LPRO - Open Lending Corporation (LPRO) Q3 2022 Earnings Call Transcript
Open Lending Corporation (LPRO)
Q3 2022 Earnings Conference Call
November 3, 2022, 5:00 PM ET
Company Participants
John Flynn - Chairman
Keith Jezek - Chief Executive Officer
Chuck Jehl - Chief Financial Officer
Conference Call Participants
David Scharf - JMP
Peter Heckmann - D.A. Davidson
Faiza Alwy - Deutsche Bank
Joseph Vafi - Canaccord
Sandy Beatty - Morgan Stanley
John Hecht - Jefferies
Vincent Caintic - Stephens
Spencer James - William Blair
John Davis - Raymond James
Presentation
Operator
Good afternoon. And welcome to Open Lending’s Third Quarter 2022 Earnings Conference Call. As a reminder, today’s conference call is being recorded. On the call today are John Flynn, Chairman; Keith Jezek, CEO; and Chuck Jehl, CFO.
Early today, the company posted its third 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 estimated and other forward-looking statements that represent the company’s view as of today, November 3, 2022. Open Lending disclaim any obligation to update these statements to reflect future events or circumstances.
Please refer to today’s earnings release and our filings with the SEC for more information concerning factors that could cause actual results to different materially from those expressed or implied with such statements.
And now, I will pass the call over to Mr. John Flynn. Please go ahead.
John Flynn
Thank you, Operator, and good afternoon, everyone. Thanks again for joining us today for Open Lending’s third quarter 2022 earnings conference call. For the third quarter, the company’s results were in line with our expectations, despite continued challenging economic and industry dynamics impacting our business.
During the third quarter of 2022, we certified 42,186 loans, total revenue was $50.7 million, gross profit was $45.5 million and adjusted EBITDA was $29.4 million. I am going to turn the remainder of the prepared remarks over to Keith and Chuck, but before I do that, I want to again emphasize how confident and excited I am in the appointment of Keith Jezek as our CEO.
Through a robust national research process, there was no one that posses such a deep knowledge and experience in the retail, automotive and technology industry, and a proven track record of success than Keith. He is an exceptional leader and the right executive at the right time to lead the company into the next stage of growth.
Keith’s expertise within the auto, retail, technology industry is going to serve shareholders well over time as we prepare for an improvement of the challenging economic and industry dynamics currently impacting our business.
Specifically Keith’s experience at Cox Automotive building and managing software products for the retail automotive ecosystem including consumers, OEMs, auto lenders, and the largest and most prominent dealer networks in the nation.
These service offerings totaling multi-billions in revenue were provided to companies including DealerTrack, Autotrader, Kelley Blue Book, vAuto and Dealer.com among others. His executive relationships and knowledge will be complementary to our existing and prospective credit union and OEM partnerships.
I am very confident that our collective continued underwriting vigilance along with key focus on our go-to-market sales strategy and technology roadmap will provide Open Lending the right balance of downside protection in the immediate term and allow us to capture significant upside as industry fundamentals recover.
It’s been an incredible honor to lead Open Lending and I am extremely excited to continue working with Keith, the leadership team and the Board as we embark on the next chapter of growth and continuing to execute our mission of serving the underserved.
So, with that, Keith, I will turn the call over to you.
Keith Jezek
Well, thank you for the kind words, John. I look forward to collaborating with you and Ross closely, and continuing to execute Open Lending’s business plan with you as a Chairman and Ross as a trusted advisor.
Since it’s my first earnings call as CEO, I thought I would start off with my relevant experience and the reason why I joined Open Lending. As many of you are aware, I have been involved with Open Lending for over a decade. Initially, I served on the Board from 2012 to 2020, while the company was private. I transitioned to an advisory role as the company entered the public markets and have served in that role for the last two years.
During my tenure affiliation with the company, I witnessed firsthand the company’s strong product adoption and market-leading profitable growth. Many of the secular trends that affected Cox Automotive have also impacted Open Lending, both companies develop technologies that provide insights and innovative decision-making tools for the respective clientele.
In the case of Cox Automotive, we help dealers, OEMs and financial institutions decide how best to deploy capital, manage inventory and optimize pricing and sales functions. At Open Lending, I will continue to draw from my market knowledge and grow our client base that use our technology to analyze risk, while connecting borrowers and lenders.
Now, let me turn to why I found the CEO opportunity extremely compelling. To begin with, I believe all great companies have the following characteristics, one, a large and growing total addressable market or TAM, two, a profound competitive advantage and significant barriers to entry, and three, a business model that leverages both one and two. Open Lending exhibits all of these attributes that is what attracted me to the company over 10 years ago and what led me to the decision to take on the CEO role a few weeks ago.
So first, on TAM, as we shared during our last earnings call, our TAM is large and growing and now totals approximately $270 billion for auto loan originations. In addition, there was approximately $40 billion in total addressable market related to the auto refinancing opportunity. We have captured less than 2% market share this year, leaving significant room for growth.
