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

Greetings. Welcome to the Pagaya Second Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Craig Smith, Investor Relations at Pagaya Technologies. Thank you, Craig. You may begin.

Thank you, and welcome to Pagaya's Second Quarter 2026 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 Jon Dobres, Chief Financial Officer. You can 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.pagaya.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 third quarter and the full year of 2026. 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 our press release today 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-Ks, 10-Qs 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 as a percentage of network volume, core operating expenses and core operating expenses as a percentage of FRLPC will be discussed on the call and included in the accompanying materials. We also provide an outlook for the third quarter and full year '26 on a non-GAAP basis. 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 to the SEC on Form 8-K today for more 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.

Hi, everyone, and thank you very much for joining. I'm really proud of our Q2 performance. The business had very strong growth. This growth was not by a chance. It was the outcome of a partner-focused strategy that we have. From an EPS perspective, Q2 reached $0.49, which is a record for us. And as a result, we are raising our net income guidance by almost 25%. Today, I want to drive home a few key messages. First, our unique profit engine. Second is that growth is accelerating, driven by repeatable product and partner expansion. Third, the Pagaya embedded B2B integration powers a unique consumer data mode at scale. Let me start with reminding ourselves of our business model. Our model is simple. Partners sell us volume, which our proprietary technology turned a portion of that volume into loans and our capital markets funds these loans with over 170 of the largest asset managers, insurance companies and pension funds in the world. With each transaction, we earn high-margin cash fees. And this quarter, every part of that engine set a record, network volume, FRLPC, adjusted EBITDA and EPS. Personal loan reached an all-time high and also set a record by a wide margin. All of this while keeping costs flat, which means all of it went to the bottom line. Auto was the standout this quarter and showed a step function growth. The driver behind it is that our network calibrates now every aspect of the offer, the amount, the rate, the duration and the document requested. Why this is so important? Because it pushes our lenders to win more deals with their crucial dealer networks. In turn, every offer strength our value proposition. This data drives the perpetual learning that improves our proprietary technology. This is the auto flywheel running, and we are still in the early days. The bigger picture, though, that keeps me excited is that the total addressable market in consumer credit is almost $1 trillion of origination per year. Today, we are only at a run rate of $14 billion of origination per year. To take advantage of this opportunity, Pagaya continued to develop 2 distinct capabilities. The first, a B2B embedded platform where our products enable our partners to be a full spectrum lender; and the second, a data mode engine for consumer lending, where every application sharpens the next decision. This combination, the data mode plus the embedded distribution sets Pagaya on track for years of profitable growth. To summarize, costs are largely flat. Volume is growing. Operational leverage is high. That combines to compound EPS and it is just getting started. With that, I will turn it over to Sanjiv.

