you know, the board's got a process they gotta go through, right? And, you know, where do you think we are in that process at this point?
Yeah, I mean, no, I appreciate you saying that, and I love, you know, love Open Lending, you know, I appreciate the board's trust in me and appointing me back in March as the interim CEO, and really, you know, they've, as you said, running the process. I think they're well into that process.
Okay.
They, you know, they're doing the work they need to do, and, you know, I'm a shareholder and an employee, and I want what's best for the company. And, so I believe in the board and trust in their decision, so they're working through that.
Great. We're out of time, Chuck. It's great chatting about-
Yeah, thank you.
... Open Lending.
Yeah.
You know, a really innovative model in the auto lending space, so.
No, thanks for having us.
All right.
Appreciate it.
All right.
Thank you.