Pagaya Technologies Ltd.

Good day and welcome to the Begaya's second quarter 2022 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Today's call is being recorded. At this time, I would like to turn the call over to Jensi John, Head of Investor Relations. Thank you. Please go ahead.

Thank you and good morning. Welcome to Pagaya's second quarter 2022 earnings conference call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya, and Michael Kurlander, our Chief Financial Officer. You can find the presentation that accompanies our prepared remarks, our earnings release, and a replay of today's webcast on the Investor Relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantages and strategy, macroeconomic conditions and outlook, future products and services, and future business and financial performance. Our actual results may differ from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and in our most recent Form 6K, as filed with the U.S. Securities and Exchange Commission, as well as our subsequent filings made with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and in the appendix to the earnings presentation. which are posted on our investor relations website. With that, let me turn the call over to Gal.

Thank you, Jensi, and welcome to our second quarter 2022 results, our first as a public company. My name is Gal Krubiner, and I'm the co-founder and CEO of Pagaya Technologies. Pagaya is a financial technology company built by innovative research team and led by an experienced team of executives. with a vision to increase access to financial products and services through the use of technology. We have seen an incredible growth trajectory since our start in 2016, delivering consistent network volume and total revenue growth. The second quarter was a record quarter, with nearly $2 billion in volume and over $118 million in total revenues. Before we discuss the agenda of our call today, I want to make a moment to thank our incredible team for the dedication and hard work to get us to the point in our journey. As this is our first learning call, I would like to spend some time sharing with you an overview of Formation, the business model, before discussing our results for the second quarter. Then I will hand it over to our CFO, Mike Wollander, who will discuss our financial and outlook in more detail. We will then take your questions. Let me begin with some context on the problem we set out to solve. Throughout history, there have always been consumers locked out of access to the global financial system due to factors like demographics, socioeconomic status, or lack of credit history. Market conditions today are worsening that problem, putting pressure on consumers who need to find basic needs like buying groceries and getting to work. My co-founders and I recognize the limitation of legacy underwriting systems and so an opportunity to innovate financial systems with our data-rich proprietary technology. We founded a company with a mission to improve lives by partnering with financial services providers to make financial opportunity more accessible. To do this, we built a platform designed to deliver consistent value for financial institutions and institutional investors through macro cycles, which ultimately leads to better outcomes for consumers. Let me spend some time describing our business model and how it all works. First and foremost, Pagaya is not a lender or a servicer. We are a B2B2C platform, sitting in the middle between partners and institutional investors. We enable our partners to provide enhanced access to financial products to consumers and facilitate the deployment of capital on behalf of our investors. When our partners and investors grow, we grow too. Here is how it works in practice. First, a consumer submits an application to one of our partners, seeking approval for a loan. Our partners, which include banks, fintechs, and other financial service providers, send the application to Pagaya via an API plug-in to our AI network. As part of the partner's underwriting process, we provide a fully automated recommendation in real time. The partner then services the loans for the customer. After origination of the loan by the partner, Pagaya facilitates the placement of the loan with our long-term institutional investors, who have already provided upfront funding for access to that asset. Now let me walk through the value proposition across our ecosystem. We think about our value proposition as a win-win-win for our partners, our partners' customers, and investors. Our partners win because they capture more customers. This means incremental fees and revenue streams with limit capital requirements or incremental risks. Since inception, not a single partner has left our network. Our partner customers win, too, through access to financial products. They benefit from choice of financial institutions rather than having to seek out higher cost of alternative elsewhere. Since 2019, we have enabled our partners to originate $10 billion plus in loans to consumers across the country. Finally, our investors win too. As they diversify their investments and gain access to unique asset flow to deploy at scale, while optimizing for their return profile. As a B2B2C, our main focus is on improving our AI to better evaluate consumer behavior. We have built an entire ecosystem to do this. Our core AI technology is data rich with approximately 63 million applications evaluated since 2019, spanning multiple channels and utilizing over 16 million trading data points. It's fully automated, which enables all 260 world-class data scientists to spot trends early and recalibrate in real time. Now I would like to turn to our financial results for the quarter. We are very proud of our second quarter financial results. We have achieved network volume and total revenue growth every quarter since inception. In the second quarter, we delivered a roughly 80% growth year-over-year in both network volume and total revenue and another quarter of positive adjusted EBITDA. This was driven by faster growth in our newer products, including auto loans, credit cards, and single-family residentials, and continued strong growth in our personal loan products. In terms of partnerships, growth was mostly driven by expansion of existing partner relationships. Now let me turn to our operating highlights for the quarter. Our business continued to demonstrate very strong momentum with continued strong application flow and expansion of existing partnerships with new programs. We are also pleased to announce that we onboarded a large US bank in the second quarter with over $100 billion in assets as a major partner for our auto products. On the funding side, despite increasingly challenging macro conditions, we raised approximately $1.8 billion in capital across diverse funding sources. I'm also happy to highlight the latest addition to our leadership team. Our new president, Ashok Vesani, former CEO of Barclays Bank UK and former CEO of Citigroup Asia, bringing over 30 years of financial services experience. Last but not least, we successfully completed our public listing on the NASDAQ in June. This was a critical milestone in our company journey, but it's only the beginning. The transition created $290 million of net profits, giving us the capacity to scale for future growth. I would like to spend time