Pagaya Technologies Ltd.

Good day and welcome to the Pagaya 1Q 2024 earnings conference call. All participants will be in the listen on emote. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Jency John, head of investor relations, please go ahead.

Thank you and welcome to Pagaya's first quarter 2024 earnings conference call. Joining me today to talk about our business and results are Gahl 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 .pagaya.com. Our remarks today will include forward looking statements that are based on our current expectations and forecast 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, including our financial outlook for the second quarter and full year of 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 10K filed on April 25, 2024, with the US 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 cost, or FRLPC, FRLPC margin and core operating expenses will be discussed on the call. Reconciliation to the most directly comparable GAAP financial measures are available, to the extent available without unreasonable efforts, and 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 8K today for detailed commentary on our business and performance in conjunction with accompanying earnings supplement and press release. With that, let me turn the call over to Gal.

Thanks, Jencie, and good morning, everyone. I'm actually very pleased with our first quarter results. At PGAIA, we are always striving to build a future where more Americans have access to the financial product they deserve through our technology. Our operating performance was strong. We grew fees with our lending partners and raised the record of $2 billion in funding. I'm very proud to announce that this month we added Elevon to our network, a top five global payment company and 18 new funding investors. Our network is now connected to 30 lenders and 116 funding partners. These accomplishments speak to the power of our business. But I'm especially proud of the progress we're making on our bank enterprise sales strategy. Let's go back to 2022 for one second. When we reported earnings for the very first time as a public company, I spoke about one of the key reasons why we decided to go public, which was to execute our enterprise bank sales strategy, partnering with the largest banks in the country. Now, fast forward two years, we now have three of the country's top banks using the PGAIA product and many more in the pipeline. And as I shared, we also added Elevon, US Bank's merchant services and payment solution

