Pagaya Technologies Ltd. (PGY) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Sam Salvas. I'm on the fintech equity research team here at Needham. Today, we have Gal Krubiner, Co-Founder and CEO of Pagaya here to give a presentation. And afterwards, we'll open it up to do a little Q&A. So with that, Gal, thanks for coming, and I'll hand it over to you.

Perfect. So hi, everyone. Thank you very much for having me. Thank you for inviting me. I think what we'll try to do today, we've prepared the presentation, going to be the basics on one-on-one of what we're trying to do, how we do it and where we are marching towards. So let's kick it off. And after that, any questions or whatever would love to have and to discuss. So the best way to start, what we do and how we think about it is obviously from the mission, and then we'll move into the business overview. So -- when we think about what is Pagaya trying to solve in the world, we are trying to deliver more financial opportunity to more people in the U.S. While that's a mission that potentially many companies have, I think, still, investors are underappreciating the fundamental issue in the U.S. ecosystem of lending and how much there is still to solve. The best way to put it, or the easiest way to describe it, is with a simple fact that is [ struggling ]. 42% of the U.S. consumers are either denied for financial lending or are not getting the credit they are looking for. Think about that. The biggest economy in the world with the most sophisticated capital markets, financial system, banks, et cetera, still, 42% of people are getting denied for credit. And as you can imagine, that part of the system is hurting more people that are discriminated or other things. When we thought about that, we said we want to solve it or at least we have to mitigate that problem as much as we can. And when we started, we saw a lot of like what we call FinTech 1.0 and a lot of companies that were digitalizing the way personal loans and other products are being consumed through the Internet. But when we thought about it and we talked to ourselves, should we start to have another business that is another lender, digital lender, it didn't make sense, because we didn't think the amount of impact we could have on that number is actually worthwhile what we did. So we took a different approach. We went to the infrastructure play. We thought that if we'd be able to build the infrastructure of lending a little bit different, the outcome of that number will be massively lower. And that's what we were focusing in Pagaya. We build a network that enabled to enrich the access to credit. And how we do it is rather an interesting story. We took 2 sides of the most important players in this ecosystem that provides consumer lending in the U.S. and we brought them together. On the one hand side, we have the lenders. Today, while we speak, already millions of millions of millions of customers are going to their lending partners, let it be banks, let it be fintechs, let it be auto lenders, to ask for credit that, as we said before, are getting denied more often than not. On the other side, there are investors that are actually looking to invest in these assets and to gain access to these type of assets, as we know them, the private credit. So while connecting the two in a very unique manner, we have managed to create a network that is enabling all of that to happen and to increase the origination of loans in the U.S. by a lot. Pagaya originating in a year something like $8 billion of new loans through that system through connecting between lenders to investors. For a Pagaya business model, and we'll touch about it later, we are earning fees in an agent business per se of 3% to 4% on every $100 of originated loan that we have created. Let's start with the way it works. From the consumer perspective. So a person is coming into one of the lenders that is registered in our network. It can be one of the biggest subprime vendors in the U.S., such as Ally Bank. It can be SoFi, it can be Klarna. And it can be a top-5 U.S. bank that we just landed a few months ago or a top-4 OEM that we just landed four months ago. The applicant is filling the full form and asking for a credit. For some unknown reason, cost of capital, lack of technology, that one of the lenders decided to deny the borrower. In that particular situation, instead of sending a decline reason to the borrower, the connectivity to the Pagaya network is allowing them in an API to send it to us. We are reviewing the application with a very strong data and AI analytics that we have. We have over 250 data science analysts. And from that 80%, 90% are getting declined, we're finding another 10% that we can actually approve, and we know that they're going to get a very good performance at the end. What we do in that moment, we're sending back in application and offer to the lender that is standing that in return to the borrower. Borrower doesn't even know that happened. They are getting an offer from one of these lenders. If they went to Ally, they will get an Ally offer. If they went to SoFi, then we get a SoFi loan. So they are staying in the ecosystem of the lender they chose you. They are getting the offer that actually was provided by Pagaya through the lender. The consumer is accepting that offer, but we have created a new loan, and we are then placing it with our investors on the banking. Now why it's so unique? The marketing dollars that we are spending is zero. We are already relying on the marketing dollar of the lenders that spend and brought these borrowers to the door. The lenders loving it because otherwise that or would have gone home without getting any offer. So it's a pure new customer for them, pure margin for them. And the most important thing, we solve their balance sheet need because we're bringing the money from the investor. So the connectivity between capital and the underwriting AI was the true product innovation that we brought to the world that