now illustrating why our business model positioned us to drive stable growth over time. First, we have a differentiated funding model that limits balance sheet utilization. Second, our fully automated data-rich AI network is able to better evaluate consumer behavior, enabling us to spot trends early and react quickly. Third, our AI capabilities allow us to drive growth for our partners through macro cycles. For example, when credit conditions are tight, we see increased application flow for our partners. Allow me now to double-click into each of these factors. First, our funding model. We believe that our upfront funding model is more capital efficient than traditional models. To illustrate, here is how it works, a step-by-step. First step, Pagaya raises cash in a financing vehicle. So cash proceeds sits in a vehicle waiting for Pagaya AI's selected network volume to be acquired based on the vehicle criteria. Second step, Pagaya AI enables our partners to originate the loan through our network. Finally, which is step three, Pagaya facilitates the placement of the loan into the financing vehicle. Important to note that given the construction of our funding model, Pagaya has limited inventory risk. defined as having two inventory loans on our balance sheet. Throughout this process, Pagaya sits in the middle as a neutral player, without direct exposure to the assets acquired through our network. Our partners service the borrowers, our investors own the underlying assets. This allows Pagaya to operate with a minimal balance sheet, further protecting us from the impact of macro volatility. Moving to slide 14, On the left-hand side, you will see that we have been able to consistently raise capital over the past several years. We raised over $10 billion since the beginning of 2020 across a diverse set of funding sources, including public capital market through AVS and our private managed funds. On the right-hand side, you can see our funding model at work using an illustrated $1.2 billion transaction. What you see is at T plus zero in January, There is cash sitting in a vehicle. Loans are then being placed into the financing vehicle over the course of five months. By raising funding upfront, we can optimize returns for our investors by having flexibility and control over go-to-market deployment timing across different channels. For example, in the market environment today, we can offer investors a way to access capital markets to capture very unique opportunities. Some of our more recent transactions speak to the resilience of our funding model and the trust our technology capability. We issued $1.6 billion of ABS in the second quarter in challenging conditions and recently priced a $1 billion transaction in July, which was upside from a $400 million due to the strong investor demand. As I mentioned earlier, our AI technology evaluates consumer behavior better than traditional models. Additionally, our key differentiator is our unique vantage point. Our connectivity to multiple channels across the lending ecosystem enabled us to spot trends early and to adapt quickly. A prime example of this occurred in the fall of 2021, when our models were able to pick up on changing macro and consumer indicators in the personal loan market. The graph at the bottom left illustrates personal loan 30-plus-day delinquencies for monthly cohorts of Pagaya production from October 2021 to March 2022. Each line represents a monthly cohort of production. We optimized our models in the fall of 2021, which resulted in a decline of over 130 basis points in delinquencies in the three months after origination. On a relative basis, the graph on the right represents Pagaya production versus a market-level unsecured consumer benchmark. There are two main takeaways from this graph. OGAIA's technology has and continues to demonstrate an edge versus the market during both good and bad times of credit performance. Second, our ability to realize trends early and adapt quickly versus the market can be seen as a growing deviation of the liquidity trends beginning in Q4 2021. Now on the partner side. I would like to walk you through a quick case study on how we enable growth through macro cycles given our technology and funding capabilities. In the third quarter, at the height of the COVID pandemic, liquidity dried up and many originators shrank their credit books. In this example, we grew from 2% to 33% of the partner's originations. Furthermore, in 2021, when the liquidity constraint eased, we dropped 37% of the partner originations. This is a testimony to the strengthening of our partnership over time as we demonstrate our value through cycles. In today's environment, we increased market volatility in the first half of 2022. There was an acceleration of application flow through Pagaya's network. As you can see, we experienced 60% growth in application flow from our top three partners year over year as the second quarter of 2022. Now let's put all of it together. We have built a business model that consistently adds value in both stable time and challenging time. through the benefits of AI intelligence and a unique funding structure. In our business, stable and challenging times are typically defined as differences in market liquidity. The graph on slide 17 illustrates Pagaya's network volume, conversion ratio, and community of application received over three different periods, two defined by liquidity constraints and one without. Application flow consistently grew. while conversion rates fluctuate depending on market conditions, resulting in a growing network volume over time. As you've shown, when credit conditions are tight and liquidity is constrained, our product is in even greater demand by our partners, who typically increase the amount of applications sent to Pagaya. This allows for an even greater ability to be more selective in terms of risk-reward thresholds while maintaining network volume growth. In stable times, we benefit from more favorable credit and liquidity conditions that support further scaling of partnerships and products, resulting in accelerated growth in network volume. Now let me talk a bit about our future growth trajectory. We have a massive one-way ahead of us, and almost all of our efforts across the organization are focused on execution. First, the total addressable market across personal loans, auto loans, Credit card and real estate is in trillions. We have added one new market every year since 2018, but we are capturing less than 1% of the total opportunity today. We have significantly scaled our personal loan business since 2018, now making up roughly two-thirds of our annual volume. Our other products are seeing rapid growth, growing strong double digits in the second quarter. We are driving continued momentum with our existing partners, expanding into new channels. The program launched in the first half of the year contributed roughly 7% of our network volume in the first half. That being said, the most substantial opportunity ahead of us is partnership with big banks in the United States. The top 25 largest banks in the U.S. represent over $650 billion in annual volume. By capturing even a small slice of this opportunity, we can reach our medium-term growth ambitions. Let me now hand it over to Mike, who will discuss our second quarter results and our 2022 and medium-term outlook. Mike?

