Pagaya Technologies Ltd. Q3 FY2025 earnings call

Product-Led Growth

• Focus on perfecting products to address lenders' fundamental challenges, with data and machine learning embedded across the lending funnel from verification to affiliate channel optimization.

Partner Expansion

• Highest number of partners in onboarding queue in company history, with up to eight partners being onboarded across asset classes (fintechs to banks) over the next twelve months.

Funding Network Diversification

• Issued $1.8 billion in ABS programs across four transactions during the third quarter; announced first auto forward flow and strategic funding on residual certificates; raised $500 million in corporate debt and expanded corporate revolver with lower costs, enhancing capital efficiency.

Product Performance

• Products beyond declined monetization contributing significantly to volume and revenue; multiproduct partners driving growth in volume, fee revenue, and customer lifetime value among existing partners

Network volume grew 19% year over year to a record $2.8 billion, led by 31% growth in personal loans. Total revenue and other income rose 36% to a record $350 million. FRLPC (fee revenue less production costs) increased 39% to $139 million, reaching 5% of network volume. Adjusted EBITDA increased 91% to $107 million with margins expanding nine points to 30.6%. GAAP net income for the third quarter was $23 million, marking the third consecutive positive quarter. Personal loans, auto, and point of sale (POS) segments each showed performance in line with expectations, with strong demand from institutional investors across all asset classes.

Full-Year Outlook

• Network volume expected to range from $10.5 billion to $10.75 billion.
• Total revenue and other income projected in the range of $1.3 billion to $1.325 billion.
• Adjusted EBITDA anticipated to be between $372 million and $382 million.
• GAAP net income forecasted in the range of $72 million to $82 million.
• FRLPC expected to grow steadily in dollar terms and remain between 4% to 5% of network volume.
• Core operating expenses expected to be slightly elevated in the fourth quarter due to higher funding issuance, with interest expense trending lower following recent refinancing

Risks

• Macro economic fluctuations that could impact consumer credit and investor demand.
• Credit risk associated with changes in consumer behavior or economic conditions.
• Volatility in capital markets affecting funding costs and availability

Q: John Hecht asked about credit quality and how the B2B model differs from B2C.

A: Evangelos Perros and Gal Krubiner discussed that the B2B model reduces cycle fluctuation as it doesn't rely on marketing spend tied to approval rates. Gal Krubiner further explained that B2C lenders are highly correlated with market cycles, whereas the B2B model (expanding through partners and products) mitigates such fluctuations.

Q: Peter Corwin Christiansen asked about risk retention and forward flow pipeline.

A: Evangelos Perros spoke about diversified funding and traction in forward flows, including the recent auto forward flow agreement. He noted robust demand for assets and the company's ability to manage risk retention even in changing market conditions.

Q: Harold Lee Goetsch asked about B2B2C model and onboarding.

A: Gal Krubiner and Sanjiv Das explained that prebuilt products enable faster onboarding, with integrated products like direct marketing engine and affiliate optimizer already in place. Sanjiv Das also mentioned cross-selling across asset classes with existing partners as a key growth driver.

Q: Rayna Kumar asked about macro trends.

A: Sanjiv Das and Gal Krubiner discussed stable consumer performance and robust demand in the capital structure. Gal Krubiner noted healthy demand in the capital structure with steady spreads, preferring a stable environment over overheating or overcooling.

Q: Kyle Joseph asked about potential new asset classes.

A: Gal Krubiner and Sanjiv Das mentioned considerations like market size (TAM), partner interest, and cyclicality for potential new asset classes. They highlighted home improvement as a potential area with growing partner interest, subject to meeting criteria like significant TAM and less cyclical nature