Second, as it relates to the competitive advantage and significant barriers to entry, Open Lending has 20 plus years of proprietary data, sophisticated technology including 5 second underwriting decisions, exclusive relationships with four A-rated insurance partners, deep lender relationships and regulatory know how. We believe we have the strongest balance sheet and unit economics of any pure-play participant in the marketplace and we do not take balance sheet credit risk.
Finally, Open Lending has a business model that takes advantage of both this large and growing underpenetrated market and our differentiated business offerings.
With that, I’d like to share my view on the current state of the retail automotive lending marketplace. Although the characteristics of each economic contraction are different, there are some common responses by the major participants in the automotive sector. To that end, we are watching a cross-section of economic, industry data and company metrics.
It’s been over 40 years since inflation rates exceeded 8%. However, the automotive sector data related to the dotcom recession in early 2000, the great financial crisis of 2008 and economic contraction and subsequent expansion from 2020 to 2021 do offer some parallels and insights.
In the prior recessions that I just referenced, the new vehicle SAAR fell as much as 40% and risk free rates for five-year treasuries declined in a range of 200 basis points to 400 basis points. At the same time, after OEMs pulled back on production, it took anywhere from 12 months to 18 months to ramp back up. I would like to point out that in these recessions, auto pricing moderated, but did not fall precipitously or below pre-recession levels.
On the topic of auto supply and inventory, the new light vehicle SAAR was 13.7 million units as of October or approximately 3 million units below the historical trend line. Inventory is improving as production continues to ramp and supply chain challenges ease, however, the rate of recovery has still been slower than expected due to the ongoing semiconductor chip shortages.
At 42.6 weeks, up 8% from a year ago, affordability is at a record 15-year high level. Although the Manheim Price Index was down 15% from the recent peak, what’s most meaningful is that 20% average increase in the rate of a five-year automotive loan, since the beginning of the year as the Fed’s fund has increased 6 times and 375 basis points, the fastest rate of increase in 35 years.
For all these reasons, we are expecting a continued moderation in auto pricing as inventory grows. If patterns of prior recessions serve as a barometer, the pace of the moderation will be correlated most closely to the production efforts of the OEMs and our resolution of supply chain conditions.
So now turning somewhat closer to home, I had the benefit of spending a few days last week with over 200 of our clients at our Annual Executive Leadership Roundtable. The key takeaways were many of our credit union customers are managing their liquidity and deposits in a more conservative fashion versus a year ago.
As they work through this challenge, they continue to embrace the value proposition we offer them to go deeper in the credit spectrum serving their members. Additionally, they recognize that there is a large yield opportunity in the near- and non-prime space versus the super-prime space due to the higher rate environment.
All that said, we are even more passionate about our ability to help those that are hoping to purchase a car or are already paying too high of a rate and we will continue to target company growth rates in excess of industry auto loan origination growth rates, but not at the expense of our commitment to managing risk. We will continue to maintain our rigorous underwriting standards as John and Ross have taken extreme care to maintain through the pandemic, as well as the current economic slowdown.
Now, before I turn it over to Chuck, I want to provide a brief operations update. We have increased our sales, account management and marketing teams by approximately 20% this year and plan to continue investing through the current economic and industry challenges.
The individuals we have hired have deep experience in the auto retail loan origination sector, in particular with credit unions, banks and OEMs. As an advisor, I was actively involved in the hiring of these individuals and laying out the structure of these teams and our sales disciplines going forward.
While early on, we have seen good progress from these investments. In the third quarter, our non-OEM business, primarily credit unions, was essentially flat year-over-year in certified loans. This demonstrates the strength of our core credit union business, while the large universal banks reported auto loan originations down 30% to 40% year-on-year.
We are pleased to have announced we partnered with America First Credit Union, the seventh largest credit union in the country at $17 billion in assets and 1.2 million members. In addition to those investments, we have added R&D team members and have continued to invest in our technology and in the enhancement of Lenders Protection.
Importantly, to insist our customers during this period of elevated affordability, we have modified our product with program underwriting changes to expand loan limits and extend the term of qualifying vehicles to 84 months.
Now, with that, I’d like to turn the call over to Chuck to review Q3 in further detail, as well as to provide updated thoughts on the full-year 2022 outlook. Chuck?
Chuck Jehl
Thanks, Keith. During the third quarter of 2022, we facilitated 42,186 certified loans, compared to 49,332 certified loans in Q3 of 2021 and 44,531 certified loans in Q2 of 2022. Total revenue for the third quarter of 2022 was $50.7 million, as compared to $58.9 million in the third quarter of 2021. Total revenue was down 14% year-over-year. However, excluding ASC 606 change in estimate associated with our profit share, revenue was down only 5% year-over-year.
