Pagaya Technologies Ltd. Q2 FY2022 Earnings Call

Good day, and welcome to the Pagaya’s Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Today's call is being recorded. At this time, I would like to turn the call over to Jency 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 6-K 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, Jency, 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 an 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 I started 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 take a moment to thank our incredible team for their dedication and hard work to get us to this point in our journey. This is our first earnings call, and I would like to spend some time sharing an overview of the business model before discussing our results for the second quarter. Then I will hand it over to our CFO, Mike Kurlander, who will discuss our financial 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, economic status or lack of credit history. Market conditions today also exacerbate this problem, putting pressure on consumers who need to fund basic needs like buying groceries and getting to work. My co-founders and I recognized the limitations of legacy underwriting systems and saw 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’s 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 plugin to our AI network. As part of the partners’ underwriting process, we provide a fully automated recommendation in real-time. The partner then services the loans for the customer. After the loan is originated 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 our investors. Our partners win because they capture more customers, which means incremental fees and revenue streams with minimal capital requirements or incremental risks. Since inception, not a single partner has left our network. Our partner customers win too by gaining access to more financial products. They benefit from a choice of financial institutions instead of having to seek out higher-cost alternatives elsewhere. Since 2019, we have enabled our partners to originate over $10 billion in loans to consumers across the country. Finally, our investors win too, as they diversify their investments and gain access to unique asset flows to deploy at scale while optimizing for the return profile. As a B2B2C platform, 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, 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 roughly 80% growth year-over-year in both network volume and total revenue, and we achieved another quarter of positive adjusted EBITDA. This was driven by faster growth in our newer products, including auto loans, credit cards, and single-family residential loans, along with continued strong growth in our personal loan product. In terms of partnerships, growth was mainly driven by the expansion of existing partner relationships. Now, let me turn to our operating highlights for the quarter. Our business continues to demonstrate very strong momentum, with sustained application flow and the expansion of existing partnerships with new programs. We are also pleased to announce that we onboarded a large U.S. bank in the second quarter, with over $100 billion in assets as a major partner for our auto product. On the funding side, despite increasingly challenging market 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 Vaswani, former CEO of Barclays Bank UK and former CEO of Citigroup Asia, brings over 30 years of financial services experience. Last but not least, we successfully completed our public listing on NASDAQ in June. This was a critical milestone in our company's 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 positions 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 quickly and react accordingly. 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 loan applications for our partners. Allow me now to elaborate on each of these factors. First, regarding our funding model, we believe that our upfront funding model is more capital efficient than traditional models. To illustrate, here’s how it works step-by-step. First, Pagaya raises cash in a financing vehicle. This cash sits in a vehicle waiting for Pagaya's AI-selected network volume to be acquired based on the vehicle's criteria. Step two, Pagaya AI enables our partners to originate loans through our network. Finally, in step three, Pagaya facilitates the placement of the loan into the financing vehicle. It is important to note that given the structure of our funding model, Pagaya has limited inventory risk, defined as the necessity to hold loans on our balance sheet. Throughout this process, Pagaya acts as a neutral player without direct exposure to the assets acquired through our network. Our partners and 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 consistently raised capital over the past several years. We have raised over $10 billion since the beginning of 2020 across a diverse set of funding sources, including the public capital market through ABS and our private managed funds. On the right-hand side, you can see our funding model at work, using an illustrative $1.2 billion transaction. What you see is at T+0 in January; there is cash sitting in a vehicle. Over the course of five months, loans are being placed into the financing vehicle. By raising funding upfront, we can optimize returns for our investors by having flexibility and control over the go-to-market deployment timing across different channels. For example, in the current market environment, we can offer investors a way to access the capital market to capture unique opportunities. Some of our more recent transactions demonstrate the resilience of our funding model and showcase the trust in our technology capabilities. We issued $1.6 billion of ABS in the second quarter under challenging conditions and recently priced a $1 billion transaction in July, which was an increase from a $400 million offering due to strong investor demand. As I mentioned earlier, our AI technology evaluates consumer behavior more effectively than traditional models. Additionally, our key differentiator is our unique vantage point. Our connectivity across multiple channels within the lending ecosystem enables us to spot trends early and adapt quickly. An example of this occurred in the fall of 2021 when our models identified shifts in macroeconomic consumer indicators in the personal loan market. The graph at the bottom left illustrates personal loan delinquencies over 30 days from monthly cohorts of Pagaya's production from October 2021 to March 2022. Each line represents a monthly cohort of production. We optimized our models in the fall of 2021, leading to a decline of over 130 basis points in delinquencies in the three months post-origination. The graph on the right side depicts Pagaya production against market-level unsecured consumer benchmarks. There are two main takeaways from these graphs: first, Pagaya Technologies has continually demonstrated an advantage versus the market during periods of credit performance, both good and bad. Second, our ability to identify trends early and adapt swiftly compared to the market is illustrated in the growing deviation of delinquency trends since Q4 2021. Now on the partners side, I would like to walk you through a quick case study on how we enable growth through macro cycles, showcasing our technology and funding capabilities. In the third quarter, at the height of the COVID pandemic, liquidity dried up, causing many originators to struggle. In this instance, we grew from 2% to 33% of our partners’ originations. Furthermore, in 2021, when liquidity constraints arose, we captured 37% of partner originations. This is a testimony to the strengthening of our partnerships over time, as we demonstrated our value through cycles. In today’s environment, amid increasing market volatility in the first half of 2022, we saw an acceleration in application flow through Pagaya’s network, experiencing 60% growth in application flow from our top three partners year-over-year in the second quarter of 2022. Now, let’s put all of this together. We have built a business model that consistently adds value in stable and challenging times due to the advantages of AI-driven intelligence and a unique funding mechanism. In our business, stable and challenging times are typically defined by differences in market liquidity. The graph on Slide 17 illustrates Pagaya’s network volume conversion ratio and community application received at three different points, including two defined by liquidity constraints and one without. Application flow consistently grew while the conversion rate fluctuates depending on market conditions, resulting in growing network volume over time. As shown, when credit conditions are tight and liquidity is restricted, our product experiences greater demand from partners who typically increase the amount of applications sent to Pagaya. This gives us a greater opportunity to be selective regarding risk and 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 network volume growth. Now, let me discuss our future growth trajectory. We have significant opportunities 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 cards, and real estate is immense. We have added one new market since 2018, yet we are capturing less than 1% of the total opportunity today. We have significantly scaled our personal loan business since 2019, now accounting for roughly two-thirds of our annual volume. Our other products are seeing rapid growth, as we reported strong double-digit increases in the second quarter. We are driving continued momentum with our existing partners, expanding into new channels. Programs launched in the first half of the year contributed roughly 7% to our network volume in the first half. That said, the most substantial opportunity ahead of us lies in partnerships with the largest 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 achieve our medium-term growth targets. Let me now hand it over to Mike, who will discuss our second quarter results and our outlook for 2022 and the medium term.