Thank you, Gal. Pagaya has been on an amazing growth journey. You can see that through the triple-digit growth we've delivered over the past five quarters in both network volume and total revenues. From 2020 to 2021, we tripled our network volume from 1.6 to $4.9 billion, and we generated an additional $3.6 billion through the first half of 2022. We also doubled revenues from the first quarter of 2021. In fact, if you annualize this quarter's revenue, we will deliver more revenue this year than all prior years combined. Looking ahead, we have two primary avenues for growth. First, we can continue to diversify across our existing products. In 2020, over 90% of our volume was in personal loans, but currently this is down to roughly two-thirds as we continue to scale our auto, credit card, and single-family residential products. The other key to our growth is new partnerships, with SoFi and Visa as recently announced partners. We believe our AI capabilities and network can work across fintechs, banks, and other financial institutions, and we are highly focused on these expansion opportunities. Now let me dive a bit deeper into our financial operating model using our results from the first half of the year. The primary driver of our revenues is network volume. This $3.6 billion figure represents the assets that were acquired by financing vehicles with the assistance of our AI technology. Revenue from fees, which amounted to $322 million in the first half of the year, are fees earned from the financing vehicles for these assets, which include the acquisition, setup, and administration fees. Our take rate, which is revenue from fees divided by network volume, was roughly 9% in the first half. This will range over time based on product and program. We also earn investment and interest income primarily related to required regulatory holdings as a sponsor of ABS transactions. This income makes up less than 10% of our total revenue. Moving on to the expense side, production costs are costs we pay to source the assets from our partners. These costs are variable and correlated to network volume, which also will vary by product. In terms of operating expenses, excluding stock-based compensation, we've been investing in areas such as headcount, AI development, public company readiness, and for bank partnerships. To give you a sense of this investment, from the beginning of 2021, we've grown our headcount from approximately 200 to over 800 strong today. Over time, we expect to achieve operating leverage as our business scales. Lastly, there are a number of miscellaneous items that get you to our adjusted net income of $8 million year-to-date and adjusted EBITDA of $9 million. Now I'll discuss our financial results in the second quarter in more depth. Compared to the second quarter of 2021, we grew network volume by 79% and revenue from fees by 77%. We delivered adjusted EBITDA of $5 million and adjusted net income of $3 million. Both metrics exclude stock-based compensation and non-recurring expenses. Sequentially versus the first quarter of 2022, we grew network volume by 18% and total revenue by 6%. Our gap net loss in the second quarter was $146 million. However, this was impacted by $146 million of share-based compensation outsized this quarter as a result of performance-based awards vesting as a result of going public. Our historical run rate on share-based compensation has been approximately $15 to $20 million a quarter. I'll now turn to our outlook for full year 2022. It is clear that our business has momentum, even in the challenging macro conditions we are seeing today. We've been able to raise capital, grow application flow, and drive both volume and revenue growth. We are positioning the business for the long run and see tremendous opportunity ahead. That will likely mean increased discretionary investments in the near term for opportunities like partnerships with large U.S. banks. We also want to be realistic about the environment we're currently operating in. All companies are dealing with a highly volatile macro backdrop. While we have built a resilient business model with diverse sources of revenue and funding, our outlook reflects the ongoing uncertainty in the market today. Higher interest rates and spreads are affecting asset prices in almost all markets, raising the cost of capital and therefore impacting the economics earned on these assets. We expect this to normalize over time as market conditions stabilize. With this context in mind, our outlook for fiscal year 2022 is as follows. We expect network volume to range between $7.2 and $7.8 billion. We expect total revenue and other income of between $700 to $725 million. And our outlook for adjusted EBITDA is negative $20 million to positive $10 million for the year. As we look out over the next three to five years, our ambition is to reach over $25 billion in network volume by capitalizing on the opportunities Gal spoke to earlier. We believe at this level of scale, we can reach an adjusted EBITDA margin of approximately 20%. Let me provide a little more detail on the path to achieve this operating leverage. On $25 billion of volume, if we assume a stable take rate of approximately 9%, And with production costs running at approximately 5% of our network volume, that can translate into $1 billion of revenue less our production costs. While our operating expenses are currently at an elevated level as a percentage of revenue, we believe we can reach a steady state of 20% of operating costs to total revenue. To be clear, this is our goal and what we are working towards with our leadership team and focus of our 800 colleagues. Of course, these assumptions are subject to prevailing market conditions, but we believe our business has significant potential to scale by capturing the growth opportunities ahead of us. With that, let me hand it back to the operator for Q&A, after which Gal will make a few brief closing remarks. Operator?