to

our POS vertical. Just one quarter after announcing the addition of US Bank to our personal loan vertical. That speaks to the value of our product. On the financial side, we once again delivered record breaking financial results, exceeding our outlook with network volume of $2.4 billion, total revenues of $245 million and adjusted EBITDA of $40 million. P revenue less production cost was up 84% year over year to $92 million. And our FRLPC margin expanded 109 basis points year over year to 3.8%. That's the highest level we have seen since the beginning of the rate high cycle in early 2022. This is obviously a clear proof that our strategy is working and that there are more room to increase our unit economics going forward. We delivered a fifth back to back quarter of improvement in adjusted EBITDA and positive quarterly gap operating income for a third time of $8 million. We reported our third quarter of positive and growing operating cash flow in a row, delivering $20 million of operating cash flow this quarter. We continue to manage credit performance very closely to deliver a strong and consistent asset return to our funding partners. We are seeing continued strong performance on our 2023 vintages with delinquencies trending at their lowest level since early 2021. Sanjiv will speak to this in more details in just a moment. As I look ahead, Pagaya is on a path to be connecting infrastructure between all major U.S. loan originating systems and public and private capital markets. Since we started back in 2016, our teams have been working day in and day out building the right infrastructure and capabilities to put us on this path. The connectivity we build thus far, 30 of the country's largest loan originations and over 100 of the country's largest funding providers is the foundation of the enterprise value of our business. We got here faster than I thought possible. Just three years ago, our business was connected to 10 lending partners and around 20 investors. As you can imagine, each new partner we onboard is adding to our institutional knowledge and capabilities to build better and smarter products for lenders across the country. As we build our product ecosystem, we're making our relationships with our lending partners stickier and increasing the overall pool of economics we can share in. And we are drawing new enterprise-grade lenders to the network, from top five consumer banks to the world's largest payment providers. Now let's talk strategy. From a strategy perspective, we're focused on two simple priorities. First, operating in a smart way to optimize for the current environment. And second, setting the stage for long-term growth. On near-term operational execution, our priorities are maximizing the profitability potential of the business and doing so with efficient use of our capital. We are seeing an increasing ability to earn more fees as we scale. Now on the capital side, our focus is to become more capital efficient as we grow. That means reducing how much upfront capital we use to fund new network volume. In order to achieve this, we are diversifying our funding and financing mechanisms to reduce net risk retention. We landed a $100 million secured borrowing facility in the quarter to finance our risk retention needs and a new whole-loan sale structure transaction that resulted in a low 1% net risk retention on that deal. We are in advanced conversations now with several counterparties to execute forward flow and whole-loan sale arrangements that could exceed $1 billion in total size. Based on our ongoing conversations with new funding and financing counterparties, we can meaningfully reduce net risk retention over the next few quarters. These initiatives are key to our strategy to reach cash flow positive in early 2025. EP will speak more to this in a moment. Thinking about our low-fill growth plan, we are not taking our foot off the gas in lending new enterprise-grade lending partners. That has been and remains our North Star for our future growth and company potential. That will ensure that we have the raising place to achieve our ambition to become the lending tech partner of choice for the largest banks in the country. Adding Elevon, as I mentioned, this quarter in our point of sale vertical is a great example and speaks to the power of enterprise sales with large banks. The ability to expand our product across multiple consumer divisions within a single enterprise. Let me spend a minute on point of sale. This is what we believe the next frontier of growth for PGAIA. Point of sale is a fastest growing consumer credit market, far outpacing the growth of total consumer credit. PGAIA is a leading white label point of sale solution provider in the market today, allowing payments businesses and banks to offer point of sale financing under their own brand. Now this is super important point. The value prop is very strong. Why give your customer away when you can partner with PGAIA? The power of that value prop is creating momentum for our future pipeline. And as such, we are in discussion with several large payment businesses that we aim to integrate over the next 12 to 18 months. Additionally, discussions with banks in our pipeline are increasingly turning to how PGAIA can help them break into point of sale. As we expand the offering to more industry leaders, we believe we can be a truly disruptive solution in the traditional buy now pay later universe. The top line opportunity is also huge. We believe our point of sale vertical has the potential to generate billions of dollars in incremental network volume to our business at scale. Now looking at our broader pipeline of prospective lending partners, we are currently in late stage discussion with six large lenders across our main verticals of personal loan, auto and point of sale. We are advancing our bank pipeline and expect to integrate three new point of sale providers or banks in our point of sale vertical over the next 12 to 18 months. On our existing lending partners, we continue to deepen our relationship with them, which is leading to better unit economics. Our 2023 cohort ramp up is tracking according to plan while we continue to prioritize our most profitable personal loan partnerships in a continuous constraint funding environment. These actions are adding to our bottom line. Our average personal loan FRLPC margin more than doubled over here to 6%. We are also in late stage talks to expand our personal low product with an existing bank partner. More to come on that later this year. With that, let me pass it over to Sinjeev to discuss our bank enterprise strategy and other operational updates.

