Pagaya Technologies Ltd. (PGY) Q1 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to Pagaya Technologies Q1 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Josh Fagen, Head of Investor Relations. Thank you, Mr. Fagen. You may begin.

Thank you, and welcome to Pagaya's first quarter 2025 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 Evangelos Perros, Chief Financial Officer. You could 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.pegaya.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 second quarter and full-year of 2025. 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 today's press release 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-K, 10-Q 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 percentage of network volume and core operating expenses will be discussed on the call. 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 with the SEC, on Form 8-K today for 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.

Thank you for joining us today for a discussion of our first quarter 2025 results as well as an update on our business. I really think that the results speak for themselves, and they demonstrate our execution against the commitment we have provided. In fact, we have exceeded expectations on key metrics and particularly on the GAAP net income profitability, which we have delivered one quarter earlier. This is and will remain a crucial metric for our management team moving forward. Perhaps more importantly is the fact that we deliver these results in the face of heightened macro uncertainty, sticking to our balanced and increasingly diversified growth focus combined with our efficient operations and structure. We grew revenue by 18% year-over-year, reaching an annualized run rate of nearly $1.2 billion. Fee revenue less production costs or FRLPC grew by 26% and reached an annualized run rate of over $460 million. And with our extremely efficient operating cost structure, these results drove 100% growth in our adjusted EBITDA to an annualized equivalent of approximately $320 million. Importantly, we achieved positive GAAP net income of $8 million this quarter, ahead of our second quarter guidance and the first time as a public company. I could not be prouder of the team and the work that has been done to get us to this point. We are truly delivering on our mission and value proposition, but now at scale. Because of Pagaya, more deserving Americans are getting more financial opportunities. And as we transform the financial ecosystem, our lending partners win and we win with them. As important as the results is a diversified manner in which we have achieved those results, which underscores the durability of our business model. We have more lending partners contributing meaningfully to our volume. In fact, 2x as many lenders represented at least $100 million of volume this quarter versus just a year ago. Loan types and product selection are increasing as Sanjay will discuss in further detail soon. And we found these volumes in the most efficient and diversified manner to date, including the recent announced forward flow agreement with Blue Owl Capital to purchase up to $2.4 billion in loans over 24 months, in addition to the previously announced forward flow agreement with Castlelake. We have also built a capital structure with ample liquidity to self-fund our business even with increasing uncertainty. Therefore, we do not need nor do we plan to raise equity capital in the foreseeable future. Combined with our prudent growth strategy and operating efficiencies, we have built a business model for all cycles. I would like to spend a moment on the macro and the geopolitical uncertainty. We understand this is an important topic to investors and this is an important topic to us as well. When we provided our guidance for 2025, we communicated that we were taking a prudent and balanced approach to growth. We understood there where unknowns and accordingly, while consumer credit behavior was and still steady, we took a cautious approach towards growth. We noted that our growth will be profitable and responsible, and indeed, this is what we reported today. We are clearly not complacent, nor we will be. We are building a business for the long term to navigate all cycles. We are best positioned to react to continued uncertainty and potential changes to consumer health and credit performance, if they will arise. Our risk management is prudent and reflects lessons learned during the post pandemic period. Our funding mechanism is the most diversified in our history. These factors enable us to stay nimble to navigate any environment that we can experience. Before passing the call to Sanjiv, I would like to talk about the commitments that we have made so far. We have now committed to our lending partners, our funding partners, and our shareholders. We are now at a point where we are delivering clearly against all of these. For our lending partners, we are now increasing the value of the Pagaya network to them even further with the introduction of our proactive prescreen product. The acceptance of our solution is only getting stronger among lending partners as we have helped many of the industry's strongest brands to better serve customers with more access to credit and without straining their balance sheet. For our funding partners, we have committed to provide high volume of credit with stringent underwriting. Look no further than the $800 million raised in April alone for our personal loan and auto loan ABS programs as an evidence for the benefits of what we are delivering to our funding partners. For our shareholders, we are delivering consistent durable growth with a keen focus on long-term profitability. In fact, we have raised our GAAP net income guidance for the full-year, which EP will discuss later in the call. With that, I would like to hand it off to our President, Sanjiv, for a review of our operational business.

