Pagaya Technologies Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the Pagaya First Quarter 2023 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Jansy John, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to Pagaya's Q1 2023 earnings conference call. Joining me today to talk about our business and results are Gal Kuviner, Executive Officer of Pagaya and Michael Kerland, 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. Pigaya.com. Our remarks today will include forward looking statements that are based on our current expectations and forecasts and involve risks and uncertainties.

Speaker 1

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 Form 20 F filed on April 20, 2023, as furnished with the U. S. Securities and Exchange Commission as well as our subsequent filings made with the SEC.

Speaker 1

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.

Speaker 2

Thank you, Jensi. This quarter was another proof point of our ability to execute Through volatility and progress on our long term strategy. I will start with a performance update, then an overview of our plan to achieve our medium term growth ambition, Before I pass it over to Mike to discuss this quarter's financial and outlook for the remainder of the year, Let me take you through the financial highlights for the quarter. We beat guidance on all of our key metrics this quarter: Network volume, revenue and adjusted EBITDA. We return to profitability on adjusted EBITDA basis ahead of our outlook and are increasing our adjusted EBITDA guidance for the full year, reflecting our focus on driving sustainable profitable growth.

Speaker 2

Network volume in the quarter was $1,850,000,000 12% higher than last year. This drove total revenue and other income of $187,000,000 9% higher than last year And adjusted EBITDA of $2,000,000 As a reminder, we closed our acquisition of Darwin in January, An investment we made to take our SFR platform to the next level. If we exclude the impact of Dowin, adjusted EBITDA would have been approximately $1,000,000 a like for like improvement of $14,000,000 sequentially versus the Q4 of 2022. Now I will discuss operational highlights that drove these results. On the partner side, 20% of our network volume came from partners and products That were unbounded in 2022.

Speaker 2

As our network grows, we see increased monetization opportunities with AI integration fees growing by 230 basis points from 5.5 percent to 7.8 percent of network volume. On the funding side, we were the top issuer of personal loan ABAs in the U. S. In Q1, continuing that ranking from 2022 with over 30% Share of market. We onboarded 2 major asset managers to our network and strengthened our relationship with some of our long term funding investors Such as GAC.

Speaker 2

Our funding capabilities remain robust as our AI technology enable us to outperform the market. With these achievements in mind, we are confident we are well positioned for future growth. We remain focused on what we can control, although the timing and pace of our growth Can be somewhat influenced by market conditions. Now stepping back for a second, we want to talk about Pagaya mission. Pagaya's mission is to empower our partners to deliver more financial opportunities to more people more often.

Speaker 2

We do this by leveraging AI technology and data science. We partner with financial institutions like Ally, SoFi and Klarna, Who originate loans with our network. Institutional investors purchase these loans through our network, too. Today, over 1,000,000 U. S.

Speaker 2

Consumers currently have active loans that were originated with the Pagaya technology. We have a unique business model that we believe is inherently less volatile than other comparable FinTechs in consumer lending space. On Slide 13 of our AirLink presentations, we compared Pagaya's volume and revenue versus a market benchmark, which shows that we have been able to deliver more consistent and stable performance over time. Looking ahead, our medium term financial ambition is to reach $25,000,000,000 in network volume and $1,000,000,000 in fee revenues less production costs or FR LPC. We plan to do this by: 1, bringing more value to existing partners 2, Adding new partners, including large banks and finally, by driving a 3% to 4% FR LPC margin.

Speaker 2

This brings us to what I believe is an inflection point in our company's journey. We already have the tools we need to reach our medium term ambition. We have become meaningful contributors to the growth of some of our most mature partners. Looking at our top 3 personal loan partners, Approximately 26% of the total origination volume are being created using our network. That compares to only 10% of the origination volumes in the Q1 of 2021.

Speaker 2

As our value grows, we see improving economics, AI integration fees, which are fees earned for the creation of assets on our network are growing, helping to offset the impact of financial markets volatility. New partners and products such as auto are also growing rapidly. Application volume for our auto business grew by 51% year over year, supported by increasing application flow of the large bank we onboarded in 2022. We grew network volume for that partner by 4 times since its Q1 on our network with significant runway to scale further in the near future. The combination of increasing scale of mature partners and the addition of new partners and products has resulted in substantial growth over the past few years.