Thanks, Carl. In Q1, we reorganized the operating business to increase capital efficiency and enhance our margin profile while still continuing to grow the business. We refocused the operations of Pagaya into two distinct areas, growth and monetization. Our growth team is focused on adding new partners across banks, fintechs, auto, captives, and POS lenders. And we put a new product organization in place that is designed to extend the Pagaya solution to our existing network of 30 partners. On the monetization side, the team is laser focused on Pagaya's economic disciplines of maximizing partner revenue opportunities and efficiently allocating capital to volumes that deliver the highest IRR. The benefit of this transformation is a highly disciplined approach in our core operating business, both in the growth of our network volume as well as enhanced economic returns through more efficient capital allocation. So the outcomes are clear. Because of this operating discipline, the benefits of higher margin are already evidenced in the growth of our FRLPC to the highest level in eight quarters. As a result of this more deliberate and disciplined capital allocation process towards partner flow, we not only deliver a higher FRLPC for Pagaya, but also a higher IRR for our funding investors. Additionally, in our credit underwriting discipline, we are making methodical flow decisions that are demonstrating an improvement in our performance. Based on MOB 30 DPD, it's fair to say that in both PL and auto, Pagaya is already outperforming the market. 30-day delinquencies for six, nine, and 12-month seasoned personal loans are at their lowest levels since April 2021, on average 30 to 40% lower than peak levels in 2021, and have been in continuous steady decline since then. Our most recent personal loan vintages from later 2023 are showing similar performance with early stage delinquencies at their lowest levels since January 2021. We continue to be encouraged by these trends, even as we are carefully monitoring consumer trends in the industry. Our vision is for Pagaya to be the lending technology partner of choice for banks and other large financial institutions. Despite being an -year-old company, we've already built up an extensive network of 30 lending partners of diverse size and scale. What we've learned from our enterprise bank partnerships is that there is a massive opportunity for Pagaya's product solution. Expanding from one bank consumer division to another consumer business in a bank is significantly easier as we demonstrate the value our product can create. As you would expect, this enterprise strategy significantly shortens our average sales and onboarding cycle. Landing Elevon at U.S. Bank is a great example of this. In just one quarter after announcing our U.S. Bank personal loans partnership, we are now in the process of offering our solution to Elevon, which is another business within U.S. Bank. Deployment of our product across the banking ecosystem also demonstrates the industrial strength of Pagaya's offering in the face of the highest regulatory and compliance standards that banks have to comply with. I take great pride in what the teams and leaders have achieved in just one quarter of focus on discipline and operational efficiency. I do believe there is more to be done. As we stay focused on this, I believe that we will have the opportunity to further reduce expenses and improve our operating efficiency, which will set us up to invest in the key strategic needs of the business. With that, let me hand it over to EP to discuss our financials in more depth.

