Pagaya Technologies Ltd.

Greetings and welcome to the Pagaya Q4 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jane C. John. Thank you. You may begin.

Thank you and welcome to Pagaya's fourth quarter and full year 2023 earnings conference call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya, Sanjeev Das, President, and Evangelos Peros, 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 involves 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, including our financial outlook for the first quarter and full year 2024. 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 EBITDA margin, adjusted net income, fee revenue less production costs, or FRLPC, FRLPC margin and core operating expenses will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available, to the extent available without unreasonable efforts 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 the SEC on Form 6K today, for detailed commentary on our business and performance in conjunction with our company earnings supplement and press release. With that, let me turn the call over to Gal.

Thanks, Jensi. Before I begin, I'm pleased to note that joining me today on our call is Evangelos Peros, or EP, our newly announced permanent CFO, and Sanjeev Das, who joined us a few months ago as our president. These two leaders have decades of experience in financial services and consumer lending between them. EP previously held senior roles in finance and investment banking at JPMorgan Chase, and most recently was a managing director and head of business planning and analytics at Apollo. He started at Pagaya about two years ago and has been instrumental in taking our company to a new level of profitability and disciplined financial execution. Sanjeev brings with him deep experience in consumer lending and capital markets, having served as the CEO of CP Mortgage Division and in senior roles at Morgan Stanley American Express and Bank of America, and most recently, the CEO of Caliber Home Loans. They will share today their perspectives on the opportunities ahead of Pagaya, which will inform their respective priorities in 2024 and beyond. I'm proud of the talent we have brought into this organization, and I'm confident that these two leaders will take our company to the next level. Moving on to discuss our results in 2023. 2023 was a record year in Pagaya's history. we far exceeded the target we set at the start of the year, with full-year network volume of $8.3 billion, total revenue of $812 million, and adjusted EBITDA of $82 million. We are delivering sustainable profitability with an improvement in adjusted EBITDA now for four quarters in a row, reaching an annualized run rate of over $135 million based on the fourth quarter. Network volume grew 33% in Q4, also growing from the past four consecutive quarters. We increased monetization of our lending networks, with our personal node Vertical now generating an average FRLPC of 5.5%, and some of our top partners generating FRLPC above 6%. We reported our second consecutive quarter of positive gap operating income and positive cash flow from operations. The integration of our 2023 cohort of lending partners is progressing well. Our product with U.S. Bank is already delivering a 2x activation rate compared to our personal loan product average. In auto, expansion with three leading national auto lenders gives us access to thousands of new dealerships across the US. And in SFR, Darwin, our tech-enabled property management platform, is now catering to some of the country's largest institutional clients, and we are on track to managing 13,000 homes on the platform by the first half of 2024. Our pre-funded model enabled us to effectively optimize for growth throughout 2023. We solidified our leadership as the number one personal loan ABS issuer in the country, issuing $6.6 billion across 15 deals and growing our investor branch by 31 new firms. We continued the momentum with the addition of 11 new investors in just January this year, reflecting continued strong demand for our financial product. By achieving a step change in our network in 2023, we believe 2024 will be a year of momentum. We aim to accelerate our growth as a product and partner-centric company. Since our inception in 2016, our vision was to use technology to enable the financial services industry to provide more America's customers with access to credit. After scaling our flagship product, our second stage re-evaluation program, we developed an enterprise-grade lending product that could meet the needs of the largest financial institutions in the country. This led to the onboarding of lenders like Ally Financial, Klarna, U.S. Bank, Westlake, a top five auto captive, and Exeter. Our integration with larger scale lenders is helping us understand how to be a true partner in achieving their growth objectives. The rays of integration with each of our partners can be utilized to cross-sell more products, expanding to new verticals, and broadening the reach into new customer segments. This will form the basis of our 2024 product and partner strategy. paving the path for Pagaya to become the trusted lending technology partner for the country's largest financial institutions as we march towards becoming a $25 billion network volume company. Our 2024 strategy consists of three key elements. Number one, expanding our product to new enterprise lenders. Number two, deepening existing partnerships and enhancing network monetization. And number three, building out the roadmap to expand our product ecosystem. First, we plan to expand our product to new large-scale enterprise lenders across markets. Last week, in collaboration with U.S. banks, we announced our exciting new partnership in our personal loan vertical. With a top five bank, we now have four enterprise-level lenders. including Ally Financial, SoFi, and a top five auto captive in our lending technology ecosystem. That means our flagship product not only meets the advanced technology needs of large lenders, but the rigid regulatory and compliance standards of the US consumer banks. Our recent conversations with other marquee lenders, both in and outside of our current pipeline, gives me confidence that our flagship product is in high demand. And we will be able to add more banks, autocaptives, and other large US lenders to our network in the near term. The addition of each enterprise lender means connecting to millions of new customers, the opportunity to extend across multiple products, and tens of millions of dollars to our bottom line once fully wrapped. Second, we will aim to deepen existing partnerships and enhance network monetization. By accelerating volume growth with our newer partners, we believe we can bring economics more in line with our mature partners, who are currently earning FRLPC above 5%. EPI will speak more to this in a moment. Third, and what excites me the most about Pagaya's future, is that we will build more products for the lenders in our ecosystem. Banks are in a race to transform the customer experience as well as their internal systems with technology. Our experience partnering with the country's leading fintechs over the last few years means that we are uniquely positioned to help banks connect with their customers through online channels, bringing them one step closer to their customers. Examples of products that are in high demand for banks are point-of-sale solutions and online prequalification marketing products that are delivered in-app and rewards the partner existing customers with additional credit opportunities on a push basis. These examples are just scratching the surface of what our technology, product infrastructure, and funding capabilities can achieve. As we expand our product ecosystem, Pagaya is well positioned to become the country's go-to lending technology partner. The success of our 2024 growth plan will rely on the disciplined and balanced approach to volume growth, profitability, and capital allocation as we aim to move from delivering positive cash flow from operating activities to total net cash flow positive by early 2025.