Speaker 2

2022 network volume was nearly 5x larger than network volume in 2020. We have significant runway for future growth with our network as it stands today. We show an illustration of this on Slide 21 and 22. We believe we can reach our medium term ambition of $25,000,000,000 of network volume and $1,000,000,000 of FR LPC with just Let me dive into this a bit further. In 2022, we onboarded 6 new partners With an estimated combined annual origination volume of over $65,000,000,000 we have already demonstrated That for some of our mature partners, we can drive growth at Lifefillen to nearly 30% of the partner's total originations.

Speaker 2

If we assume that we eventually reach 30% of 2022 origination volume for just the 6 partners we onboarded last year, This is an additional $20,000,000,000 of network volume, on top of the $7,000,000,000 we already delivered in 2022, Gives us a total of around $27,000,000,000 in annual network volume. That assumes 0 growth from other partners on our network And 0 new partners. While we will, of course, continue to drive growth from existing partners and adding new ones, We have the ability to reach our financial goals even without doing so. If we apply our target FR LPC margin of 3% to 4% to the $27,000,000,000 of network volume that translates to nearly $1,000,000,000 of FRLCC. Now let me discuss our focus on growing and diversifying our funding network.

Speaker 2

We offer institutional investors one stop shop access to 5 different markets at scale with outperformance enabled by AI. We have raised over $16,000,000,000 in funding across all of our financial vehicles since 2020, and we have been able to do so consistently even in severe market dislocations. Our ABS deals are typically oversubscribed by 2 to 3 times, enabling us to become the top personal loan ABS issuer in the U. S, reaching this rank in just 4 years. As our auto business grows, we are increasing issuance to fund new partners origination.

Speaker 2

We issued $1,100,000,000 in 2022, ramping up to nearly $800,000,000,000 in May 2023 year to date. Our investor base is growing. Our order book for our ABS vehicles has around 80 unique investors and is becoming more diversified over time with a mix of large asset managers, sovereign wealth funds, hedge funds and insurance companies. We have seen a significant step up over time in repeat investment from existing investors, as you can see on Slide 30, speaking to the strengths of our performance track record. As we announced last month, we extended our funding relationship with GIC through 2028.

Speaker 2

We also welcomed new top tier institutional investors to our funding network. As we announced yesterday, we are partnering with Angelo Gordon, VARDA partners and Atlas to provide funding for a multibillion dollar credit union. We believe The growing investor demand is a reflection of our ability to consistently deliver asset outperforming with AI technology. While application volume from partners tend to grow over time as our network expands, our conversion rate is our level to optimize asset performance as macro conditions evolve. Backed by AI driven insights, we have been exercising underwriting prudent in the current environment, reducing our approval rate by nearly 50%, as you can see on Slide 32.

Speaker 2

As liquidity conditions will improve, We can dial the rate back up and increase network volume. In fact, if we applied our peak Q3 in 2021 conversion rate To full year 2022 application volume, network volume in 2022 would have been over $10,000,000,000 doubled what it was in 2021. With the faster reaction time enabled by our AI, Our personal loan portfolio has consistently outperformed the market benchmark. 30 days past due at months on book 3 For Q4 2022 vintages are 55% lower than Q4 2021 vintages, which were some of the world's performing vintages market wide. With recent vintages returning to Q1 2021 performance levels, We're comfortable with our target ROA range of 8% to 12% return.

Speaker 2

Before I turn things over to Mike, let me recap. I believe that our business is at inflection points. First, our network is expanding with significant runway ahead of us. As the network expands, our AI technology gets stronger with more training data points and increased model accuracy. As our data model grows, we have an increasing ability to monetize our network.

Speaker 2

Increasing scale and monetization combined with a focus of operational efficiency give us an achievable path forward to delivering sustainable, profitable growth. Let me pass it over to Mike to discuss this as well as our 2023 outlook in more detail. Thanks, Gal. The inflection point Gal just spoke to is also starting to be reflected in our financial performance. We believe that the path forward

Speaker 3

to delivering sustainable profitability will primarily be a function of 3 factors. Number 1, significant runway for future growth, which Gal spoke to. Number 2, a resilient business model that enables consistent delivery of our targeted 3% to 4% FR LPC margin and number 3, a continued focus on operating efficiency. As a reminder, in 2022, we made significant discretionary investments resulting in near breakeven adjusted EBITDA of negative $5,000,000 In the Q1 of 2023, we returned to positive adjusted EBITDA, excluding the impact of Darwin, $14,000,000 sequential improvement versus Q4 2022. Our Q1 2023 results reflected a focus On higher margin generating volumes, further monetizing our network and executing on cost savings initiatives, while also optimizing primarily from the acceleration of new partnerships balanced by continued low conversion rate of application volume.

