Q3 2024 Pagaya Technologies Ltd Earnings Call
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Speaker Change: Ladies and gentlemen, greetings and welcome to the Pagaya 3Q 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star and zero on the telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, Josh Fagan. Thank you. Please go ahead.
Josh Fagan: Thank you, and welcome to PGAIA's third quarter 2024 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of PGAIA, Sanjiv Das, President, and Evangelos Perros, Chief Financial Officer.
Josh Fagan: You can find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.bagaia.com. Our remarks today will include forward-looking statements that are based on our current expectations.
Josh Fagan: and Forecast with respect to, among other things, our operations, the financial performance, including our financial outlook for the third quarter and full year of 2024. Our actual results may differ materially from those contemplated by these forward-looking statements.
Josh Fagan: Factors that could cause these results differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events.
Josh Fagan: Please refer to the documents we follow from time to time with the SEC, including our 10-K, 10-Q, and other reports for a more detailed discussion of these factors.
Josh Fagan: Additionally, non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs, or FRLPC, FRLPC percentage,
Josh Fagan: The core operating expenses will be discussed on the call. Reconciliations to the most directly comparable gap financial measures are available, to the extent available without unreasonable efforts, in our earnings release and other materials, which are posted on our investor relations website.
Speaker Change: We encourage you to review the shareholder letter which was furnished with the SEC on forum 8k today for detailed Commentary on our business and performance in conjunction with the accommodating earnings supplement and press release with that Let me turn the call over to Gal
Thank you and good morning, everyone.
Speaker Change: I hope you had a chance to read our shareholder letter.
with our strong third quarter results.
Speaker Change: HODAYA is at an approximate annual rate of $1 billion of revenue, $400 million of pre-revenue net production cost, and $220 million in adjusted EBITDA.
Speaker Change: Pagaya is now reaching the next level of scale and profitability.
Speaker Change: This is the result of both increasing demand for our products and laser-focused execution of our financial goals to improve free generation, funding efficiency, and drive economic sustainability.
Speaker Change: all of which set Pagaya to deliver positive total cash flow and gap profitability during 2025.
rings to our lenders.
Speaker Change: as they are always looking to improve the value they can offer to their customers.
Speaker Change: The use of our products, since we started, has generated over $24 billion of loans, with approximately 2 million new customers added or retained.
Bye, y'all. We're closed.
as our network grows.
and our data moat is becoming bigger.
Speaker Change: We are enabling our partners to acquire and serve more customers with each application they are sending our way.
The engine is perpetual.
and only getting more powerful with time.
Existing lending partners.
Speaker Change: are looking to PAGAIA to play a critical role in the 2025 road plan.
As part of these plans,
Thousands are asking for more of our products.
creating additional revenue opportunities for both Togaia and our followers.
Speaker Change: and in return, enhancing the lifetime value of their customers' relationships.
Speaker Change: We expect next year to have over 8 relationships generating over 500 million dollars per year of network volume.
channeling the power of our existing customer franchises.
Speaker Change: Growth of our pipeline is a key driver of our long-term growth.
Speaker Change: In line with our strategy, we continue to make inroads with the largest bank in the country.
The onboarding of a top five bank.
in our point of sale vertical.
continues to progress well.
Speaker Change: Additionally, following multiple quarters of convolving and integration, I am also happy
Speaker Change: U.S. Bank Point of Sale Arms is now live on our network.
Speaker Change: In terms of future prospective lending partners, we are currently in term sheet level discussions with several other top 20 lenders across personal loan, point of sale, and other.
Speaker Change: And we are expecting to be able to announce some of these names.
Speaker Change: I could not be more optimistic about the opportunity in front of us.
Speaker Change: Between the ongoing expansion of our network, combined with improving macroeconomic backdrops, the conditions are right to extend access to credit for more consumers.
Speaker Change: We transition for Gaia this past year to a business that can sustainably convert revenues into profits and cash flow.
I want to be clear.
This is without raising external equity capital.
Speaker Change: All of that brings me to our core 2024 financial strategy.
Speaker Change: to improve fee generation, funding efficiency, and drive greater economy of state.
I will split this into three areas of focus.
All right.
Speaker Change: We are earning more fees on every dollar of network volume we generate.
reaching a record level this quarter.
Speaker Change: Cost savings has amplified the benefit of higher fees on our bottom line returns.
Next.
in terms of our funding.
We have demonstrated consistent improvement in our ABS execution.
Speaker Change: as well as adding more diversified funding sources to our network.
We have a kid there.
Speaker Change: through structural changes in our ABS program. For example, achieving a AAA rating on our Personal Loan Program and a AA rating on our Auto Loan Program.
Speaker Change: We have also broadened our funding channels to Forward Flow, Managed Funds, and Pathways.
Speaker Change: All of these resulted in a material improvement in our votes, funding costs, and the lowest risk retention method in over two years.
Speaker Change: In addition to that, this has created a significant cushion against future impairments on our risk retention efforts.
Lastly, our volunteers.
Speaker Change: that has become much stronger as a result of a series of transactions we announced in September to refinance high-cost debt, reduce interest expenses, and unlock additional balance sheet liquidity.