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to register a question at this time. The first question today is coming from Rania Kumar of UBS. Please go ahead.

Good morning. Thanks for taking my question. Could you just walk us through the puts and takes of your 22 guidance range? What's to happen for you to get to the high end of the range versus the low end?

Sure, and thanks, Marina, for the question.

What I'd start by saying is that our business is continuing to grow, and just to put it in context, our outlook, even if you just think about the lower end of the range, reflects roughly 50% both in volumes and revenues. The important thing to remember is that if you think about our role in the ecosystem, it's really to help our partners grow their business, and investors to earn returns both in low and high cost of capital environments. And so to do that, that means that we're going to be investing and we'll continue to invest in our platform over the long term. So as we said in the presentation for Begaya, we look at growth in terms of application flow. When it comes to EBITDA, to your question of puts and takes, really in the very short term, it comes back to how we monetize that flow That's going to be driven largely by macro conditions, which are things such as interest rates, the state of the capital markets. And that's reflected in the range, and that's going to drive the difference between the top side and the low side in our outlook. The most, I think, important thing that I just want to reemphasize is that the focus for us isn't as much on the optimizing one quarter or the second quarter of EBITDA. It's really around the medium term, which comes back to executing on the vision for $25 billion in network volume and 20% of adjusted EBITDA margin percentage.

Great. That's very helpful detail. And as a follow-up, could you walk us through the key areas of investments for 2022 and beyond? Thank you.

Yes, definitely. It's gone here, so I'm going to take that question. Thank you so much for the question. I think from a strategy perspective, as we showed in the presentation and as the company is focusing on growing, we are doubling down on onboarding large banks in the U.S. When we see about the potential of our volume and growth to continue to increase in that rate, we are tapping into a new set of type of partners, which are mainly the banks in the U.S. So you can imagine that moving from a so-called fintech product to a bank-type AAA-graded product requires a lot of investment, especially in the infrastructure. You can think about changes for the commercial side, regulatory and compliance enhancement, legal, and so many other things that when you're working with banks in the U.S., you need to get to ex-par. Now, when you build these things, you are designing for the outcome of a one bank as much as this is the outcome for attendance. So as you know, we mentioned about the onboarding of a $100 billion bank on a platform. And in order to do that, we invested a lot in critical senior hires, such as Leslie Gillen, which was the chief marketing officer of JPMorgan Chase. Ashok Vasani, that is the president, and these folks have started already to build teams and will continue to do so as we're scaling. So we're already seeing the results of that with the banks that Echelle is onboarded, but more important than that, the level of investment for that will chime down as we think about onboarding 10-plus partners that will take over the next few quarters. And as we see that coming on, we will see the operational leverage kick in, and then we'll be in a position where all the infrastructure that we build are actually being creative to our revenues and growth and definitely to the epitaph. So that's mainly the point of the investment from that perspective.