To break down total revenues in the third quarter of 2022, profit share revenue represented $26.5 million, program fees were $21.8 million and claims administration fees and other were approximately $2.3 million. It’s important to note that while our certified loan volume was down year-over-year, our program fee revenue increased slightly due to the mix of business certified, resulted in higher unit economics related to our program fees year-over-year.
Now to further break down the $26.5 million in profit share revenue in Q3, profit share associated with new originations in the third quarter of 2022 was $24.9 million or $589 per certified loan, as compared to $27.9 million or $566 per certified loan in the third quarter of 2021.
Also included in profit share revenue in Q3 of ‘22 was $1.7 million in positive change in estimate of future revenues from certified loans originated in previous periods, primarily as a result of positive realized portfolio performance due to lower severity of losses. Change in estimated future revenues were $7.5 million in the third quarter of 2021.
Gross profit was $45.5 million and gross margin was approximately 90% in the third quarter of 2022, as compared to $52.5 million and gross margin approximately 90% in the third quarter of 2021.
Selling, general and administrative expenses were $17.7 million in the third quarter of 2022, compared to $11.8 million in the previous year quarter. There were approximately $3.5 million in one-time expenses during the current quarter. The increase year-over-year excluding one-time expenses is primarily due to additional employees to support our growth, with a focus on our go-to-market sales strategy and investment in R&D technology.
Operating income was $27.8 million in the third quarter of 2022, compared to $40.7 million in the third quarter of 2021. Net income for the third quarter 2022 was $24.5 million, compared to $29.4 million in the third quarter of 2021. Basic and diluted earnings per share were $0.19 in the third quarter of 2022, as compared to $0.23 in the previous year quarter.
Adjusted EBITDA for the third quarter of 2022 was $29.4 million, as compared to $42.1 million in the third quarter of 2021. There is a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release.
Adjusted operating cash flow for the quarter was $35.9 million, as compared to $38.8 million in the third quarter of 2021. We exited the quarter with $399 million in total assets, of which $201.8 million was an unrestricted cash, $99.9 million was in contract assets and $73.4 million in net deferred tax assets. We had $165.7 million in total liabilities, of which $148.3 million was an outstanding debt.
As Keith mentioned, we believe the most significant factor weighing on unit growth and originations for the auto retail sector in the near-term is affordability for the end consumer. As the year began, industry forecast called for a slow and steady improvement of inventory and pricing moderation as represented in the Manheim Price Index.
However, the new vehicle SAAR has now been revised downward in each of the last two quarters and is currently at a run rate of 13.7 million units in contrast to 15 million units as we began the year.
In addition, with the FOMC press conference this week, we have now seen the fastest rise in Federal funds rate in over 35 years and a communication by the Federal Reserve Chairman that rates could potentially stay high for longer than previously anticipated. For those reasons, we are tightening our guidance for full year 2022 accordingly.
Based on year-to-date 2022 results and trends into the fourth quarter, we are tightening our previous guidance range for total certified loans to be between 160,000 and 170,000, total revenue to be between $180 million and $190 million, adjusted EBITDA to be between $112 million and $122 million, and adjusted operating cash flow to be between $130 million and $145 million.
In our guidance, we continue to take the following factors into consideration, continued disruption in transportation networks and raw material shortages, including global semiconductor chip shortages, dealer inventory that remains below historic levels, the rate of contraction for an index of the largest public auto lender financial institutions, some of which originated 30% to 40% less volume on a year-over-year comparison in the third quarter of 2022, the Affordability Index of our target credit score due to continued inflated used car values, and finally, inflation and rising interest rates and overall consumer sentiment, specifically for the overall auto industry, the Affordability is now at 42.6 weeks, the highest levels in a decade.
We want to thank everyone for joining us today and we will now take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from David Scharf with JMP.
David Scharf
Oh! Yeah. Good afternoon. Thanks for taking my questions and congrats on the new role, the formal first earnings call for you. Hey. Two things. One is more, maybe just some context around the Q4 guidance, a little more granular question. There is typically some pretty steep seasonality in the auto industry with a slowdown sequentially from Q3 and Q4. Just trying to gauge as we think about what’s implied by the full-year guidance, what’s implied for the fourth quarter, sort of how much of that sequential decline in the topline is normal seasonality and how much of it is maybe some incremental caution versus three months ago and your macro outlook?
Chuck Jehl
Yeah. Hi, Dave, it’s Chuck. As we thought about the guide, obviously, there are a lot of factors that went into it the inputs. Obviously, the Fed monetary policy that came out that’s been ongoing but Fed Chairman Powell talked yesterday and it’s definitely seasonality for Q4 that’s out there, historically, lower volume.
But really this affordability issue to the -- there are non-prime consumer is really what’s driving a lot of what we have taken into consideration with the rising rates. I mean, we have had 375 basis points increase in the past five months in the Fed funds rate.