Thank you, Sanjeev, and good morning, everyone. We delivered another record quarter across our key metrics. While we continue to operate in a higher for longer rate environment, we remain focused on profitability and capital efficiency. Network volumes reached the record $2.4 billion in the quarter, up 31% year over year, and up for the fifth consecutive quarter. Application flow grew year over year. Our conversion rate remains low as we optimize for our most profitable lending channels and returns for our funding partners. As a result, personal loans, our most scaled and highest margin product, continue to be the largest driver of network volume at 55%. Total revenue and other income grew 31% to a record $245 million compared to the same quarter in 2023, driven by a 35% increase in fee revenue. We continue to improve our unit economics. Fee revenues less production cost once again outpaced network volume growth by a significant margin. FRLPC grew by 84% to a record $92 million compared to network volume growth of 31%. Sequentially, this equated to FRLPC growth of $16 million, the largest quarterly increase in our history. Fees from our lending partnerships amounted to 63% of total FRLPC in the quarter compared to 43% in the prior year. This is a testament to the growing fee generating power of our business, making us increasingly less reliant on network volume expansion to drive bottom line growth. FRLPC margin increased 109 basis points year over year to 3.8%, the highest level since early 2022. Our personal loan business generated an average FRLPC margin of 6%, over 200 basis points above the blended average, and up 300 basis points compared to the same quarter last year. We grew fee rates across almost all of our personal loan lending partners in the quarter. Additionally, in the first few weeks of the second quarter, we further improved unit economics with some of our lending partners as we scale these channels. Higher FRLPC is translating directly to our bottom line. We delivered record adjusted EBITDA of $40 million with an adjusted EBITDA margin of 16.2%. We also delivered our third consecutive quarter of positive gap operating income, which was $8 million in the quarter. Core operating expenses, which exclude stock-based compensation, depreciation, and one-time expenses, increased $4 million year over year and $10 million sequentially. Record funding of $1.9 billion led to elevated ABS setup costs sequentially, which we expect to raise to fund network volume. Additionally, we're lapping a one-time compensation benefit from the fourth quarter. Net loss attributable to Pagaya was $21 million, an improvement of $14 million from the prior year. Share-based compensation expense amounted to $15 million. Higher interest expense of $15 million reflects the addition of our new term loan facility in the first quarter. Credit impairments of $19 million after accounting for non-controlling interest on our investments in loan and securities represented less than 3% of our portfolio. We reported our fourth consecutive quarter of positive adjusted net income of $13 million, an improvement of $24 million compared to the prior year. Shifting now to discuss our approach to capital efficiency. First, let me discuss our funding in the quarter. Overall funding markets are on a stronger footing than in 2023. We're seeing spreads in our 2024 deals reduced by 150 to 200 basis points compared to the peak in 2023. We took advantage of more favorable market conditions at the start of the year to raise $1.9 billion in funding, giving us excess dry powder of approximately $1 billion at the start of Q2. We added another 18 funding partners in the quarter. The tailwind of private credit deployment in consumer credit markets continues to work in our favor, with alternative asset managers being the majority of new funding partners we added in the quarter. Capital efficiency is a key enabler as we march toward our next financial milestone of reaching cash flow positive. Our strategy is focused on minimizing the amount of upfront capital we utilize to fund new network volume. We plan to do this in two ways. First, by diversifying our funding model with structures like whole loan sales or forward flow, and second, by executing more efficient ABS structures and financing arrangements. On diversifying our funding strategy, we executed a $50 million securitization in March that was uniquely structured to mimic a whole loan sale to investors. With this deal, we retained a net 1% vertical slice of the transaction. We have strong confidence we can scale programs like this one to reduce our upfront capital needs. We are in the midst of advanced discussions with several large asset managers to execute new forward flow and whole loan sale arrangements, which we believe could exceed $1 billion in total size. In our core ABS funding model, we're solving for two things. Lowering net risk retention and improving the quality of the assets retained. We're accomplishing this by taking a larger gross portion of our deals with a higher quality mix of both debt and equity securities. This enables more efficient financing, which results in single digit net risk retention. While we will dynamically adapt our funding strategy based on market conditions, our aim is to target an average net risk retention rate of 2% to 3% of network volume with a diverse mix of funding sources. This is a key driver of our strategy to get to positive net cash flow by early 2025. Moving on to our balance sheet and cash flow. As of March 31, our investments in loan and securities net of non-controlling interest was $804 million. As a result of excess funding issuance, we added gross new investments in loan and securities of $262 million offset by proceeds from securities of $36 million. We recorded net fair value adjustments, which reduced the carrying value of the portfolio of $40 million in the quarter. Cash and cash equivalents amounted to $310 million. We delivered our third consecutive quarter of positive cash flow from operating activities of $20 million driven by FRAPC growth and continued operating leverage. Combined cash flow from investing and financing activities was $68 million driven by our debt and equity capital raises in the quarter offset by excess funding issuance. We expect additional financing on these issuance to be executed in the second quarter. To close, our feed generating business continues to deliver. We see a significant opportunity for further FRLPC expansion as we bring our newer lending partners to the similar economics as our mature partners. We've demonstrated the operating leverage inherent in our B2B business and we see opportunities to be more cost efficient and plan to execute on some of those initiatives over the next few months. On the capital side, we're entering 2024 in a stronger position to execute on our funding strategy already proving our ability to do so in the first quarter even in a continued challenging market environment. As we expand our feed generation and drive capital efficiency, we remain confident we can reach cash flow positive next year. Now let me switch gears to our second quarter and 2024 financial outlook. Our key priorities this year are enhancing profitability and capital efficiency. Our guidance for the second quarter and the full year reflects a few key assumptions. First, we expect to continue to drive improved unit economics with our lending partnerships. We are focused on dynamically managing our portfolio as market conditions evolve to direct capital to our more profitable lending channels. Second, we expect to significantly scale our whole-loan sale funding program and execute other structures like forward flow along with raising additional secured borrowing to drive our net risk retention lower over the remainder of the year. In the second quarter of 2024, we expect network volume to range between $2.2 and $2.4 billion. Total revenue and other income to range between $235 and $245 million. We are reiterating our full year 2024 outlook. We expect network volume to range between $9 and $10.5 billion. Total revenue and other income to range between $925 million and $1.05 billion. And adjusted EBITDA to range between $150 and $190 million. With that, let me turn it back to the operator for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on a touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from John Hecht with Jeffries. Please go ahead.