Thank you. Thank you.

The next question is coming from John Davis, excuse me, of Raymond James. Please go ahead.

Hey, good morning, guys. Gail, maybe just to start, talk a little bit about your funding diversification. Obviously, we're kind of in a fickle macro environment. So talk about, you know, obviously you have one large partner, but where you are in kind of adding funding partners and just any other thoughts on funding costs in this environment. How much have they gone up? Do you expect them to go up further? Any color there would be helpful.

Definitely, John, and thank you so much for the question. I think from the diversification of funding perspective, obviously, as you know, we have a very strong access to both the public and private capital markets. So we are a recurring issuer on the EVF side, and we have privately managed funds that are creating a very unique opportunity for our investors to be able to tap in in these days to the market and the market cycles. When we're thinking about our diversification of funding, most of our investor base are consisted by sophisticated long-term institutional investors, including sovereign wealth funds, pension funds, insurance companies, et cetera. So you can imagine that these type of investors, it's a lot of relationship building and understanding of the bits and bytes of the platform, and therefore investing over cycle. From the perspective of how much we kind of like enlarge in that pool base. So we have seen our investor base across the ABS and the project managed funds grow very much over time. It's coming in different forms. It's coming in one form that our platforms and funds are becoming more kind of like known in the market. And then there is a creative understanding of like what is these type of products and how you get exposed to them. And the other piece of that is as we are moving for more markets, we are opening our ability to raise capital for more investments. And as you imagine, more investors, they are becoming more diverse and therefore more stability. So the movement from PL, as we shared in the presentation, they will move from being a 90% plus of our products just a year or two years ago. Now it's becoming something like two-thirds. So by the nature of that part, we are creating much more diversification as such. I think the last part to mention in that question is the sign of trust that we have with our relations and with our investors. We have issued today 28 ABS transactions. Most of them are repeatable investors that are coming and participating as a programmatic participant over time. And just in July, a few weeks ago, we closed the $1 billion ABS, as you mentioned, in not very easy conditions. which actually been kind of like sized up for a $400 million due to demand. So I think that's the main issue. And in terms of cost of funding, I think the main driver for that is actually coming from the environment changes by the Fed. So we don't see major differences from that perspective. But as you can expect, when the world is going for cost of funding higher for everyone, so yeah, definitely Pagaya and the investors of Pagaya are in that period. We are thinking about that as a transition period. between highs and lows. And once we are kind of like settling in and things are becoming much more kind of like prediction of outlook of what's going to be on this table and like ability to understand where things are going, that should be like kind of like more ability to predict and to have a better outcome than that.

Okay. No, that's super helpful. And then just as a quick follow-up there, if I look at the take rate implied in the second half guide, it's closer to 9% versus almost 10% in the first half. Is that seasonality? I would assume that that would go higher as kind of rates go up. But maybe just talk about what impacts your kind of top-line yield or take rate and why you kind of are implying that down in the second half of the year.

Absolutely. Mike, I'll take that one.

I wouldn't tie it back to absolute level of rates. That's not a major factor for us in terms of our take rate. We're earning fees on our network volume as opposed to pure interest rates play. And so when you think about it, our range for take rate historically has been between 8% and 10%. That's really going to be driven more so by a function of product mix. Gal mentioned our expansion from personal loans into other products, and each one, each product and each channel that we operate in will have a slightly different take rate. So you can look at the range between 8% and 10% as a good, healthy range for us going forward and really more driven by that product mix as opposed to any absolute level of interest rates. Now, the one other follow-on I will mention is that right now, our revenues from fees are entirely driven more from our financing vehicle side. Over time, we definitely see an opportunity as we become more and more entrenched in our partner's success. We definitely see an opportunity to expand and partner with our partners to participate in some of the economics on that side. That's not baked in to our current numbers or our forecast right now, but definitely something that we look forward to as an opportunity on the horizon.

Okay, and then one last question for me. Just, Gal, on the new partner side, obviously you signed up a large new bank for autos. I would assume this macro environment makes a sales pitch a little bit easier. More people are taking your calls. Obviously, they're wanting to say yes to more people, even if they tighten their own underwriting. They're just curious on the environment and the conversations you're having with new potential partners, whether it's banks or fintechs. This environment is actually a catalyst for more signups and more partnerships. Thanks, guys.