Thanks, Gal. Big picture, this was another strong quarter of disciplined execution. We stayed focused on profitable volume growth and on diversifying across asset classes, partners and channels. What's driving this is our product-led growth playbook, which we keep rolling out partner by partner to unlock growth. So let's start with the headline. This quarter, we achieved the highest network volume in Pagaya's history at $3.5 billion, which is a 33% increase year-over-year. We did it with no change to our credit posture with a steady conversion at roughly 1% and almost no incremental OpEx. Auto alone was more than 3/4 of our year-on-year growth in network volume. In fact, this quarter, application volume grew 29% year-on-year. Our auto approach remained focused on the indirect auto industry and the relationship between the dealer and the lender as we believe that the dealer will continue to be where most of the auto transactions will eventually take place. About 83% of auto loans close at the dealer's desk. So the dealer is the gateway to the loan with Pagaya connected to more than 40% of the U.S. market. Let me break down what we are actually optimizing in auto to solve critical dealer needs and thereby enabling our partners to become full spectrum lenders. First, we optimize our lenders' capabilities. So when a partner can't make an offer or their terms just aren't going to convert, we set them with an approval or a counter, so they stay relevant right there at the dealer's desk. This means that our lenders stay in deals they'd otherwise lose. Second, we optimize for the borrower. We adjust the down payment, the APR, the loan-to-value, the term, all in real time to find the structure that the borrower can actually close on, and that's the key. The goal isn't the offer that looks best and safer. It's the one that the borrower actually says yes. And third, last but certainly not the least, we optimize for the market because the dealer is seeing multiple offers at the same time. So we look at what the other lenders are putting in front of them, and we make sure ours is the most compelling one in that lineup, not just approvable but win worthy. So you put those together and you get a self-reinforcing flywheel. We deliver a seamless dealer experience. We let our lenders make competitive offers and that earns us more application referrals. As we expand full spectrum approvals and capture more flow, approval rates and application volumes both rise, which makes our partners the preferred lending provider for the dealers, pulls even more flow into the top of the funnel for them and feeds the next turn of the cycle. And here's our real structural advantage. Our embeddedness in our partners' business is driving our unique customer data moat. That combination, the B2B integration on one side and the data on the other side is what makes it so hard to replicate. Now on to PL or personal loans. This quarter alone, the affiliate Optimizer engine, our flagship personal loans product contributed more than $1 billion in network volume. Last quarter, we onboarded one of our leading personal loans partners into Experian Activate, and we are on track to add a few more personal loans partners to that platform this year with a line of sight to 2 more next year. In the second half of this year, we expect to go live with a few more new partners, including regional banks. The important part, every new partner comes on through our prebuilt product integration, which makes scaling additional products far more seamless and capital efficient. Finally, our point-of-sale business has the same story, a robust, diversified pipeline across verticals and ticket sizes. It runs from retail solutions like Sezzle to upgrade travel-focused BNPL product, FlexPay, up to large ticket POS providers in onboarding right now. Part of the play here is enabling our existing personal loan partners to grow their POS business. FlexPay is a great example, and we have another large ticket partner in the pipeline. And beyond what's live today, we are building new solutions like PreQual to keep pushing the POS offering forward. On the funding side, the institutional demand for Pagaya's assets stays strong, and we keep optimizing our cost of capital and our access to liquidity. This was our largest funding quarter ever with $3.7 billion, and we closed 6 ABS transactions, including our largest auto securitization ever at $600 million. Demand was strong enough that we grew our investor network by 11 to a total of 174 investors, and we upsized our last 3 securitizations this quarter. Jon will talk more about it. So to step back, this quarter reflects the repeatability and scalability of the model. By staying disciplined in underwriting, deepening our partner relationships and executing methodically against the playbook, we are building a more diversified multiproduct platform. And with every turn, the flywheel gets stronger. Each new partner and each new product compounds the value of the last, which is exactly what makes this mix, prudent risk management plus relentless execution so powerful. It sets us up to deliver profitable, sustainable growth and to keep creating value for our partners, our funding network and you and our shareholders. With that, I'll hand this over to Jon.

