Greetings, and welcome to Pagaya Technologies Q1 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Josh Fagen, Head of Investor Relations. Thank you, Mr. Fagen. You may begin.

Thank you, and welcome to Pagaya's first quarter 2025 earnings conference call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; Sanjiv Das, President; and Evangelos Perros, Chief Financial Officer. You could 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.pegaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the second quarter and full-year of 2025. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time-to-time with the SEC, including our 10-K, 10-Q and other reports for a more detailed discussion of these factors. Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs, or FRLPC, FRLPC percentage of network volume 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 8-K today for detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release. With that, let me turn the call over to Gal.

Thank you for joining us today for a discussion of our first quarter 2025 results as well as an update on our business. I really think that the results speak for themselves, and they demonstrate our execution against the commitment we have provided. In fact, we have exceeded expectations on key metrics and particularly on the GAAP net income profitability, which we have delivered one quarter earlier. This is and will remain a crucial metric for our management team moving forward. Perhaps more importantly is the fact that we deliver these results in the face of heightened macro uncertainty, sticking to our balanced and increasingly diversified growth focus combined with our efficient operations and structure. We grew revenue by 18% year-over-year, reaching an annualized run rate of nearly $1.2 billion. Fee revenue less production costs or FRLPC grew by 26% and reached an annualized run rate of over $460 million. And with our extremely efficient operating cost structure, these results drove 100% growth in our adjusted EBITDA to an annualized equivalent of approximately $320 million. Importantly, we achieved positive GAAP net income of $8 million this quarter, ahead of our second quarter guidance and the first time as a public company. I could not be prouder of the team and the work that has been done to get us to this point. We are truly delivering on our mission and value proposition, but now at scale. Because of Pagaya, more deserving Americans are getting more financial opportunities. And as we transform the financial ecosystem, our lending partners win and we win with them. As important as the results is a diversified manner in which we have achieved those results, which underscores the durability of our business model. We have more lending partners contributing meaningfully to our volume. In fact, 2x…

Thank you, Gal. I'd like to start by reinforcing what Gal noted on the importance of responsible and profitable growth. We are committed to building an outstanding franchise for the long-term, and we are not and will not maximize top-line volume growth just for the sake of short-term results. We are building a business designed to grow through all cycles with a focus on leveraging our unique data advantage and investments in products that will add huge value to our lending partners. We will remain extremely responsible to credit underwriting, while driving consistent and strong revenue, profitability and liquidity. While we strive to consistently drive strong results, we are just as focused on our progress in building the foundations of a long-term enterprise. As our quarterly results underscore, our focus on profitable growth and our ongoing investments to deliver this consistently over the long-term is crucial to our proven management team. As Gal noted, we are fully aware of the heightened state of volatility in the markets at the moment. However, while we carefully monitor events and trends, it is important that we remain focused on the building blocks of our long-term growth strategy. I will provide an update on our growth priorities, which center around creating value for our partners through our products. In personal loans, our ability to deliver significant new customer growth while driving customer retention and lifetime value has become a game changer in our core value proposition for our partners. In auto loans, by providing a seamless lending experience and higher approval rates for auto dealerships, we provide lenders a very significant competitive advantage when they grow their dealership distribution. In the point-of-sale category, where we continue to invest and ramp rapidly, we will give lenders the ability to immediately provide merchants higher approval rates…

Thank you, Sanjeev. We committed to deliver positive GAAP net income which we have now reported ahead of schedule. This is the result of our execution against all pillars of our financial strategy, improving unit economics, driving operating leverage, increasing capital efficiency and optimizing our balance sheet. These achievements are the result of making the right decisions for the business even if they brought near term dislocation. I'm extremely proud of the team's relentless execution and focus on our long-term priorities and commitments to our shareholders and our partners. We have also underscored that our focus will be on growing partner volumes to drive profitable growth with stringent underwriting and the results of this quarter are in line with that strategy. Network volume was in line with the year ago levels of $2.4 billion. This was slightly below our guidance range of $2.5 billion to $2.7 billion primarily due to lower SFR volume, as we continue to be laser focused on profitable growth. Excluding the impact of SFR, volume grew by 26% versus the year ago period and was up 6% sequentially. This result was in line with our plan for prudent growth. Our largest business, Personal Loans, saw volume growth of 17% from year ago levels, while conversion of applications remained stable at approximately 1%, in line with the results of the past multiple quarters. Importantly, we continue to target similar conversion levers in the near term. Revenue and other income increased by 18% to a record $290 million with revenue from fees up 19% to $283 million. This was a result of higher personal loan and auto lending fees. Fee revenue less production cost or FRLPC of $116 million grew by 26% from year ago levels. As a percent of network volume, FRLPC rose 100 basis points year-over-year…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. The first question comes from the line of John Hecht with Jefferies. Please go ahead.

