Open Lending's (LPRO) CEO John Flynn on Q1 2022 Results - Earnings Call Transcript

May 07, 2022 8:31 AM ETOpen Lending Corporation (LPRO)
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Open Lending Corporation (NASDAQ:LPRO) Q1 2022 Earnings Conference Call May 5, 2022 5:00 PM ET

Company Participants

John Flynn – Chairman and Chief Executive Officer

Ross Jessup – President and Chief Operating Officer

Chuck Jehl – Chief Financial Officer

Conference Call Participants

Peter Heckmann – D.A. Davidson

Joseph Vafi – Canaccord

Spencer James – William Blair

Vincent Caintic – Stephens

John Davis – Raymond James

Faiza Alwy – Deutsche Bank

Mike Grondahl – Northland Securities

John Hecht – Jefferies

Operator

Good afternoon, and welcome to Open Lending’s First Quarter 2022 Earnings Call. As a reminder, today’s conference call is being recorded. On the call today are John Flynn, Chairman and CEO; and Ross Jessup, President and COO; and Chuck Jehl, CFO. Earlier today, the company posted its first quarter 2022 earnings release 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’d like to remind you that this call may contain estimates and other forward-looking statements that represent the company’s view as of today, May 5, 2022. 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 materially from those expressed or implied with such statements.

And now I’ll pass the call over to Mr. Flynn.

John Flynn

Thank you, operator. Good afternoon, everyone. Thanks again for joining us for Open Lending’s first quarter 2022 earnings conference call. I’d like to start today by reviewing our first quarter highlights and the progress we’ve made on our growth objectives. Then Ross is going to provide an update on the auto manufacturing and lending landscape, discuss the recent underwriting program enhancements and provide an update on our insurance partners. And then finally, Chuck is going to review our Q1 financials and outlook for the full year 2022.

Now to our high level financial review of the first quarter results. We’re very pleased to report another strong quarter at Open Lending. Q1 2022 certified loans increased 32% to 43,944 as compared to Q1 2021. We reported revenue of $50.1 million, which was an increase of 14%; and adjusted EBITDA of $33.8 million, which was an increase of 11% as compared to the first quarter of 2021. We’re also very encouraged by the continued growth in our credit union and bank line, where we achieved a 76% year-over-year increase in certs for Q1 2022. This was driven in part by a few things: the addition of new accounts, including some that are preparing for CECL compliance by the end of the year; the continued strength of our refinance program; and further penetrating our existing customers through wallet share.

Let me first turn to the new customer side. We signed 18 new accounts in the first quarter, and five of these were Tier 1 accounts classified as over $1 billion in assets. Momentum has also continued into April with seven new contracts signed since quarter end and 20 active implementations underway.

Now I’d like to turn to the refinance program and expand on our success with this channel. We continue to add new and existing credit unions and banks to the refinance program during the quarter, which has been an enhanced focus of ours to help lenders and consumers offset the temporary headwind associated with affordability due to the inflated car values and inventory shortages. We added two new refinance channel partners in Q1 2022 with our volume reaching nearly 40% of our total search.

As a result of our flexible business model, our refinance channel has accommodated consumers by allowing them to modify their existing terms and lower their payments in a challenging environment. Our value proposition for refinance will remain strong regardless of the rising rate environment due to the fact that credit unions cost of capital remains very low relative to other lenders, and they always seem hungry for auto loans, which was proven in the previous rising rate environments that we’ve seen.

Moving on to the existing customer expansion. Our top 10 customers, excluding OEMs, have increased their certification volume by 166% in Q1 2022 as compared to Q1 2021. And we continue to focus on expanding our wallet share with our existing customers, which is a key initiative of ours in 2022.

Now I’d like to update you on our other long-term growth initiatives and strategic investments to support our mission, which is to serve the underserved by using our technology and valuable data to empower consumers to get the best loan rates that their risk status will allow, while satisfying the return goals of our lending customers.

First, the one big area of investment this year will be our go-to-market sales strategy with additional dedicated sales team members to capture more of the significant $250 billion TAM. Secondly, we will be growing our account management staff to continue focusing on expanding wallet share with our existing customers. We’ve already made several key hires within our sales and account management staff in first quarter, and we’re seeing good early traction with these investments.

We’ve also recently made a key hire to support our OEM captive and large institution opportunities to ensure that we are well-positioned to grow and capture the flood of pent-up demand that will ultimately come when the inventory headwinds subside. We’ll also be making some key hires with core experience in bank and auto originations and underwriting to further penetrate the bank space.

And then finally, we’re investing in technology to further enhance the Lenders Protection Platform for our lenders by modernizing the platform and infrastructure to support our growth, improving lender reporting and claims capabilities and investment in development resources.

