Pagaya Technologies Ltd.

Good day and welcome to Pagaya's third quarter 2023 earnings call. Today's call is being recorded. At this time, I would like to turn the call over to Jen C. John, Head of Investor Relations. Please go ahead.

Thank you and welcome to Pagaya's third quarter 2023 earnings conference call. Joining me today to talk about our business and results are Gal Kruvener, Chief Executive Officer of Pagaya, and Michael Kurlander, our Chief Financial Officer. 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.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve certain 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 filings and in our Form 20F filed on April 20, 2023, 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, including adjusted EBITDA, adjusted net income, and fee revenue less production costs, or FRLPC, will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release and other materials, which are posted on our investor relations website. We encourage you to review the shareholder letter, which was furnished with SEC on Form 6K today, for detailed commentary on our business and performance. in conjunction with accompanying earnings supplement and a press release. With that, let me turn the call over to Gal.

Thank you, Jensic. I would like to start off by saying that we are proud to be an Israeli-founded company, and our hearts are with all those affected by the terrorist attacks that have occurred in Israel. We have taken several measures, first, to ensure the continued safety and well-being of our team, and secondly, to ensure business continuity. we are operating without any disruption to our business. And I continue to be inspired by the resilience of our people. And more than that, I'm confident they will continue to deliver for our employees, partners, and investors. Now, let's move on into the progress we achieved this quarter. The past few months were again changing for Pagaya. First, the momentum in our business is driving continued strong financial performance. In the third quarter, we once again exceeded the high end of our guidance across all of our KPIs, delivered record network volume, total revenue, and adjusted EBITDA. We surpassed $2 billion in network volume for the third time this quarter. Our recently integrated partnership with NI Financial and Klarna are driving meaningful incremental volume. Our product is now integrated with allied network of dealerships in 41 out of 50 states. And our POS application volume doubled sequentially from second quarter 23 and 6x compared to the first quarter of 23. Total revenue grew 4% year over year to $212 million. Fee revenue less production cost grew 29% to 3.4% of network volume as we continue to drive attractive unit economics. We remain focused on profitable growth. Adjusted EBITDA grew to a record $28 million, hitting a major milestone of over $100 million on an annual run rate basis. As a result of this strong momentum, we are raising our full-year for 2023 outlook across all metrics. Mike will speak more on this in a few minutes. Our performance this quarter reflects the strength of our value proposition in the consumer finance ecosystem. By using our products, lenders get growth in origination and revenues without the associated balance sheet risk. Investors, on the other hand, get access to billions of dollars of continuous flow of assets generated by our AI credit decision technology. The demand for our product has enabled us to outperform peers and continue to deliver profitable growth. Our business is also benefiting from two structural macro tailwinds. First, banks are tightening their lending standards, pulling back on new originations as they face tight liquidity conditions and increasing regulation. Additionally, private credit is increasingly stepping in the excess capital to deploy into additional banking assets. Given Pagaya's position in the ecosystem, we can offer an attractive solution to both lending institutions and asset managers. If these trends continue, all else being equal, we expect they will be supportive to our growth in the near term. Moving on to talk about our business achievements in the quarter. we achieved a step change in our network with the addition of several transformational partnerships. We have added three new lenders to our network, in line with our ambition to add two to four lending partners each year. I am pleased to announce that we have integrated our personal loan product with a top five U.S. consumer bank. This represents our largest lending partnership to date by asset size and an incredible achievement by our team. From initial discussion to integration, we collaborated closely with a partner, working with multiple bank committees, testing and validating our models, and ensuring rigid compliance with all required regulatory and legal frameworks applicable to a large consumer bank. I'm fully confident we have a bank-ready product that now can be effective and successfully rolled out to other large enterprise customers. In OTO, we integrated our product into the loan origination system of two new OTO lenders. First, Westlake Financial, the country's leading subprime OTO lender with a network of over 50,000 franchise and independent dealerships. The second, our first OEM, OTO Captive Finance Company, ranked number four in the U.S. by new vehicle sales. Our auto product is now integrated with over 10 landowners, giving us broad geographic coverage across thousands of dealerships. These new