Speaker 3

Total revenue and other income grew 9% to $187,000,000 Revenue from fees, which makes up 95% of total revenues, Grew by 11% year over year. Our take rate defined as revenue from fees as a percentage of network volume Remains stable versus the prior year at 9.5%. This reflects an evolving composition of our fee revenue as you can see on Slides 4041. While capital markets fees are lower in the current macro environment, we've increased AI integration fees and contract fees. We believe our ability to effectively hedge the impact of financial markets with multiple revenue streams speaks to the resiliency of our business model and the future potential to monetize the network as we grow.

Speaker 3

After factoring in production costs, our FRILPC margin declined to increase above 3% in the 2nd quarter and on a full year basis in 2023 as we realize the full quarter's impact of improving economics. Turning to operating expenses. Last quarter, we spoke about cost savings initiatives that we planned to implement in 2023 to deliver gross Annualized savings of $50,000,000 We accelerated the bulk of those initiatives in Q1. Operating expenses less stock based compensation, depreciation and one time expenses in the Q1 declined $10,000,000 sequentially versus the Q4 of 2022, excluding the impact of our recent Darwin acquisition. Our operating expense declined by 3 percentage points sequentially versus 4Q 2022 to 29% of total revenue.

Speaker 3

GAAP net loss was $61,000,000 impacted by non cash items such as share based compensation and our election to a shift to available for sale accounting for our risk retention assets. GAAP net loss in the quarter reflected the cumulative impact of this shift. Adjusted net loss in the quarter was $11,000,000 excluding these items. In summary, Let me reiterate that we remain committed to delivering sustainable profitability on an adjusted EBITDA basis. With another quarter of strong execution behind us, We are entering Q2 with significant momentum.

Speaker 3

As a result, we are raising our adjusted EBITDA guidance to now range between 15,000,000 and $30,000,000 on the year. Our outlook for Q2 fiscal year 2023 reflects a few factors. 1st, continued prudence in underwriting standards as the environment remains uncertain second, delivering our target 3% to 4% FR LPC margin and third, a continued focus on cost management. It's important to note with limited visibility, We are not factoring in any material improvements in capital markets into our outlook. In the second quarter, we expect network volume to range $1,800,000,000 total revenue and other income to range between $180,000,000 $190,000,000 And adjusted EBITDA to range between $5,000,000,000 $10,000,000,000 For the full year 2023, We expect network volume to range between $7,500,000,000 $8,000,000,000 total revenue and other income to range between 7.75 and $825,000,000 and adjusted EBITDA to range between $15,000,000 $30,000,000 With that, let me turn it back to the operator for Q and A.

Operator

On Joseph Vafi with Canaccord.

Speaker 4

See the fine tune up on the EBITDA line. Just at a high level, maybe some of the top of the funnel metrics could dive into I know you disclosed a really nice increase in application volume in auto. Just wondering what you're seeing in some of the other verticals and Related to that, appetite from new lenders, becoming partners. And then I have a follow-up.

Speaker 2

Sure, Joe. It's Gal here. Thanks for the questions. So as you pointed out, definitely, OTO was the application that we grew the most At an over 50% because of like very good partnerships, we landed. That's the part where we're growing the most.

Speaker 2

Second to that, I will say that we are seeing a strong demand for application from our existing partners continue to grow up, Both on the personnel loan and some other new partners, as you know, like Clama and others, they're just onboarded and working very diligently to increase the amount of application flow and to ramp up this type of partnership. From new partners' perspective, we do expect to have 1 or 2 more at the other half of the quarter, hopefully, big names That we've been working a lot on and will show the importance and the progress of the lending partners as such. From the way we think about conversion of these things, obviously, it's important to say that we are staying very prudent in this environment and we are shifting to more resilient bowels. Conversion rate is taking down 50% from 3Q 2021, and that actually means 2 things. It means that like we have already Embedded growth in our systems, lentils, etcetera, that as soon as the environment improves, we can Tweaking that up and create a lot of growth based on what we have already.