E.P. will discuss the significance of this in a moment.
Speaker Change: In parallel to these initiatives, we continue to iterate on our underwriting model, leveraging our unparalleled and growing data advantage.
Speaker Change: The improvement in performance from adjusting our model over the last 18 months has helped us to demonstrate significant stronger and stable credit performance.
Speaker Change: All in all, we have created a sustainably profitable business with growing feeds, increasing operating leverage, and capital efficiency.
2025 will showcase the true earning potential of the business.
Speaker Change: as our growth continues and the negative impacts of older retention positions are behind us, which we expect by the end of 2024.
Speaker Change: And with any business, the successful build-out of our franchise came with a significant investment.
The cost of that investment
Speaker Change: some of which was credit-related and is impacting our financial results today, has delivered massive returns.
Speaker Change: We grew our network of top lenders and institutional investors, enhanced our underwriting capabilities with a richer data set, and are strongly positioned to take advantage of the improving environment.
Speaker Change: I am proud of our team for sticking to the vision on our journey to offer one of the most in-demand lending technology solutions.
in the U.S. and become a multiproduct lending technology enterprise.
Speaker Change: I have never been more excited, as we tell the causes, to a year when we start to demonstrate the true earning power of our company in 2025.
To close.
Speaker Change: I could not be more confident about the future of our company and our ability to consistently deliver value to U.S. consumers, our partners, our investors, and our shareholders.
Speaker Change: With that, I will hand it over to Sanjiv to take your remarks.
Thanks, Carl, and good morning, everyone.
Sanjiv Das: I want to spend a few minutes on our multi-pronged and focused growth strategy.
Sanjiv Das: and provide an update on our progress with new and existing partners.
Thank you.
as well as exciting developments on our new products.
Sanjiv Das: It is important to understand how our products do more for our partners than just growing their originations through incremental loan conversion.
Sanjiv Das: Our products are increasingly being used as a catalyst for additional growth within the portfolio of our existing partners.
Sanjiv Das: We are helping our partners to expand the breadth of credit solutions they can offer their existing customers without taking the associated balance sheet risk.
Sanjiv Das: The most common benefit our partners are looking for is in increasing the lifetime value of a customer.
Sanjiv Das: This includes retention of existing customers and increasing additional revenue opportunities by offering credit products responsibly.
Additionally, in the case of banks,
Sanjiv Das: Retaining valuable depositor relationships and creating fee-based revenue is of great importance to their growth, especially in a regulatorily constrained environment.
Sanjiv Das: As a result, we are seeing Pagaya's products being increasingly offered to existing customers within our lending partners, the potential of which is multiplicative.
Sanjiv Das: At this time, we are witnessing an increasingly normalizing macroeconomic backdrop.
Sanjiv Das: This is driving banks and lenders to more vigorously compete for consumers and valuable deposit funding that is so critical to the stability and growth of their businesses.
Sanjiv Das: These enterprises are increasingly leaning on Pagaya to grow and strengthen their product offerings with existing customers.
Sanjiv Das: In fact, because of this phenomenon in the third quarter, we surpassed a record $200 billion of quarterly application volume.
Sanjiv Das: And indeed, as our 31 partners are finalizing their plans for 2025, we see that Pagaya's products are increasingly an integral part of their growth strategy.
Sanjiv Das: This tailwind from existing partners will result in propelling Pagaya's growth in 2025 and beyond.
Sanjiv Das: Turning to new partnerships, our pipeline is strong and it includes recognizable and notable brands across all asset classes.
Sanjiv Das: First, I'd like to discuss some highlights of structural changes we are witnessing in our pipeline.
Sanjiv Das: We are seeing exceptionally high levels of demand for our point-of-sale products.
comprising roughly one-third of our pipeline.
This includes a mix of great global payment brands.
major money center banks, and regional banks.
The other notable change is growing demand from regional banks.
Sanjiv Das: In light of continued regulatory uncertainty and balance sheet constraints, a large number of regional banks have approached us to partner with them to create speed-driven revenue growth and boost customer value.
Sanjiv Das: Currently, one-third of our new partner pipeline is comprised of large regional banks across all asset classes.
Sanjiv Das: We look forward to helping these banks continue to serve the local and regional needs of American communities.
And now turning to growth from existing partners.
Sanjiv Das: Starting with our point of sale business, our volumes grew by 67% year-on-year and 51% sequentially this quarter, and that's ahead of the real ramp in this business.
Sanjiv Das: Our partnership with Klarna is now at a point where we expect a significant ramp in volume.
Sanjiv Das: We are working to include additional products that are focused on larger ticket size and longer duration loans.
Sanjiv Das: Helavon, the U.S. bank point-of-sale financing arm, has completed tech onboarding and will begin to contribute to our results in the fourth quarter.
Sanjiv Das: Additionally, we are currently in late stages of onboarding the famous business of a top five money center bank.
Sanjiv Das: The auto lending sector has faced challenging conditions over the last couple of years with volatility in both the macroeconomic backdrop and vehicle value.
Sanjiv Das: Returns are now more stable and our partners are looking to Pagaya to achieve more normalized growth expectations.
