Pagaya's 2Q24 Letter to Shareholders
This morning, we presented our strong 2Q24 results. Here is our letter to shareholders.
Our business fired on all cylinders this quarter. We took major strides forward in expanding our network, increasing unit economics and driving operating and capital efficiency.
What I’m most excited to share with you today is the major milestone we achieved on the path to cash flow positive. Pagaya is now generating positive incremental cash flow on network volume. This was the most important step to self-funding our growth by early 2025. EP will discuss in more detail in his section of this letter.
This achievement is a reflection of disciplined execution across our key strategic priorities. More of the country’s top lenders joined the Pagaya network, fees are growing from existing lending partners and our funding strategy is becoming more efficient than ever with the addition of stable, diverse funding channels, such as forward flow. Consumer health remains in a good place. We’re pleased with the performance of our recent vintages and as always, we’re keeping a close eye on consumer trends.
Business momentum is translating to strong financial results. We reported another record quarter of total revenue, FRLPC and adjusted EBITDA, delivering an annualized run-rate of approximately:
With this outperformance, we are raising our full-year outlook for total revenue and Adjusted EBITDA. We are also raising our target range for FRLPC as a % of network volume. We remain on track to become cash flow positive and GAAP net income profitable in 2025.
As we look beyond 2025, accelerating demand from lending partners across all of our key markets - personal loan, auto and POS - is laying the groundwork for our long-term growth plan. We invested heavily in our product and technology over the years, enabling deeply embedded API integrations with some of the largest banks, neobanks, fintechs and monoline lenders in the country. The resulting network effect creates a formidable competitive moat. Pagaya is quickly becoming the leading extended credit platform for the U.S. consumer lending industry, expanding access to credit for over 1 million U.S. consumers, with an ambition to serve millions more.
Adding New Enterprise Lenders to our Network
We recently onboarded OneMain Financial to our network. With the addition of Elavon earlier this year, we’ve delivered our target to add at least two enterprise lenders to our network each year. And we are excited to announce that we are now onboarding another top 5 bank in our POS vertical.
Our growth strategy is simple: expand our lending partner network. As more financial institutions sign up to use our product, we get access to more borrowers, more data, enhance our revenue generation potential and accelerate future growth. Demand for the Pagaya product is growing in an environment where regulatory pressures for lenders are increasing - with our solution, lenders can expand credit to more borrowers without capital requirements or credit risk.
We continue to prioritize enterprise relationships with the largest lenders in the country. Following the initial integration, there are a multitude of opportunities to expand our product across consumer divisions within a single organization. Our recent partnership with U.S. Bank is a clear case study - in just a few months, we expanded our personal loan partnership to now include its point-of-sale business.
OneMain Financial has selected Pagaya to support its foray into auto lending via its recent acquisition of Foursight. The partnership will eventually expand to an enterprise relationship to include its personal loan business - today the second largest in annual originations in the country. With our technology, OneMain will be able to approve more borrowers across its network of auto dealers and 1,400 branches, with volumes expected to go live in Q3.
We also deepened our partnership with LendingClub, one of our bank partners and the country’s fourth largest personal loan originator, to our flagship credit decisioning product. This is an expansion beyond our existing smaller-scale secondary purchase program.
As a further proof point of the value we’re providing to our partners, we have secured exclusivity arrangements with select partners to the majority of their second-look application flow. These are multi-year agreements, a proof point of the mutually beneficial nature of a stable partnership through market cycles.
We continue to see an acceleration in our pipeline of prospective lending partners. Conversations with other deep funnel targets - which currently include 5 names primarily in auto and POS lending - continue to be productive and onboarding timeframes remain on track.
It’s important to note that we’re always being thoughtful in how we drive conversion of our pipeline. Our priority is delivering value for our lenders and investors and growing in a profitable way. That means being prudent in the way we onboard new partners (which can take up to 12 months) and ramp up volumes post onboarding (which can take up to 18 months).
POS as the Next Frontier of Growth
Point-of-sale lending is a massive TAM expansion opportunity for Pagaya’s product. We believe at scale it can be more than 30% of our business.
With Elavon going live later this year, our recent addition to Mastercard’s Engage merchant network, and our expanding relationship with Klarna - we’re building a solid foundation for our POS product.