Thank you very much for taking my questions and thanks for all the great detail on the call. You spent a lot of time on the capital efficiency going forward and you talked about forward flows, agreements and whole loan sales. I think you cited maybe a billion dollars in the pipeline and a 2% goal for the committed capital. I'm just wondering, are those billion dollar flow arrangements that are going to come into effect in this quarter or is this just developments over the course of the year? I'm just wondering about the cadence of how to think about this.

Hi, John. It's Guy here. Thank you very much for your question. I think the way to think about it is we are very focused on these points, as you mentioned, and I did mention that in my previous script. The main thing to consider is the following. Because we have such a vast majority of connections to the biggest asset managers in the world, we actually already have all the connectivity to the folks we are discussing with. So what we're just now focusing is to move these relationships that has been, as you can imagine, very strong and robust on the ABS to lead to a transaction that are both on the path through structures which are making us retain much smaller piece and both on the forward flow agreements that we're actually coming through in the very near future. So we are now in the midst of negotiation and we hope very, very soon we are going to land and to announce these as such.

Okay, great. Thanks very much. And then you had a lot of very big ads of partners on the lending front in the latter part of last year. I know there's an onboarding process and in a period of ramp that occurs. I'm wondering how those new partnerships are ramping relative expectations.

Hi, John. I'll take this. This is Sanjeev. A couple of things. One is, you know, we talked about the new partners that we've onboarded last quarter, but we also talked about the disciplined approach with which we sort of monitor the volumes. There are a couple of things, John, that I've looked at. One is I want to make sure that the quality of the flow is, before we sort of turn on the taps completely, that the quality of the flow is very carefully monitored. And that's what we are doing in the first quarter. We are, you know, watching for DTI, LTV, those kinds of things as we are taking on new partners and getting ready for the flow. What I'm seeing so far is that the quality is actually pretty good. And the other thing is with some of these auto partners, obviously, as you know, we go dealer by dealer by dealer, and so it takes a little bit of time to ramp it up. By the time we get to full potential, it's normally six to nine months in terms of steady state. And we want to do this the right and disciplined way. Take the case of different sector, US bank, for example, we are seeing enriched customer data coming in. So we sort of look at that to see how we can continue to improve the quality of the flow. So basing ourselves and before we ramp this up.

That's very helpful and appreciate the focus on the flow. Final question is, you know, the point of sale vertical, it's becoming increasingly important, you know, and a good driver of growth. I'm wondering, can you maybe just give us the characteristics of the typical loan, the structure of the typical loan in that channel relative to say the installment loan business?

Yeah, John, so let me start giving the high level of how we think about it and then Sanjay will get into specifics and details. So POS is definitely one of the frontiers for growth for us, mainly because today, literally, all of the banks are looking to have that as a product. And this is one of the areas where we have the strongest pipeline of partners and banks are calling us and asking the question of how can we help them accelerate their penetration into this market. So it's a market that the banks were a little bit left behind and they are now looking to keep up with the fintechs. And Pagaya, quite frankly, is maybe the only the best solution that allows them actually to give the customers and not give it to anyone else, but in the same time to offer that outcome. And for us and for the banks, it's very clear why to partner with someone that you need to give up on the customer when you can partner with Pagaya to be able to completely keep the customer. So that's the thesis that we have and that's what the excitement that we see from the banks. The first piece that you can appreciate on the non-bank side is a typical paying for that exists out there. And then there is some kind of a progression or mature into loans of like six to 12 months. Again, a very interesting play for Pagaya because we have so much knowledge and capabilities on the full personal loan spectrum. So we are coming as a very natural on for this and helping the BNPL providers to have an enhancement in their ability to collect fees by extending loans to that. Sanjeev, do you want to add anything?

Oh sure. I mean look, as both of you said, the POS is in fact the fastest growing sector in the consumer world. As a former banker, I know that when we were moving from personal installment loans to purpose-driven loans, that the quality of the credit was substantially higher. There are three major categories, John, that we are seeing this growth in within POS. One is in health, one is in education, and then of course in medical, sorry, in home improvement. So those are the three major sectors where we are seeing growth. And the term structure is very similar to personal loans which is why it fits Pagaya's model perfectly.