Sanjiv Das: We are mainly focused on premier lenders on our platforms such as Ally, OneMain, and Westlake.
Sanjiv Das: Over the next 12 months, we expect noticeable growth in this market, with a focus on extremely prudent underwriting.
Personal loans, which are currently our flagship asset class.
Sanjiv Das: has now achieved our company's highest FRLCC percentage of 6.6% in the third quarter, demonstrating the value we bring to our partners.
Sanjiv Das: Overall partner demand has increased, a trend which we expect to continue into 2025.
Speaker Change: But before I hand it over to E.T., I want to take a moment to discuss our product roadmap, specifically our free screen product.
Speaker Change: This is a product I'm extremely excited about based on our early successes.
Speaker Change: This product is designed to enable connected partners to offer Pagaya products to their existing book of customers, creating more lending opportunities across other segments.
Speaker Change: In the third quarter, we expanded the reach of our pre-screen offering from one to two live partners.
and we have seven more in the pipeline.
Speaker Change: We expect a ramp in integration and utilization of this offering, which can ultimately be leveraged across all our franchise of 31 members.
Speaker Change: What I'm most excited about is that the pre-screened product epitomizes the power of Pagaya's network to use existing connectivity and trust to drive further lifetime value to all our partners.
and then our partner twin, Peter.
Speaker Change: With that, let me now hand it over to E.P. to discuss our financial reports.
Sanjiv Das: Thank you Sanjiv and good morning everyone. We reported third quarter total revenue of $257 million, free revenue less production costs of $100 million, and adjusted EBITDA of $56 million.
Sanjiv Das: Before I walk through this quarter's results, I want to discuss the progress we made to achieve our two key financial milestones.
Sanjiv Das: Sustainable Total Cash Flow Generation and Gap Profitability, which we expect to reach during 2025.
Sanjiv Das: This progress is due to focused execution on our financial strategy that we set out at the beginning of the year.
Sanjiv Das: First on unit economics, third quarter fee revenue less production cost was a record 100 million at 4.3% of net work volume with increased fees across multiple partners and channels.
Sanjiv Das: Next, on operating leverage, we took action to reduce core operating expenses by approximately $25 million annually, a portion of which was reflected in the third quarter, driving improved overall operating efficiency.
Sanjiv Das: In terms of capital efficiency, we optimized our ABS structures and diversified our funding sources to lower the use of our capital, while reducing the potential for future impairments related to our risk retention portfolio.
Sanjiv Das: Last, we optimize our corporate capital structure and de-risk our business.
Sanjiv Das: We achieved it by paying down expensive debt and unlocking liquidity through the release of securities that served as collateral against that debt.
Sanjiv Das: In addition, the debt paydown is expected to reduce interest expense by approximately $13 million, an opportunity we highlighted on our second quarter earnings conference call.
Sanjiv Das: We have positioned our company to leverage demand for our products and to produce sustainable and profitable growth. This will become increasingly evident as we enter 2025.
Sanjiv Das: In 2024, we recognized losses related to vintages originated in 2023 and prior, when capital market conditions were much more challenging.
Sanjiv Das: Based on the seasoning of these vintages, we expect to book the majority of any remaining fair value adjustments on these securities in the fourth quarter of 2024.
Sanjiv Das: This, coupled with the cushion we have created in our portfolio against future losses, further supports our path to gap-net income profitability, which we expect to reach during 2025.
Sanjiv Das: Turning to third quarter results, network volume of 2.4 billion grew by 11% year over year with continued strength in our personal loan and POS businesses, up 15% and 67% year over year respectively.
Sanjiv Das: Total revenue and other income grew 21% year-over-year to $257 million with revenue from fees up 24% to $249 million.
Sanjiv Das: Pre-revenue-led production costs grew 38% year-over-year to $100 million, which was meaningfully higher than the growth in our network volume and revenue.
Sanjiv Das: Fee Revenue Less Production Cost as Percent of Network Volume Expanded by 83 Basis Points Year-over-Year to a Record 4.3% Toward the High End of our Second Half 2024 Target Range of 3.5% to 4.5%
Sanjiv Das: The growth in our fee revenue less production cost continues to be driven by fees from our lending partners, which comprise 71% of total FRNPC in the quarter versus 60% the prior year.
Sanjiv Das: It is important to note that our largest and most mature vertical, Personal Loans, generated an FRNPC of 6.6% of volume.
Sanjiv Das: While FRNPC grew 38% in the quarter, core operating expenses were flattened year-over-year and down 5% sequentially.
Sanjiv Das: This demonstrates the strong operating leverage embedded in our business, along with the benefits of the cost savings initiatives we announced in June.
Sanjiv Das: Co-operating expenses were 52% of FRLPC, down from 72% in the prior year quarter, and the lowest level since going public.
Sanjiv Das: Total operating expenses in the quarter were impacted by whole loan losses of $12 million related to loan purchases from older ABS transactions.
Sanjiv Das: The combination of higher fees and continued operating leverage drove a 61% incremental adjusted EBITDA margin in the third quarter. Adjusted EBITDA of $56 million grew by $28 million year-over-year, a margin of 21.8%, up 846 basis points.