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 billion to $4.9 billion, and we generated an additional $3.6 billion through the first half of 2022. We also doubled revenues since the first quarter of 2021. In fact, if you annualize this quarter’s revenue, we’ll 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 sourced from personal loans, but now this share has decreased 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 being recent additions. We believe that our AI capabilities and network can work across fintechs, banks, and other financial institutions and we remain highly focused on these expansion opportunities. Now, let me dive 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. The $3.6 billion figure represents the assets acquired through financing vehicles with our AI technology's assistance. Revenue from fees, which amounted to $322 million in the first half, includes fees earned from the financing vehicles for these assets, such as acquisition, setup, and administration fees. Our take rate, which is revenue from fees divided by network volume, averaged roughly 9% in the first half, although this will vary 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, which makes up less than 10% of our total revenue. Moving on to the expense side, production costs are those we incur to source assets from our partners. These costs are variable and correlate to network volume, which may 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 partnerships with banks. To give you a sense of this investment, from the beginning of 2021, we grew our headcount from approximately 200 to over 800 today. Over time, we expect to achieve operating leverage as our business scales. Lastly, there are a number of miscellaneous items contributing to our adjusted net income of $8 million year-to-date and adjusted EBITDA of $9 million. Now, I’ll discuss our second quarter's financial results 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 excluding 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 GAAP net loss in the second quarter was $146 million. However, this figure was influenced by $146 million of share-based compensation due to performance-based awards vesting as a result of our public listing. Our historical run rate on share-based compensation has been approximately $15 million to $20 million per quarter. I’ll now turn to our outlook for the full year of 2022. It is clear that our business has momentum, even in the challenging macro conditions we observe today. We’ve been able to raise capital, grow application flow, and achieve growth in both volume and revenue. We are positioning the business for the long run and see tremendous opportunities ahead. This likely means increased discretionary investments in the near term for opportunities like partnerships with large U.S. banks. However, we want to be realistic about the environment in which we are currently operating. All companies are facing a highly volatile macro backdrop. While we've built a resilient business model with diverse sources of revenue and funding, our outlook reflects the ongoing uncertainty in today's market. Higher interest rates and spreads are influencing asset prices in nearly all markets, raising the cost of capital and thus impacting the economics associated with these assets. We expect these conditions to normalize over time as market conditions stabilize. With this context, our outlook for the fiscal year 2022 is as follows: We expect network volume to range between $7.2 billion and $7.8 billion. We expect total revenue and other income of between $700 million and $725 million. Our outlook for adjusted EBITDA is negative $20 million to positive $10 million for the year. Looking ahead over the next three to five years, our ambition is to reach over $25 billion in network volume by capitalizing on the opportunities Gal mentioned earlier. We believe that at this level of scale, we can achieve an adjusted EBITDA margin of approximately 20%. Let me provide a little more detail on the path to reach this operating leverage. With $25 billion of volume and assuming a stable take rate of approximately 9%, along with production costs running at approximately 5% of our network volume, that could translate into $1 billion of revenue minus our production costs. While our operating expenses are currently at an elevated level as a percentage of revenue, we believe we can achieve a steady state of 20% for operating costs to total revenue. To be clear, this is our goal and what we are working toward with our leadership team and 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.