I’d like to now turn it over to Ross.

Ross Jessup

Thanks, John. Today, I will highlight the current and near-term U.S. automotive market conditions and outlook, recent underwriting program enhancements made to Lenders Protection, commercial activities with our industry-leading OEM customers and prospects, and progress with our insurance partners.

First, on the current and near-term U.S. automotive market conditions and outlook. As we enter 2022, we began to see incremental improvement in a variety of leading indicators for production. We remain optimistic that the toughest headwinds facing the industry are mostly behind us as we navigate through the remainder of the year. As we reported last quarter, dealer networks across the country are reporting modest improvements in inventory, presold orders, velocity and overall demand conditions.

Entering the second quarter, North American vehicle production industry forecasts for the full year 2022 have been updated to reflect the impact of the renewed first-quarter lockdowns in Asia and subsequent production shutdowns. The industry is now expecting 2022 total production to be roughly in line with the total units delivered in 2021 or close to 15 million units. As for demand and pricing with the production run rates 2 million units below levels prior to the pandemic, demand remains strong.

We continue to closely monitor vehicle affordability as average used vehicle pricing was up double-digit year-over-year in the first quarter. Specifically in the last 12 months, on average, we have seen monthly payments for used cars segment increased 18% year-over-year to approximately $488 per month. When reviewing the last 24 months of data, it does appear that pricing peaked in February. We are monitoring the tightening supply in March and April as we execute our go-to-market strategy for the quarter.

Our expectation for a gradual return to affordability that will enable the near-prime and non-prime consumers to return to the dealerships over the next 18 months. It’s our understanding and belief given what we’ve experienced in prior cycles that claim severities will increase gradually in a predictable fashion as we revert to normalized conditions.

Moving on to our recent underwriting program enhancements. Over the past two months, we rolled out two major enhancements in our product offering. For indirect lending, we expanded our loan limits by approximately 30%. The last time we changed these limits was approximately six years ago. In reviewing the potential impact, we found that over one-third of our applications were requesting larger the loan amounts than we allowed. Additionally, early in April, we expanded term offerings to 84 months for certain model years and lower-mileage vehicle.

The potential impact is also significant as approximately one-third of our applications received were asking for terms longer than our previous limits. Both changes were enacted while maintaining our discipline and rigor in underwriting. We are very encouraged by the early results and believe we are well-positioned in the future to capture a large portion of these applications. For purposes of historical comparison, during the period of 2009 to 2011, the average term for a used car increased from 57 months to 64 months. Most importantly, the average delinquency rate declined 150 basis points from 4.5% to 3%.

Next on commercial activities with our industry-leading OEM customers. We continue to have strong partnerships with two of the most powerful automotive brands as they are powering through the market challenges globally. For 2021 and Q1 2022, our volume as a percentage of theirs has remained at a consistent level.

We look at this as a positive sign that as the supply continues to ramp toward normal levels, our volumes should increase proportionately. In fact, there should be even more opportunity for us since the near and non-prime consumers were notably underserved over the last year. We continue to engage weekly with top leadership at our OEM captive customers and prospects so that we are well-positioned as the market recovers.

Lastly, as you know, expanding our insurance partner relationships is a key initiative. We are excited to announce that we signed an agreement with Arch Specialty Insurance Company, our fourth insurance partner, to be an additional provider of credit default insurance policies for our Lenders Protection Program. This is another important strategic initiative for us, and we are thrilled to be working with such a great team at Arch. We believe that there is more than enough volume to support all of our insurance partners while continuing to deepen our value relationship with our existing partners. The terms of this agreement and the financial arrangements are substantially similar to the others. Although capacity has not been an issue to date, we are excited to have Arch on our team based off our significant TAM and growth plan in front of us.

I’ll now turn this over to Chuck to discuss our Q1 financials and outlook for 2022.

Chuck Jehl

Thanks, Ross. Despite all of the macro headwinds John and Ross mentioned, we are pleased to report another strong quarter at Open Lending. During the first quarter of 2022, we facilitated 43,944 certified loans, compared to 33,318 certified loans in Q1 of 2021, a 32% increase year-over-year, and we executed 18 contracts with new customers. In addition, as John stated earlier, we currently have 20 active implementations with go-live dates in the next 60 to 90 days.

Total revenue for the first quarter of 2022 increased 14% to $50.1 million, as compared to $44 million in the first quarter of 2021. Profit share revenue represented $28.3 million of total revenue, program fees were $19.7 million, and claims administration fees were approximately $2 million. If we further break down the $28.3 million in profit share revenue in Q1, profit share associated with new originations in the first quarter of 2022 was $25.7 million or $584 per certified loan, as compared to $22.7 million or $680 per certified loan in the first quarter of 2021.