Sanjiv Das: Net loss attributable to Pagaya was $67 million in the third quarter, compared to a net loss of $22 million in 3Q of 2023.
Sanjiv Das: Credit-related fair value adjustments reported in other expenses amounted to negative $70 million net of non-controlling interest.
Sanjiv Das: Adjusted Net Income, which excludes share-based compensation and other non-cash items such as Fair Value Adjustment, was positive $33 million, showcasing the underlying earnings power of the business.
Sanjiv Das: While we expect credit losses to be a normal part of our business, as is the case for all lending businesses, we expect that with continued top-line growth, we will reach sustainable gap of stability during 2025.
Now, moving on to credit performance.
Sanjiv Das: We have seen a significant improvement and stability in credit trends over the last 18 months.
Sanjiv Das: The combination of both a shifting our portfolio to more resilient borrowers and an improving macro environment has driven notable improvements relative to peak losses in both our personal loan and auto loan portfolios.
Sanjiv Das: The latest data for our 2023 Personal Loan Visages show that CMLs have improved by 20-40% relative to peak levels we saw in 2021.
Sanjiv Das: The latest data for our auto loan businesses saw an improvement of 30-50% relative to the peak levels we saw in 2022. Credit performance across all our three products is now in line with our expectations.
Sanjiv Das: Turning to funding, we've made significant progress this year in terms of capital efficiency by optimizing our ABS program and diversifying our funding sources.
Sanjiv Das: At the same time, demand for consumer assets continues to strengthen and pricing has meaningfully improved compared to 2023, which was a far more challenging environment for the industry.
Sanjiv Das: As of here today, September 30th, we have issued $4.4 billion in our ABS program across 12 transactions.
Sanjiv Das: In the third quarter, we closed our second AAA-rated APS deal, a $500 million transaction that was significantly oversubscribed.
Sanjiv Das: It was priced at the lowest cost of capital we've seen since early 2022, and our effective net cash risk retention came in at about 4%.
Sanjiv Das: Looking ahead, barring any significant changes in the funding environment, we expect our net risk retention on these personal loan APS deals to remain around 4-5% of the national size.
Sanjiv Das: In October, we successfully completed our second pass for Certification of the Year, valued at $100 million.
Sanjiv Das: These transactions have minimum net risk retention at just 1% of the total notional amount. We anticipate executing one or two more such transactions in the next few months with plans to further scale the program in 2025.
Sanjiv Das: At the same time, we will continue to expand our privately managed funds and forward flow programs which require little to no risk retention.
Sanjiv Das: In total, we expect non-APS funding channels to account for 30-40% of our total funding in the fourth quarter and anticipate net risk retention levels to be around 2-3% of total network volume, which represents our average target range over the cycle.
Sanjiv Das: Turning to our balance sheet, in September, we announced a series of opportunistic transactions, raising an exchangeable note of $160 million, up-sizing our term loan by $70 million, and executing an expected sale of approximately $100 million in balance sheet security.
Proceeds will be used to pay down high-cost borrowings.
Sanjiv Das: These transactions meaningfully strengthen our balance sheet, improve access to liquidity with a release of high-quality collateral and excess cash, and are expected to reduce annual interest expense by approximately $30 million.
Sanjiv Das: We expect to complete these transactions by the end of the year.
Sanjiv Das: This quarter, we recognized a fair value impairment net of non-controlling interest of $17 million. We also reported a change in our gross unrealized loss of $19 million booked in other comprehensive income in shareholders' equity.
These charges were primarily related to our 2023 Bintas securities.
Sanjiv Das: The remaining fair value of our 2023 securities as of September 30th was approximately $275 million.
Sanjiv Das: As I noted earlier, we expect the majority of any remaining fair value adjustments related to these vintages to be recognized in the fourth quarter of 2024, setting us up to better demonstrate the true earning power of the business in 2025.
Sanjiv Das: These 2023 ADF structures were issued in a high cost of capital environment.
Sanjiv Das: The relative high sensitivity to even small changes in losses resulted in credit-related impairment charges.
Speaker Change: As Gal mentioned, during that time, we continue to invest in the growth of our franchise with a focus on building long-term shareholder value.
Speaker Change: Our step change improvement in capital efficiency, coupled with a more normalized capital market, results in a much higher cushion against future impairments, which coupled with ongoing growth in our business, will enable us to reach positive gap net income during 2025.
Speaker Change: Now let me close with our outlook for the remainder of the year.
Speaker Change: For full year 2024, we are narrowing our target ranges across all of our key metrics.
Speaker Change: As we stay laser focused on accelerating cash flow generation and profitability, we are directing our production to our most profitable channels.
Speaker Change: We expect full-year network volume to range between $9.5 and $9.7 billion.
Speaker Change: We expect total revenue and other income to range between $1.01 and $1.025 billion.
Speaker Change: We expect Adjusted EBITDA to range between $195 and $205 million.
Speaker Change: To close, we are excited about our trajectory to receive accelerated profitable growth and all of the milestones we have achieved towards that goal.