Thank you, Gal. I'd like to start by reinforcing what Gal noted on the importance of responsible and profitable growth. We are committed to building an outstanding franchise for the long-term, and we are not and will not maximize top-line volume growth just for the sake of short-term results. We are building a business designed to grow through all cycles with a focus on leveraging our unique data advantage and investments in products that will add huge value to our lending partners. We will remain extremely responsible to credit underwriting, while driving consistent and strong revenue, profitability and liquidity. While we strive to consistently drive strong results, we are just as focused on our progress in building the foundations of a long-term enterprise. As our quarterly results underscore, our focus on profitable growth and our ongoing investments to deliver this consistently over the long-term is crucial to our proven management team. As Gal noted, we are fully aware of the heightened state of volatility in the markets at the moment. However, while we carefully monitor events and trends, it is important that we remain focused on the building blocks of our long-term growth strategy. I will provide an update on our growth priorities, which center around creating value for our partners through our products. In personal loans, our ability to deliver significant new customer growth while driving customer retention and lifetime value has become a game changer in our core value proposition for our partners. In auto loans, by providing a seamless lending experience and higher approval rates for auto dealerships, we provide lenders a very significant competitive advantage when they grow their dealership distribution. In the point-of-sale category, where we continue to invest and ramp rapidly, we will give lenders the ability to immediately provide merchants higher approval rates at the point of sale. For lenders such as Klarna and Elavon, this is a huge advantage when driving new merchant adoption. Now I'll provide a quick overview of our key accomplishments achieved in the first quarter. Starting with the largest and most mature category, personal loans. Here, we are working to enhance the value proposition we provide to our lending partners by way of new customer growth, greater retention and ultimately increasing customer lifetime value. Two initiatives I'd like to discuss that we are especially investing in are the following: Pagaya's Prescreen solution and Pagaya's marketing acquisition engine, which we delivered through affiliates such as Credit Karma, Experian and LendingTree. Starting with Prescreen, a product that we have been developing over the course of the past two years. Prescreen adds the ability to proactively engage with customers to deliver credit using vast amounts of data and offering loans in a frictionless prescreened way. Prescreen is optimized for campaign management through direct mail and email channels and helps partners not only gain new customers, but to increase engagement and monetization with existing customers using our advanced data analytics. Lending partners can leverage a tech-enabled personal loan product solution to drive incremental value with very low acquisition costs, retain valuable deposits, drive down churn and drive up lifetime value of those customers. In terms of our marketing acquisition engine, Pagaya is working to leverage mainstream affiliate channels to drive new customers to lending partners. By integrating with lead aggregators, Pagaya can effectively leverage its models and advanced analytics to drive qualified customers at scale at highly optimized acquisition costs for our lending partners. Turning to auto lending. Pagaya is benefiting from several factors, including improved risk modeling, efficiency in our funding mechanism, continued expansion of our partner network and improving vehicle costs. This follows an uncertain macroeconomic backdrop in 2024, which drove the team to reduce volumes, while focusing on improved credit underwriting and funding efficiency. On the heels of significant improvement in funding execution and credit underwriting, we are now in a very different place. With first quarter auto volumes up nearly 50% sequentially. In fact, our auto volumes equated to more than $1.1 billion on an annualized run rate. In point-of-sale lending, our newest and fastest growing category, demand remains extremely robust and we could not be more encouraged. We are positioned to ramp with existing partners including Klarna and Elavon as they grow their merchant networks and loan demand. We continue to evolve and build our funding mechanism and capacity to support the growth of this very exciting segment. Before handing the call to EP, I want to emphasize to investors that Pagaya has reached the level where the value we provide to current and prospective customers' franchises is at an institutional scale. We are demonstrating the benefits of years of investment in differentiated data and technology, as well as underwriting and capital market skills. We are helping partners not only strengthen the value of their existing customer basis, we are proactively identifying additional credit solutions for deserving customers both inside and outside of their footprints. When consumers are served better, our partners win and when our partners win, Pagaya wins with a focus on responsible and disciplined growth. With that, I'll hand the call to EP.

Thank you, Sanjeev. We committed to deliver positive GAAP net income which we have now reported ahead of schedule. This is the result of our execution against all pillars of our financial strategy, improving unit economics, driving operating leverage, increasing capital efficiency and optimizing our balance sheet. These achievements are the result of making the right decisions for the business even if they brought near term dislocation. I'm extremely proud of the team's relentless execution and focus on our long-term priorities and commitments to our shareholders and our partners. We have also underscored that our focus will be on growing partner volumes to drive profitable growth with stringent underwriting and the results of this quarter are in line with that strategy. Network volume was in line with the year ago levels of $2.4 billion. This was slightly below our guidance range of $2.5 billion to $2.7 billion primarily due to lower SFR volume, as we continue to be laser focused on profitable growth. Excluding the impact of SFR, volume grew by 26% versus the year ago period and was up 6% sequentially. This result was in line with our plan for prudent growth. Our largest business, Personal Loans, saw volume growth of 17% from year ago levels, while conversion of applications remained stable at approximately 1%, in line with the results of the past multiple quarters. Importantly, we continue to target similar conversion levers in the near term. Revenue and other income increased by 18% to a record $290 million with revenue from fees up 19% to $283 