Pagaya Technologies Ltd. Q2 FY2024 earnings call

• Strategic priorities:
  • Expanding the network to more top lenders, met target of adding two to four partners a year five months ahead of schedule, building enterprise relationships with OneMain and a top five bank in point of sale.
  • Improving capital efficiency, signed $1 billion forward flow agreement with Castlelake, got first ever AAA rating on personal loan ABS program, and announced acquisition of Theorem Capital.
  • Improving unit economics, fee revenue - led production costs reached record level, took action to reduce operational expenses.
• Business execution: Accelerating growth strategy by targeting enterprise lenders, expanding relationships with U.S. Bank, LendingClub, and OneMain; point of sale market is a key growth area, pre - screen product is in testing with encouraging results.

In the second quarter, total revenue, FRLPC, and adjusted EBITDA hit record levels. FRLPC grew 49% far outpacing network volume growth of 19%. FRLPC as a percent of volume was above 4% for the first time as a public company. Core operating expenses were 22% of total revenue in the second quarter compared to 28% in the prior year. Adjusted EBITDA is now at an annual run rate of approximately $200 million with an adjusted EBITDA margin above 20% for the first time since going public. Operating cash flow was $15 million in the quarter, the fourth consecutive quarter of positive operating cash flow. FRLPC is expected to range between 3.5% and 4.5% of network volume for the remainder of 2024.

• Third quarter 2024 outlook: Network volume is expected to range between $2.3 billion and $2.5 billion. Total revenue and other income is expected to range between $250 million and $260 million. Adjusted EBITDA is expected to range between $50 million and $60 million.
• Full year 2024 outlook: Narrowed network volume outlook to range between $9.25 billion and $10.25 billion. Raised total revenue and other income range by $50 million to range between $975 million and $1.05 billion. Raised adjusted EBITDA outlook range, with the low end raised by $20 million to $180 million and the high end raised by $10 million to $210 million. Aim to be cash flow positive and GAAP net income profitable in 2025.

Factors that could cause actual results to differ materially from forward - looking statements include competitive advantages and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance, including non - GAAP financial measures and their reconciliations to GAAP financial measures.

Q: Could you elaborate on how you expect to utilize self - funding and if it takes care of all opportunities?

A: EP said that the most important step is earning more fees on network volume than the capital used to fund it, and they reached that point in Q3. As volume scales, incremental cash generated will offset operating costs to get to total cash flow positive. Gal added that this takes into consideration all things they think they need to invest in.

Q: Talk about the Castlelake relationship, pipeline, and how it factors into expectations?

A: Gal said they are excited about the agreement, it's part of driving capital efficiency. Deals like this are the path to get to cash flow positive, and there is demand for such assets.

Q: Get color on the pre - screening tool and its potential expansion to other partners?

A: Sanjiv said the pre - screen product is a firm offer of credit to existing customers of partners, has shown strong response rates in testing, and can be expanded to all partners.

Q: How to think about risk retention with the AAA rating on ABS issuance?

A: Gal said the AAA rating lowers the cost of capital for investors and risk retention requirements, with an optimized ABS structure calling for five or less percent risk retention combined with other structures.

Q: What assets and resources does Theorem bring to Pagaya and perspective on problems solved for OneMain?

A: Gal said Theorem brings access to Pagaya's network for its LP's and funding diversification for Pagaya, and the team will stay. Evangelos said OneMain's customer segment is consistent with Pagaya's, and Pagaya helps OneMain scale, especially with its acquisition of foresight, and enables approval at the dealer point of sale.