Speaker Change: We expect to turn to positive government income during 2025 and will provide formal 2025 guidance of our next quarterly results.
Speaker Change: With that, let me turn it back to the operator for Q&A.
Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on the telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star and 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen, we request that you limit yourself to one question and one follow-up. We will wait for a moment while we poll for questions.
Speaker Change: The first question comes from Joseph Waffe with Canaccord Genuity. Please go ahead.
Speaker Change: different funding sources. Could maybe we go a little bit more deeper into the mechanics of, you know, how, you know, how loan volume, network volume is allocated across
Speaker Change: some of these funding sources and then maybe a little bit on economics for you on the various funding sources other than the traditional ABS and then I'll have a quick follow-up.
Speaker Change: Hi Joe, thanks for the question. I'll take that one. This is Ipi.
Speaker Change: Yeah, so we're very excited about where we are currently in terms of our...
Speaker Change: funding. On one side we have obviously optimized significantly our ABS structures.
Speaker Change: which combined with diversified funding sources from forward flow pass-through structures and all of that, we expect the blended mix to be around 2-3% across our entire volume. We continue to scale these programs. We see significant opportunity and demand to grow the pass-through programs in particular and we're in discussions to explore further forward flow agreements.
Speaker Change: All of that hints at the significant demand, obviously, from investors, which we're very excited about. And any, you know, changes in the pricing and all of that amongst the different structures is already reflected in our guidance of 3.5% to 4.5% of FRPC as a percent of volume.
Speaker Change: Got it. Is there any way that, you know, maybe just a little more there, AP on how you, how, you know, how volumes get allocated across these different funding vehicles, like a little bit more detail?
Speaker Change: Sure, and we have provided some information in our letter as well, but I would think about ABS being approximately 60%, 60-70% of our volume currently, with the alternative sources across pass-throughs, forward flows, and our privately managed funds taking the remaining 30-40%.
Speaker Change: Got it. And then one on point of sale, sounds like...
Speaker Change: There's a lot of point-of-sale in the pipeline, obviously, you've got.
Speaker Change: Some big logos already signed up there. You know, how should we think about, you know, network volume and point of sale over time compared to maybe some of your other loan cohorts like, you know, personal loans? Could it be that large one day or how do you see it relative to some of the other loan types? Thank you.
Sanjiv Das: Hi, this is Sanjiv, I'll take that. So yes, I totally agree with you. The new growth area for us, the new emerging asset class, which is super exciting, is obviously point of sale or BNPL as many people describe it. That, as you know, we have a relationship already with Klarna that's going to grow very substantially because of
Sanjiv Das: The way we've sort of set it up, and as I said, we'll also go into longer duration, longer ticket-sized loans.
Sanjiv Das: Same with Elavon, we are seeing that phenomenon happen at most of the banks.
Sanjiv Das: that are getting into payments or have been in payments for quite some time in a very substantial way. We see this across major money center banks, we see that across regional banks.
Sanjiv Das: And the fact that we are increasing the loan size and duration makes it appear in some ways like, behave a little bit like personal loans if you really think about it. And the short answer to your question on whether or not it'll be as big as personal loans, we absolutely believe that it will.
Sanjiv Das: This is an area that is very, very, very strongly adjacent to the credit card business, lending partners. They are investing a lot of money in that, and so are we. And we totally believe that this will be at least as big as a PL business and equally as profitable. And we look forward to that.
Great, thank you very much.
Thank you.
Speaker Change: The next question comes from Mark Palmer with Benchmark. Please go ahead.
Yes, thank you very much for taking my call.
I have one question and then a quick follow-up.
Speaker Change: The company has done a great job of creating operating leverage through expense reductions
Speaker Change: and that's really shining through in terms of profitability. How are you thinking about the balance between expense control and additional investments in the platform going forward and what's the implication with regard to the company's margins?
Speaker Change: So, hi Mark, it's Gali here. Thank you for the question. So, I will take it first from a business perspective and then we'll hand it over to Ipi for a few financial remarks.
Speaker Change: So, from a business perspective, I think this is one of the biggest differentiator pieces of PAGAIA. As you think about it from an infrastructure perspective, the reality is that to manage 31 partners or 50.
Speaker Change: It's not that different. So it's not to say that we don't have 5 or 10 percent higher amount of expenses needs, but it's zero related to the scale and the magnitude of that. And think about it that we build an engine.
Speaker Change: that knows to onboard or add something between two to four a year. So from that perspective, our cost is mainly going to stay flat.
Speaker Change: while the additional revenues or net revenues, whatever you want to call it, should continue to grow in the high single, sorry, high double digit numbers. The only other piece I want to add to that,
Speaker Change: is that the reduction in force that we did and where we are staying today with the platform, especially as Sanjiv came into effectively in his role, is not a place where we are running lean right now.
Speaker Change: That's how we view the business, that's what we view the expense basis to be, and that's where we believe we can execute in front of many more strategic initiatives.
Speaker Change: In addition, for even more products and more asset classes down the road that could be in the same concept because it's really high leverage to our ability to build a scalable business and that's the story of Podaia.