Good morning guys. Thanks for taking my questions. And I really appreciate the focus on operating efficiencies and profitability. So thanks, so first question is, there's a lot of economic -- you guys talked about this on the call, but there's a lot of economic uncertainty with a variety of potential outcomes. And I know you guys have sensitized for some of those potential outcomes. But I guess, how do you position your business for that variability in outcomes at the product level?

Hi, John, it's Gal. Thank you for the nice words. I will take this question. So when we think about Pagaya, obviously, first and foremost, we're building a long-term business. And when you're building a long-term business, which relies on the profitability and the capability of your products, you are going through some times of macro uncertainty as the one we're expecting today. So to say, for us, it's normal to see the unnormal. If you recall to what we said in the call, when we came into 2025, we assumed a lot of uncertainty because so we guided to not very aggressive growth because we are balancing growth and profitability moving forward. And part of it is, as you think about the right balance, not to be too much caught up into a short-term situation of the macro economy that could drive you to do mistakes for the long-term. So the word for us is the right set of growth, which is aligning with the long-term growth is what we are after. Now specifically to your question, let me ask -- let me start with an answer on the statements. We do not see today in the data any impact whatsoever from any discussion about tariffs or macro and the resilience that we see in the consumer is purely stable. Having said that, we are looking to be very careful on how we are managing forward and uncertain these days are requiring us to pay even more attention to that. As you know, we have very strong data capabilities because we are one of the only ones who are seeing in live in real time, how the loan performance and the applications and interaction is coming through over 30 different partners in the U.S. across auto loans, point of…

That's very helpful. Thank you so much, Gal.

The next question comes from the line of Pete Christiansen with Citi. Please go ahead.

Good morning. Thanks for the question. Nice results. I have two questions. First, Gal, I know we talked about prescreening in the past. It's been kind of like a proof-of-concept for the company, not really representing too much of volumes, but it seems like this is a really interesting opportunity going forward. How should we think about that product scaling across your partners, your existing business over the next, I don't know, let's call it 12 to 18 months? And then my second question is for EP. I know on the last call, there was a scenario contemplated for fair value marks for the year, I think somewhere around $150 million. Are we still in that range? Should we still continue with that assumption? Thank you both.

Pete, this is Sanjiv. Let me take the first part of the question, and obviously, EP will take the second. With respect to prescreen and affiliate, those are two very specific initiatives or products, as we call them at Pagaya that we have invested very heavily over the last, I'd say, two years. And the initial proofs-of-concept that we have done so far have been extremely encouraging. Conceptually, what these two initiatives do is that they essentially help our lending partners grow their customers in a very, very meaningful way, both existing customers and prospectively new customers. And what they do is in a prescreen, essentially we have the Pagaya models that we apply on the huge amount of data that our partners provide on their existing customers, and we are able to harvest this data, implement the Pagaya models, which, as you know is our core, core, core strength across vast amounts of data and provide loans to customers -- unsecured loans to customers in a completely frictionless way, which allows our partners to not only grow more customers, but also enable existing customers to get more credit in a frictionless way. So this is a huge part of how Pagaya will grow its PL business, personal loans business. And as you know, we are embedded already in 31 partners. And so think about it as a massive line extension in addition to what we have done so far. Today, we serve only 3% of our customers in our existing lending partners base. The TAM is almost 60 million customers with our existing partners. But the whole idea is to help them grow, help our lending partners grow and we grow when they grow. And the three proofs of concept we've done so far have been super exciting and…

Hey, Pete, thanks for joining us. Yes, I think what we put in the supplement should be sort of your guidepost for potential losses, if any, in the future. Think about that rolling forward over the next four quarters. And you see how the losses came in this quarter, which we consider normalized levels and things that you would expect in any business that's in the consumer lending space.

Thank you both. Super helpful.

Thank you. Next question comes from the line of Rayna Kumar with Oppenheimer. Please go ahead.