partnerships will increase our access to independent dealerships, as well as give us a foothold in both used and new vehicle sales. Overall, we expect our integration with LA Financial Westlake and this new captive will significantly expand our auto volume over the next few years, a critical growth driver as we march towards our $25 billion of network volume ambition. Finally, we announced the integration of our rental product with three major commercial partnerships, Boulevard Residential, My Community Homes, a KKR-backed company, and Rhythm Capital Corp., These leading real estate investment firms are now utilizing Darwin's premier end-to-end offering for the management of the homes in their respective portfolios. These partnerships have significantly increased the size of Darwin platform, which will now have approximately 13,000 homes under management, making Darwin a top 10 SFR operator in the U.S. While our rental B2B2C platform is still in its early stages, these partnerships reflect the future potential of our rental product, and we are excited about the massive market opportunity ahead of us with the unique tech capabilities that Darwin has. Looking ahead, these wins reinforce our confidence in our medium-term ambition to reach $25 billion in network volume, $1 billion in FRLPC, and $500 million in adjusted EBITDA annually. To achieve these targets, we are executing three key strategic initiatives. The first, expanding our integration to more lenders to increase application volume. The second, structurally improving our conversion rate of applications with tech and AI model enhancement. And the third, delivering high quality and efficient financial products at scale to investors. Our growth strategy is outlined in significantly more detail in our shareholder letter, but I will spend a few minutes discussing it at a high level here. Starting with extension of our product, we are focused on deepening our product integration with existing lending partners while also integrating new lenders. To put it into context, The lenders we added in 2022 are expected to deliver approximately $1 billion in network volume this year. The recent addition of three large strategic partnerships, Westlake, the top five bank, and the auto captive, have the potential to deliver significant incremental volume over the next year to Pagaya. This is the third year in a row we have added at least two partners to our network. strengthening our ability to convert large, meaningful partners in our pipeline in the future. Looking at our pipeline and consistent with our track record, we are confident we can integrate two to four new partners annually. We are in discussion with 80% of the top 25 banks in the country by asset size. We have more than 10 opportunities across banks and auto captives that we consider deep funnel. with the latest stage opportunities expected to deliver billions in network volume annually once fully ramped. We can also drive growth by increasing our conversion rate of applications into loans by continuously enhancing our models and technology as we see more data over time. We recently launched new improvements in both our personal loan and auto loan models that we believe will drive improved predictive power which will drive higher asset returns and a higher conversion rate. Driving our conversion rate higher from its current sub-1% level can mean a significant boost to network volume. Every 10 basis points increase in our conversion rate on our existing application flow translates to an additional of $800 million in network volume. On the other side of our network, Our growing data advantage and proprietary technology enable us to offer institutional investors high-quality financial products. With a focus on innovative structuring and issuing at increased scale, we can lower the cost of capital, making our product even more attractive to investors. This is reflected by the consistent growth of our funding network. We issued $1.8 billion across four ABS deals in the third quarter, amounting to $5 billion issued year to date. We were once again the top personal loan ABS issuer in the U.S. this quarter. As we grew in auto issuance, we are tapping into the rated auto market, which also helps reduce the cost of capital. And our investor base is growing and diversifying. We attracted six new investors since August to the platform for a total of 93 unique investment firms, including a top-tier whole life insurance company. The strength of our product offering to lenders and investors and the wealth of data flowing through our network set us up for future revenue diversification flow by monetizing our product in new, innovative ways. We can offer ancillary services, such as the recent launch of our servicing optimization product, which improves collection for our lending partners. A product that has the potential to add millions of dollars of incremental profit every year. In summary, we have achieved a step function change in Pagaya's growth trajectory. We delivered a record financial performance this quarter, integrated our product with multiple transformational partnerships, added new investors in our funding network, and launched new monetization opportunities enabled by our connectivity. We are better positioned than ever before to partner with financial institutions across the consumer finance ecosystem to deliver more opportunities for U.S. consumers. With that, let me pass it to Mike to discuss our financial results in more detail.