Speaker Change: Yeah and I want to double down on one thing that Gal said, it's the business has an inherent operating leverage and that's a key differentiator. It's less about managing expenses down, it's more about our ability to continue to deliver on our strategy and take advantage of the growth opportunities.
Speaker Change: without necessarily any incremental investments. If you look at costs year over year, they're about flat, yet fee revenue less production costs has grown by more than 38%.
Speaker Change: The point of this is that we can continue to execute on our strategy and take advantage of all the growth opportunities ahead of us without any incremental or material incremental investment in our cost infrastructure.
Speaker Change: Thank you. And one quick follow-up question. We are now a week since the U.S. presidential election. I just wanted to get your initial thoughts on what the expectations are for the operating environment for PAGAIA under the new administration from a regulatory perspective in particular.
So, so hi Mark, sure. So, so I think.
Speaker Change: Generally speaking, right, and without speaking about politics, we are really in a situation that from a market perspective there is a very, I would say, strong belief that regulatory is going to be more constructive and that in the same time the belief that growth should happen in the U.S. is there. For our perspective, as you think about that, these two different type of narratives, they
Speaker Change: We are supportive of a strong consumer that will have the ability to take the debt and to pay it properly. And at the same time, as you can imagine, as a disruptive in this space,
Speaker Change: For us to bring more technology and more capabilities into the banks and into the other pieces is definitely a strong tailwind for us.
Speaker Change: So, all in all, the ability to actually drive more value by exploring and opening technology into the different ecosystems and banks is definitely something that is a tailwind for us.
Thank you very much.
Thank you.
Speaker Change: The next question comes from John Heck with Jeffries. Please go ahead.
John Heck: Morning guys, and thanks very much for taking my calls and congratulations on continuing to execute against the growth plan. Maybe just because I know that the personal loan product, it's more mature, it's more scaled. Maybe can you talk about the FRPC with that?
John Heck: versus like the other new products and also maybe talk about the risk retention in across the different product lines.
Hi John, thanks for the question.
Speaker Change: Today, as you saw, we reported in the third quarter a record FRLPC across the entire company of 4.3%, which is closer to the upper end of the range. When you try to dissect that across our product, personal loans, which is a more mature product, it's close to 6.6%.
Speaker Change: And then, as it relates to auto and POS, these are areas where we continue to see significant more opportunity to grow the unit economics as we're moving forward.
Speaker Change: These are still investment areas for us, but we see that opportunity to basically apply the same roadmap that we had on personal loan, it's just a few quarters behind.
Speaker Change: From a risk retention perspective, what I would say is that there is little difference between the different products. What I would say is, you know, if you take a personal loan, as an example, at 6.6% FRLPC and a risk retention close to 2-3%, we're already looking at a product that's significantly profitable and we expect to replicate that success in the other products as well as we continue to mature in those fronts.
Speaker Change: Okay, that's helpful. And then maybe, Kez, can you talk about...
Speaker Change: You said the conversion rate is still very conservative. It's been on a downward trend Despite the fact that you've had very solid volume growth You know, where are we in the cycle that you might we might receive reversal of that trend in the conversion rate? And what might that what kind of opportunities does that present to you guys?
Speaker Change: Yeah, listen, as you may have seen a little bit, you know, we continue to see significant growth opportunity, right? We have built now a franchise that looks at more than 200 billion of application flow coming in for our 31 partners per quarter.
Speaker Change: And our conversion rate, to your point, continues to be in that sort of a little bit less than one percent, materially lower than what it used to be. We obviously have the opportunity to change that and grow, but we want to make sure we do that in the form of profitable growth and not at the expense of profitability and returns.
Speaker Change: As we continue to move on and we get more flow and some of the relations with our newer partners mature, we will naturally see an increase in that conversion ratio coming up soon, particularly in 2025.
Okay, thank you guys.
Thank you.
Speaker Change: The next question is from the line of Sanjay Sakrani with KBW. Please go ahead.
Speaker Change: Hi, this is actually Stephen Clark filling in for Sanjay. Thanks for taking my questions.
Speaker Change: Because I just want to drill down on credit and the credit impairment this quarter seems like credit metrics
Speaker Change: seem to be trending fine. Just curious as to what's led to the credit impairment this quarter, and it seems like it was related to 2023 vintage, if we could just drill down on, was it on the personal loan side or auto side, if you could just provide some more details, thanks.
Sure, I'll take that, Sanjiv.
Sanjiv Das: So, look, the impairments were mainly related to the 2023 vintages and I want to underscore that either way the company, as a business today, is very well positioned to drive to gap net income profitability in 2025, reflecting impairments, if any, in the future. In addition, and I want to be clear, and we provide a lot of information on that, is that our credit performance continues to improve and has been improving for multiple quarters.
Sanjiv Das: When you look at the 2023 vintage C&Ls across all our products, they are significantly better than the 21s or 22s in the range of 20 to 40, even 50%. So this was not related specifically to credit.
Sanjiv Das: What you have here is this position, this potential position that we took related to the 23, it was done in a very challenging funding environment. Effectively, you're having investors looking at very high expected returns to underwrite these types of assets.