And even since our last call in August 150 basis points since then. Your point about the three months that have transpired since we last talked so. And really no, this is really aggressive manner on the Fed and it’s difficult to anticipate the lag effect of the federal policy. So we think it’s prudent to be conservative.
David Scharf
Got it. Got it. And maybe following up on the affordability challenges, to the extent that you are extending some loan terms to 84 months and loan limits for qualified borrowers, I would imagine that the premiums, the cost of default insurance would go up as well coincident with those types of revisions. Are the carriers in this dynamic sort of insistent on maintaining their own return requirements and does that therefore potentially impact the average profit share we should expect from a cert?
John Flynn
Hey, David. You have hit the nail…
Chuck Jehl
Yeah.
John Flynn
… on the head on this. I will let Chuck speak to the profit share, but from a carrier standpoint, you are right. We have tried to maintain -- and this is John answering the question. Every sale that we write to, a sale being loan-to-value or a FICO score driven metrics, if you will, is written to about a 60% loss ratio.
So to your point, if the risk -- if it’s a greater risk, 84 months higher loan amount, the premium is going to be a little bit higher, because you are extending that out and get the payment to income into a much better situation for the consumer, meaning fewer defaults.
But you have hit the nail on the head from a standpoint the premiums are going to be a little bit more, and hopefully, would be reflected in the profit share. But, Chuck, do you want to expand on the profit share part of that?
Chuck Jehl
You bet. And David, yea, I can, John. And you can see it in our Q3 results, we -- on new originations, we booked $589 for certified loan, over the last year, it was $566 and you may recall in our underwriting changes and some of the things we did earlier this year, we had in addition to the higher premium on the loan amounts, as well as the extended term vehicle valuation discount, which also is an increase to the premium.
So we feel like it’s the right decisions on the underwriting, where we are in this challenging backdrop. But I think, more importantly, your comment about the underwriters, they are part of the decision, it’s a partnership and we are all working together with the premium increases or any other changes.
David Scharf
Got it. Thanks very much. Very helpful.
Chuck Jehl
Yeah, sir. Thank you.
Operator
The next question comes from Peter Heckmann with D.A. Davidson.
Peter Heckmann
Hey. Good afternoon. Thanks for taking the question. Looks like if I am reading my model right, nine quarters in a row, where you have got a positive adjustment to profit share. This is the smallest of those nine, and certainly, looking into the T lead peer, I guess, what would you -- what would be driving that more, is it the increasing severity of loss per claim due to the drop in the used car values or are you actually seeing a little bit of an uptick in potential defaults?
Chuck Jehl
Yeah. How you are doing, Pete? It’s Charles. Yeah. I mean, you are absolutely right. I mean you think back last year, I think, 2021 I’d like $30 million almost $31 million and positive changes and that was primarily driven by obviously the liquidity in the consumer’s hands and lower defaults claims and severity.
And what we have continued to model in this challenging time going forward into 2022 in the last couple of quarters and also into the future is increased severity, because we have modeled the Manheim index, price index coming down moderately. Our prepared comments, I think, 15% year-to-date in that, and as well as defaults normalizing to normal levels.
And even past that, we have stressed the future portfolio as it relates to the vaults defaults and severities. So and it will benefit to prepay speeds due to the rising rate environment and the loans being in our portfolio longer. So it’s kind of a combination of all.
Peter Heckmann
Okay. All right. That’s helpful. And then just from a housekeeping perspective, how many lending customers did you end the quarter with and were there any -- I know you have the one notable add, but if I remember correctly, there is a couple of relatively larger FIs that we are onboarding?
Chuck Jehl
Right. Yeah. America first, obviously, it was large when Keith talked about. But we had about 400 active institutions at Q3 and...
Peter Heckmann
Okay. I will follow up offline on that one and I will get back in the queue. Thank you.
Chuck Jehl
Okay. Thanks, Pete.
Operator
The next question comes from Faiza Alwy with Deutsche Bank.
Faiza Alwy
Yes. Hi. Thank you. I wanted to ask about refinancing volume, because I think, historically, that’s something that you have disclosed and unless I missed it, I haven’t sum that yet. So just give us some color on how that has trended and what your expectation is for that going forward?
John Flynn
Sure. A little bit of a slowdown with Pentagon has caused the refinance channel to slow down a little bit. It’s still a significant piece of our volume for sure and we think it will continue to be going forward.
But as we have talked about in our comments with credit union kind of retooling trying to figure out where to find some cash, some of our larger one that has slowed down a bit and we have found to, I think, Keith alluded to this, with the cost of fund, some of our larger funding sources there are still taking app but the app flow is simply down.
We are just not seeing the app that we were seeing leading into this quarter. So I think the percentage of approval perhaps is still way up there, particularly in that channel but simply the applications aren’t coming through as quick as they were.
So it’s still a significant piece of our business. We think we will continue to grow as we talked about with the cost of funds rising all over, some of our funding sources advisor yield targets by as high as 300 points, where credit unions have already raised it by 60 basis points. But I think there’s still some significant room for growth there.