Also included in profit share revenue in Q1 of 2022 was $2.6 million change in estimated revenues from certified loans originated in previous periods, primarily as a result of healthy consumer balance sheets against a backdrop of full employment and the continued overall portfolio performing better than we expected due to fewer defaults and claims and lower claim severity as a result of our conservative underwriting.

Gross profit was $45.3 million in the first quarter, an increase of 11%, driven primarily by the increase in certified loans in Q1 of 2022 as compared to Q1 of 2021. Gross margin was 90% in the first quarter of 2022, compared to 92% in the first quarter of 2021. Selling, general and administrative expenses were $13 million in the first quarter of 2022 compared to $11.2 million in the previous year quarter.

Operating income was $32.2 million in the first quarter of 2022, compared to $29.4 million in the first quarter of 2021. Net income for the first quarter of 2022 was $23.2 million, compared to $12.9 million in the first quarter of 2021. Basic and diluted earnings per share was $0.18 in the first quarter of 2022 compared to $0.10 in the previous year quarter.

Now turning to adjusted EBITDA for the first quarter of 2022 was $33.8 million, as compared to $30.3 million in the first quarter of 2021, an increase of 11%. There’s a reconciliation from GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. We exited the quarter with $342.7 million in total assets, of which $147.4 million was in unrestricted cash, $107.5 million was in contract assets and $64.9 million in net deferred tax assets. We had approximately $159.4 million in total liabilities, of which $145.6 million was an outstanding debt. We had approximately 126.2 million shares outstanding on March 31, 2022. We posted an updated investor presentation and first quarter 2022 earnings supplemental to our Investor Relations website, which includes a slide that lays out our current share count.

Now moving to our guidance for 2022. Based on our first-quarter results and trends into the second quarter, we are reaffirming our guidance ranges for the full year of 2022 as follows: total certified loans to be between $195,000 and $225,000; total revenue to be between $210 million and $240 million; adjusted EBITDA to be between $135 million and $160 million; and adjusted operating cash flow to be between $140 million and $165 million. Despite the industry headwinds as dealer inventory is restocked, we are confident in the resiliency of our business and the ability to navigate through the supply and affordability constraints.

In our guidance, we took the following factors into consideration: the affordability index for our target credit score due to continued inflated used car values; the continued strength of our refinance program and the value proposition it offers consumers; inflation and rising interest rates; the global semiconductor chip shortage; OEMs that have streamlined their supply chain, having moved to just-in-time inventory manufacturing processes; disruption in transportation networks and raw material shortages; low levels of dealer inventory; and, of course, the investments we are making in our business that John mentioned earlier.

I want to thank everyone for joining us today for our first quarter 2022 earnings call. We will now take your questions.

Question-and-Answer Session

Operator

[Operator instructions] Your first question comes from the line of Peter Heckmann from D.A. Davidson. Your line is open.

Peter Heckmann

Thanks for taking the question. A lot of information there. Can you talk about – in terms of the trends that you’re seeing with refi almost at 40%, and I believe you said you added another refi referral partner, do you think that level can be sustainable and can continue to bridge Open Lending’s growth in certified loans until we see a recovery in new car inventories?

John Flynn

Yes, Peter. This is John Flynn. I agree with that statement 100% that this is definitely sustainable. We’re seeing a ton of applications come through that platform. These are consumers that have all been taken advantage of. And when you look at the fact that it’s still that $250 billion TAM, we’re just continuing to grow that side of the business. I don’t see it going away even – even during an inflationary-type period, I think you’re always going to see that our credit union core business is very hungry for these types of loans. And with their cost of capital, I think it’s only going to continue to grow. So yes, I think it’s definitely going to help us bridge the gap between new cars hitting the dealerships again and the numbers we’ve thrown out there.

Peter Heckmann

Great. Great. That’s helpful. And then just, can you help me – remind me when Open Lending reversed the pricing increase that they put in place after the pandemic. I’m just trying to account for the average profit share per loan. When excluding the adjustment, it looks like it was maybe 585 this period against maybe 680 last period? Can you just help me perhaps reconcile the differences between the two?

Chuck Jehl

You bet, Peter. It’s Chuck. Yes, on the – it was April of 2021 when we actually took that COVID vehicle value discount, 5% off. And so the comparable profit share that you’re seeing in the supplemental, the 584 per certified loan on new originations in Q1 of 2022 as compared to the 680 previous year quarter, that has not been taken off yet. And it was about $100 roughly per certified loan. It’s about a 15% premium increase during – a little bit more than that in the COVID adjustment period. So it will be more comparable Q2 forward when we report later for the second quarter.

