Pagaya Technologies Ltd.

Good day and welcome to the Pagaya First Quarter 2023 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Jancy John, Head of Investor Relations. Please go ahead.

Thank you and welcome to Pagaya's First Quarter 2023 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krugener, Chief Executive Officer of Pagaya, and Michael Karlander, 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 Form 20-F, filed on April 20, 2023, as furnished 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. This quarter was another proof point of our ability to execute through volatility and progress on our long-term strategy. I will start with a performance update then an overview of our plan to achieve our medium-term growth ambition, before I pass it over to Mike to discuss this quarter's financial and outlook for the remainder of the year. Let me take you through the financial highlights for the quarter. We beat guidance on all of our key metrics this quarter, network volume, revenue, and adjusted EBITDA. We returned to profitability on adjusted EBITDA basis ahead of our outlook. and are increasing our adjusted EBITDA guidance for the full year, reflecting our focus on driving sustainable, profitable growth. Network volume in the quarter was $1.85 billion, 12% higher than last year. This drove total revenue and other income of $187 million, 9% higher than last year, and adjusted EBITDA of $2 million. As a reminder, we closed our acquisition of Darwin in January, an investment we made to take our SFR platform to the next level. If we exclude the impact of Darwin, adjusted EBITDA would have been approximately $5 million, a like-for-like improvement of $14 million sequentially versus the fourth quarter of 2022. Now I will discuss operational highlights that drove these results. On the partner side, 20% of our network volume came from partners and products that were onboarded in 2022. As our network grows, we see increased monetization opportunities with AI integration fees growing by 230 basis points from 5.5% to 7.8% of network volume. On the funding side, we were the top issuer of personal loan ABAs in the US in Q1, continuing that ranking from 2022. with over 30% share of market. We onboarded two major asset managers to our network and strengthened our relationship with some of our long-term funding investors, such as GAC. Our funding capabilities remain robust as our AI technology enables us to outperform the market. With these achievements in mind, we are confident we are well positioned for future growth. We remain focused on what we can control, although the timing and pace of our growth can be somewhat influenced by market conditions. Now, stepping back for a second, we want to talk about Pagaya's mission. Pagaya's mission is to empower our partners to deliver more financial opportunities to more people, more often. We do this by leveraging AI technology and data science. We partner with financial institutions like Ally, SoFi, and Klarna, who originate loans with our network. Institutional investors purchase these loans through our network too. Today, over 1 million U.S. consumers currently have active loans that were originated with the Pagaya technology. We have a unique business model that we believe is inherently less volatile than other comparable fintechs in consumer lending space. On slide 13 of our earning presentations, we compare Pagaya's volume and revenue versus a market benchmark. which shows that we have been able to deliver more consistent and stable performance over time. Looking ahead, our medium-term financial ambition is to reach $25 billion in network volume and $1 billion in fee revenues, less production costs, or FRLPC. We plan to do this by, one, bringing more value to existing partners, two, adding new partners, including large banks, and finally, by driving a 3% to 4% This brings us to what I believe is an inflection point in our company's journey. We already have the tools we need to reach our medium-term ambition. We have become meaningful contributors to the growth of some of our most mature partners. Looking at our top three personal loan partners, approximately 26% of their total origination volume are being created using our network. That compares to only 10% of their origination volumes in the first quarter of 2021. As our value grows, we see improving economics. AI integration fees, which are fees earned for the creation of assets on our network, are growing, helping to offset the impact of financial markets volatility. New partners and products, such as auto, are also growing rapidly. Application volume for our auto business grew by 51% year over year, supported by increasing application flow of the large bank we onboarded in 2022. We grew network volume for that partner by four times since its first quarter on our network, with significant runway to scale further in the near future. The combination of increasing scale of mature partners and the addition of new partners and products has resulted in substantial growth over the past few years. 2022 network volume was nearly 5x larger than network volume in 2020. We have significant runway for future growth with our network as it stands today. We show an illustration of this on slide 21 and 22. We believe we can reach our medium-term ambition of $25 billion of network volume and $1 billion of FRLPC with just the existing partners and products on our network. Let me dive into this a bit further. In 2022, we onboarded six new partners with an estimated combined annual origination volume of over $65 billion. We have already demonstrated that for some of our mature partners, we can drive growth equivalent to nearly 30% of the partner's total originations. If we assume that we eventually reach 30% of 2022 origination volume for just the six partners we onboarded last year, this is an additional $20 billion of network volume on top of the $7 billion we already delivered in 2022. Gives us a total of around $27 billion in annual network volume. That assumes zero growth from other partners on our network and zero new partners. While we will, of course, continue to drive growth from existing partners and adding new ones, we have the ability to reach our financial goals even without doing so. If we apply our target FRLPC margin of 3% to 4% to the $27 billion of network volume, that translates to nearly $1 billion of FRLPC. Now let me discuss... our focus on growing and diversifying our funding network. We offer institutional investors one-stop shop access to five different markets at scale with outperformance enabled by AI. We have raised over $16 billion in funding across all of our financial vehicles since 2020, and we have been able to do so consistently even in severe market dislocations. Our ABSDs are typically oversubscribed by two to three times, enabling us to become the top personal loan ABS issuer in the US, reaching this rank in just four years. As our auto business grows, we are increasing issuance to fund new partners' origination. We issued $1.1 billion in 2022, ramping up to nearly $800 billion in May 2023, year-to-date. our investor base is growing. Our order book for our ABS vehicles has around 80 unique investors and is becoming more diversified over time with a mix of large asset managers, sovereign wealth funds, hedge funds, and insurance companies. We have seen a significant step up over time in repeat investment from existing investors, as you can see on slide 30, speaking to the strength of our performance track record. As we announced last month, we extended our funding relationship with GHC through 2028. We also welcomed new top-tier institutional investors to our funding network. As we announced yesterday, we are partnering with Angelo Gordon, Varde Partners, and Atlas to provide funding for a multi-billion dollar credit union. We believe that growing investor demand is a reflection of our ability to consistently deliver asset outperforming with AI technology. While application volume from partners tend to grow over time as our network expands, our conversion rate is our level to optimize as a performance as macro conditions evolve. Backed by AI-driven insights, we have been exercising underwriting prudence in the current environment, reducing our approval rate by nearly 50%, as you can see on slide 32. As liquidity conditions will improve, we can dial the rate back up and increase network volume. In fact, if we applied our peak third quarter in 2021 conversion rate to full year 2022 application volume, network volume in 2022 would have been over 10 billion dollars doubled what it was in 2021 with the faster reaction time enabled by our ai our personal loan portfolio has consistently outperformed the market benchmark 30 days past due at month on book 3 for q4 2022 vintages are 55 percent lower than q4 2021 vintages which were some of the worst performing ventures market-wide. With recent vintages returning to Q1 2021 performance levels, we're comfortable with our target ROA range of 8% to 12% return. Before I turn things over to Mike, let me recap. I believe that our business is at inflection point. First, our network is expanding with significant runway ahead of us. As the network expands, our AI technology gets stronger. with more training data points and increased model accuracy. As our data model grows, we have an increasing ability to monetize our network. Increasing scale and monetization combined with a focus of operational efficiency give us an achievable path forward to delivering sustainable, profitable growth. Let me pass it over to Mike to discuss this as well as our 2023 outlook in more detail.