Pagaya Technologies Ltd. Class A Ordinary Shares Q2 2026 Earnings Call

Greetings. Welcome to the second quarter 2026 Earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Craig Investor Relations at Pagaya Technologies. Thank you Craig. You may begin.

Thank you and welcome to second quarter 2020 Earnings conference call. Joining me today to talk about our business and results are Gal Krubiner Chief Executive Officer of Sanjiv Das president. And John 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 dot dot 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 ten kHz, ten kHz and other reports.

For 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 free PCFRLPC as a percentage of network volume. Core operating expenses and core operating expenses as a percentage of FROPC 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. Path 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 products and partner expansion. Third, the 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 and. US volume, which our proprietary technology turns 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 for LPC. Adjusted EBITDA and EPS. Personal loans reached an all time high, and auto 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 out 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 to. Today. We are only at a run rate of $14 billion of origination per year to take. Advantage of this opportunity. To continue to develop two distinct capabilities. The. First, a B2B embedded platform where our product. 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.

Bagaya on track for years of profitable growth to. Summarize. Costs are largely flat. Volume is growing. Leverage is high. That. Combines. To compound EPS. And it is just getting started. With that, I will turn it over to Sanjiv.

Thanks God. A 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. Moving. 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 history at $3.5 billion, which is a 33% increase year over year. We did it. With no change to our credit posture. We. With a steady conversion at roughly 1% and almost no incremental OpEx. Auto alone was more than three fourths 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 closed at the dealers desk. So the dealer is the gateway to the loan with pergola connected to more than 40% of the US market. Let me break down what we are actually optimizing in order 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 step in 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 is in the offer that looks best on paper. It's the one that the borrower actually says yes to. And third. That. 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 a real structural advantage. Our embeddedness in our partner's business is driving our unique customer data mode that. The B2B integration on one side and the data on the other side is what makes this 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 loan partners into Experian, Activate, and we are on track to add a few more personal loan partners to that platform. This year, with a line of sight to two 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 pre-built 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 Cesl to upgrades to travel focused Bnpl product. Flex pay 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 live today we are building new solutions like Pre-qual to keep pushing the POS offering forward. On the funding side, the institutional demand for asset 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 six. 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 free 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, multi-product 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 John.

Thank you. Sanjiv. I met the guy. 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. 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. For LPC. Grew 16% to 147 million, a record for LPC as a percent of network volume contracted about 60 basis points sequentially to 4.2%, two drivers affected the LPC 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've priced ABS transactions with more conservative loss assumptions that trades lower day one 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 five points over last year. Core operating expenses were actually lower sequentially and declined 6% year over year. As a percentage of PC core core opex hit a record low of 31% and eight 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 a year and a half. That is unique and could 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 30th, 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's 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 for PC. 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 of 2026, we expect network volume between 3.425 and 3.625 billion. Total revenue and other income in the range of 370 to 390 million and adjusted EBITDA between 120 and 130 million. We expect GAAP net income for the quarter of 42 to 52 million for the. Full year 2026, we're expecting network volume between 12.5 and 13.25 billion. Total revenue in the range of 1.425 to 1.525 billion. Adjusted EBITDA between 460 and 490 million, and GAAP net income between 100 and 50 5 to 180 million, with that, let me turn it over to the operator for Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Our first question is from John Hecht with Jefferies, LLC. Please proceed with your question.

Morning, guys, and thanks for taking my questions and 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, maybe talk about your pipeline and the competitive,, you know, the competitive situation in, you know, what, what's causing the, you know, the auto to grow so fast relative to the other segments., hi, John, this is Sanjiv. I'll take the call ., I'll take the question rather,, thank you for the compliments on the performance ., I will 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 the dynamic offer optimization,, which was essentially ,, improving. The conversion rate,, at dealer level in order to make our offers more win worthy. So when a customer. Applies for a loan, we not, we didn't give just one offer. We gave multiple offers in multiple choices. So it was, you know, dynamically optimized ,, at that, at the point of sale for,, for the, 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, few months. If you recall, in the last quarter, we had talked about,, you know, updated terms and updated ticket sizes to meet market levels. So there was a much greater product market alignment., and. 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,, and so the lenders often prefer to provide ,, approval as opposed to their own, because it's sort of more fuller in terms of the loan amount. And,, 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 three things. There's the product as a result of the optimization of the offer, the greater alignment with the market in terms of the ticket size and the, the market levels.

And of course, access to new flow. All of this effectively,, led to the growth in our auto business. Perhaps Gal can give some more color on that.

Yeah. John. Hi. Good to hear from you. I think the one, one sentence I would add on top of all what Sanjeev said, which was exactly the points, is the unique power that we have because we have many lenders and what we perceive to be our,, partner product growth engine 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 saw 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 Gaia works, to be able actually to receive it in an output. And instead of that sending our offer instead. And that has driven 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 action, 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.

Okay. 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.

Yeah. So basically we are experiencing very, a very, very strong pipeline. In fact, in the last,, last quarter, we had announced that there are about seven in last six months. Actually, there are about seven 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, the mix will roughly remain the same because the sort of,, you know, pl continues to be our flagship product, auto is showing significant growth and POS. We continue to grow and diversify., in terms of our,, 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 US, banks are now starting to ,, personal loans and are looking at fee income as a major source of growth auto. We are also seeing a lot of interest from the banks, although we have started moving.

Interestingly, in the direction of OEMs and some of the enterprise grade dealers,, we will announce some of these,, in the forthcoming., in the forthcoming quarters and in POS. We continue to have,, very important discussions with our existing partners who are now starting to branch into different forms of, of POS, like purchase finance,, and,, and so, yeah, 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, in the three asset classes that we operate in today.

Great.

Thank you so much.

Our next question is from Sanjay Sakhrani with KBW. Please proceed with your question.

Is that -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? Thank you., I apologize, I think the first part of your question got cut off. When I cut into. The call it was. Yeah.

Yeah. So you guys were expecting some some of that pressure on the capital markets line item. That -23 million that we saw this quarter, I guess is that run rate. Now., or can