Peter Heckmann

Okay. That’s helpful. I’ll get back in the queue. Appreciate it.

Chuck Jehl

Thanks, Peter.

Operator

Your next question comes from the line of Joseph Vafi of Canaccord. Your line is open.

Joseph Vafi

Good afternoon. Nice to see the steady results in a tough environment. I thought maybe we could focus – I know CECL is coming up for the credit unions. And I know they’ve got that on their radar this year, and I know that you’re seeing some activity on that already. Just wondering, what the rate environment and inflationary environment may mean for some of the credit unions that you have and potential new partners relative to CECL and what you’re seeing in general on the credit unions with CECL coming up? And then I have a follow-up.

John Flynn

Thanks, Joe. I appreciate it. The – I think just the number of Tier 1 accounts that we signed in the first quarter, and then I just talked about continuing into the – even April, I think is just evidence of the fact that these larger shops are starting to position for the CECL relief that we can provide them. Again, I think regardless of where the rate increases go, we’ve been through this in 2008 and 2009, and credit unions continue to actually increase their volume because of their low cost of capital.

When everybody else starts to increase their rates across the board because of inflation and rate increases, credit unions again continue to kill it. So I think you couple that low cost of capital with the CECL relief, and it’s really setting us up really well for some good tailwinds.

Joseph Vafi

Okay. That’s helpful. And maybe, Ross, could we get any updates on potential new OEM partners? I mean, I know you said that you hired a new key resource to help with that channel.

Ross Jessup

Yes, Joe. Yes. We brought on someone that’s worked with us as an advisor and consultant, but we brought him on full time. We also have a couple of positions out. We’re talking to folks actually next week about joining that have years of experience with – in the market, they are well known and know all the folks out there. It’s – our activity level and our conversations are still ongoing. We’ve got things teed up here later in the year after some IT projects are finished that we’re going to be back on the radar to see about implementation and cemented implementation. So – but we’re really excited about it.

They all see the value prop of what we deliver. And they have to look actually out 12 to 18 to 24 months to see when these current vintages of originations, you cannot use historical losses when you’re looking at what you’re doing today. There will – it’s a bell curve from a loss on a PD standpoint. And so today’s vintages are exactly the reason you need us out there to protect you from what is inevitable 12 to 24 months, and our premiums are all rated that way as well.

John Flynn

Ross, the one thing I’d add to that, that I think is important, the gentleman that Ross just alluded to, his background is not just in the auto space. He comes from the bureaus as well having been inside selling for some of the bureaus, which has created some key contacts with the risk people at the big auto lenders. And I think that really expedites our sales. When you talk about like the sales cycle, typically, it’s you get to the lending people.

Yes, they think it’s great. We can do more volume. Now we got to get it in front of the risk people. We’ve got to get it and I think the people that we’re looking to bring on now with the backgrounds that we’re finding, kind of expedite that by getting you in front of the larger group at the same time.

Ross Jessup

Yes. You’re right, John. I mean the individual we brought on that has been helping us over the years came out of the OEM side, and now this other person comes out more of the captive finance side. So it’s a great combination to have both of them helping us expand on what we’ve already had great success at.

Joseph Vafi

That’s great guys. Thanks very much.

Ross Jessup

Thank you, Joe.

Operator

Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Spencer James

This is Spencer James on for Bob Napoli. Thank you guys for taking the question. Just one on the new insurance carrier you announced. What are the biggest advantages to signing additional insurance carriers? Is it more on the new sales side? Or does it help with your underwriting? What’s the biggest advantage there?

Ross Jessup

I just think when you start looking at how large our TAM is and what our plan is over the next five years, it’s just nice to know we’ve got that capacity. So we don’t have to spend our time trying to bring on someone three, four years down the road. They’re already there. They do have connections in the bank, credit union and OEM world.

They can also help us expand. But it just – it’s better to have more capacity than less, and that was kind of what we’ve done over time. And I just think it’s a great combination. The financial economics are the same. We make sure of that, that way, there’s no adverse selection. And so it’s just great to board them. And as of June 1 is our target launch date with them, and it’s great. John, do you want to add anything to that?

John Flynn

Yes. I think the only thing I would add to that, Spencer, is when you have insurance companies of the size that we’re bringing on now, having done their due diligence and gone through all the risk models, I also think it brings a little bit more credibility to the market to know that our program, our underwriting rules and everything has been bedded to the point where they’re willing to sign up for the risks. So I think it’s just a great combination to have three or four big companies saying they all agree with what we’re doing.

Ross Jessup

I think one other thing to add, Spencer, too, is every one of our agreements, of course, isn’t exclusive, which means that we’re tied together. They cannot offer this program to anyone else. And so really, it just helps us maintain the fact that we have no competition today, and that certainly has – helps us maintain that position.