Speaker 2

And the other piece is in these days, it's bringing us And better quality of both wells that are actually having higher FICO, higher income because of other funding partners closing their credit box more and more. And maybe the last point to add just like on the funding side of that, which is another top of the funnel metric, We have raised about $2,500,000,000 yield today to support that growth.

Speaker 4

Great. And then Maybe one on conversion rate. I know it's down as you're remaining prudent and cautious It's on underwriting, but it looks like it's kind of stabilized here for a couple of quarters. How should we feel about that Conversion rate trajectory or basically do you think we're at the bottom of where conversion rate Is or would there be something that would take it lower other than perhaps another macro leg downturn? Thanks a lot guys.

Speaker 2

So I think you are on point. We are in the field today that we have bottomed out Like we're up to the bottom from a conversion perspective, I will say that these things are coming from where we see the funding cost and where we see the ROA of the assets that we are You're seeing from an ROA perspective, we believe that we are in the 8% to 12%, which is our target and therefore we don't need to reduce the conversion any further. Think the next thing you will see in the coming quarter is the conversion will start to go up. It's how to predict exactly when and how, But definitely, the trend of the direction is for that, and that's what we believe is the power of the situation we're

Speaker 5

Thanks,

Operator

Joe. Our next question comes from Michael Legg with Benchmark.

Speaker 5

Thanks. Just kind of want to follow-up on Joe's question on the verticals. Can you talk a little bit more about the geographic Dispersion of where you're seeing strength, weakness throughout different regions a little bit? Thanks.

Speaker 6

Sure. So

Speaker 2

from Regions' perspective, it's rather diversified Across the U. S, so like the big states such as California, Texas, etcetera, you will assume they are higher percentage. But if you do it by population, It's kind of like more or less the same.

Speaker 5

Okay, great. And then just a follow-up. You mentioned AI integration fees going up. Can you

Speaker 3

It's Mike. Absolutely, we see in these times the value proposition of Pagaya is Really enabling our partners to continue to grow. And as Gal touched on, in this environment, you see credit tightening, you see funding more scarce. And in that sort of environment, we're able to, help our partners grow using the Tagay Network. And as we do that, we've been able to, As part of our value proposition increased fees and so as our partners win, we've been winning alongside and that's allowed us to grow our integration fees by approximately 2 30 basis points over last year.

Speaker 5

And just following on that, does that mean that you have a host People who want to use your API and that you're by increasing the cost, it's almost Limiting the expansion in the near term just based upon availability or your capacity, I should say?

Speaker 2

Yes. I think this is Guy again. I think that like if you think about it in economics and environments like that, You are prioritizing places where you have a higher margin or higher fees. And as the environment and the macro is You will move more to grow even in the lower margin type of products and you will be less prudent on that side too. So I think that you can think about it as not as like a slower of growth in that environment and that's part of the way it's influencing us.

Speaker 2

But as we move to a positive EBITDA being strong with the fundamentals of the business as such and as these things will move on, We'll continue to grow because we have all the fundamentals to be able to do so.

Speaker 5

Great. Congratulations on a great quarter. Thanks.

Operator

Our next question comes from Moshe Orenbuch with Credit Suisse.

Speaker 7

Thanks and go and Mike, great quarter. Maybe following up on that a little bit, I think Pagaya had some unique advantages During that difficult funding environment because you kind of prefunded and you were able to sort of get compensated Could you talk a little bit about how you if the financial markets normalize, How do you kind of protect the advantage that you were able to get in this environment?

Speaker 2

Definitely. And Moshe, nice to hear you and thanks a lot for the question. So it may be a little bit less intuitive, But like in times like that, as you mentioned, our value proposition is actually becoming more apparent. So let me talk about it both on the partner side, as you mentioned on the funding side, so for the sales side, the partner side, like we are a big part of the ability to fund it and we're enjoying doing that. This is our duty.

Speaker 2

That's why we are here to support our partner to be able to bring more credit to our consumers. And you see that in few Places in the presentation that our wallet share, so to speak, with many of our partners is increasing as the day goes by and especially in these environments. On the funding side, it's and sorry, and for that, like it obviously creates for us a Lower cyclicality volatility versus others because we are becoming a bigger part of that lending ecosystem in these days. So like Normally, the environment is growing, and we are keeping our fair share. But in days like that, the environment maybe is not growing, but we are increasing our fair Sure.

