Open Lending Corporation (NASDAQ:LPRO) Q4 2023 Earnings Call Transcript
Open Lending Corporation (NASDAQ:LPRO) Q4 2023 Earnings Call Transcript February 27, 2024
Open Lending Corporation misses on earnings expectations. Reported EPS is $-0.04 EPS, expectations were $0.05. LPRO isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Open Lending's Fourth Quarter and Full Year 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are Keith Jezek, CEO; and Chuck Jehl, CFO. Earlier today, the Company posted its fourth quarter and full year 2023 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 and other forward-looking statements that represent the Company's views as of today, February 27, 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 differ from those expressed or implied with such statements. And now, I'll pass the call over to Mr. Keith Jezek. Please go ahead.
Keith Jezek: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending's fourth quarter and full year 2023 earnings conference call. I am pleased to report that excluding a negative change in estimate associated with our profit share, we exceeded the high end of our guidance range for certified loans and revenues in the fourth quarter. I am proud of our team and would like to thank each of our team members for delivering these results. For the full year 2023, we certified nearly 123,000 loans and delivered total revenue of $117.5 million, adjusted EBITDA of $50.2 million, and generated $75.5 million in cash before repurchasing $37.3 million in our common stock. As I reflect on 2023, the automotive lending environment, which directly impacts Open Lending, faced constrained inventory levels, the highest Fed funds rate in over 20 years, a high consumer affordability index, which represents the weeks of income needed to purchase a vehicle, and worsening credit availability and credit performance metrics.
Additionally, credit unions experienced decades low share growth and the highest loan to share ratio since prior to the pandemic. Against this market backdrop, we continue to improve our product and technology, further refine our go-to-market strategy, and invest in key talent to position us well for growth as industry conditions improve. We remain focused on our mission to change lives by making transportation affordable. Notably, one of our most significant accomplishments in 2023 was launching an enhanced lenders protection proprietary scorecard in the fourth quarter. Our new scorecard includes three additional alternative data sources beyond LexisNexis. The additional data provides us with access to 350 million detailed transactions, over 170 million consumer checking accounts, and an expanded suite of credit report attributes developed and maintained by TransUnion.
Our model leverages AI machine-learning algorithms and is trained and validated against a large set of proprietary lenders protection data to identify the most predictive credit risk attributes for our borrowers. We anticipate that over time, the new scorecard could lower default frequency by better predicting risk, which we expect will improve our lenders, our carriers, and ultimately Open Lending's performance. This effort was recently recognized by the National Association of Federal Credit Unions, or NAFCU, who selected Open Lending as the winner of the 2023 NAFCU Innovation Award for our Enhanced Lenders Protection Scorecard. The award recognizes companies making the most valuable and innovative contributions to credit union success, including groundbreaking advancements in technology and software.
In addition to the new scorecard, the team delivered on additional improvements to our product and technology in 2023, including improved our co-application underwriting logic to further align with our default probabilities, implemented a prequalified decision helping bolster our lender's ability to provide a better direct-to-consumer experience, developed and deployed a new claims adjudication platform to improve internal efficiency and turnaround time of our claims process, and incorporated complex logic for decisioning that is difficult for lenders to implement in loan origination systems, thereby enhancing and improving our customers daily workflows. Through these actions and others, we have and will continue to implement improvements to our product and technology with the expectation of making easier to do business with Open Lending.
Turning to our go-to-market execution, in the fourth quarter of 2023, we added 15 new accounts as compared to 19 in the prior year quarter. Of the accounts recently added, I am pleased to report that 20% of these were larger accounts with combined total assets of almost $20 billion. In comparison, in Q4 2022, only 5% were of a similar size. This is a testament to our focus on signing new accounts that are more likely to contribute meaningful certified loan volume, have lending capacity, and operate loan origination systems for which we already have existing successful technology integrations. In addition, we continue to closely monitor macroeconomic and auto sector conditions. First, I would like to provide further insights into the challenges we faced in 2023.
On affordability, consumers faced elevated vehicle prices brought on by supply and demand shock, high interest rates, and higher total cost of ownership with gas, insurance, and maintenance expenses up almost 15% year-over-year. Auto industry loan delinquency rates reached 15-plus year highs as consumers continue to be stretched with declining savings rates, which was 3.7% in December 2023, down from a peak of over 30% in April 2020. In addition, total credit card debt is now $1.13 trillion, which is up almost 15% year-over-year, indicating even more pressure on the consumer. In this environment, we have seen most all auto lenders tighten their underwriting standards and shift towards prime and super prime consumers as lenders seek to perceive safety of these borrowers.
Credit unions continue to be challenged as they experience the slowest share or deposit growth since 1991, with Q3 2023 share growth of 1.7% compared to the lowest level before FY2023 of approximately 3.5%. This, combined with high loan to share ratios, has led to a slowdown in loan growth throughout 2023 impacting Open Lending as credit unions represent approximately 75% of our total Cert volume. Looking ahead to 2024, we do anticipate market stabilization. Cox Automotive recently released its 2024 forecast and called for a return to normalcy in the U.S. auto market. The report predicts 2024 will be the best year for car buyers since the pandemic. Cox is expecting vehicle inventory to rise in 2024, prices to decline slightly and incentives to be higher.