Spencer James

Okay. Thank you. And then one follow-up. The growth from the top 10 customers excluding OEMs, up 166% year-over-year, that’s definitely a really impressive number. Could you talk a little more about where that growth is coming from? Is it just off a low base? Are you expanding the credit boxes with those customers? Anything like that?

Chuck Jehl

Yes. Spencer, I’ll start and then John – yes. Go ahead, John.

John Flynn

No. No. I was just going to say it’s a combination of both. But I think some of the underwriting rule changes that Ross and his team have been working on, coupled with expanding our refinance channel partners to bring more apps to the table is what’s driving a lot of that. But go ahead, Chuck.

Chuck Jehl

You noted it. Yes. I think if you think about those customers and the growth in refinance and adding the channel partners and really focusing on the refi channel during these challenging times for inventory has been really good for our customers and for us.

Spencer James

Okay. Thanks. And then one last one. The – you mentioned some incremental investments in salespeople and go-to market. Would you say this is just more of the same hiring to build off what you built in 2021? Or is this kind of an inflection point in ramping up additional hires?

John Flynn

I think it’s an inflection. But I think it’s a combination of both actually. We really have 10 dedicated salespeople for the most part, following leads from a reseller that we use called Allied Solutions. And I think now that we’re – we’ve made some great progress.

We’ve got a great reputation, if you will, and especially in the credit union and bank space, the OEM, we’re not throwing names out there. But I think we’re just kind of expanding the team to be closer to the territories they work in. And it’s not just on the sales side, we’re putting a big effort into bringing on more account managers, which are farming our existing accounts. It’s a lot easier to get business from an existing account that may have fallen off for one reason or another.

You lose a loan officer or two, and the new hires don’t know enough about us to use us. Now by bringing on some more account managers and getting inside our shops on a more regular basis, we’re starting to see some real benefit from doing that.

Spencer James

Thank you for the questions.

Ross Jessup

Thanks, Spencer.

Operator

Your next question comes from the line of Vincent Caintic from Stephens. Your line is open.

Vincent Caintic

Thanks for taking my questions. Congratulations on the Arch win. So I have a follow-up question on that. So just wondering with Arch if you’re able to expand your product set or do anything differently. I know Arch is – a global insurance company either in Canada and other places, so maybe with that or with some new products like power sports. And just with – you mentioned that the economics are the same. And I’m just curious with Arch and really with the insurance companies sort of what you’re hearing in terms of their – in terms of views on when credit normalizes, what’s the appetite and any – what their thoughts are with that?

Ross Jessup

John, do you want to go first?

John Flynn

Yes. From a standpoint of other products, Vincent, we continue to get asked almost quarterly. And I think since the last earnings call, we – our executive team have spent a lot more time digging into future products, geographic expansion. We’re in the process of a cost-benefit study right now on Canada.

We’ve engaged a firm that did our study. If you remember back when we first came up with a $250 billion TAM, that was an independent study from a company called LEK. We’ve reengaged them to ask us – to look at the market from a standpoint of what is the benefit of digging into the leases. What would be the next product? Leases, power sports, geographic expansion.

So right now, we’re in the middle of that study. We hope to have more answers back via by the next earnings call. And other products, I’ve just been confronted by a company that wants to look at sharing home equity, which we’ve talked about in the past. But another one just popped up, a small business loan company that has all the data they claim you need to underwrite them and is there a way to ensure that.

So we continue to have conversations with all four carriers and so what is their appetite for these different asset classes based on the data.

Ross Jessup

Yes. Vince, I’ll just kind of – to finish it off, though, I think we’ve come to the decision that in the near future, there’s no reason we should be looking at anything except auto. I mean it’s such a gigantic space. We’ve scratched the surface and done very well there. Let’s continue to expand and keep looking at these other opportunities, but I never lose sight of our – what’s right in front of us.

Vincent Caintic

Okay. That’s helpful. And just a follow-up. The – yes, on credit, just kind of their views. Because I agree with your point that they’re validating your model by having these large global insurance companies signed up. So kind of how your discussions are when people are kind of nervous about credit? Thank you.

Ross Jessup

Yes. Vincent, I mean, it’s – they’ve obviously – in order to sign up today, they’ve done a lot of their own homework. We have our actuarial firm that we work with. We have our own internal risk folks. We bet everything out. Everything that we’ve been doing, any underwriting rule changes we make from a 84-month expansion, for example, over 72 and loan amount, those are all done with – collectively, and we’re all on the same page. So there’s not a single one that has taken a deviation from that. And so Arch has been around a long time.