Yes, definitely. And that's definitely a good point. I would not say any sales call is easy. It's important to show the value over time. But definitely, we are opening the playbook that we saw in COVID. And when I would say market conditions are a bit tighter, people are seeing more clearly how we are becoming and help exactly as you say, when people are actually closing their credit boxes. So I think that the phone call is definitely becoming more as an inbound, if you will. But in the same time, there is a lot of work behind of how you are building that over time. And I think the most important piece from our perspective is the stickiness of that thereafter. So like what we have experienced post COVID and something was reflected in our presentation is that like when partners are signing up and we are doing all the work to get them connected, et cetera, that's becoming a kind of like a major way for them to get liquidity even after the markets are becoming stable. So that's a great kind of like ability to get into organization and to help them and to make sure we are really position to make sure they are having a more stability and liquidity of funding sources. So definitely trying to help as much as possible and seeing in our eyes the partners as the major part. And you can see that really in page 16 in the presentation to the left-hand side. you will be able to see the penetration with a specific partner before COVID, after COVID, and then how it's staying after as people are seeing the value add, which is becoming. I want to add a last point to that. The interesting part that we have noticed is after the dust has settled and things are becoming more stable, then there are more kind of like cross-sell and partnerships that are being done on top of that. So when these type of partners are thinking about launching a new product or more products, they are automatically going to Pagaya because we have already the trust and the relationship, which is the most important thing. So definitely a way for us to get more market penetration and to work with more amazing partners as a lift and a leverage, and definitely something that we are looking at as an opportunity to capture.

Okay, thanks for all the cover, guys. Appreciate it.

Thank you. The next question is coming from Joseph Buffy of Canaccord. Please go ahead.

Hey, guys, good morning, and thanks for taking my call, and also thanks for explaining your business model in a little bit more in-depth. Just circling back on the funding side and the lending side a little bit, I was wondering, I know that probably some of the other categories are growing faster than personal loans right now. Just want to get an idea, is that still a category you're growing, or is most of the growth coming from other categories? And then a quick follow-up.

Thank you, Joe. I appreciate that question.

We're growing across all of our products. Our personal loan product is the one that I would say is the most mature, just given it's where we started the business a few years ago. And that does continue to grow. We definitely see opportunities to continue to expand, but the newer products are growing, as you can imagine, at an even faster rate, just given they've started a little bit later over the course of the last few years. We've had a history of expanding out by one product in each year. And so when you think about our ability to penetrate on auto and cars and most recently into the single-family residential, all of those are strong double-digit growth in the second quarter versus the first quarter. And again, that's not to say that personal loans didn't grow. It actually has continued to grow every quarter as well. But those newer products are growing starting from a lower starting point at an even faster pace.

Got it. And then, you know, when you look at that growth, I mean, there's clearly – Two things that underpin it, it's, you know, the lending partners you have and then the actual financing demand for those different categories. Just wondering, you know, on that latter point, if you are seeing any differences in demand, you know, from the actual investors on different categories of loans or is it relatively broad based there in what they're looking for?

Sure, Joe. It's Gaz here. So I think from that perspective, I think we see a strong demand across the board. The kind of like the funding model that Pagaya has is really about, especially in these days, finding ways where we are creating much more opportunities for our investor base. So as we are raising the capital, we're actually approaching investors with the ability to deploy capital in the new market environment. which is helping to get an excess of return for them. So we see a very strong demand across the different products and not something that we see one versus the other. And part of that is the fact that we have different products is giving us the ability to play in between them and to be able to make sure that we are capturing the opportunity across the spectrum and not just in the single product that we have. So we see the fact that we have multiple products, as definitely a strong point, especially in these days. And when we're speaking with investors and they are thinking about expanding to other places and looking for more opportunities, that's becoming an easy conversation when you have that matured type of programs. And again, the one example that I shared already but still important to mention is the July upsize of a transaction for $400 million to a billion, which you can imagine is correlated to investor demand.

Sure, that's great. Thanks, Kyle. And then just one quick follow-up just for my benefit. I was just wondering if you could give us a rough idea of lead time between when you bring on a new lending partner and how long that integration could take before they perhaps go live. And then when they go live, how does your product or service offering kind of expand internally over time there. Thanks a lot.