Thank you. The first question today is coming from Rayna 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 2022 guidance range, like what has to happen for you to get to the high end of the range versus the low end?

Sure. Thanks Rayna for the question. I’d start by saying that our business is continuing to grow, and just to put it in context, our outlook, even at the lower end of the range reflects roughly 50% growth in both volumes and revenues. The important thing to remember is that when thinking about our role in the ecosystem, it’s really to help our partners grow their business and ensure that investors earn returns in both low and high-cost capital environments. Consequently, we’ll be investing and continuing to invest in our platform over the long-term. So, as we mentioned in the presentation for Pagaya, 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 largely driven by macro conditions such as interest rates, the state of the capital markets, and that will be reflected in the range, which will define the difference between the high and low end of our outlook. The most important aspect I want to emphasize is that our focus isn’t merely on optimizing one quarter or the second quarter of EBITDA; it’s really about the medium term, which pertains to executing our vision for $25 billion in network volume and a 20% adjusted EBITDA margin.

Great. That’s very helpful detail. As a follow-up, could you walk us through the key areas of investment for 2022 and beyond?

Yes, definitely. It’s Gal here. Thank you for the question. From a strategic perspective, as we shared in the presentation, the company is focusing on growth. We are doubling down on onboarding large banks in the U.S. When discussing the potential for our volume and growth to continue to increase at this rate, we are engaging with a new set of partners that are primarily U.S. banks. Moving from a fintech product to a AAA-graded product requires significant investment, especially in infrastructure. These changes encompass regulatory and compliance enhancements, legal considerations, and many other factors required to achieve a successful partnership with banks in the U.S. As we mentioned, we onboarded a $100 billion bank onto our platform, and to make that happen, we invested significantly in critical senior hires such as Leslie Gillin, who was the Chief Marketing Officer of JPMorgan Chase, and Ashok Vaswani, our President. These executives have already begun building their teams, which will expand as we scale. We are already seeing results from that bank partnership, but the level of investment required will diminish as we look to onboard 10 or more partners over the next few quarters. As we start to see that operational leverage take effect, we’ll be in a position where the infrastructure we’ve built will significantly contribute to our revenues, growth, and ultimately our EBITDA; that’s mainly the focus of our investments.

Thank you. The next question is coming from John Davis of Raymond James. Please go ahead.

Hey, good morning, guys. Gal, maybe just to start, talk a little bit about your funding diversification. Obviously, we’re in a fluctuating macro environment. So talk about where you are in adding funding partners and any thoughts on funding costs in this environment. How much have they gone up, and do you expect them to increase further?

Definitely, John. Thank you for the question. Regarding our diversification of funding, we have strong access to both public and private capital markets. As a recurring issuer in the ABS space, we are constructing an investment opportunity for our investors that adapts to current market cycles. Our investor base largely consists of sophisticated long-term institutional investors, including sovereign wealth funds, pension funds, and insurance companies. Thus, cultivating relationships and understanding the ins and outs of our platform is essential for investment oversight. From our perspective, we have expanded our investor base across ABS and our managed funds significantly. This shift is happening in different forms; our platforms and funds are becoming more recognized in the market, leading to better understanding of these products and effective investment opportunities. Our movement from personal loans, for example, has shifted from making up over 90% of our services to about two-thirds currently. As a result, we are creating diversification among our investor base. Additionally, we’ve issued 28 ABS transactions, most of which include repeat investors who participate programmatically over time. Just in July, we concluded a $1 billion ABS transaction, which was an increase from an initially targeted $400 million due to investor demand. Regarding funding costs, the primary driver is related to environmental changes from the federal perspective. While we don’t see significant shifts in that area, funding costs are increasing for everyone during this transition period.