We have a great team there. Our current partners all have had – we get them in the same room together. And so I think we’re in a great position. We have weekly meetings. And I – we have not – we’ve got history here, and so they always want us to look back to 2008, 2009 and what happened and what would have happened, and the same thing happened today. And so we’re constantly doing that. Chuck, do you want to –

Chuck Jehl

Yes. And, Vincent, the only thing I’d add is maybe in my prepared comments about – we talked about profit share even. The healthy consumer balance sheet and some statistics that we track from the U.S. household debt service payments as a percent of disposable income, it’s less than 10% per consumer, which is the lowest in 30 years. So the consumer balance sheets really strong. And when you think about deposits at the largest banking institutions, deposit and currency is over $4 trillion, I think we heard earlier this week. So it’s really a healthy consumer and – which will bode for the credit.

Vincent Caintic

Perfect. And one last one for me. Your business continues to generate a lot of cash. I think you’re close to $150 million of cash right now.

Chuck Jehl

Right.

Vincent Caintic

I’m just curious about your capital priorities, especially with your stock trading as low as it is. Just any interest in buying back stock. Or just maybe talk about capital usage?

Chuck Jehl

Yes. Thanks, Vincent. Yes, I mean, obviously, we generated $30 million in the quarter in cash flow and about $150 million roughly on the balance sheet at quarter end. Obviously, we’re investing in the business. We talked about it on the year-end call and again today, and that’s our first priority, obviously is, is use of cash is in the go-to-market strategy and sales and account management and marketing that John has talked about. Obviously, in our technology, we’re enhancing Lenders Protection and the platform for the – our customers and modernization of that and really making some enhancements there this year. So after that, obviously, we still generate a lot of cash. And obviously, we look at the share buyback as a good use of cash.

It’s how – it’s a Board-level decision, and it’s something we evaluate with the Board. And we’re not highly levered. We’ve got very low debt. And on a net debt basis, we’re actually a negative net debt $1.8 million. So – but it’s definitely something that we evaluate and – but more first and foremost, focused on investing in the business.

Vincent Caintic

Great. Very helpful. Thank you.

John Flynn

Thanks a lot.

Operator

Your next question comes from the line of John Davis from Raymond James. Your line is open.

John Davis

Good afternoon, guys. Chuck, just hoping you can help us a little bit with the ramp in search. Obviously, kind of 44 million – or sorry, 44,000 this quarter. I think the midpoint of the guide would imply something like 55,000 on average. But just if you could help us think about the ramp. I assume that the back half is going to be significantly better. But maybe just any color on 2Q or how we should think about the ramp in search, at least how you guys think about it today?

Chuck Jehl

Yes. When we talked – John, yes, when we talked earlier on the Q4 call, we pointed to that 20% of the midpoint for Q1, which we exceeded. So we’re very pleased with the Q1 results. And I guess I would point you to for the – to not be specific on Q2 is it really depends on the rate of the restocking and really the production around the OEMs, the domestic OEMs.

Large production is really weighted to the second half of the year, and we got to get more inventory. Obviously, the refinance business, we’re very excited about the channel and the growth there. However, it’s going to take more vehicles and – in inventory to continue on the rest of the growth. However, seasonally, summer months are strong. So we look at that as well. So it’s a little bit of a back-end-loaded year. And – but it’s – we feel good about our guide. We reaffirmed the full year.

And we came off of a record March month and encouraged by the trends into the second quarter. But there’s a lot of demand out there. And we believe production bottomed in the fourth quarter and dealer inventories bottomed. So we believe the recovery is going to – is taking place.

I think there’s a couple of backdrops that we all saw recently with, obviously, the geopolitical in Ukraine and the rare earth materials that are needed for chips and the COVID reoccurrence in China that shutdown some of the production there. So some of those are headwinds. But we watch the supply and demand dynamic daily, and we’re ready and executing to run the business. So long answer, but that’s kind of the things we think about.

John Davis

Okay. That’s helpful. And John, just maybe spend a minute talking about the competitive landscape. I think 4Q last year, maybe some competitors started to get a little bit desperate and kind of crazy from a pricing standpoint. You called it out as a headwind that you and your banks weren’t willing to kind of go where maybe some of your competitors were from a pricing standpoint. But obviously, with – we’re in a different environment now, three to six months later. So just curious, are you seeing that your pricing is – that your banks are comfortable with, and banking credit unions is more competitive today? Just any color there would be super helpful.

John Flynn

Yes. I think Ross kind of alluded to a little bit of this from the standpoint of we just went up to an 84-month term, which was a big move for us. But all the studies we did, and Ross can speak to this better, but on the risk side – but all the studies show that the 84-month term consumer performed better when they were a near-prime consumer than if they were a prime borrower simply because they need the payment. So with payment to income being one of our big indicators of default, and you can now stress their payment out into that 84-month term, we’re seeing that the default rates are exactly what we could live with from this insurance standpoint.