Sanjiv Das: And from our perspective, Pagaya was continuing to invest during the environment in the growth of our franchise, and we're focusing on building up liquidity and planting for future growth.
Sanjiv Das: So, even though we didn't anticipate those losses, what you have here is ABS structures that left us effectively susceptible to impact, financial impact, even from small changes in the credit performance.
Sanjiv Das: So, that's what drove this impairment, and obviously, as I said, primarily driven by 2023s.
The key question here is where we are today.
Sanjiv Das: A couple of things there. First of all, obviously the capital markets and funding environment is significantly better and positive.
Sanjiv Das: But most importantly, we have significantly optimized our funding structures and diversified our funding, all of that leading to a significant cushion against any future impairments.
Sanjiv Das: So, as I noted on the call, as it relates to the 2023 vintages, we expect the majority of any remaining impairments for that vintage to be taken in the fourth quarter. And we obviously want to take that sort of noise away to demonstrate the earnings power of the business going forward and leading to gap netting and profitability in 2025.
Speaker Change: As of today, do you have any preliminary expectations of how large the credit impairments in the fourth quarter could be?
Speaker Change: I can give you that guidance, we still need to mark the position and in order to do that we need to get more data as this
risk retention position season, particularly the second half of 2023.
Speaker Change: And that's important for us to get there, to really be predictive in terms of the magnitude of the impact.
Speaker Change: What I would highlight is, and we did that, provide that clarity, is today the 2023 portfolio stands on our balance sheet at approximately $275 million total, and as I pointed out earlier, we expect majority of any remaining impairments to be taken in the fourth quarter.
Speaker Change: Got it. That was very helpful. Thanks for taking my question.
Thank you.
Speaker Change: Thank you. The next question is from the line of David Sharp with Citizens JMP. Please go ahead.
Speaker Change: Good morning and thanks for taking my question. I wanted to kind of revisit the the FLRPC outlook, you know, particularly as
Speaker Change: The asset class mix evolves. I mean, it sounded like you're expecting auto to accelerate, very bullish commentary on point of sale.
Speaker Change: And as the business evolves to the point where personal loans are a lower part of the mix, I'm wondering, should we be thinking about
a lower kind of weighted average.
FLRPC margin, or conversely,
Speaker Change: Based on the 6.6% you recorded in personal loans this quarter
Speaker Change: As the other products scale, should we be thinking about the long-term margin structure above, you know, the current 3 to 4% outlook?
Speaker Change: I want to take it from a business perspective for a second. What we are building here is one of the most
Speaker Change: unique infrastructure and platform of credit generation in the United States. And that comes across, as you mentioned, in the same concept but with three different major markets that all of them are very big and growing.
Personal Loan, Auto Loans, and Point of Sale.
Speaker Change: The reality is that when you get to the right scale, and to the right size,
Speaker Change: because all of these assets are rather complicated assets to produce that you will need to have very intense infrastructure for that.
Speaker Change: The profit, or the contribution margin, or the FRLPC, or any way you want to put it, is actually more or less over the lifetime the same. So you should expect to see
Otto's reaching closer to these numbers.
Speaker Change: You should expect point of sale to reach to that number. Now do remember, there are a lot of...
Speaker Change: Sanjiv Das, Founder and CEO of Evangelos Perros, Gal Kruniner, Sanjiv Das, Gal Kruniner, Sanjiv
Speaker Change: But if you take all of that into consideration, you will see that while creating the same high double-digit returns.
Thank you very much.
Speaker Change: Together with efficient funding, which is way below that, the excess spread and the ability to provide profits to Pagaya
Speaker Change: will remain at the 3 1⁄2 to 4 1⁄2 over all asset classes and will drive higher and bigger as we mature more.
Speaker Change: The markets, as we did with personal loan, you should expect the same to happen in auto and thereafter with point of sale. I hope that gave you the clarity.
Speaker Change: Sanjiv, I just wanted to add to what Gal just said, which I think was spot-on. Obviously,
Speaker Change: The summary of what Gal said was the acid classes will converge to roughly the same kind of...
but I will say this in defense of personal loans.
that by no means have we even reached.
Speaker Change: So, as we are getting into all of our existing lending partners, I'll give you an example. We're a very large bank. We are now starting to talk about offering Pagaya personal loans.
as a
Speaker Change: unsecured home improvement loan to their entire portfolio. That's very, very powerful in terms of growth in an existing partner.
Speaker Change: So personal loans have a very long trajectory to go. As you all know, the TAM of the auto market is also extremely large, and of course POS is the newly emerging asset class. But the point is that all three asset classes will grow because of the way we are going
Speaker Change: horizontally now across personal loans, which is a much more mature product with strong FRLPCs. And of course, the economics will more or less converge because these products are more or less and that's God's plan, so I just wanted to read.
You know, there's been a lot of private credit.
Speaker Change: flowing into the personal loan sector lately, not just Begaya's Flow Partner but a lot of other primary lenders. Are you seeing any change in
Behavior Approval Rates by
lending partners you serve as they become better capitalized.