This is Jake Kooyman on for Rayna Kumar. Thank you for taking our question. So firstly, I was just hoping you could please talk about some of the key drivers behind your three addressable markets of personal loans, auto and POS. And then just as a follow-up, I was hoping you could talk about what you're seeing out there within capital markets, specifically if you're seeing any changes in pricing? Thank you.

So hi, Jay, it's Gal here. So let me start taking it from a value proposition perspective, and then EP will supplement that with a little bit drivers on the business financial outcome, if that's okay by you. So from a value proposition, think about the Pagaya network as a way to enable lenders to have bigger, better business for themselves. And then the question is, what does that entail in each of the different markets as we think about personal loan, auto loan, and the point of sale? So for personal loan, I think Sanjiv covered that rather well, which at the end of the day, there are lenders with two parts of their business. Number one is a big marketing spend that they are putting out there in order to increase the number of customers that are going through their brand and channel and lending facilities. Our value proposition there is to help them to acquire more customers through the online marketing channels, let it be the affiliates as we spoke and many other permutations of that. The second piece in the personal loan is once you already have customers, there are many of them that actually didn't take loans from you in the past or the engagement level with them is rather low. So as a company, as a bank, as a big lender, when you're thinking about increasing your customer experience, increasing your customer satisfaction, what you're trying to do is to provide more loans and credit to these folks. So the proactive product is an ever-ending engine that goes through the portfolio of customers that each lender bank has and asking the question, who could we provide them a proactive approach to do that. So we moved from just helping lenders get more customer booked…

Yes. Just quickly how that translates to some of the financials. Again, we're focusing on prudent and profitable growth. Year-over-year, these three verticals, personal loans, auto and POS have grown by, call it 25% year-over-year, 6% sequentially. We're very pleased with the contribution of auto into the overall profitability now getting to a similar level of FRLPC margin like personal loans. And we expect to see POS as well to continue to grow its contribution on the overall FRPC margin. So we are in line with our strategy, as I said before, on prudent and profitable growth, executing with a very disciplined capital allocation.

Great, thank you. Appreciate the details.

Thank you. The next question comes from the line of Joseph Vafi with Canaccord Genuity. Please go ahead.

Hey guys. Good morning. Great results and nice to see the outlook here for 2025. Just circling back to the prescreen product. Just wondering if that's a driver of FRLPC expansion. It feels like I heard Sanjiv say frictionless, you're hitting your existing customers. It feels like it should be a kind of lower cost opportunity. Wondering how that may affect FRLPC over time? And then secondly, without kind of providing any guidance or anything, just wondering when the implementation of some of the forward flow agreements here into your funding mix may start to make their way into us being able to see some changes in fair value adjustments moving forward. Thanks a lot.

This is Sanjiv again. I'll take the question -- the first half of the question and I'll pass it on to EP again. But I will say that with respect to prescreen, you're absolutely right. Essentially, prescreen will have the impact of significantly lowering the acquisition cost for our partners in order to acquire more customers and give loans to existing customers at a significantly lower acquisition cost. Now that's a proven model. We all know that that's what prescreen campaigns tend to do. How we think about the economics of those relative to us and how it strengthens our FRLPC, we definitely think that it will have a positive impact. And the fact that we are making it, again, as Gal pointed out, there are two parts to this. One is that it's prescreened and the other part is that it is frictionless. And so that will -- think about the really successful Fintechs in the consumer lending business that have been really successful are those that have made the process completely frictionless from the point-of-sale or point-of-purchase to the point of getting the loan. That whole process is completely frictionless. So we expect that it will have a very positive impact on our earnings and FRLPC. EP, if you want to ask?

Yes, as it relates to the guidance, again, it goes back to disciplined allocation. We continue to focus on our key verticals, personal loans, auto and POS, which have both the highest sort of growth potential as well as higher profitability. And obviously, that mix is changing. It's a targeted mix, targeted change in the mix in order to drive profitability. And also, just keep in mind, this is profitability and growth without necessarily taking incremental risk. We talk about conversion ratios and how that has been steady over the last multiple quarters. To your other questions around the fair value, you actually see that a little bit even this quarter when you look at the total portfolio, while the business continues to grow, the sort of -- the portfolio is of investments loan and securities has not grown as much. You'll see a little bit more of that going forward to your point. And as we get into the later part of the year, again, without making any projections on what will happen elsewhere, I think you'll start seeing on a relative basis, relative to the overall volume, you'll see that being reflected in the risk retention, while the impact of those forward flows is already embedded into our FRLPC guidance, which we increased now to -- from 4% to 5% range for the year.