Okay. No, that’s super helpful. One last quick follow-up — if I look at the take rate implied in the second half guidance, it’s a little closer to 9% versus almost 10% in the first half. Is that seasonality? I would assume it would go higher as rates increase, but could you discuss what impacts your top-line yield or take rate? And why is it implied lower in the second half?

Absolutely. It's Mike, I’ll take that one. I wouldn’t correlate the take rate to absolute levels of interest rates; that's not a significant factor for us. We earn fees based on our network volume, rather than just having a pure interest rate tie. Historically, our take rate has ranged between 8% and 10%. This will be influenced more by product mix. As Gal mentioned, as we shift from personal loans into other products, each product and channel we operate within possesses slightly different take rates. Overall, the implied take rate told for the second half would ideally remain within that 8% to 10% range and will be influenced mostly by product mix changes rather than any one absolute level of interest rates. Additionally, while our revenue currently relies more on our financing vehicle, there’s definitely an opportunity as we grow entrenched in our partners’ success to participate in some of the economics of that side. This hasn’t been factored into our current forecasts, but we view it as a future opportunity.

Okay. And then one last question for me, just Gal on the new partner side — obviously signed up a large new bank for autos. I assume this macro environment makes a sales pitch a little easier. Are you taking more calls with potential partners, such as banks or fintechs? Is this environment a catalyst for signing more partnerships?

Yes, definitely. That’s a good point. I wouldn’t say any sales call is easy; showing value over time is essential. However, we are observing inbound engagements as we experienced during COVID. When market conditions become tighter, potential partners see clearly how we can assist, especially when they’re closing their credit boxes. Therefore, the frequency of inbound calls has increased. However, it still requires significant effort to cultivate relationships over the long term. The most important aspect for us is the stickiness of that partnership afterward. After onboarding, partners often leverage us for liquidity needs, even as market conditions stabilize. We’ve seen success based on our demonstrated value, illustrated on Page 16 of the presentation, which shows penetration with specific partners before COVID, during COVID, and the levels at which cooperation remains afterward. Furthermore, we noticed that once partners stabilize, they tend to bring more cross-sell opportunities to the table. So, partners frequently approach us when launching new products due to the established trust and relationship. Ultimately, this facilitates increased market penetration and the chance to engage with more exceptional partners.

Hey guys, good morning. Thanks for taking my question, and for explaining your business model in more detail. Just circling back on the funding and lending side — I know some of the other categories are growing faster than personal loans right now. Are you still growing that category, or is most of the growth coming from the newer categories? I'd like to clarify that and then I have a quick follow-up.

Thank you, Joe. We’re experiencing growth across all our products. Our personal loan product is the most mature, stemming from where we initiated the business a few years ago, and that continues to expand. However, our newer products are observing even faster growth, given they started a bit later in our timeline. We generally expand by adding one new product each year, so we are actively penetrating the auto and single-family residential markets, both showing strong double-digit year-over-year growth in the second quarter. That’s not to downplay the growth in personal loans; it has grown consistently each quarter as well, but newer products are growing at a quicker pace due to their initial low starting points.

Got it. And while looking at that growth, it's evident that two elements underlie it: the lending partners you have and the actual financing demand for the different categories. Are you observing any variations in demand from investors across different loan categories, or is it relatively broad-based in what they are seeking?

Sure, Joe. I believe we’re seeing strong demand across the board. Our funding model is designed to create numerous opportunities for our investors to engage in market cycles. As we raise capital, we're positioning investors to deploy their funds effectively in changing market contexts. Thus, we see considerable demand across various products. Having multiple products certainly strengthens our bargaining position with investors, granting us flexibility and enabling us to ensure effective routes to market. Moving from personal loans to offering ABS transactions demonstrates how we can adapt and cater to an array of investment needs. We’ve experienced a notable increase in our transaction size, recently moving from a $400 million ABS issuance up to $1 billion due to robust investor demand.

Sure, that's great. Thank you, Gal. Just one quick follow-up. Could you provide a rough estimate of the lead time from when you onboard a new lending partner to the time they might go live, and how your products or offerings expand internally over time?