Thank you, Sanjiv. I met Pagaya initially as an investor in 2020 before joining in 2021. I was drawn to its unique value proposition for lenders and data-driven competitive moat as well as a highly scalable operating model. Our results since then, including our current net income run rate of over $180 million substantiates that initial confidence. Now let's get to the specifics on a highly successful quarter. Network volume grew 33% year-over-year to a record of $3.5 billion, driven by strength in auto and personal loans. Application to volume conversion remained at roughly 1%. Total revenue grew 19% year-over-year to a record $387 million. Interest and investment income doubled to $22 million as we continue to orient our investment portfolio toward cash interest bonds. This now comprises approximately 50% of our overall investments versus less than 30% in 2025. FRLPC grew 16% to $147 million, a record. FRLPC as a percent of network volume contracted about 60 basis points sequentially to 4.2%. Two drivers affected the FRLPC percentage this quarter. The first is product and partner mix. By design, new products and partners initially enter the portfolio at lower margins, consistent with our existing legacy products as volume grows, margin follows. The second is the rate environment. Benchmark rates remain elevated, which compresses the margin we earn from the funding side of our network, even with interest in our funding vehicles at an all-time high. Importantly, over the course of 2026, we priced ABS transactions with more conservative loss assumptions. That trades lower day 1 revenue for more stable vintage performance with a larger loss buffer. Turning to GAAP profitability. This is where our business model really shows its strength. Operating income reached $106 million, up 87% year-over-year. Adjusted EBITDA increased 43% to $124 million with a margin of 32%, up 5 points over last year. Core operating expenses were actually lower sequentially and declined 6% year-over-year. As a percentage of FRLPC, core OpEx hit a record low of 31%, an 8-point improvement versus last year. This deserves a second mention. We increased volume 33% and increased profits nearly 200%, but core OpEx has not increased in 1.5 years. That is unique and can only be accomplished by a software-like business model that requires virtually no marketing spend to generate volume. Quarterly GAAP EPS was a record $0.49 with overall GAAP net income increasing $29 million to $45 million. That was driven primarily by 19% growth in total revenue alongside lower operating expenses and interest expense from our more efficient balance sheet. Net income margin reached 12% compared to 5% last year. On credit performance, all asset classes are performing in line with underwriting expectations. 2025 and 2026 vintages continue to reflect consistent performance with cost of capital down approximately 200 to 400 basis points versus 2024 and earlier despite higher benchmark rates. Our funding diversification strategy, including more forms of longer-term committed capital has received strong receptivity by our investor network. We combine prefunded ABS, seasoned ABS with committed long-term revolving structures and forward flow. Turning to the balance sheet. As of June 30, we held $249 million in unrestricted cash and cash equivalents and $1.04 billion of investments in loans and securities. Our investments have consistently improved in quality and mix over the past 15 months with now approximately 50% in bond tranches with highly attractive yields. As we have discussed in the past, there is widely available funding against these bonds and our ability to sell them as they season provides additional optionality. On fair value, the investment portfolio was adjusted downward by $42 million in the quarter, in line with expectations. We added $118 million of new investments net of paydowns from prior deals. Now turning to guidance. Based on a strong quarter and visibility on the remainder of 2026, we are raising our full year net income guidance by about 25% at the midpoint. We expect network volume growth to be driven by deeper engagement with existing partners, primarily in auto, contributions from new partners and new product initiatives. This will be partially offset by lower point-of-sale volume. FRLPC percent is expected to be between 4% and 5% for the remainder of the year, and we assume that benchmark rates remain elevated for the rest of the year. For the third quarter 2026, we expect network volume between $3.425 billion and $3.625 billion, total revenue and other income in the range of $370 million to $390 million and adjusted EBITDA between $120 million and $130 million. We expect GAAP net income for the quarter of $42 million to $52 million. For the full year 2026, we're expecting network volume between $12.5 billion and $13.25 billion, total revenue in the range of $1.425 billion to $1.525 billion, adjusted EBITDA between $460 million and $490 million and GAAP net income between $155 million to $180 million. With that, let me turn it over to the operator for Q&A.

[Operator Instructions] Our first question is from John Hecht with Jefferies LLC.

Congrats on a good quarter and good guide. It seems like there's a lot of strength in auto. You mentioned lower point-of-sale volumes. Maybe talk about your pipeline and the competitive situation and what's causing the auto to grow so fast relative to the other segments?

This is Sanjiv. I'll take the call. I'll take the question rather. Thank you for the compliment on the performance. I would say that a large part of our auto growth came in with -- as a result of a lot of the hard work that had been going on for the last 6 to 9 months on the auto product. We had spent a lot of time essentially working on what we call dynamic offer optimization, which was essentially improving the conversion rate at the dealer level in order to make our offers more winworthy. So when a customer applies for a loan, we not -- we didn't give just one offer. We gave multiple offers and multiple choices. It was dynamically optimized at that -- at the point of sale for the dealer. This led to a significantly higher flow that came into our lenders because they were able to approve more loans. The other thing was a very strong effort that we had made in terms of product market alignment over the last few months. If you recall, in the last quarter, we had talked about updated terms and updated ticket sizes to meet market levels. So there was a much greater product market alignment. And last and certainly not the least, in fact, it's something that I would like to double-click on was that we got access to substantially new flow from our partners, which was essentially driven by this new construct of what we call counters, where our underwriting models provide sometimes more optimized volumes of offers or loan approvals for the customer. And so the lenders often prefer to provide Pagaya's approval as opposed to their own because it's sort of more fuller in terms of the loan amount and the approvals. And this is really important because our partners are now giving us new flow that they used to keep for themselves. So there are 3 things. There's the product as a result of the optimization of the offer, there's greater alignment with the market in terms of the ticket size and the market levels and, of course, access to new flow. All of this effectively led to the growth in the auto business. Perhaps Gal can give some more color on that.