Faiza Alwy
Okay. Okay. Understood. And then, can you talk about sort of, has there been some churn on the customer side? I think, previously, like last quarter, you talked about 463 active lenders. You lower -- it sounds like it’s the same issue that you have just -- you have been describing, John, but give us a bit more color and maybe on the new partner that you have signed sort of how significant of a benefit could that be and when will that start kicking in?
John Flynn
Sure. Even I think Peter have asked, not the total number of accounts, but what have we signed approximately 55 or 60 new accounts this year?
Chuck Jehl
That’s right, John. In fact 53…
John Flynn
What number that…
Chuck Jehl
… 53 year-to-date.
John Flynn
Yeah. And I wouldn’t say that there has been any significant churn. I mean, we have not had people actually canceling. When we determine what is an active account versus a funding source, sometimes you get some credit unions that will not be as active on the platform, simply because of liquidity issue.
Yeah, but we continue to see a lot of inbound calls. We have got a very active sales force and we continue to see a lot of interest from some of the larger credit union looking to get out of the platform. So I am not familiar with any major accounts that have fallen off from a standpoint of actually shutting down the program.
Chuck Jehl
Hey, John. I will jump in and Faiza what you are thinking, it was last quarter, we actually put a new disclosure in the 10-Q. So the way we had previously defined an active account was one active cert within the trailing 12 month. We still provide that and we exited the quarter, that was about 430, okay, active customers.
Then, what we did is added in the periods presented Q3 and then nine months to-date for 2022, we actually show new lenders added and then anybody that might have been inactive in the quarter, it doesn’t mean they have gone inactive and they left the business or the company. They just didn’t have a certainty in the quarter and one of the disclosures this quarter when we file our Q tomorrow is we had 21 new lenders in Q3 execute their first certified loan with Open Lending.
Faiza Alwy
Got it. Very helpful. Thank you.
Chuck Jehl
You bet.
Operator
The next question comes from Joseph Vafi with Canaccord.
Joseph Vafi
Hey, guys. Good afternoon. Once, again, welcome, Keith.
Chuck Jehl
Hi, Joe.
Joseph Vafi
Maybe start with one for you, Keith. I know you are really focused on go-to-market and I mean the macro is to say the least dynamic. But do you see any, without giving away any secret sauce, any kind of tweaks or opportunities on the go-to-market, now that you are CEO? And then I have a follow-up.
Keith Jezek
Well, I appreciate the question and good afternoon. Certainly, the vision that I have for the company is to continue the great work that John and Ross have set in motion. But my idea is to kind of bring a series of refinements to the go-to-market model that I have kind of worked on and best practices that I have developed in my career both in founding the vAuto and growing that to hundreds of millions in revenue and then a series of acquisitions that we did at Cox Automotive. So developing best practices and now utilizing those acquisitions and then utilizing those here.
The great news is, obviously, I have had 10 years to kind of study up on Open Lending as opposed to like 90 days due diligence on the acquisitions. To get a little bit more specific, it’s developing new practices and refinements to marketing in lead gen, sales, account management, implementations and product development.
But the key ingredient being to test new hypotheses and kind of new and a little bit different ways to go to market and then once we find the right mix and then just to scale that as rapidly as we can.
Joseph Vafi
Got it. That makes a lot of sense. And then just a question about kind of the medium- to long-term, and I am going to try to kind of phrase that as best I can. But we have got some longer term loan products, I think, to 84 months and we clearly have still an affordability issue with the price of cars and especially used cars. And the one thing that I think about from time to time is, if the prices on used cars come in, that’s going to be good for your volumes, obviously, because affordability gets better, the consumer comes back and your search go up. But then when you think about residual value of the existing loan book and if prices come down on used cars materially, what does that mean maybe relative to loss provisions a couple of years ago and how do you think about that and account for that in your underwriting model? Thanks a lot guys.
Chuck Jehl
Yeah. Thanks, Joe. It’s Chuck. Yeah. My comments earlier about the profit share. We have a robust quarterly process. We have got a really experienced risk team. There are auto finance experts, a lot of experience and what we do on a quarterly basis, we subscribe to Moody’s economic forecast quarterly. It’s -- the input is from that go into our model. We have got the Manheim coming down moderately through this year as well into next year and then beyond.
So we feel like we have got stress on the portfolio that takes that into consideration. We have had these inflated prices. We have had positive change in estimate under the accounting, primarily due to the severity of losses being lower than historical averages. But as you may recall, we model historical averages and then stress that higher.
So we don’t have a crystal ball, but I think we have a really great process that we follow quarterly that obviously I am involved in, our executives in the risk team, John and Ross historically and now Keith with his experience.
So we are all be involved in that and but I feel like we have got that modeled in, but just depends on how fast it moderates, but we have got default severity, as well as pre-pay speeds into our econometric model.