Speaker Change: Yes, David, it's Gal here. So first I want to take the first question. So you're right. We have heard with many of our peers at Tefra that private credit shops and generally alternative lending is starting to be much more constructive and therefore what we call leaning in, that leaning in will at the end result
Speaker Change: in a growth for the sector and for the different lending pieces.
Speaker Change: So this is a phenomenon that we see, we see where we are at the efficacy of it because we have over 120 different partners and you will be surprised and these days every public shop wants to have a private shop so we are a very good enabler and connectivity tissue even if you will between that private credit phenomena and flowing into the consumer credit assets.
Speaker Change: The one thing I do want to call out is that
Speaker Change: We are not yet in an environment where lenders are starting to increase massively their approval rates.
And the reality is that we are still in a...
environment and things are starting to become much more
Speaker Change: So we expect people to open their boxes, they did start to do so.
Speaker Change: But on the margins, obviously we're happy to see that because it means much better environment for the consumer, many more opportunities for them to get financed and refinanced.
Speaker Change: That, in return, is another phenomenon that could reduce losses even further in the future. So, all in all, to your question, we don't see a massive phenomenon as such, but definitely the growth modes have started with us.
Speaker Change: It started with Arthur, but it is prudent growth and not irresponsible growth.
Understood. Thanks very much.
Speaker Change: Thank you. The next question is from the line of Hal Goach with Be Riley Securities. Please go ahead.
Speaker Change: Hey, good morning guys. I wanted to go back to the fair value mocks again.
Speaker Change: I'll make sure I heard you guys correctly, like 2023 was an extremely difficult year. We still had
Speaker Change: Fears of interest rates going higher, inflation staying high, then we had a banking crisis in the middle of the year.
Poor environment for principal credit on banks' balance sheets.
Speaker Change: Am I hearing you right? You did deals to invest in the business, to support your customers.
Speaker Change: that had structures that were much more sensitive to small changes in
credit performance, and the structures you're doing today.
Speaker Change: aren't as sensitive and that's what's helpful to your outlook for 2025.
Speaker Change: That's what I want to, I want to get at the end. We'll clarify that. It's a 20-year event and the market's hung up on that and I wanted to get your thoughts on that. Yeah, so let's nail it down. So let's start from the past. The reality, what is Pagaya? Pagaya business is a network.
Speaker Change: In a network, you need to make sure the network is flowing all day, every day, no matter what.
Speaker Change: That's our responsibility, for both our partners and investors, to deliver to them the best flow and the best return. In 2023, which was a unique time where there was a really big gap, we filled the gap.
That is an investment.
We did that.
Speaker Change: because we believe that the investment we'll do is going to end itself in a much massive outcome which is the enterprise value that you see here today.
31 different partners, US Bank
Speaker Change: many others, and in the same time, happy investors from 2023.
Speaker Change: Every investor you're going to speak with that invested in Apigai security in 2023 will tell you great platform, great retails. And these are the investors that are looking now to open their deployment, as you heard David speaking about. So we are the first choice.
Speaker Change: So we did all of that to get ready for that particular moment in time to make sure we are capturing that momentum very well.
Speaker Change: Two things left to speak about. One, what is giving us the confidence that in the next cycle like that we're not going to be in the same situation. The reality is that the structural changes that we did, the diversification of the funding to Forward Flow and many others,
Speaker Change: the new type of funding vehicles and some internal things about how we manage risk and how we are managing our production.
Speaker Change: have got us to a situation where we are, even in the future different cycles, are going to have much less potential impairment losses, even if nothing is changing. We are talking, just for you to reference...
Speaker Change: 40% less risk retention dollars that we are putting now on our balance sheet versus what it used to be a year ago just because of all these different structural changes that I shared with you.
Speaker Change: Now, the last point that is left to figure out is how the production of today is behaving and what should we expect from that on the impairment level of the future.
Speaker Change: So put it in a different word. The 40% versus what last year that you are putting on your balance sheet, what's the probability of that to get impaled?
Speaker Change: And the answer to that, and what Yipi said before, is that the likelihood of them to get impaired is much, much, much lower. Why? Because these different structural things we did in the ABS.
Speaker Change: made the first dollar loss is much more far away from a potential losses happening than what it used to be in 2023. And therefore, when we speak about 2025,
Speaker Change: And when we think about what is our expectation, our expectation is from the operational leverage that we have that generates strong cash flows and strong profits.
Speaker Change: Even taking into consideration some normal risk retention write-downs, we are expecting the company to be gap net income.
Speaker Change: And for a platform like us, which is rather young and one of the leading fintech, it's a very impressive target to put out there as we think about 2025, and we're saying that with full confidence.
Thank you, Gal.
I'll hop back into the queue.
Thank you.
Speaker Change: As there are no further questions, I would now like to hand the conference over to Gal Krubiner for closing comments.
Gal Krubiner: Thank you very much everyone. And to close, I just want to say that we are very proud of what we have achieved this year. We successfully executed against every one of our 2024 goals. We positioned the business to deliver sustainable, profitable growth in 2025 and beyond. The growth opportunities ahead of us are massive, and the demand for our product, as you heard in this call, is stronger than ever.
Gal Krubiner: Thank you as always for your partnership and looking forward to catching up with you very soon.
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time.