Speaker 2

And that is a little bit of the lack of volatility more consistently that we are speaking. And historically, We sell as part of these volatile markets, partner really much appreciate the stability there for them Top number 1, kind of like metrics in the stability of the network and it strengthens their value proposition, their Their ability to be there for their consumers and therefore increasing our value proposition with them. So I think that the stability is something that like the fab was very Appreciated. And we are working day in, day out to make sure we are going to be for that through the times and as such, Getting compensated for that and reworded. On the funding side, in days like that, investors want to be more prudent.

Speaker 2

They want a high quality source of assets that is coming with a very strong underwriting capabilities. And I think to that, just yesterday, we announced And very unique partnership that we did together with Angela Gordon and Varde to be able to facilitate some kind of the portion of portfolio sell out through a credit union through our technology. So being there next to our funders, Next to our funding partners and to be able to facilitate and to utilize the network AI capabilities in order to To make sure the performance is going to be in line and intact is the thing that we are flipping and making sure we're doing in this environment. And as I said about the power, that goes a long way in becoming strong relationships that appear to stay after these market situations and

Speaker 7

Great, thanks. And maybe as a follow-up, the idea of being able to charge AI fees versus capital markets fees, I would imagine it's generally when the capital markets environments We're more robust. It was easier for your customers to pay you in those capital markets fees. But could you talk a little bit about how you see that mix evolving over time?

Speaker 2

Sure. Yes, Mike, you want

Speaker 3

to take it? Absolutely. Hey Moshe, really I think it's a good demonstration of the Resiliency of the business model, because there's actually a slide, I think it's 41 in the deck that shows us our visibility. You've got those 2 different types of fees that you referred to. On the capital market side, you've seen the trend actually decrease as market liquidity has dried up overall.

Speaker 3

And we actually think that's now Really hitting a bottoming out point. And the other side, you've got the AI integration fees, which is everything Gal just spoke to around the Our goal is to deliver consistent results of FR LPC in the 3% to 4%. And we think we can get there through multiple ways, which is the unique Structure of our business model that's resilient.

Speaker 7

Great. Thanks very much.

Operator

Our next question comes from Kirtel Akossa with VB Moshe Nathanson.

Speaker 8

Yes. Thank you. Good morning. On Dorin, you disclosed Dorin's contribution to adjusted EBITDA. Could you also disclose Dorin's contribution to revenue and Maybe to volume

Speaker 3

2. Yes. Hey, thanks for the question. I'd say maybe stepping back On the question around DARWIN overall, I would just start by saying we're really pleased with the progress of the integration. We spoke last quarter about The value of Darwin and a strong leadership team and disruptive technology that's really going to add to our overall vertical platform in the SFR space.

Speaker 3

So overall, really excited about the future growth trajectory allowing with DARWIN coming into our platform. From an actual results perspective, actually Very immaterial in terms of our business, which is in line with our expectations. We did disclose, as you mentioned, on adjusted EBITDA. Without the adjusted EBITDA impact of Darwin, we would have been approximately $5,000,000 So in the order of single digit small 1,000,000 of dollars of impact, We don't expect that to be material in the upcoming quarter, but over time we expect to really generate the synergy and the value of the DARWIN platform as it grows.

Speaker 8

Got it. Makes sense. Just to follow-up on that, where do you see the single family rental business going in the medium term? What are your plans for That's critical.

Speaker 2

So I want to connect that for a second for our mission. From a mission perspective, Pagaya is Created to provide access to credit people through our partners, whatever they are and whatever type of loans The same mission and vision exists for us in the residential space in the U. S. There are big part of the population in the U. S.

Speaker 2

That Looking to get access to more affordable housing and places where they should have the ability to do so in a Cheaper cost on the one hand side and not to be restricted by high level FICO or other type of restriction things. So with that in mind, we designed that we purchased the Darwin and to be able to connect the modern AIs that are allowing to And a lot of potential value of the ability to provide housing to more people, residential and high quality Through the dialing part. So in our perspective, we believe that like, I would say, the End of this year or maybe the start of next year, we're going to start seeing material progress in that perspective From the growth initiative and from the ability to implement all of that and to bring to a real change in the way we operate. It just takes a little bit of time to Have the full integration and understanding and the design of the product of how you do that, but we are very certain that And this call is going to become a meaningful contributor for our business in the next year or so.