Sure. So I think first of all, it's important to mention that there is no one box fits it all. So there are different types of partners. There are a little bit more legacy partners versus a newer partner. There are different types of products within that. So in terms of like process, like there is the connectivity, the discussion process, They're going over due diligence on both sides and then doing a seamless kind of integration that is moving into the ramp up, the wrap up from that perspective. So when you're looking on that, I think that, like, it can vary from, like, as soon as a quarter for a new program with an existing partner and up until nine months of a very large type of a partner that is deciding to take a full program up to it. So the real answer is it varies, and it's anywhere from a quarter to three quarters in that discussion.

Great. Thank you.

Thank you. The next question is coming from Rob Wildhack of Autonomous Research. Please go ahead. Rob, please make sure your phone's not on mute. Rob, can you please go ahead with your question? You're breaking up a little, sir. We'll move on to the next question, which is coming from Reggie Smith of JP Morgan.

Please go ahead.

Hey, good morning, guys. Thanks for taking the question. I wanted to, I guess, dig into the funding a little bit more. I know a lot of questions have been asked. I know you mentioned, I believe, 28 ABS notes you guys have done, I think, since inception. Can you help us understand kind of what's the mix of funding? Is it ABS and then there's also like kind of whole loan sales? Or what's the alternative to ABS? Like what's the general ratio of kind of funding there? And I got a few follow-ups. Thank you.

Sure, Reggie. It's Mike. Thanks for the question.

Right now, when you think about their funding diversification, it's a wide range of investors across the different ABS. So one thing just to stress is that they're not all created equal. And so those 28 transactions are across different products with different investor bases and different structures. Outside of ABS, we also have privately managed funds, and that creates an alternative funding channel than the ABS markets. When we think about the medium-term outlook and getting to $25 billion of volume, certainly what we're positioning for is going to be there's a number of other financial products that investors are looking for that we can actually expand into. And that's what we're really driving towards as we think about the future growth potential. We expect and are focused on expanding out our channels from what we have today, which is a really good base to start from. But as our volume grows, we're going to look to expand out to alternative channels as well. One thing I would add to that, I would just add that right now, when you think about our investor base, we are dealing with sophisticated, long-term institutional investors. And so that actually helps when you think about the expansion of different products. The investors that we talk to that are investing in Plagueye today have the capacity and the ability to expand out through other different forms of investments as well. And so it leads very naturally to our progression in that space as well.

Understood. And it seems, and I guess correct me if I'm wrong, it seems like you guys have to balance kind of two sides. On one side, you've got applications, and the other side, you're trying to fund these loans. As you sit kind of today, where do you feel you may be leaning or overweighted on either? Are you more application constrained? Are you funding constrained today? And how has that evolved over time?

Definitely, Reggie. This is Galvian. So I think when we are thinking about the growth and the growth of the platform, we are really thinking about only one thing, which is application growth. Application growth is something that we are getting as we onboard more partners and as we expand more partnerships with the partners that we have. And this is really the one thing that we are optimizing for over the long run. and trying to make sure and working very diligently on increasing that over the lifetime of the company. Now, to that respect, as you mentioned, there are different times and situations where you will lean more or will lean less into the production of that flow. We call it the monetization of that flow to be able to kind of like bring that to investors and other places. So I would say in a higher cost of funding at TEFA, you can imagine that we are taking a much more application flow on the HADL side, but the production is becoming So we are thinking about that as the change and the shift that's happening between macro conditions. And again, something that is very much described in page 17 in the presentation that we're trying to illustrate with actually the data behind. And as you think about multi-conditions are easing, you can expect that to lean more toward the other side and to kind of like monetize all of that growth from that perspective to be over the cycle. So that's really the system, the ecosystem, and how we think about it and what we are driving towards versus the short-term monetization versus long-term monetization.

Got it. If I can sneak one last question in. You had a slide that showed the link between trends for your book, and I guess it compared it to a benchmark. There was another one that looked at different cohorts. And I can certainly appreciate the, you know, what appears to be outperformance relative to the October 21 vintage and even the December 21 vintage of those personal loans. My question is, is there an optimal level of kind of delinquencies or charge-offs that you guys are driving to? Because you can, you know, obviously you can lower delinquencies, you can lower charge-offs by tightening the credit box. But is there something that you guys are optimizing or driving to? Because a low delinquency rate isn't necessarily great.