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Today, the space is led by fintechs that provide merchants the ability to offer quick, secure financing at checkout, primarily for low-ticket size purchases. Banks and non-bank lenders are increasingly looking for ways to gain market share. That’s where Pagaya comes in as a go-to-market enabler - allowing lenders to add point-of-sale solutions to their existing portfolio in a speedy, capital-efficient way, with zero credit risk.
POS lending is a strong fit for our product, with similar structural dynamics and lender needs as our other market verticals. Moreover, with “purposedriven lending”, we move up the credit spectrum to higher credit-quality assets, compared to unsecured lending. POS lending also gives us better data on consumer behavior - translating to an enhanced ability to predict future performance and generate better asset returns for funding investors.
Our partnership with Elavon is on track to go-live in the fourth quarter. It will focus on larger ticket size and longer duration installment loans, enabling us to penetrate new categories like medical and home improvement payments. Volumes are expected to ramp up more meaningfully in 2025.
We are also proud to be selected to join Mastercard’s Engage program, linking Pagaya to over 100 financial institutions on the Engage network. As the only POS credit enabler in the program, we are the go-to solution for banks and fintechs looking to deliver real-time installment loans for Mastercard customers.
We’ve gained valuable learnings from our partnership with Klarna, one of the world’s largest BNPL providers. Quarterly volumes are accelerating with 2Q’24 originations on our network up by approximately 2x compared to last year. We’re working closely with Klarna to broaden the partnership, including launching a first-look product for loans higher on the credit spectrum.
The onboarding of another top 5 bank to our POS product reinforces our confidence in the importance of POS as an investment area for future growth.
Growing Funding Demand
Capital markets have come a long way since 2023. Appetite for consumer credit assets is increasing. Improving conditions support our ability to secure diverse sources of funding such as forward flow and structured pass-throughs and have expanded our ABS rated deal offerings, ultimately lowering our cost of capital.
We signed our first forward flow arrangement with Castlelake. With no upfront capital requirements, forward flow as a funding channel goes a long way in limiting the use of our capital to fund network volume.
The pending acquisition of Theorem will create a combined credit fund platform with over $3 billion in AUM, giving Theorem’s funding investors access to new investment opportunities via the Pagaya network. The transaction will also bring Theorem’s data science and investment technology capabilities in-house, strengthening our value proposition to lending partners.
We’re also continuously optimizing our ABS program. We achieved an AAA rating on our recent $550 million personal loan deal, our first ever AAA rating in our personal loan ABS program, which helps lower investor cost of capital and our risk retention levels going forward.
The combination of alternative funding sources and optimized ABS structures that lower our overall capital requirements are key drivers to reaching cash flow positive by early 2025.
On the credit side, we continue to see stable performance. Early-stage delinquencies (30-day+ DQs at 3 months of seasoning) on our recent personal loan vintages remain at their lowest levels since peak 2021 levels. This trend continues when looking at older vintages at the 6-month and 9-month marks, which are down 40% to 50% from those 2021 levels. In auto, we’re seeing similar strong performance on recent vintages, with 60-day+ DQs at 6 months of seasoning at their lowest levels since 2022. Overall, borrower health remains resilient. We’ll continue to take a disciplined and prudent approach to underwriting and monitor consumer health closely.
Advancing our Product Vision
Our future product roadmap is based on developing fit-for-purpose, high-value-add technology products for our lending partners.
We are developing solutions to enable deeper engagement with our lending partners’ existing customers. Lenders on our network serve an estimated total of 60 million customers - creating an exciting opportunity for Pagaya and our partners to provide them with expanded access to credit.
We rolled out our pre-screen product to several of our longstanding fintech partners as part of a beta test in April of this year. The program offers existing customers pre-approved access to new credit products, enabled by Pagaya. Initial results are very positive with strong response rates. We already have a pipeline of 5 other partners interested in a test launch.
Over the longer term, we’re focused on extending our data and technology capabilities to expand our moat and create additional value for lenders, partners and customers. We are still in the early stages of building a product ecosystem that fulfills our vision of becoming the trusted lending technology partner to the country’s largest financial institutions. With a newly streamlined, product-driven organization, we are confident we can execute on this vision and deliver our strategic and financial goals.
Congrats, Gal. Great quarter.