Speaker 8

Yes. Okay. Makes sense. One last question, please. You raised about 75,000,000 Last month, what are the priorities for deploying that capital, either organically or inorganically?

Speaker 3

Sure. We spoke at the time of the opportunities that we see in the market just given current valuations. We think it's a really exciting time right now, where there's going to be in our potential opportunities for strategic transactions such as M and A. So primarily the goal of that raise was to give us the resources that are necessary to be able to Execute very quickly should one of those come to fruition.

Speaker 8

Thank you.

Operator

Our next question comes from Rayna Kumar with UBS.

Speaker 9

Hi. This is Aditya Kulkarni on behalf of Rayna Kumar. Thanks for taking my questions. So network volume and revenue and other income came in above your prior expectations for the quarter, but You are maintaining your targets for both for the full year. So can you just help us understand some of the underlying macro assumptions that are built into the full year top line outlook?

Speaker 2

Yes. Thank you very much for the question. So I think it goes back a little bit to the conversion rate and the discussions we had before. We have a very strong confidence in the business and the ability to execute, but we are maintaining that guidance because Our ability to predict a conversion point in time given the volatile market condition could And therefore, we keep it as such. We prefer to be prudent and understand of where we are going, and that's something we are going to assess, over the next quarters to come.

Speaker 3

And I'll just add to that. Really, we're Managing that conversion ratio to drive to that target return of 8% to 12% for our investors. And we're really pleased that we've been able to generate That will be our target return at this point. We'll continue to monitor it, but really that's going to be the driving force to allow us to toggle that conversion rate when the market improves And that's a uncertainty at this time, but when the market improves, we'll be able to increase that conversion ratio, which can lead to upside on potential volume, but We're not taking a view at this point of when that will happen.

Speaker 9

Understood. That's very helpful. And just as a follow-up, Have you seen any material impacts from the ongoing challenges that U. S. Regional banks face, particularly as it relates to Partner demand for your network solution.

Speaker 2

Yes. So I want to take you again back to the announcement we had So they will be partnering with Pade and Angela Gordon to facilitate the credit union sale part of their portfolio. So We see the impact of that from two sides. On the one hand side, it gives us a unique opportunity To utilize the technology and the AI to facilitate more of that and to help banks, credit unions, etcetera, To get to a better funding position with the strong relationships we have on the capital market side and the private capital Bundled with unique AI, we are satisfied in the perfect moment, in the perfect time. And the other piece is That like we see part of these banks, medium sized banks, were big buyers or big drivers of this ecosystem in the U.

Speaker 2

S, Anywhere from the personal loan through Fintech lenders and up until auto lenders, they were kind of like buying or So we're selling loans to credit unions and others. So like it's creating a much better environment for pricing and the ability to actually Provided quality assets and in the same time, it provides us a unique opportunity to react and to be even more centralized with our network AI.

Speaker 9

Great. Thank you so much.

Operator

Our next question comes from Hal Goch with B. Riley Financial.

Speaker 6

Hey, good morning, everybody. I'd like to ask a question on Slide 17, and it shows The percentage of volume that has increased over the past 2 years, it's gone from like 14% to 26%. And the reference point for Q1, 2022 was that there was a tremendous amount of lending going on and There was high growth and high demand and everyone was issuing lots of credit. And then a year later, it's a very different situation in Q1. It's very tight everywhere.

Speaker 6

My question is, what do you think is what's normal? What do you think will be a normal Percentage you might have of your partner's volume in a more normalized environment, clearly not 14. Is it 26? It's somewhere in between. Thank you.

Speaker 2

So you're absolutely right about your observation that you see here quarters with a very different funding or macro environment. What we have been noticing historically is that like once you hit these targets and these percentage points, usually The integration and the relationship between the organization is working to keep that as such. So that's becoming kind of like a sticky number. Now it's not to say that 26 cannot go to 24, but generally speaking, the upward trend of like different part of the Flow that is being generated by different partners. Think about it more as a partnership that like once you set it up and once you grow it And it's kind of like a land and expand strategy.

Speaker 2

Your ability to grow that over time is relevant. So the major part of it is the ability to integrate very heavily into the way these organizations are working and to be able to provide them a solution over time, and that's why you see this percentage growing irrelevant of where the market is. It is true that the market sometimes is giving a push for acceleration of that, but the trajectory is actually to become Hi, Ian. Hi, Ian. Hopefully, it's about 25%.