Yes, John, good to hear from you. I think the one sentence I will add on top of all what Sanjiv said, which was exactly the point, is the unique power that we have because we have many lenders and what we perceive to be our partner product growth is really that when we are unlocking some product, in this case, was understanding in one of our partners that actually the decline flow is less where it's interesting, but much more than what if we sell all the applications that are actually being sent back to the dealers with cutbacks and recognizing that the probability for them to convert is much lower and changing the full product of how Pagaya works to be able actually to receive it in an output and instead of that, sending our offer instead. And that has drive a very major growth with that partner. But more interesting than that, we took that concept of kind of like meeting more what are the needs of the customer in the dealership moment through activating the best offer that could show to the customer, in this case, through reducing the amount of counter. And we took it to another few lenders. So what you see is really the product partner growth in actions, specifically in auto, where one product solution is happening to one is actually pushing to be deployed and sold across the platform. And therefore, you see that meaningful change in rather short term or short period of time to be able to drive meaningful growth, and it should remain the same in the future.

And then if you think about the momentum of the different products and then the pipeline, how should we think about product mix on a volume perspective in 2027?

Yes. So basically, we are experiencing a very, very strong pipeline. In fact, in the last quarter, we had announced that there are about 7 -- in the last 6 months, actually, there are about 7 new partners that we are in the process of onboarding. Some of them are in the personal loan side, some of them are in auto and a couple in POS. We expect that the mix will roughly remain the same because we sort of PL continues to be our flagship product. Auto is showing significant growth. And POS will continue to grow and diversify. In terms of our pipeline, we are now seeing a shift in the mix, which is very interesting. In personal loans, we are seeing much more traction with the regional banks. In fact, there are a couple of banks that we are -- we've signed term sheets with and in the final contract stages with them. It's interesting to see that in the U.S., banks are into personal loans and are looking at fee income as a major source of growth. In auto, we are also seeing a lot of interest from the banks, although we have started moving interest in the direction of OEMs and some of the enterprise-grade dealers. We will announce some of these in the forthcoming quarters. And in POS, we continue to have a very important discussions with our existing partners who are now starting to branch into different forms of POS like purchase finance. And so yes, so we expect the mix to remain pretty similar. But I will remind you that we had exponential growth in our partner onboarding in the last couple of quarters, and we expect the momentum to continue over the next few quarters without a very substantial mix in the 3 asset classes that we operate in today.

Our next question is from Sanjay Sakhrani with KBW.

Is that negative $23 million this quarter run rate now? Or can that become more severe as you bring on incrementally more volume in the back half of the year? And are you guys seeing any changes in demand from asset managers? Or is there still some repricing there?

I apologize. I think the first part of your question got cut off.

Yes. So you guys were expecting some of that pressure on the capital markets line item. That negative $23 million that we saw this quarter, I guess, is that run rate now? Or can that potentially increase as you guys kind of lean into volume growth in the back half of the year?

Thanks for the question. This is Jon. So we don't view that as a run rate. However, we still see, as we said, benchmark rates remaining elevated. So you should think about our FRLPC margin as 4% to 5%. It reflects our self-funded business model, and it's a range we remain very confident in. As benchmark rates remain elevated, as we expect, you will continue to see some pressure on the funding -- from the funding side of the FRLPC contribution. But I wouldn't think of it as something that's going to necessarily increase much from where it is today.

Our next question is from Kyle Joseph with Stephens Inc.

Let me echo John's congratulations on a good quarter. I just want to get your posture on underwriting. I know you guys tightened coming into the year. And obviously, it looks like the growth is reaccelerating there. And I just want to kind of see if anything has changed on the underwriting front? Or is that really just a function of new products and new partners?