Joseph Vafi
Great. Thanks for that extra color, Chuck.
Chuck Jehl
Yes, sir.
Operator
Next question comes from James Faucette with Morgan Stanley.
Sandy Beatty
Hi. This is Sandy Beatty on for James.
Chuck Jehl
Hey, Sandy.
Sandy Beatty
More of a question for Keith but for all of you guys as well. How are you thinking about capital allocation priorities and I am thinking, particularly as it pertains to M&A. Just given obviously a transition in leadership, obviously, you are all still working together, but any update on that thought process would be helpful?
Keith Jezek
Yeah. Go ahead.
Chuck Jehl
Yeah. How about I start, Sandy, and then Keith can jump in. Obviously, we feel very strongly still about our value proposition to our customers. Obviously, there’s the challenges in the dynamic of the industry, maintain a very flexible financial profile.
We have got a strong balance sheet, got $200 million in cash at quarter end, refinanced and amended our credit facility. We have got great liquidity under that. So we feel really good about the strength of our balance sheet and the position of the company and we are investing in our go-to-market, in our technology roadmap, et cetera, as Keith mentioned.
So that’s first and foremost from capital allocation and then, obviously, M&A is something we can look at over time. But we are very focused on the wide space ahead in the TAM and we are less than 2% penetrated today and that’s still a great opportunity for us to get market share in our business.
So, other opportunities that are out there that we will consider, but Keith is been here, I think this is the third week or fourth week and it’s been great and these are things we are going to talk about and come back and talk further about it at the year-end call.
Keith Jezek
Yeah. Thank you, Chuck, and this is Keith. It’s great question. I mean the only color that I would add is that, certainly using the strength of the balance sheet, not to go too far afield at all, but to continue to provide additional services and products to our current installed base and future customers.
Sandy Beatty
Got it. Super helpful. And then one follow-up, just mindful of the trajectory on revenue into 4Q and then even into 2023, how are you thinking about the reaction function and operating leverage just from an adjusted EBITDA margin perspective, just cognizant of the sequential trends here and obviously the macro impacts as well?
Chuck Jehl
Right. Good question. And Sandy, I will point out, in Q3 we had some one-time cost that, if you normalize that out, we were still in that, call it 63%, 64% EBITDA margin in the business. Longer term and full year 2022 in the guide, for full year we still feel we have strong EBITDA margins and you know in that, call it, 60% to 62% range, so that’s in and if you look at the midpoint of the guide and kind of where that goes. But strong margins and we plan to continue investing in the business and our go-to-market and our technology and while others are not. So this is how we are proceeding through these times.
Sandy Beatty
Got it. Thank you.
Chuck Jehl
Thank you.
Operator
The next question comes from John Hecht with Jefferies.
John Hecht
Afternoon guys, and welcome, Keith. I can’t remember if it was Keith or Chuck, but one of you guys talked about the concept of affordability, the issue tied to affordability and I think you even mentioned that kind of a stat or index tied to it. So I am wondering how do you define or evaluate affordability. And then like what factors come into play to kind of release this as a headwind, which I think would maybe allow for kind of quarter-to-quarter growth going forward? I am not asking for guidance in that regard, but just sort of thinking kind of think about given these issues when do they -- when do these headwinds become tailwinds in order for growth to reoccur?
John Flynn
Chuck, go ahead.
Chuck Jehl
Yeah. Yeah. It’s a good question. And I think the stat John that maybe you were thinking of is in our prepared comments was what it takes for a consumer to buy a car and its 42.6 weeks, I think, is -- which is above I think norm is more like 30 weeks in the past.
So what didn’t help, we already had the inflated cars per paycheck in the 42.6 weeks. We got the inflated values. I think early in January the Manheim price was 236, whatever it got to in the peak.
And then if you think about what’s happened over the last five months with rate increases and 8% inflation, 50-year low employment -- unemployment, tight labor market. All these things wane.
And affordability is going to come down I think, obviously, when rates can normalize again. And right now, the new and non-prime consumer that we target is --they are payment buyers and it’s very hard to afford a vehicle right now.
John Flynn
And Chuck, the thing I’d add to that and the question, what are we doing to combat it. I think coming out with the 84-month term.
Chuck Jehl
Yeah. Good point.
John Flynn
Again, the big driver of that is to get the PTI in line, so that the payment is affordable by the consumer to be able to stay in the loan long-term. So the more we can accommodate that and make the payments work for them, keep them in the loan, they are less likely to default if the payment is not over their budget, so I think things like that are what we are working on to continue to help combat that affordability issue.
John Hecht
Okay. And then any...
Keith Jezek
Thank you, John.
John Hecht
Sorry.
Chuck Jehl
Yeah. Go ahead, Keith.
Keith Jezek
I was going to say, and this is Keith.
John Hecht
Oh! Oh!
Keith Jezek
I mean just -- and I would just add that combating the affordability issue is, the Manheim Index has been drifting down over the last couple of months, so that would be something on the positive side of the equation for affordability that and lowering gas prices.