So I think stuff like that, we’ve looked at. When I mentioned that the headwinds of the likes of Exeter a couple – maybe two quarters ago, offering to pay four points to get a loan in the door and things like that, that are driving our refinance channel through the roof. When the Exeter’s, the Santander’s, the high cost of capital funding sources, they might have paid some money to get the loan in the door. But when that consumer is paying 21% or 18% or some high rate that they shouldn’t have been subjected to, that’s where our refinance channel is picking up that loan and driving them down into more of an affordable 11% or 12% rate. So I think just staying the course doing what we do well. We’ll still capitalize on those that have made some changes that we can pick up the pieces afterwards.

John Davis

Okay. And then one more quick one for Chuck. If I look at kind of profit share per cert ex the economic assumption adjustment, I think it’s 585 or 584 this quarter. Is that kind of a good run rate to think about, Chuck, for the rest of the year? Any color there? Obviously, it’s bounced around a lot with COVID and different assumptions. But just curious there, how should we think about the profit share ex the economic adjustment?

Chuck Jehl

Yes. No. We do, John. We’ve talked about it internally. And anywhere from that, call it, 560 to 600 range is a good – there’s going to be some mix impact in there, and it just depends on the claims and the submissions, etc. But we think that’s a good modeling number for the rest of the year.

John Davis

Okay. Appreciate all the color guys.

Chuck Jehl

You bet. Thank you.

Operator

Your next question comes from the line of Faiza Alwy from Deutsche Bank. Your line is open.

Faiza Alwy

Yes. Hi. Thank you. So a couple of questions from me. One, just wanted to get a sense of how do you think about refi certs as a percentage of the overall certs as we get through the end of the year because it’s obviously been increasing, and there’s rightly a focus on that. So curious if you have any perspective on that.

John Flynn

Yes. I think when you talk about it as a percentage of total certs, that’s going to be a moving target. I think we will – certainly continue to grow the refinance channel from a shared numbers standpoint. But as the captive is come back online and cars – new cars start to hit the lots, the hope is obviously that those numbers are going to pick up as well. So will it stay 40% or – I think it’s going to stay a high number, but I couldn’t indicate exactly what percentage it will be.

Chuck Jehl

Yes. And, John, I’ll jump in. If you think about – obviously, it was a little under 40% for Q2. And I think as inventory restocks and there’s more inventory for – people are trading in cars. There’s more used inventory. And we’re 90-plus percent used today. And I think that, that percent over time, in the near term, I think it can – we can sustain it. As there’s more inventory and restocking and there’s more indirect search, I think it could – it would be a lower percentage of our overall going forward. But I think – yes, but the units are going to go up, the absolute numbers. So it’s a great opportunity.

Faiza Alwy

Yes. Yes. And then just on – you mentioned like signing of new like Tier 1 accounts. I’m curious if the economics are any different if you sign Tier 1 accounts versus others. And maybe if you can share sort of what percentage of your overall accounts are Tier 1?

John Flynn

Yes. We...

Chuck Jehl

Yes, the...

John Flynn

Go ahead, Chuck.

Chuck Jehl

No. I was just going to refer to the economics. Our economics for program fees, a technology fee and everything is equal. I mean, there’s volume discounts for large accounts that generate larger cert volumes and 3% of the loan amount down to roughly 2% generally based on 25 cert increments in growth. So – but the general economics would be the same on those. And, John, if you want to talk a little bit about the – maybe the – around the Tier 1s?

John Flynn

Yes. I was just trying to look. I just actually had a report put together yesterday. You give me the number of active clients that are over $1 billion, and that’s what we consider a Tier 1 account. So we have approximately 140 credit unions and banks that are over $1 billion in assets. So of the total, it’s probably one-third Ross or Chuck?

Chuck Jehl

Yes. We’ve got about active customers as of quarter end of about 400.

Ross Jessup

I think one thing just to add to her question is I would think on the program fee, our unit economics will be lower for the larger accounts than to the volumes. But you would think on the flip side, on the profit share, those large institutions may have more sophisticated servicing, good platforms. And their results should perhaps be better than the less sophisticated ones. So back to Chuck’s deal, I do think there’s no materiality difference between the two in aggregate.

Faiza Alwy

Understood. Thank you.

Ross Jessup

Thank you.

Operator

Your next question comes from the line of Mike Grondahl from Northland Securities. Your line is open.