Speaker 6

Okay. That's great. Thank you. Follow-up question would be then For like a new customer, a new platform that you've connected to through APIs or software like Ally or another type Aggregator of a great amount of application demand. Generally, how does what is the trajectory on a same store basis as you launch and then maybe in year 1, year 2, year 3, because I like that term land and expand because it sounds like, hey, The volume will build over time even with an existing partner.

Speaker 6

Can you give us your thoughts on that?

Speaker 2

Yes. So I want to actually speak about it from 2 lanes, if that's fine by you. So the South Lane is the lane of like, let them expand, as we say, and we start Rather small. We are learning the flow. It takes time to adjust and to create that.

Speaker 2

You can see, for example, on the auto loan slide that like both the application were 51%, but more than that, the funding through that accelerated 4x Of the integration, it's like continuing to expand. And it usually can start as low as like 1%, 2%, 3%. And in the height of it, it could reach to the 25 plus percent that we just described in your previous question. But I think there is another The people are underestimating in that effect, and this is the most that this is creating. So think that you have a partner and you've been working with him for 3, 4 years and you learn the flow and the application and all the different type of uniqueness that that partner has and what it's actually doing is giving you a unique data advantage that your AI can convert compete with because you have all the knowledge and the connectivity for the unicastric analytics of a specific channel that is making that channel in the product landscape where Because you have knowledge and 4 years of like specific data that no one else has.

Speaker 2

So to your question, in the early days, it can be little bit different. But with that, it's coming a unique advantage that we are learning this channel very much and optimizing

Operator

Excuse me for the final question. I will turn it back Shubhgal Gubner, please go ahead.

Speaker 2

Thank you, operator. And now we have a unique last question, guys. As an AI driving company, we strive to always be at the forefront of AI innovation, in line with our core values. This quarter, we decided to bring this spirit of innovation to our earning call, potentially for the first time ever. We invited Chegg Gdp to our earnings Q and A session as a participant.

Speaker 2

We wanted Chegg Gdp to ask One question that it shows as if it were an analyst on our earnings call. Let me explain how we went about it. We uploaded our earning materials and historical materials earnings to Czech GDP this morning and promoted it to suggest a question as If it were a sell side analyst and suggest an answer as if it were the CEO of Stogaya Technologies, which means me. I'm going to have Jen C. Read the question that Czech GDP suggested, and I will read out loud the answer that he provided.

Speaker 2

To be clear, we did not edit or change a single word of both the question and the answer provided by CheggiDP. Here we go, Jensi.

Operator

Thanks, Gal. The question from Chat GPT is, how does Pagaya's rapid growth in the auto business

Speaker 2

to say is the following. Thank you for your question. Pagaya's rapid growth in the auto business has significant contributed To our overall competitive position by expanding our network and strengthening our AI data moat. Our connection to over 20,000 dealerships, both franchise and independent through our partnership with major lenders has allowed us to access a vast majority of unique data, which in turn improves the power and accuracy of our AI models. This enable us to provide better underwriting solutions and drive growth for our partners.

Speaker 2

As for opportunities in this segment moving forward, we see tremendous potential in continuing to expand our partnerships and further scaling our auto business. Our recent addition of a large auto bank has already led to a 51% increase in total auto application volume evaluated by Spagaya Network. This growth not only enhance our ability to serve our existing partners, but also attract new partners who recognize the value of our innovation underwriting technology. Moreover, as we continue to gain operational leverage through scale and cost management, we expect to achieve sustainable profitability, further solidifying Our competitive position in the market. In summary, the rapid growth of our auto business has put Pergaya as an inflection point, we are well positioned to capitalize on the opportunities in this segment to drive our medium term goal of reaching $25,000,000,000 in network volume and $1,000,000,000 Thank you very much, AGDP, for the question and the proposed answer.

Speaker 2

With that, I will make a few closing remarks. I'm confident in our ability to continue to deliver for our partners and investors. We have significant momentum as we enter Q2 and beyond, And we'll continue driving towards achieving our mission. Thank you all for joining us today, and we look forward to continue to talk with you in the future.

Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a great day.

Powered by Quartr
Earnings Conference Call
Pagaya Technologies Q1 2023
00:00 / 00:00