allowed for the lenders to increase their production by 10% to 20% of what they did before. All of that goes into the bottom-line. They have more customers, and in the same time, they don't need to do anything else. When we did that, we actually started to scale that. We started all of that in 2016 in a personal loan and we managed to move it into the auto loan space and to the POS. One of the only fintech companies that managed to penetrate into 3 scaled products per se, and we have very noticeable partners in each that we'll talk about in a second. We have more than 28 lending partners on the partnering side that are fully connected to the LOS system of the origination. As I said before, part of them is a top-5 bank, federal bank in the U.S. We are seeing more than $1 trillion of applications every year. And we had 100% retention with our partners, lending partners since we started, trying to say what I said before, lending partner [Indiscernible]. On the other side, we have over 90 institutional investors. We have already originated $20 billion almost of personal loans, auto loans, and POS. We are the biggest personal loan issuer in ABS in the United States, yet not many know about us on the equity capital. Behind that, very sophisticated and seasoned team, a combination of well-known banking leadership. From our President, Sanjiv Das, thast was the CEO of CitiMortgage; Leslie Gillin, that was the Chief Marketing Officer of JPMorgan Chase; to many other leaders that help us and take the company to the ability of integrating that very sophisticated technology into the bank, in to do that. So that's the high level. Let's summarize the key investment highlights and why we're so excited about the business that we have. We have a very strong, powerful business model that is fit for purpose to sort a very big problem in the U.S. We have a growing advantage network because as the network is growing, the data is growing; as the data is growing, our ability to approve more is actually growing. We have managed to develop a product-led growth company that is enabling us to land more and more partners as we think about the different parts of the ecosystem. And we have a very attractive economics that is flowing through our balance sheet. Today, we are at a run rate of over $100 million from an EBITDA perspective. So Pagaya today from a run rate perspective, as I said, is originating over $8 billion. We have what we call a fee revenue less production cost, gross margin, pensioner say gross margin of almost $300 million. And because we have leveraged already in our scale, we're managing to have an adjusted EBITDA of over $100 million on the right rate, all of that is based on Q3 numbers. Where we are going from here? We are trying to take the business to a $25 billion of network volume. We'll touch in a second how we're going to do that, but the fact is just doing more of what with you. That will allow us to have a $1 billion of net revenues, gross margin. And from that, because of the additional leverage that we get, the pass for a $500 million of EBITDA is rather easy. These are our medium-term growth targets that we have put in front of the Street. And as we work through in the company, that's what we're marching to. Now what I want to do is I want to take a little bit deeper look on the 2 sides of the value proposition that we show, both for the lenders and to the investors. So later when we have the questions, feel free to point to the right areas of interest. First, we start with the lender. The lenders are our biggest partners. We love them. We hear them. We listen to them. We learn from them. We are solving one of their biggest problems: High cost of acquisition and a gap to the long-term value from the borrowers. We designed a technology tool that is super-strongly embedded into the loan origination systems of these lenders to be able to do all of that seamlessly, for them to be able to ping us in the API in less than 0.5 seconds and to be able to give us really the application. But the real question that you're interested in is why they love us. And why they love us is these very simple, free, basic. We help lenders say yes to more customers without Pagaya, when some of the customers wouldn't have been existed. They are taking zero incremental funding risk because they don't need to commit anything in that funding process. And they do all of that in a friction, real time, which allows them to keep the customer. That is almost a perfect product for any lender in each industry that they exist, and that's what we started from the personal loan and moved to the auto loans and ended up with the POS, point of sale. What you see in front of you is a case study. When we are going into a lender and we are running through all the applications that they have, we are giving them the businesses of why they should care and why they should listen. What you see in front of you is the approval of one of the lenders that we work with in that process, divided by the FICO scores into the what are the potential approvals that Pega approved, and therefore, what are the enabled issue approvals that could happen. You can see that the numbers are very high. We are talking about 20%, 25% of incremental approval that parts are getting converted and parts are not. We are talking about millions of customers for the more mature partners that are working with us already, or hundreds of thousands of customers that are working with us already for a few years and dozens of thousands of lenders that are starting with us in the beginning. You have below testimonials of the potentially two most sophisticated subprime auto lenders in the U.S., testifying that to work with Pagaya gave them an edge and gave them a lift. And as I said, we did that across the personal loan, which we originated over $14 billion. We did it in the auto loans. And we managed to connect to over 40,000 dealerships. Can you imagine for a company with 650 employees how tough would be to connect to 40,000 dealerships? Almost impossible. We are leveraging the infrastructure of our partners hand to hand, trying to get to a better outcome. And the third one is the payment. Our biggest partner is Klarna. 