Great, thanks guys.

Thank you. The next question comes from the line of David Scharf with Citizens Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. I'll echo the congrats on all of the achievements thus far. Two questions for EP. The first, just focusing on expense levels. Obviously, the operating leverage has been coming in considerably stronger than expected. When I look at just the core OpEx, I think it was in the mid-40s this quarter. I mean EP, that's a full 20% lower than just the last two or three quarters. Is there anything that's artificially suppressing it in this Q1? Or is that actually, even with all the investments you're making, a pretty sustainable level?

Yes. Thanks for the question. No, I think the current levels are sustainable. You should continue to see some of that percent improvement coming through as the business grows on the top line and expenses are held reasonably flat. You should continue to see that improvement. What I would point out is the great thing about the business and differentiator is the operating leverage. I want to focus on the fact that we are now in a position to grow the business by twice as much, let's say, relative to the current level because we have already built out the infrastructure associated with our ability to do that and also the disciplined capital allocation. The mix also comes through the fact that as we're changing a little bit the funding mix and structure -- funding mix, you see lower overall ABS setup costs. So that's what you see some of the benefit keeps trickling in even this quarter.

Got it. That's helpful. And just a follow-up on funding, notwithstanding the diversification and increased flow partners. Maybe if you can just get a little April update or post-April 2 update on the ABS markets. And specifically, I know you got a few large deals done. Our understanding is that spreads have probably widened about 60, 70 basis points since all the tariff noise began. But notwithstanding the slightly wider spreads, has there been any change in the market for residuals? Like have you've been required in April to retain maybe more a percentage in the form of residuals than in March? Or is that largely steady?

Hi, David. Definitely. So two questions in one. First of all, I would say that, as you know, Pagaya is one of the leading, if not the leading ABS securitizer in the space. We were the first one to open the auto loan market. We were the first one to open personal loan market. So by some definition, Pagaya is the market in that perspective. There are two phenomena. The phenomena of the very short, short term, like a few weeks after things like announcement, a big announcement in the macro happens. It takes time for the market to find its place. So the 60 to 70 basis points that you have just mentioned are in line with what happened, but could go very quickly back to 25, 30 basis points. And then I think it will remain a question of how much uncertainty there is in the environment and then what we call people will price for volatility. In any way, for Pagaya, these type of small changes because we are doing the ABS deals before we actually pricing the loans because of prefunding nature, it's something that we are taking into account and therefore, pricing that on the assets and the borrowers in order to maintain the profitability and the discipline. So you could expect that flowing through to the assets themselves and therefore, mostly neutral in the effect on us. On the other piece of the retention, it all comes to the question of price. So again, in the very high life of day, you might don't want to have the capabilities and the liquidity and the balance sheet, you might don't want to sell that in that price in that moment, but it means nothing after a few months where performance is kicking in and people could see that the production is as expected. So I would think about it more as a buffer rather than a capability because there is a lot of demand out there, a lot of people that are looking to put money to work, and they just want to get a little bit more reassurance on this type of market short-term volatility, but there is no big waves that are happening around the corner, which we feel good about.

Got it. That is very helpful, Gal. Thank you and congrats again.

Thank you. Due to time constraints, ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Gal Krubiner for closing comments.

So in closing, I obviously first want to thank all of you for your time and the opportunity to talk about not only our results, but also our vision and product strategy. I'm extremely proud of our results and the team and all the work that we have put inside to make this day possible. And it's really truly demonstrating the earnings power of our assets and our model. We want to leave investors with a simple message. We have built the business for the long-term that is profitable and will scale profitability over time, thanks to our nimble and unique model. I also want to underscore what Pagaya is in the long-term journey. And it's easy to focus sometimes on the short term and sometimes to miss the big picture. We have everything we need to reach our long-term aspirations, which is to add every possible lending partner to our network and to help them to fully leverage the value of the Pagaya network to grow their businesses and better serve their customers. We are positioned with the best possible team, assets and technology to win in a market with a massive TAM to drive strong results over the next decade that will bring the gap between Wall Street and Main Street to become smaller. I'm fully confident that Pagaya and what we have achieved in the past will be just a blip of what we are going to achieve in the next decade. Thank you very much, everyone for joining us.

Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.