Pagaya Technologies Ltd. Q4 FY2024 earnings call

Management Statement and Operational Highlights:

• Gal Krubiner highlighted the company closed 2024 with annual revenue over $1 billion (+27% YOY), FRLPC $407 million (+54% YOY), and adjusted EBITDA $210 million (+156% YOY). Updated fair market values for risk retention securities tied to 2021-2023 vintages, with $145 million markdown in Q4. Emphasized the unique value proposition enabling lenders to reach underserved customers, with over $2.6 trillion in loan applications processed and $28 billion in loans originated.
• Sanjiv Das discussed product strategy: disciplined growth in personal and auto loans, rapid growth in POS, and pre-screen product testing with existing partners to drive lower customer acquisition costs.
• Evangelos Perros detailed financial results: FRLPC at 4.5% of volume, adjusted EBITDA up 88%, and inaugural GAAP net income guidance for 2025, targeting GAAP net income profitability in Q2 2025.

Segment Performance:

• Personal loans: Q4 organic volume growth of 24% to $1.6 billion, FRLPC at 6.3% of volume, being the largest contributor at ~60% of total network volume.
• Auto loans: Year-end annualized run rate nearly $1 billion, Q4 sequential growth ~40%, with improved credit performance compared to 2022 peaks.
• Point of sale (POS) loans: Fourth quarter sequential growth over 170%, year-end run rate over $1 billion, as the fastest-growing vertical.

Guidance:

• Expect GAAP net income profitability in Q2 2025.
• Q1 2025: Network volume $2.5 billion - $2.7 billion, total revenue and other income $280 million - $295 million, adjusted EBITDA $65 million - $75 million, GAAP net income -$20 million to breakeven.
• Full year 2025: Network volume $10.25 billion - $11.75 billion, total revenue and other income $1.15 billion - $1.275 billion, adjusted EBITDA $265 million - $315 million, GAAP net income -$10 million to $14 million.

Risks:

• Fair value adjustments on risk retention securities tied to 2021-2023 vintages were a significant factor in past losses.
• Challenges in the funding environment during 2023 led to sensitivity of these securities to credit and prepayment assumptions, impacting P&L.

Question and Answer: Q: Morning guys. Thanks very much for taking my questions and all the details that you've provided. And I guess my question is, you've done some -- you've given us some details around the fair value marks in the quarter. The marks were a little bit bigger than prior quarters. Maybe can you give us a little bit more detail on kind of what framework you use to make the fair value marks? What's baked into them now and what gives you confidence that there won't be ongoing fair value marks as we go through 2025?

A: Sure. John. Hi, it's Gal here. Thank you so much. So, I will take the first piece and then will hand it over to EP to speak more specific about the framework and where the loss is coming from, and Sanjiv to speak about what it means for the business. So first let me say that, as we think about the impairment and as you mentioned out, the last three quarters were outsize losses versus what we used to have in the past and what we expect to have in the future. Most of them where are the things that are driving for 2023. If you recall in our last earning call that we stood here in November, we actually said that we are going to have another quarter of losses coming through. Most of the losses and EP will speak specific numbers are related to the 2023 vintages that throughout the year got seasoned and therefore versus where they are marked on the balance sheet where the actual data coming in took the fair market value hit. And all of that in 2023 was because the funding conditions were so challenging that in order to support the network, the funds and the investors, et cetera, we needed to put up these things that we knew could have some potential losses in the form of the level of sensitivity to it. But really the bigger question that you're asking is, how should we feel comfortable that this will not be happening again? So first and foremost, let me share that the guidance that we provided for 2025 is including any potential credit related impairments. We have built in the last two, three quarters a very robust infrastructure and capabilities to be much more predictive about these type of outcome as it relates to the losses and the different parts. And if you remember, we repeatedly said that as we think about the 2024 deals and transactions that we have on the balance sheet because of the different environment they were produced in plus how we know the performance of the credit is performing and it's performing well, we are in the very strong belief and we have the visibility to know that a meaningful or magnitude like that of losses is out of the question. That comes to the last piece, which is when we are thinking and speaking about the 2024 trends and where we are standing today as the business and what the business is underwriting today is a very strong production that is consisted both on the credit on the income side, but a lower cost of capital and a better structure on the other side that is translated into normal future losses meaningful on the 2024 and the future. And when we did the full fair market value adding our regular process to bring these down, the prior 2024 vintages should not have any material drag on our performance. And hence, we are today having the ability to provide a GAAP net income guidance inclusive of any potential credit related impairments. I will hand it over now to EP to speak a little bit more about the specific of the numbers and the things behind and then Sanjiv will close it out with the understanding of the business impact.

Q: Obviously demand in the pipeline remains very strong. So, I'll just follow-up with a couple of follow-on credit questions. Hey, first is, I guess for EP, I just want to make sure I understand the guidance correctly because I'm looking at the slide that has the Slide 21, which has the scenarios about write-downs and impairments in the loan portfolio. It looks like scenario A is sort of driving your guidance. Am I led to believe that if expected cash flows actually perform in line with your forecast that you're that we'll have $100 million to $150 million more pretax income effective for GAAP? Is that how we're supposed to interpret Slide 21 that inherent in the GAAP guidance is some very conservative assumptions around expected cash flows?

A: Hi, thank you for your question. No, I think let me provide more clarity. If we expected any more losses on our existing portfolio, we would have obviously taken that. So, the base case is what drives effectively our expectation for 2024. What we're doing is in our guidance together with everything else, we're just using that scenario A, which provides an additional $100 million to $150 million potential impairments, if any, and that's what's basically driving our guidance. And that's just to be clear, it's on the full year guidance for 2025, not 2Q.

Q: Good morning. Thanks for the question. EP, I think, you mentioned in your prepared remarks, I was just hoping you can reiterate it. I think you were able to overcome some redemption issues that you've had, potentially with these marks. And then as a quick follow-up, just curious how you see the mix of network volume evolving this year. I would assume higher degree of point of sale could translate to lower risk of on the risk retention side. Just some thoughts there would be helpful.

A: Sure. Just to clarify a little bit on your first point, what I was highlighting is that in the valuation that we did for our fair value for Q4, some of that is coming through early redemption rights that we have on some of those securities. We didn't have any issues or anything, just to provide some clarity. But moving on to the important question, as we think about the volume guidance, again, as we have been doing in the past, you need to appreciate the fundamentals of our model. We don't grow by chasing credit growth or chasing conversion, we grow by adding more partners to the network. So, when you think about the higher end of our range on the volume side, effectively that would imply that some of the newer partnerships that we have announced will accelerate more than we would versus the lower end of the range, which means we will take a little bit more time for those relationships to mature. That's a little bit how to think about the volume growth. And then in terms of areas of investment, as you think about the different asset classes, personal loan will continue to grow, but most of the investment and, call it, higher ROI and growth potential that we see is in our auto platform and POS. And maybe Sanjiv can add a little bit more color to those.

Q: Sorry about that. Thanks guys and, for all the color and nice to see the outlook for 2025. Just wondering if, it's too early to have maybe kind of a more normalized fair value adjustment kind of margin or percentage of FRLPC or network volume as we move forward and maybe if we've gotten past some of these rough bumps, how to think about that on a normalized basis over the medium term?

A: So, Joe, it's Gal here. I think in the numbers, there is some baked assumptions that are relatively stable numbers that you saw in the past. We are not yet in the place to characterize it in a percent, et cetera. We are working through that, but you should assume that in the GAAP net income full year guidance, there is some out of it. And post the call, we can take you to the different pieces to see where it stands.