Mike Grondahl

Yes. Hey guys. The expanded loan limits and the expanded term, was that early April, late April? When did you roll that out? And are you seeing anything from it?

Ross Jessup

Yes. Mike, yes. First of all, on loan limits, we were able to get that in a release in mid-March. And one thing to remember is when we make – whenever an application is submitted, we keep that active for 30 days. So we still have a little blend of time line. So loan limit, anything we’ve decisioned in April had the full impact of the loans, except for about four or five of our institutions that wanted to wait to get that rolled out this month to next month. And then on the term side, we launched three customers, April 1; we launched seven more customers, April 4 or 5; and then we launched almost all the other ones around, I think, the 14 or 15 for other months. So really, we’ll be able to really come back the next quarter and give you a lot more results.

We’re encouraged by the results. Just the fact that we were countering, not saying a full yes, but countering a third-plus of these applications in the past were asking for larger loan amounts and larger terms. I mean, you’ve got to know that the close ratio of those you’re able to fully say a yes to versus not is much better. So we’re anxious – we’re actively tracking that and very pleased with this result.

Mike Grondahl

Great. And then just one more. Ross, I think you kind of said in relation to the OEM opportunity that you needed to finish some IT projects. Can we infer from that, like hunting for OEM three and four is sort of a later this year kind of event? Or I don’t know if you could frame that a little more.

Ross Jessup

Yes. We have always on the – one of the OEMs that we’re close with, they had a project – they have a project still ongoing that we thought would be wrapped up at the end of the year by – an IT project. And our endeavor always fell behind that. And so they’re – that vendor is still working.

We hear that they’re working on their servicing platform, is – even though it’s behind, they do have like a new date out there sometime in the third quarter, early third quarter. And so that means that we can start kind of revisiting how we’re going to launch within that organization. So it is late this year. But it’s – I think it’s fallen behind only because it was always behind one of the other IT projects. And so that’s the status of that. And we look forward to reporting some positive momentum here once that project is finished, and we’re close to launching.

Mike Grondahl

Great. Thanks for the clarification.

John Flynn

Thanks, Mike.

Operator

[Operator Instructions] And your next question comes from the line of Sagiv Hartmayer from Jefferies.

John Hecht

Sorry. It’s actually John Hecht with Jefferies. And I apologize if you commented on some of this. I’m bouncing between a few different earnings reports today. But – and you guys referred to, you called it the close rate that you would expect some positivity out of that given some of the term and size changes, but that’s early on. I’m just wondering, like, what’s your close rate now versus what it was when you didn’t have the headwinds of inventory issues and things like that?

Ross Jessup

Well, that – it varies by channel. I mean, we got refi direct all that by – within finance companies versus credit unions and even within the channel. So our close rate, John, is probably 30% lower than it has been during pre-pandemic. And a lot of that is you’ve got the non-prime consumer applying but not being able to afford that offer.

And so they aren’t going elsewhere. They’re just sitting on the sideline, and that’s why I believe that we’re poised with the new offerings. And the longer term, we’re in the right position to – we do think that pricing will start decreasing. It’s going to be a slow over the next 18 months. But we’re going to – we’re there today. We’re going to be there in 18 months, and we should see an uptick of that for sure.

John Hecht

So I mean, is it fair to think that you could have just 30% recovery in growth as your sort of conditions normalize?

Chuck Jehl

What’s the close rate?

Ross Jessup

I would think that’s appropriate.

John Hecht

Okay. And then the second question, totally unrelated, but how do you guys perceive about the sensitivity of the refi market to interest rates? How does that interact with each other?

John Flynn

Yes. That’s a question, John, that we did answer a little bit ago. And it ties back to credit unions are always going to have pretty much the lowest cost of capital out there. And they’re hungry for auto loans. And I think what we’re finding is that we went through this back in 2008 and 2009 when rates went up and things were heading south. And credit unions stood in there and continued to – but they love a three-year average light piece of paper that generates a yield that’s probably three to four times that of an investment they could make. So I think we’re always going to have credit unions funding that refinance channel as a real tailwind to the company.

John Hecht

Okay. Appreciate that and apologize for asking redundant question. But thanks very much.

Ross Jessup

No, problem. Thanks, John.

John Hecht

Thank you, guys.

Operator

I will now turn the call over to John Flynn for closing remarks.

John Flynn

Thank you, operator, and thanks to everybody on the phone. Great questions today. As you can tell, we’re extremely excited about the quarter and where the company is heading. I think we always talk about it’s not a matter of if, it’s when. Cars are coming back, and we’re going to be there to help fund them. So we’re excited about it, and we appreciate everybody’s continued support. So thanks for the call.

Ross Jessup

Thanks, everybody.

Chuck Jehl

Great. Thank you.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.

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