Great. I appreciate all that guys.

Thank

you.

The next question comes from Joseph Wafi with Canaccord Genuity. Please go ahead.

Hey everyone. Good morning and great to see all the progress both on partners, P&L, balance sheet, all facets of the business. That's great. Just I thought we'd start it, you know, looking at the shareholder letter. It looked like total application flow was up about 5% but, you know, obviously network volume was up more than application flow. I was wondering if we could kind of drill down into underwriting in the quarter a little bit and what might have been, you know, driving the higher network volume versus application flow and then I'll have a follow-up.

Yeah, thanks for the question. I'll take that. So look, application flow continues to grow and as Garland and Zee mentioned, the value proposition of our product is quite unique. So as we add more partners, application flow will continue to grow and has been doing that for the last few quarters. What we are doing, we're very disciplined in our approach and focusing significantly more on the channels that will drive, that have higher unit economics and drive higher FRPC. And as a result, those are the channels that will have more mature relationships. So that's why you would see effectively network volume growing by a faster rate than the application flow that we're seeing. So let's think about it as a higher conversion ratio for those types of channels that we get higher

economics. And Joe, maybe one add-on on this. You think about it that as we move into stronger institutionals that have higher quality of flow, you will expect to see lower growth on the application, but every application means much more because it's much more, call it likely borrower that we would like to lend to. So there is an inverse of like as the company get bigger and therefore we are lending more unique marquee partners, the ratio between the two is rather different.

Sure, that's great and makes a lot of sense. And then secondly, appreciate the movement to new funding sources to reduce net retention. I think that's a big positive here. Just wondering if you move to forward flows or other vehicles, is there a potential impact down the line in FRLPC upside from the investment side of the business? Thanks a lot, guys. Great results.

No, thank you for the question. No, I think we'll continue to, as you have seen, we're accelerating the feed generation power of the business and improving the unit economics. Obviously, diversification of the funding sources will allow us to lower the net retention of what we're keeping from the deals, but I think over time we will continue to see that growth in FRLPC while we continue to diversify this type of, diversify the funding sources. So overall, as we look forward, we do expect the FRLPC to range between the 3 to 4 percent in line with what we have provided in terms of

guidance before. Great, thanks a lot. Thank you.

The next question comes from Michael Legg with Benchmark. Please go ahead.

Thanks, good morning and great results, guys. Question on the 1.9 billion raised. What was the cost of capital after using expenses for that?

Hi,

Mike. It's Gal.

So cost of capital for this transaction, think about it from an IG perspective. It's trending below the 7. So really robust and much stronger, like lower cost of capital of what we had in the past and even a little bit the IG, something around the 8.

Okay, great, thanks. And then on the investment in loans and securities of the 800 million, do you have the tranches on that? Like how many are from the 23 issuances versus 21, 22? Do we have a breakout on that? So

yeah, I'll take that. So majority of what we currently have in the portfolio is driven by the 2023 and 2024 vintages as the previous vintages has mostly paid down or amortized. As we look forward, one of the things I want to highlight is that in the recent transactions that we did, what's important to remember is that the mix of the portfolio is shifting. In the last deal that we did, we did get much more of the debt versus the equity securities. So the quality of the portfolio is improving. And actually that has two very positive implications. First, we are able to secure better financing because the debt can now support the pay down of the secured borrowings. And more importantly, given the mix and the quality of what we're retaining, it is actually expected to be accretive both to the P&L and the balance sheet overall.

Thanks. And then just last question, just on the consumer, are you seeing anything regionally or anything that gives any indication of what you're seeing with the consumer? Thanks.