John Hecht
Yeah. All of that makes sense. And then anything to think about, call it, near-, intermediate-term trends in terms of the profit share per cert or the fee per cert?
Chuck Jehl
Yeah. John, one of the -- in the quarter, we had $589 in average profit share for the new originations and our program fees were $518, which program fees were actually, if you look at it year-over-year, we are up about 18% and the profit share was up about 4%, a lot of that, obviously, the higher loan amount will increase the program fee, as well as mix of business sold.
So, I think, longer term that profit share, it’s hard to take an exact number there, but in that $550 million range and then the program fees longer term, call it, $475 million to $500 million, I think, is -- but it does depend on mix.
John Hecht
Okay. Super helpful guys. Thanks very much.
Chuck Jehl
Yeah. Thank you.
Operator
The next question comes from Vincent Caintic with Stephens.
Vincent Caintic
Thanks. Good afternoon and thanks for taking my question, and Keith, welcome aboard. Look forward to working with you, especially with your decades of auto tech experience. First question on the guidance, just looking at the sort of updated certification guidance and what it implies for the fourth quarter, I think, it’s down per quarter-over-quarter. But just wanted to understand if there is -- as we are thinking about 2023 and I understand it’s probably a little early to provide 2023 guidance. But for the fourth quarter, is there -- is that a seasonally weaker quarter or is there something we should be thinking about it or is that a good number when we think about jumping off into 2023 for certifications?
Chuck Jehl
Hey, Vincent. It’s Chuck. Yeah. A little earlier, we got one question about the guide. And yeah, I mean, Q4 is, as you know is seasonally historically a lower volume quarter. But really, what’s changed since the last time we have all talked is, it’s just really the aggressiveness of the Fed actions, the affordability issue on the consumer that we have talked about.
And also, all things being equal, our customers primarily credit unions are being more conservative managing their liquidity and deposits right now. So it’s a combination that went into our tightening of that guide for the year and consequentially the fourth quarter.
Vincent Caintic
Okay. Understood. Thank you. And then second question I think for Keith. Just curious, you have been here for a couple of weeks. I believe there was a big user group meeting, were you able to meet a couple of your clients and just kind of wondering what you have been hearing in terms of the opportunities and challenges and what your clients are looking forward? When I cover a couple of the other auto lenders and you have got Capital One and Ally who were saying that the credit unions are able to take share and able to price things better and so I would -- was just wondering if that’s the opportunity for you and what the banks and credit unions and your customers are saying? Thank you.
Keith Jezek
Yeah. Happy. It was a pretty wonderful time to begin with any new company and that is to have 200 customers fly in and be able to talk, shop and learn from them. I would say, certainly, hats off and congratulations to our credit union customers, because over the last quarter, they actually supplanted the captives as the number two source of auto lending in the country. So they have been very, very busy at work.
That said, however, there was just a little bit of caution around how they are going to manage their deposits and the way they think about their lending portfolio going forward. But it was a wonderful time to learn from the customers. And then, also I just have to reiterate the incredible relationships that John, Ross and the entire team had developed with each and every one of those customers. It was very impressive to see.
John Flynn
Hey, Keith. The one thing I would add…
Keith Jezek
Okay.
John Flynn
Yeah. The one thing we don’t want to lose sight of, what got credit unions, I wouldn’t say, out of whack. Their loan to share ratios grew significantly in the last nine months, primarily because mortgage rates were low, everybody was trying to get into the houses and they went out and put a bunch of money out on mortgage loans.
Well that’s reversed itself, with mortgage rates at an all time high, they are going to be looking for an asset class to lend to, that is going to be a shorter term better rate loan. So all these shops that kind of went out on a limb and did a lot of mortgage loans are regrouping and looking for that two and a half to three year average like piece of paper, which is auto and it’s priced appropriately.
So I think even though it was a short term kind of run out of cash deal, if you will, and they are obviously not going to go paying off those shorter term mortgages, but the balances are going to be paying down and they need to find a home for that money, which will be auto loans.
Vincent Caintic
Okay. Perfect. That’s very helpful everyone. Thanks very much.
Chuck Jehl
Thanks, Vincent.
Operator
The next question comes from Bob Napoli with William Blair.
Spencer James
Hi, everyone. This is Spencer James on for Bob Napoli. Thank you for taking the question. I was wondering if you could provide an update on close rates and maybe share if you back out the expanded loan terms you guys have made. Have close rates started to recover or you are not yet seeing that?
John Flynn
Would you say if we backed out the 84, because I can tell you that had a significant impact on close rates. But I am not sure that I have the exact number right in front of me of what it was if we were to back that number out.
