Pagaya Technologies .(PGY) - 2024 Q2 - Quarterly Results

Overall Performance and Outlook Pagaya delivered record Q2 2024 financial results, exceeding outlooks, expanding its network, and raising full-year guidance, positioning for future self-funded growth and profitability Q2 2024 Financial & Business Highlights Pagaya delivered record Q2 2024 financial results, exceeding outlooks with strong network volume, revenue, and adjusted EBITDA, alongside network expansion and capital efficiency enhancements | Financial Metric | Q2 2024 Result | Growth / Note | | :--- | :--- | :--- | | Network Volume | $2.3 billion | 19% YoY | | Total Revenue & Other Income | $250 million | 28% YoY, exceeded outlook | | Revenue from Fees | $243 million | 31% YoY | | FRLPC | $97 million | 49% YoY | | FRLPC % of Network Volume | 4.2% | +84 bps YoY, an all-time high | | Adjusted EBITDA | $50 million | Nearly 3x higher than Q2 2023, exceeded outlook | | Adjusted Net Income | $7 million | 5th consecutive quarter of positive adjusted net income | | GAAP Operating Income | $5 million | 4th consecutive quarter of positive GAAP operating income | | Cash Flow from Operations | $15 million | 4th consecutive quarter of positive operating cash flow | | Net Loss Attributable to Pagaya | ($75 million) | Impacted by non-cash items | - The company continued to expand its lending network, onboarding a new top 5 bank in the point-of-sale (POS) vertical and signing an enterprise deal with OneMain Financial to support its auto and personal loan businesses[3] - Achieved a record FRLPC percentage of 4.2%, leading the company to raise its target range for the remainder of 2024 to 3.5% - 4.5% from the previous 3.0% - 4.0%[3] - Enhanced capital efficiency by signing a $1 billion forward flow purchase agreement with Castlelake and achieving a first-ever AAA rating on its personal loan ABS program, which is expected to lower the cost of capital and reduce risk retention[4] - A business reorganization is expected to reduce core operating expenses by $25 million on an annualized basis, with $10 million in savings anticipated in the second half of 2024[5] Shareholder Letter (CEO & CFO Commentary) CEO and CFO commentary highlights strong business momentum, positive incremental cash flow, and strategic priorities for network expansion and capital efficiency, targeting self-funded growth and GAAP profitability - The company has reached a critical inflection point where fees earned from network volume (FRLPC) are now higher than the capital required for risk retention, generating positive incremental cash flow[6][23][24] - Pagaya is on track to become cash flow positive and achieve GAAP net income profitability in 2025[8][24] - The company is running at an annualized rate of approximately $1 billion in total revenue, $400 million in FRLPC, and $200 million in adjusted EBITDA[7] Strategic Execution & Growth Pagaya is executing its growth strategy by expanding its lender network with new enterprise partners and focusing on the Point-of-Sale (POS) segment as a key growth frontier - The company is successfully expanding its network, adding enterprise lenders like OneMain Financial and a new top 5 bank in the POS vertical, in line with its goal of adding 2-4 new partners annually[9][10] - Point-of-Sale (POS) lending is a major growth opportunity, with a target to become more than 30% of the business at scale. The partnership with Elavon is on track to go live in Q4, and the company joined Mastercard's Engage program as the sole POS credit enabler[13][15] - The partnership with Klarna is accelerating, with Q2 2024 network originations up approximately 2x compared to Q2 2023[15][16] - The company is developing a pre-screen product to offer existing customers of its lending partners pre-approved access to new credit, with positive initial results from a beta test[20] Capital & Financial Strategy The company's financial strategy emphasizes capital efficiency through a $1 billion forward flow agreement and optimized ABS structures, aiming for cash flow positivity by early 2025 - Signed a $1 billion, 12-month forward flow arrangement with Castlelake to fund personal loan purchases, significantly improving capital efficiency[4][18] - Achieved a first-ever AAA rating on its personal loan ABS program, which helps lower investor cost of capital and reduces the company's risk retention requirements going forward[4][18] - The pending acquisition of Theorem Technology Inc. will create a combined credit fund platform with over $3 billion in AUM, strengthening the funding ecosystem[4][18] - Credit performance of recent loan vintages remains