Yeah, so I just want to set the stage, as you know, but just repeating for all the folks on the call, Baguio is in a unique place that can see, quite frankly, most of the consumer credit trends, the fact that we are connecting to 30 plus originators, give us a very wide understanding of how these trends are actually happening. So we have a very unique vantage point on that. What we are seeing, and I think you heard us talking on the 2023 vintages, is especially on the personal loan, but generally on consumer credit, that there is a very steady environment already since the start of 2023. You did hear some different narratives, I would say, with different earning calls of different companies. So we heard and saw a little bit of softening on the higher FICO type of thing, but from our perspective is really driven because of higher demand for these segments. So think about it, as people migrated from the more average FICO to the higher FICO, they created a little bit of a competition and therefore losses are a little bit higher there. We are not playing in that segment because we don't see the value there, per se, right now. And we are sticking to the 670, 680, that's the areas where we are operating and over there the performance, as I've mentioned, is very stable since 2023. And we are hopeful and looking forward to continue to watch it as a hawk as we go into 2024.

Great. Thanks. Great quarter,

guys. Thank you. The next question comes from the line of David Shaw with Citizens JMP. Please go ahead.

Great. Good morning and thanks for taking my questions as well. Hey, I had a general question about unit economics and how we ought to think about them evolving. There are obviously a lot of moving pieces associated with how rapidly you're growing both asset classes beyond personal loans as well as exploring new funding structures. Maybe a question for you, Evangelos. You know, personal loans is the most profitable product. Does the FRLPC margin, does it change over time as you do more auto and more point of sale lending versus personal loans? And then on the funding side, do the fees from your capital markets, partners, do the economics of that change as you engage in more whole loan sales and forward flows? Just trying to understand as the business evolves, it sounds like it may be a considerably different mix even just 12 months from now, whether that impacts the consolidated unit economics.

Thanks for the question. Look,

we see very positive momentum on our FRLPC growth, right? And it's actually faster than we expected, partly obviously because the value proposition that we're offering to our lending partners and also because of our disciplined approach this year to focus on the higher sort of fee-paying partnerships. And as you pointed out, PL is now at 6% this quarter, which is the highest it has been in our history, up 300 basis points a year over a year. And we believe we can achieve the same things for auto and even POS over time. Obviously those continue to be investment areas for us so that a few years behind let's say than the personal loan, but the playbook is the same and we know we can achieve that in those verticals as well. Now as your question generally as we look ahead, we have given you guidance historically of FRLPC being between 3% and 4%. And even though this quarter again is .8% on the higher end of the range, it's always going to be a mix of partners between new partners coming in that are coming in at lower economics and that being offset by higher fee-paying channels. So we feel very comfortable about continuing that 3% to 4%. When it comes to funding, the capital market fees are pretty much the same. They don't really change between the different products across ABS and some of the other funding sources that we're using. And over time, given the unmatched access to capital that we have for the network of over 315 partners, we can achieve this new diversified sources of funding with the goal of getting to an average 2% to 3% net retention over time across all verticals.

Got it. No, that's very helpful. And on the risk retention front, it sounds like you're in a lot of advanced discussions on making terrific progress there. As we think about modeling the balance sheet exposure, with that 2% to 3% of network volume target, do you have a timeframe in mind when you hope to be able to achieve that? Is that as early as the end of the current year or is that a longer-term goal?

Yeah. So obviously the 2% to 3% is an average that we expect to achieve over time. And we have actually demonstrated that in our history, if you go back. What I would say is we're progressing in a very fast way diversifying our funding sources. We're already in discussions with multiple parties to execute on forward flow agreements for whole loan sales that could lead up to a billion dollars each. I can't speak specifically on the timing, but overall we're progressing over the year. We do expect to see some of those benefits for the remainder of the year.

Great. And if I can just add one quick maybe product question. Specifically for Elevan, I know it's the old Nova merchant solutions. It's one of the world's largest merchant processors. Are they actually providing point of sale loans currently? I wasn't exactly sure maybe what the product set is at Elevan.