Yeah, definitely. I think just for that slide, I think the point of that slide was to show that our B2B2C platform and the vantage point that we have allow us to start and doing some changes in November last year. This is a very meaningful statement because what we have seen has already started like many months back. And as a company, as an organization, we spot that early on and adapt to it quickly. So I think the point of that slide was to show when we saw it and how we reacted to that, both in terms of trend and point in time, and the same time in the relative value basis that you are speaking on. Now in terms of what we are optimizing for, we are optimizing for a little bit different things. We are optimizing for investor return from that perspective. So we are looking on different type of losses versus different type of times versus different times of capital. So there is a value chain that we are trying to solve to make sure that all of that is sustainable over the long period of time and becoming accretive to our investors as they are thinking about investing with Pagaya and taking opportunities. And that's really the thing we're solving for the long period of time, that's creating the stickiness and the stability of the funding.

That makes sense. Thank you for taking the question.

Thank you. The next question is coming from Blair Abernathy of Rosenblatt Securities. Please go ahead.

Thanks very much. Just wanted to follow up first on the question of onboarding. I wonder if you could give us a sense of the timing and cost of onboarding customers that you saw sort of in the last year or so. versus where you think you can get to over the next two to three years? What sort of opportunities do you have to streamline and speed up the onboarding process of partners?

Got it. It's Mike. I'll take that one.

For onboarding new partners, think about it as we've got an upfront cost, which is largely around getting ourselves ready, especially for large bank partners in the U.S. And so that investment comes down to the people that are required to handle large banks, all the people Gal mentioned in compliance, legal and regulatory. Now, that's all upfront investment. And certainly what you're seeing now is us making those investments ahead of the revenues that will come in the future years once those partners are onboarded and once they scale. We've grown our headcount overall just to give you a sense to be able to handle this growth in new partners from roughly 200 a little over a year ago to 800 today. So a big chunk of that is that upfront investment that's, in our minds, ahead of the curve for when revenues will then start becoming created. Most of our revenues in this year are coming through existing partners. So really the goal for us is to invest ahead of that curve. That's what the investment we've made. We'll continue to make those investments as we see our pipeline strengthen. And that will pay off as we think about revenues and EBITDA potential and operating leverage in future years.

Okay, great. Thank you. And then just on the R&D side, besides onboarding customers? What's the focus on R&D? What should we expect from our product innovation programs over the next couple of years?

Definitely.

I think when we are looking about investment in R&D and as we think about the growth of our platform, there are two main topics that we are doubling down. The first and foremost, and this is rightfully for Folpagaia since day one, is because we are dealing with a lot of like the decisioning of that type of a platform. So there is a lot of investment on the research side. We have one of the biggest research teams in the financial industry with over 260 data scientists that are working day in, day out to figure out what type of trends are happening there and how we can improve our models and our outcomes, both to create a better outcome for our investors and to be able to increase our take rate to help our partners. So that's the main focus. And then we think about building that and becoming even a larger kind of organization. You can imagine that each and every type of product will have its own dedication to team and research, et cetera. So as we build our B2B2C platform, like you should expect to have more of a research double down from that perspective as we involve more products on scale. The other part of that is I think the institutionalization of all of that processes. So if you think about a platform that knows to handle with kind of like 20 or 40 different partners, it's very different than one that knows to do it over a number of scale of partners with think about it as a different type of partner that require a little more embedded type of solution such as the banks. So think about the second piece as like the cost of connectivity. So we are creating a platform and trying to connect like the major lenders in the U.S. to that platform. So the second part of it is like whatever we need to do to make sure that connectivity is going to stay strong and healthy over time.

Great. Thank you. And one last quick one. Just, I mean, obviously you've been very U.S. centric for some of your major customers now. What's the international picture look like for Pagaya?

So as we think about the U.S., there's such a big opportunity out there here and so much knowledge that we already generated in that market. We'll speak here about a few trillions of dollars versus a different market. And I think for the time being and as management sees that, we are going to focus and stay focused on execution in the U.S. Not to say that global expansion is not something that could potentially be one day as an addition growth engine. But as we see now, there is enough kind of like meat on the bone or low-hanging fruit to be able to capture in the U.S. as we think about, you know, the medium-term kind of like horizon.

That's great. That's great. Thanks very much.

Thank you. Ladies and gentlemen, unfortunately, we have run out of time for questions today. I would like to turn the floor back over to Mr. Krubiner for closing comments.

So to close, I want to reiterate how honored I am to lead a company, along with my co-founders of Italian Yav and the rest of our leadership team, into the future that we think is very bright. We have an opportunity to transform the financial ecosystem and change lives. It's incredibly humbling because we have a lot of work to do. I'm confident in the strengths of our team and our business model and believe we are well positioned to continue to drive growth in the future. Thank you so much, everyone, for joining us today for our first learning call, and I'm looking forward to partnering with all of you as we continue on this journey of Pagaya Public Company.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.