Certainly. It’s essential to note that there's no one-size-fits-all solution. Different partners come with varying experiences; some might be more entrenched in legacy systems versus newer entrants. The onboarding process involves overseeing due diligence on both sides and ensuring seamless integration, which can span a ramp-up period. Generally, this process can last from as short as a quarter for new programs with existing partners to up to nine months for launching extensive programs with larger partners. The overarching answer is that it varies from one quarter to two or three quarters, depending on multiple factors.

Thank you. The next question is coming from Rob Wildhack of Autonomous Research. Please go ahead.

Hey, good morning. Thanks for taking the question. I wanted to dive a bit deeper into funding. I know we've been discussing this a lot. You mentioned 28 ABS notes you’ve done since inception. Could you help us understand the mix of funding? Is it primarily ABS, or what alternatives do you have to ABS?

Sure, Reggie. It’s Mike; thanks for the question. Currently, our funding diversification encompasses a wide range of investors across various ABS instruments. It’s crucial to clarify that these 28 transactions are not uniform; they span different products and encompass various investor bases and structures. Beyond ABS, we also utilize privately managed funds, and this provides alternative funding channels outside the ABS markets. As we look towards our medium-term goals, and capitalizing on the $25 billion volume objective, we are positioning for that by seeking out new financial products that investors are looking for, and that we can expand into.

Understood. I guess, can you clarify where you think your current position is — are you more application-constrained or funding-constrained at this point in time? How has that changed over time?

Honestly, Reggie, we’re primarily focused on growing application flow. Application growth correlates directly with onboarding new partners and expanding existing relationships. This is our primary focus for long-term growth – enhancing those flow applications. Depending on varying macro conditions, like production and monetization flow, we might shift the focus between application growth and production. Especially in higher funding conditions, we might prioritize application flow rather than production; however, we view this as an essential aspect of our overall ecosystem. This is detailed on Page 17 of our presentation.

Got it. Just one last question while I have the chance. On the slide regarding delinquency trends, showing outperformance relative to consumer benchmarks, I’m curious if there’s an optimal level of delinquencies or charge-offs you're aiming for. Tightening credit can lower delinquency rates, but what balance are you aiming for?

Absolutely. The intent of that slide is to illustrate our B2B2C platform and the vantage point we have, which allows us to make early adjustments in our operations. This means responding proactively to trends, ensuring we are capable of implementing changes in a timely manner. In terms of optimization, our focus leans towards delivering investor returns. We continuously evaluate losses under various conditions and timing, ensuring that the value chain we establish sustains over the long haul, resulting in ongoing investor retention as they consider Pagaya for their investment opportunities.

Thanks very much. I wanted to follow up on onboarding speed and costs. Could you give us a sense of how onboarding customers compares over the last year versus where you aim to be in two to three years? Where do you see opportunities for streamlining and speeding up the onboarding process?

Absolutely. For onboarding new partners, there’s an upfront cost, predominantly centered around preparation for large bank partners in the U.S., wherein a considerable number of people are required to manage those partnerships. This includes investment in compliance, legal, and regulatory matters. All these represent upfront investments; as we see revenues scaling from these new partnerships down the line, we believe the significant growth will justify these past expenses. We’ve scaled our headcount substantially — from around 200 a year ago to over 800 presently — to accommodate this ongoing growth and onboarding process. Our focus in this initiative is around investing ahead of the growth curve, setting us up for success. Revenues primarily emanate from existing partnerships at present, but these investments will translate into returns as we onboard new partners.

For R&D, we see two core areas of focus. First, as mentioned, our data science teams are fundamental to enhancing our decision-making capabilities. With over 260 data scientists dedicated to exploring trends and improving models, our outcome for investors and partners is continuously evaluated. With our ongoing growth trajectory, we expect each product will have dedicated research teams to enhance our B2B2C platform.Expansion will include developing technologies that ensure robust connectivity to our lending partners, allowing us to cater effectively across a multitude of partners. Regarding global expansion, while we are centered on U.S. operations for the time being due to vast market potential and knowledge gathered thus far, international expansion could have potential down the line, but our priorities lie firmly toward U.S. market growth. Currently, there remains ample opportunity to optimize and fill market gaps domestically. To conclude, I want to reiterate how honored I am to lead this company alongside my co-founders, Avital and Yahav, and our leadership team into the promising future we envision. Our aim is to transform the financial ecosystem and change lives, which is incredibly humbling as we acknowledge the work ahead. I am confident in the capabilities of our team and our business model, and I believe we are well-positioned to drive growth in the future. Thank you all for taking the time to join us for our first earnings call. I look forward to partnering with each of you as we move forward on Pagaya’s journey as a 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.