Hi David, I'll take it. This is Sanjeev. The short answer is they are about to with the GAIA solution. And so for example, we met with the BNPL POS lending head. And we know that that's the direction they want to go in. And as you rightly pointed out, they are a top five payment process. And listen, my background itself from data demonstrates that the ability to for a payment processor to add more value to the merchant at the point of sale is really what is critical to them. We've been talking about very, very late stage coming obviously on boarding right now in terms of making sure that we pull through their second look value proposition. And

David, as you can think about that, that's exactly what I was mentioning when I spoke about POS. This is a great use case of someone who is looking to a bank that is looking to enhance their capabilities. And obviously we love them and they are a very good partner and has a lot of capabilities. And together with GAIA, the ability to open that and become a major business for them, obviously not just on us, we are the complementary piece, is a very appealing value proposition for them and quite frankly for us too.

Great, great. Now that's an exciting development. I mean, it kind of potentially opens up the broader merchant processing, you know, vertical to the extent they want to get into point of sale Thank you very much. Thank you.

Thank you. The next question comes from HAL Coach with B. Riley. Please go ahead.

Hey, great quarter guys. My question is on the automotive channel. Could you just give us an update on automotive partners like Ally and others and where they're at in their rollout by state or by number of dealerships and how the overall auto business is going for you?

Hi, HAL. It's Gael. I will take a question here. So yeah, definitely as we said, auto loan, the auto space is something that we had been working a lot last year. And we are definitely focusing on completing the rollout on Ally. There are a few states left and on Westlake and other, we are continuously improving the product and finding the right place where we can add the most amount of value. Auto loan in general, I would say was a little bit softer throughout the year from a world of funding, etc. And what has been through in this type of environment for that specifically versus auto loan. And therefore, when we are disciplined, focused on higher unit economics and on higher return, etc. We might shift more towards the PL or the other things or de-prioritize. And as we see things are becoming stronger in different places, we are over allocating there. I think it's a very good use case to how PGAIA is having solved both the long term growth and the ability to lend more partners and to increase the network capabilities. But in time managing the short term goals of shifting capital in between different parts to make sure we are lending on the right financial side.

Does that answer your question, Mr. Gortz? We move to

the next question. The next question comes from Sanjay Sikrani with KBW. Please go ahead.

Hi, it is actually Stephen Kwok going in for Sanjay. Thanks for taking my question. Within the prepared remarks, you talked about further improving the unit economics and that you made some additional changes in the first two weeks of the second quarter. Could you provide an update around where we are within the process? And then how does the benefit flow through? Do we see it on the take rate side or is it on the production cost side or is it both? Thanks. Hi, thanks

for the question and looking forward to working together. So to your point, what we are doing as we said, our strategy is now to continue to be very disciplined and improving unit economics across the portfolio. And what I wanted to highlight there in the prepared remarks is that we actually continue to take more action as we did in the early part of Q2 to continue to improve the fees as our value proposition to our lenders continues to resonate. So obviously that will take over time and we expect that to basically translate to higher on an apples to apples basis, higher FRLPC and get the full benefit of that into sort of second half Q2, most importantly into a full quarter impact in Q3. And that will come both to your point reflected both on the take rate as well as obviously the FRLPC rate.

And if I may, I just wanted to add to what EP just said, which is again part of our remarks and Sanjay, good to talk to you again. I will say that in terms of our pricing power today in the market, I feel very, very confident to be able to deliver the FRLPC numbers that we are projecting to sort of talking about in Q3. I will say to you, just cut to the chase here, in many of our top five accounts, we have a dominant share of their business and we are realizing that our ability to closely with them to increase our pricing power is actually very, very

high.

Great, thanks for taking my question.

Thank you.

This concludes our question and answer session. I would now like to turn the conference back over to Gaurd Krubner for closing remarks.

Thank you. So to close, I want to speak for a minute on our growing value proposition in the U.S. lending ecosystem. We have truly unique solutions for lenders in the U.S. that can add real value immediately. You're seeing this reflected in the additions of top banks and lenders to our network, the increasing fees we're earning and the rapid pace of funding that we are bringing to our network. Thank you all for joining today and I look forward to our continued partnership in the future.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.