11,000 merchants that we never met, but is connected to our system and our ability to provide them, lending to their customers. On the investor side, we are providing the ability to access to a very stale AI vetted loans. So when you think about it, the core power, and we'll see it later, of the ability to provide a good better performance for the institutional client is relying on the fact that we have the access to all these data. The network is very powerful to the ability to feed the AI algorithms into the outcome that we're looking for. And that is creating an ability for a big institutional client like Sovereign Wealth Fund of Singapore that is investor in Pagaya, both in the assets and in the equity, to generate and to source billions of billions of dollars of consumer credit-based assets into their allocation over time. And as we all know, private credit is definitely an asset class that is getting more and more familiar in the sphere and replacing the bank in the ability to provide credit to the borrowers. We have more than 93 institutional investors on our institutional platform, which means you invest in personal loan, invest with Pagaya. And we have managed to gain more and more market share as the years went by. We'll not talk about it today, but our way of operating is rather different than the others. We have a pre-funded model. So we are taking the liquidity risk of running out of money for originating loans who are very little, because we are going to institutional clients, and we tell them, "Hey, we're about to originate loans from our 28 partners. Would you mind to participate?" And then they are providing us capital in a co-mingled pre-red ABS deals to be able to go and to buy them based on fuel restrictions. So the ability of Pagaya to left one day with a lot of loans and not a lot of liquidity is very minimal to not exist. We still have some credit risk as we are investing in the ABS that we put as part of the Dodd-Frank rules. And therefore, we have some exposure to the credit risk, but it's minimal compared to the billions of dollars that we are owing. To summarize, we have built a unique AI network that has one-of-a-kind lending product to the partners and very scaled solution for the institutional investor world to be able to drive value across the ecosystem and to solve or to try to help for the mission that we are spending for, which is reducing the 42% of people that are getting denied for credit for no reason because the performances. Few slides to summarize is what you see in front of you is the difference between a credit regular business to the AI network that we have. The reason why we love our business so much is because it's not cyclical. When you are thinking about the top of the funnel, which is the light blue, it's continuing to grow as we add partners, as we gain more flow from the partners. And as you can see, it's in the trajectory of a growth company. While the conversion rate, which is how much we see to how much we produce or fund, would change over time because of macroeconomic scenarios, still the growth story is very clear. So while people look on Pagaya today and say, okay, it's only growing 10% or 20% yes, but that's because of the economy going against. And when that's going to bottom down, and it did, and it will, the potential of the upside is enormous. And that's what makes us so excited of the resiliency of the business and why we can originate $100 million-plus of an EBITDA in a macro environment, which usually credit is a tough word. So the flywheel effect to end up is more data, the more investors, more products, more lenders are giving more data, and more data is being generated into a higher conversion into a better data and into a higher digination. So the flywheel and the uniqueness position that we have in the ecosystem is allowing us to continue to grow through cycling with our partners. Our growth initiatives, simple put, end product that you integrate with more lenders. We are talking to 80% of the top 25 banks. We never had a no. We had not-now because it's a heavy lift. Let's talk in a quarter. But there is no lender in the world who will say no to something like that. Number two, work on better and better algorithms and models to increase the conversion through the power of technology. And lastly, build more products for the network to bring more value to your partners that are already considered to be the most lucrative clients in the world that are connected to Pagaya from a tech perspective. All of that is bringing us to the $25 billion of origination network volume that I shared in the beginning, but this is our goal. What you see in front of you is the different origination by different colors by the cohorts of lenders that we landed. So all the production that has actually happened and anticipated to happen from lending partners that we landed in '21 and then in '22 and then in '23 and then in '24. 70%, 80% of that production projected in our medium-term growth plan is already from existing part, i.e., we don't need to land many more partners or very few in order to hit our medium growth targets, which are very, very high. Last point is -- the beautiful part is everything is automatic in Pagaya. We never speak with the customer. We never approach a customer. Therefore, scalability is 100%. So how much we need to invest more to onboard 2, 4, 5, 6 new partners, not because we have the infrastructure. Now you will need to make the team a little bit bigger, managers, et cetera, but nothing compared to what we -- what you would assume in a regular business. We have managed to move to much higher EBITDA numbers, partly by cost savings and being in a very strong position to continue to leverage our operational level. So with that, thank you so much for listening.