It's Gal. So as you can tell, there are -- actually, we spoke about it many times, but we'll share it. There are 2 sides to it, but let me start with the bottom line. The bottom line is the posture in underwriting is not changed. The way we think about how do we bring together growth and in the same time, the concept of being more prudent in risk measures as we have been, we are and we will be, is really looking on the growth engine that is coming from new partners and from new products. So a lot of the growth that we have seen in this specific quarter has came from new products that has been deployed in our major partners in the auto. And you should continue to expect that as we bring new auto partners to see much more growth from that front through the embeddness of this product into them. So the concept of growing through embedding more product into more partners, which is the B2B concept of Pagaya, which we're taking the unique capabilities that we have on the consumer credit side and kind of like allowing different vendors to become full spectrum through this is really what drives more applications to come to our way what is driving the ability at the end of the day to present a very impressive growth numbers that we saw this quarter. On the other side of it, you have the disciplined B2C side because we are talking about credit and we are taking credit risk. We are constantly looking for the areas and pockets that are actually slightly softer or areas that we feel that we are not pricing well and constantly on a biweekly basis are changing and adapting to the different population into the different places. And as I said in the beginning, for now, we don't see any shift. And therefore, the posture for us is unchanged as the U.S. economy is in a very good spot. There is a lot of investment coming in. Unemployment is low. And these are really the major driver for specifically our borrower, which is rather a healthy borrower and Sanjiv will give a few comments on that in a second, but allowing us to stay very much on course without any major changes to the credit posture. I don't know, Sanjiv, if you want to add anything to that?

Sure. Actually, I do want to double down on what Gal just said. In the last quarter, when we said we were anticipating that there were shifts going on in the market because of inflationary pressures and all the kinds of stuff that people were talking about the economy at the time, we -- and I will repeat what we said last quarter, we took a prudent credit posture by cutting out the highest risk because we were anticipating that some consumers will be under pressure. I must stress that -- when you show growth, you say, okay, I'm going to grow by basically shifting the mix that we have in the business flow that comes in through to Pagaya. Now there's one major misconception in the market, which is that we are a decline-only lender, which is not true. We have used decline as a mechanism to get into the loan origination system of about 36-odd partners, which is a very big deal. And once you do that, then you start moving upstream, up the funnel with our partners, which is what we have demonstrated we have done with prescreen, with affiliate marketing, with counter flows. And that is now starting to become a very large part of our flow. In fact, about, I would say, greater than 45% of our flow comes from non-decline types of flow. And I think that's a very important point for everybody to understand. So product-led growth, which is what we've been calling this, has been really important in shifting the positioning of Pagaya from a decline-only partner to using decline to leverage the embeddedness within our partner and grow up the funnel. That's really, really an important point. The second point is, as a consequence of this, we have -- and this is another misconception that we would like to straighten out is that we are a -- I don't think people understand that as a result of moving up the funnel, we've actually significantly shifted the profile of the borrower that comes into Pagaya. So the average borrower income is now about $120,000. The average FICO is about $680. 37% of them are homeowners, and they have an average DTI of about 28%. To me, that looks like Middle America or Mass America. And as you know, Middle America is not the bottom of the spectrum. Middle America manages its finances quite responsibly, and we've seen that across credit cards and other unsecured products through some of the other lenders. And so that's kind of how we are growing right now. We are growing through product. We are growing through top of the funnel, and that is starting to be evidenced both in our auto business as well as in our personal loans business and so in our POS.

And then just one follow-up for me. In terms of point of sale, obviously, some moving parts there in terms of your partners adding some losing one. But just kind of talk about your expectations for volumes from point-of-sale specifically given what's going on there.

Thanks. Yes. So when you think about point of sale through the rest of the year, you'll see some volume decrease there from the roll-off of one of our POS partners. That being said, that partner represents very, very little in terms of FRLPC margin. So while it might have an effect on late Q3, Q4, volume has really no effect on FR LTC. And obviously, as we get into next year, toward the end of this year and next year, as we scale new POS partners, you'll begin to see that volume ramp again.

Can I just add one little thing to what Jon just said. Jon rightly pointed out the rolling off of one of our partners, but we continue -- and we continue to grow in partners like Several, partners like FlexPay with existing partners like Upgrade. And we are in pretty intense discussions with our existing partners. We want to grow into areas like home improvement loans, purchase finance and so on. Loans that have structures very similar to our personal loans business, which we understand quite well. And I know that in some of the earnings calls that you've had with some of our lending partners in the last few days, they're all talking about growth in other areas of the NPL. We are right alongside them in our growth across that particular asset class.