Additionally, the interest rate environment has been stable since August 2023 and many signs point to potentially lower rates later this year, should that happen, we would expect that to be a benefit to consumer affordability. For used vehicles specifically the Manheim Used Vehicle Value Index, or MUVVI, a leading indicator of wholesale used auto prices declined to 7% in 2023 compared to 2022, though the index remains approximately 35% higher than pre-pandemic levels. Cox's current forecast projects only 0.5% increase in the MUVVI in 2024, suggesting used auto prices are unlikely to increase materially in the near-term, which would be a net benefit for Open Lending. Historically, these cycles in the automotive industry have always proven to rebound and are nearly always led by used autos.
As you may have heard me say previously, consumers can defer the purchase of a new vehicle, but ultimately they cannot defer the purchase of transportation. Now, turning to our core customer credit unions, there are early signs of increased share growth. Preliminary data suggests average credit union share growth in Q4 2023 was 2%, an almost 20% sequential increase compared to Q3 2023. This represents the first increase in share growth since Q1 2021, but as seen in prior cycles, it will take time for loan growth to improve as credit unions build up shares, so that their loan-to-share ratio can decrease from their near 10-year plus highs of 85% in Q4 2023. Lastly, auto loan growth in Q4 2023 was 2.9%, near the lowest levels observed since the beginning of the pandemic, which was 1.8%.
Based on this data, and absent any further deterioration, the slowdown of lending at credit unions may be approaching a bottom. Moving to the OEM captive segment in Q3 2023, these lenders had the highest market share of all lender types at 30% of total autos financed in the U.S., up from only 21.5% in Q3 2022. This fact has reflected an Open Lending certified loan volumes from OEMs, which for full year 2023 increased over 15% compared to prior year. Should these lenders continue to capture share in the market, we anticipate we will continue to benefit. With the automotive market expected to stabilize and credit union lending possibly nearing a bottom, and growth in the OEM segment, we believe there are signs that the market conditions will improve in the near future.
Our goal is to be well-positioned for that inevitable return to growth. Now, let me turn to our priorities for 2024, which we anticipate will help us maximize near-term opportunities and allow us to capture the growth. First, we will optimize the core business. We plan to further enhance our sales and account management capabilities to better serve our existing clients and more rapidly and effectively acquire new credit union customers to capture market share over time. We will continue to closely monitor developing market conditions, particularly around credit metrics such as defaults and delinquencies, and make underwriting and pricing adjustments as needed throughout the year to optimize performance and profitability. We will continue to evaluate the appropriate number of carrier partners with a balanced allocation across our partners based on our current certified loan volume along with anticipated future growth.
To that end, we recently signed a program management agreement with Core Specialty Insurance Holdings, enabling them to be an additional provider of credit default insurance policies for our lenders protection platform. One of the central reasons why auto lenders have come to rely on and trust Open Lending is that we have the stability and firm backing of our A rated insurance carrier partners. We are pleased to have Core Specialty join us in adding to that stability on behalf of our lenders and the consumers they serve. Secondly, we plan to expand our focus in the bank segment where we already have dozens of producing lenders and signed two new bank customers in FY2023. We are investing in a dedicated team with existing relationships within community and regional banks who are capable of selling the unique value proposition of our product to this segment.
Based on our analysis, this is a very significant opportunity and importantly, most participants in this market are larger than our average credit union customer. Additionally, based on our conversations with bank prospects, they have the lending capacity and the appetite to lend in this environment. To wrap up, I would like to express my continued confidence in the long-term opportunities before us. I'm encouraged by the response of our team during these difficult times in our industry. I would like to again sincerely thank all of our team members for their efforts. I remain confident about our position in 2024 and beyond as we execute on our mission to change lives by making transportation affordable. I believe our value proposition to the various players in the auto, retail ecosystem is strong, in fact, strong as ever, and by executing on our priorities in 2024, we'll be well-positioned to capture the pent-up demand as the auto industry inevitably recovers.
With that, I'd like to turn the call over to Chuck to review Q4 results in further detail, as well as provide our thoughts on the outlook for Q1 2024. Chuck?
Chuck Jehl: Thanks, Keith. During the fourth quarter of 2023, we facilitated 26,263 certified loans compared to 34,550 certified loans in the fourth quarter of 2022. Total revenue for the fourth quarter of 2023 was $14.9 million, which includes an ASC 606 negative change in estimate of $14.3 million associated with our profit share, compared to $26.8 million in revenue in the fourth quarter of 2022, which includes a negative change in estimate of $12.8 million. Excluding the negative change in estimate in fourth quarter of 2023, we exceeded the high end of our guidance range for both certified loans and revenues. To breakdown total revenues in the fourth quarter, program fee revenues were $13.5 million and claims administration fees and other revenue were $2.6 million, while profit share revenue was negative $1.1 million due to the impact of the previously mentioned negative change in estimate.