stable and strong, with early-stage delinquencies at their lowest levels since the 2021 peak[18] Q2 2024 Detailed Financial Results Q2 2024 saw significant growth in Network Volume, Total Revenue, and FRLPC, with strong operating leverage leading to a near tripling of Adjusted EBITDA | Metric | Q2 2024 | Q2 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Network Volume | $2.3B | $2.0B | +19% | | Total Revenue & Other Income | $250M | $196M | +28% | | FRLPC | $97M | $65M | +49% | | FRLPC % | 4.2% | 3.3% | +84 bps | | Adjusted EBITDA | $50M | $17M | +188% | - FRLPC growth significantly outpaced network volume growth, driven by a higher FRLPC % in the personal loan vertical, which reached 6.2% in Q2 2024[27][28] - The company demonstrated strong operating leverage, with core operating expenses flat year-over-year at $55 million, representing 22% of total revenue, down from 28% in the prior year[31] - The funding network expanded to 120 institutional investors with the addition of 22 new funding partners since the start of the year[35] - Net loss attributable to Pagaya was $75 million, compared to a $31 million loss in Q2 2023, primarily impacted by higher interest expense and non-cash fair value adjustments on the risk retention portfolio[33] 2024 Financial Outlook Pagaya raised its full-year 2024 guidance for Total Revenue and Adjusted EBITDA, reflecting strong performance and an increased FRLPC target range | Metric | Q3 2024 Outlook | Full Year 2024 Outlook | | :--- | :--- | :--- | | Network Volume | $2.3B to $2.5B | $9.25B to $10.25B | | Total Revenue & Other Income | $250M to $260M | $975M to $1,050M | | Adjusted EBITDA | $50M to $60M | $180M to $210M | - The target range for FRLPC % was increased to 3.5% to 4.5% for the remainder of 2024, up from the previous range of 3.0% to 4.0%[42] Financial Statements & Reconciliations This section presents Pagaya's consolidated financial statements, including statements of operations, financial position, cash flows, and reconciliations of non-GAAP financial measures Consolidated Statements of Operations For Q2 2024, Pagaya reported increased Total Revenue and achieved Operating Income, despite a Net Loss attributable to the company due to other expenses | (In thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | | :--- | :--- | :--- | | Total Revenue and Other Income | $250,344 | $195,612 | | Total Costs and Operating Expenses | $245,317 | $205,850 | | Operating Income (Loss) | $5,027 | ($10,238) | | Other income (expense), net | ($73,194) | ($16,895) | | Net Loss Attributable to Pagaya | ($74,785) | ($31,297) | Consolidated Statements of Financial Position As of June 30, 2024, Pagaya's total assets increased to $1.45 billion, primarily due to investments, while total liabilities also rose, impacting shareholders' equity | (In thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $233,593 | $186,478 | | Investments in loans and securities | $911,425 | $716,793 | | Total Assets | $1,452,977 | $1,208,376 | | Secured borrowing (current & non-current) | $400,221 | $271,713 | | Long-term debt (current & non-current) | $232,592 | $0 | | Total Liabilities | $763,153 | $468,377 | | Total Shareholders' Equity | $615,574 | $665,749 | Consolidated Statements of Cash Flows For the first half of 2024, Pagaya generated positive cash flow from operations, with investing activities primarily funding loans and securities, and financing activities providing substantial cash | (In thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $35,961 | ($25,513) | | Net cash used in investing activities | ($351,287) | ($190,867) | | Net cash provided by financing activities | $362,434 | $213,359 | | Net increase (decrease) in cash | $45,385 | ($5,708) | Reconciliation of Non-GAAP Financial Measures In Q2 2024, Pagaya reconciled its GAAP Net Loss to positive Adjusted Net Income and Adjusted EBITDA, primarily adjusting for non-cash items and interest expense | (In thousands) | Three Months Ended June 30, 2024 | | :--- | :--- | | Net Loss Attributable to Pagaya | ($74,785) | | Share-based compensation | $18,044 | | Impairment loss on certain investments | $58,179 | | Other adjustments | $5,750 | | Adjusted Net Income (Loss) | $7,188 | | Interest expenses | $21,563 | | Income tax expense (benefit) | $14,512 | | Depreciation and amortization | $7,042 | | Adjusted EBITDA | $50,305 | | (In thousands, unless otherwise noted) | Three Months Ended June 30, 2024 | | :--- | :--- | | Revenue from fees | $242,594 | | Production costs | $145,602 | | Fee Revenue Less Production Costs (FRLPC) | $96,992 | | Network Volume (in millions) | $2,331 | | FRLPC % | 4.2% |