Chuck Jehl
Yeah. John, I will jump in. So, Spencer, maybe the way to think about it is the program underwriting changes that we made earlier in the year on the 84 month term, as well as the loan amount increases that we made. We are seeing increases in the capture rate about 8% to 10% on both categories is what we are seeing. So, obviously, that’s in the direction we obviously -- we are looking for and -- but that’s kind of early, early indication.
Spencer James
Okay. Thank you. And one follow-up, the increase in premium pricing, will that continue to mainly come from the expanded loan terms or are there other levers you can pull to raise that premium pricing, if you could talk about your willingness to do so and what might lead you to do so?
Chuck Jehl
Yeah. John, do want to start...
John Flynn
We have not…
Chuck Jehl
Oh! Go ahead.
John Flynn
Yeah. I was going to say, we have not had any premium increases, because we haven’t needed them. I think to your point, the additional premium today is coming from 84 months. Some of the levers that could be pulled, we can change premium with a 30-day notice to be insured, if we need to, because it’s a surplus lines policy. But some of the easier levers, if we wanted to do them, is simply change the advance rate.
I don’t know if you remember us talking over the last year or two that we have occasionally gone out, and said, instead of using, let’s say a 100% of wholesale, we were pricing off 95% of wholesale. So if the advance them and bumped them up into a 110 or 115 advance based on using a lower dollar figure, that will have the impact of more premium coming in. But at this point, we don’t see the need to do so. The profit share is working well for the carriers and us, but there is certainly levers that can be pulled if we needed to.
Spencer James
Thank you. Appreciate it.
Chuck Jehl
Thank you.
Operator
The next question comes from John Davis with Raymond James.
John Davis
Hey. Good afternoon, guys. Chuck, just a quick one for you, took operating cash up flow despite taking EBITDA on some of the stuff towards the lower end of the range. So just want to understand kind of what’s driving that kind of up to the higher end of the prior range for operating cash flow?
Chuck Jehl
Yeah. Hey, John. How you doing? Yeah. It was just more of taking the low end up a bit and the high, the adjusted operating cash flow through September, we are right about $110 million back of the earnings release already.
So we felt like, obviously, it’s been a good cash collection, strong cash collection year and profit share program fees and all of the three legs to the stool generate a lot of cash. So that’s why just kind of trending into the quarter.
John Davis
Okay. I know the -- on the profit share, I know the economic assumption has come down, but was still positive this quarter, which I guess is good on one hand, but on the other hand, given where we are going from a macro perspective, why not just kind of keep that in your back pocket? I mean I just maybe I want to understand a little bit of methodology that literally just whatever the model spits out is what you guys put in the numbers, because at some point like it’s -- likely that assumptions is going to go the other way. So just thoughts on how you guys get to that, is it literally just whatever the model spits out it is what it is or is there any subjectivity to it at all?
Chuck Jehl
No. I mean, we have talked about, John. I mean, we have got a really thorough robust process with our risk team. But as if you think about the $1.7 million that we booked net in Q3, obviously, was lower than in any other quarters, in the past probably four, five or six, obviously that has slowed down as we continue to put stress on the portfolio as it relates to severity, the Manheim coming down gradually, severity of loss going up, defaults normalizing, et cetera.
So, but what really drove the $1.7 million was realized portfolio performance, which means that the actual claims through that balance sheet date of 9/30 that we thought would happen, didn’t happen as high as we thought, so that turns to cash.
So we basically increase the contract asset accordingly for that. But prospectively we had more stress out into the portfolio on severity is going up and default is going up. So it’s a quarterly process, it’s very robust and we monitor it very closely and change our facts on a circumstances.
John Davis
Okay. And then, just last one for me, as we look out, appreciate you are not -- it’s too early for 2023 guidance, but if we were to look at the certs in 4Q, any reason why that’s not a reasonable run rate to start out at least the first part of next year as we think about kind of building our models in 2023?
Chuck Jehl
Yeah. Remember the -- John, seasonality in the business in Q1 is, March is obviously seasonality wise a good month for us due to the tax returns and folks getting tax refunds. So I would, obviously, take that into consideration in your modeling.
And Q4 as Keith and I both talked about, and John, obviously, the affordability, the Fed action, as well as some of the conservatism at our credit union customers right now with their liquidity and deposits. And as we have got do the bottoms up work on 2023, we will come back and talk to everybody about full year on the February call. So we are doing that work now.
John Davis
All right. Appreciate. Thanks guys.
Chuck Jehl
Yeah. Thanks, John.
John Flynn
Thanks, John.
Operator
[Operator Instructions] That concludes…
Chuck Jehl
Okay.
Operator
… our question-and-answer session. I would like to turn the conference back over to Chuck Jehl for any closing remarks.
Chuck Jehl
We would like to thank everyone for joining us today and your interest in Open Lending and appreciate your support. And I want to officially welcome Keith, we are excited he’s here and leading our company into the next era of our growth. So we will talk to you soon and thanks again. Have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
For further details see:
Open Lending Corporation (LPRO) Q3 2022 Earnings Call Transcript