As a reminder, profit share revenue is comprised of 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 carrier partners reduce our contract asset. Profit share revenue in the fourth quarter of 2023 associated with new originations was $13.2 million or $501 per certified loan as compared to $18.9 million or $546 per certified loan in the fourth quarter of 2022. As a reminder, U.S. GAAP revenue recognition rules related to variable consideration require that we reevaluate the reported profit share revenue estimate for prior periods based on new available information each quarter.
This process requires the evaluation of both internal and external information available during the period to quantify the change in estimate for the quarter. Profit share change in estimate is a measure of current quarter cumulative actual data combined with changes to previously forecasted frequency of default, severity of loss, and prepayments. In applying this accounting standard, to the extent new information presents a negative impact to previous forecast, the change in estimate will result in a negative impact to our operating results and vice versa, when new available information represents a positive adjustment to previous forecast, this will result in a positive impact to our operating results. The Q4 2023 $14.3 million negative change in estimate is associated with cumulative total profit share revenue recognized of over $380 million for periods dating back to ASC 606 implementation date in January of 2019 and represents over 400,000 insured enforced loans in the portfolio.
Importantly, to put this in perspective, the cumulative profit share change in estimate since 2019 is a positive $5.6 million, which includes the impact of the negative adjustment recognized in the fourth quarter of 2023. As Keith mentioned, auto industry delinquency rates have increased to 15-plus year highs, which we considered in combination with the higher than expected claim submissions and adjusting projections to reflect higher frequency of default, the primary driver of the current quarter negative change in estimate. In addition, the Manheim Used Vehicle Value Index, or MUVVI declined faster than industry projections at the end of Q3, and as a result, severity of loss was also a negative factor in the current quarter. Lastly, lower than expected prepayments were a slightly favorable factor as premiums on loans enforced remained in the portfolio longer than previously projected.
As you may recall, we implemented multiple price increases over the past two years to appropriately price for the risk that we are taking and we will continue to evaluate further price adjustments. In addition to pricing, as Keith mentioned earlier, we launched an enhanced scorecard in late Q4 2023, which we anticipate will lower default frequency by better predicting risk. We are now better positioned to take additional targeted credit and pricing actions with a focus on driving improved performance for our lenders, our carrier partners, and ultimately Open Lending. Operating expenses were $17.9 million in the fourth quarter of 2023 compared to $17.2 million in the fourth quarter of 2022. Operating loss was $8.3 million in the fourth quarter of 2023 compared to operating income of $4.8 million in the fourth quarter of 2022.
Net loss for the fourth quarter of 2023 was $4.8 million compared to a net loss of $4.2 million in the fourth quarter of 2022. Basic and diluted loss per share was $0.04 in the fourth quarter of 2023 as compared to a loss of $0.03 in the previous year quarter. Adjusted EBITDA for the fourth quarter of 2023 was a loss of $2.1 million as compared to a profit of $8.5 million in the fourth quarter of 2022. Excluding profit share revenue change in estimate, we generate $12.2 million in adjusted EBITDA in the fourth quarter of 2023. There's a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. We exited the quarter with $374 million in total assets, of which $240.2 million was in unrestricted cash, $29.3 million in contract assets, and $70.1 million in net deferred tax assets.
We had $168.5 million in total liabilities, of which $145.3 million was an outstanding debt. In fiscal year 2023, we generated $75.5 million in cash before acquiring 37.3 million or 5.2 million shares of our common stock at an average price of $7.13 per share. We have $20 million remaining under our current share repurchase program, which expires at the end of the first quarter of 2024. Now moving on to our Q1 2024 guidance. While we are encouraged that market conditions appear to be stabilizing, the following factors were considered in our Q1 2024 guidance. The continued impact of affordability due to constrained inventory levels, continued elevated vehicle prices, and high interest rates, total cost of ownership and of course, inflation, continued lending capacity challenges at our credit unions, elevated cost of funds making credit unions less competitive when consumers have other options, tighter underwriting standards as lenders continue to shift their focus towards prime and super prime borrowers and high percentage of cash buyers due to elevated interest rate environment.
Accordingly, our guidance for the first quarter of 2024 is as follows. Total certified loans to be between 24,000 and 28,000, total revenue to be between $26 million and $30 million and adjusted EBITDA to be between $10 million and $14 million. We have a strong balance sheet, no near-term debt maturities and generate positive cash flow, all of which afford us the resilience needed to navigate current market conditions. At Open Lending, we have navigated through these economic cycles before. Based on our analysis and experience, what is different in this cycle versus the prior two is the impact of inflation and how it is impacting our target market consumer. As the sector and macroeconomic conditions inevitably recover, we expect to capture pent-up demand and capitalize on the thoughtful and measured investments we have made during economically challenging times.
We'd like to thank everyone for joining us today, and we'll now take your questions.
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