million. This was a result of higher personal loan and auto lending fees. Fee revenue less production cost or FRLPC of $116 million grew by 26% from year ago levels. As a percent of network volume, FRLPC rose 100 basis points year-over-year to 4.8%. While in excess of our prior 2025 guidance of 3.5% to 4.5% range, the increase is due to a shift in our targeted mix as SFR carries a lower FRLPC margin than the other verticals. Excluding SFR's impact, FRLPC as a percent of volume was 5.2%. The contribution of FRLPC continues to move toward lending product fees, a positive trend that supports durability of our monetization. In fact, lending product fees of 77% in the quarter compared to 63% one year ago and 43% two years ago. Adjusted EBITDA more than doubled year-over-year to a record $80 million in the first quarter with margins up more than 10 percentage points to 27%. Likewise, operating income of $48 million was up more than 5x year-over-year. This strong margin profile underscores our operating leverage, which is the key differentiator of our business model. Turning to our profitability, we delivered GAAP net income of positive $8 million for the quarter, our first quarter of GAAP profitability as a public company. This reflects an improvement of $29 million from the year ago period with 18% revenue growth and lower operating expenses. We look forward to demonstrating even greater levels of value generation going forward as we build on these key inflection points and continue to demonstrate the earnings power of our business. Net credit related losses reported in other expense net amounted to a loss of $24 million in the quarter versus $229 million in the prior quarter driven by our 2024 vintages. In addition, there was $6 million of whole loan impairments recognized in G&A expenses in line with the prior quarter. We consider these normalized levels of losses for our business. Interest expense of $21 million is down approximately $5 million sequentially and down an annualized $25 million since peak third quarter '24 levels as a result of the balance sheet optimization actions we executed last quarter. Adjusted net income was positive at $53 million which excludes share based compensation and other non-cash items such as fair value adjustments. Credit performance in the quarter reflected the continued stability of over 24 months with notable improvement from peak loss levels. Our 2023 vintage cumulative net losses were approximately 20% to 40% lower than peak levels in the fourth quarter of 2021. Auto loan C&Ls through 2023 vintages are trending approximately 30% to 50% lower than year earlier levels. We are closely monitoring macro and policy related uncertainty and the impact it may have on the consumer and our outlook. It is important to note that our prior full year outlook reflected uncertainty and volatility and you can see how we managed our business in the first quarter accordingly. Still, we expect this volatility to persist further and we're ready to react as needed. On the funding front, we continue to see the benefits of substantial improvements in capital efficiency. We've enhanced the structure of our ABS programs, achieving a lower cost of capital across the stack, while significantly diversifying our funding base. We issued $1.4 billion in ABS across three transactions in the quarter, distributed through our growing network of 135 institutional funding partners. While we anticipate net risk retention requirements to remain in the 4% to 5% range of our personal loan ABS issuances, we actively manage retention levels with a goal of enhancing profitability by lowering both our cost of capital and any potential future credit related losses. Our ability to raise approximately $800 million through ABS transactions in recent weeks despite heightened market volatility speaks to the consistency of our underwriting and the ongoing demand of our assets. As we announced earlier this year, in the first quarter, we finalized the forward flow agreement with Blue Owl Capital to purchase up to $2.4 billion in loans over 24 months. In total, we have raised prospective capital of nearly $3.7 billion between our forward flow and pass through program since inception. We expect non-ABS funding channels to contribute 25% to 50% of our funding in 2025 driving total net risk retention requirements lower, which further solidifies our ability to generate cash for further growth. Finally, based on the current outlook, our business plan is self-funded. We do not need nor do we plan to raise equity capital in the foreseeable future. As of March 31, our balance sheet was anchored by $230 million in cash and cash equivalents and $760 million in investments in loans and securities. Over the past 12 months, we have meaningfully enhanced the quality and composition of these assets bolstering our access to liquidity and reflecting the deliberate work we've undertaken to build a business that is resilient to market dislocation. We will continue to proactively evaluate our balance sheet for further optimization opportunities, particularly in light of broader market dynamics. In the first quarter, we recorded a fair value adjustment of $45 million to our investment portfolio net of non-controlling interest compared to $156 million adjustment in the previous quarter. These adjustments were primarily tied to post 2023 vintages. During the quarter, we also added $35 million in new investments loan and securities, net of paydowns from existing positions. Turning to our outlook. Our full year and second quarter outlook reflects both the momentum and resilience in our business to date. At the same time, our outlook takes into consideration market volatility, which we expect to persist and is reflected in the lower end of the ranges. Notable drivers include similar levels of production in personal loan and continued growth in auto and POS products, offset by a decrease in SFR volume. As a reminder, SFR still has an immaterial impact on our overall financial performance. We expect FRLPC to grow through our focus on our most profitable and growing verticals. As a result of our newly targeted volume mix, we expect FRLPC percent to range between 4% and 5% in 2025. Expenses reflect continued discipline and operating leverage, while we expect credit-related impairments, if any to be in line with our scenarios in our supplement. Interest expense is assumed to remain at similar levels as in the first quarter, driven by continuous paydown of more expensive borrowings, offset by higher variable interest expense and opportunistic actions to optimize capital efficiency and lower cost of capital. Stock-based comp is expected to range between $15 million and $20 million in the following quarter. For the second quarter of 2025, we expect network volume in the range of $2.3 billion to $2.5 billion, total revenue and other income in the range of $290 million and $310 million and adjusted EBITDA in the range of $75 million to $90 million. We expect GAAP net income in the range of breakeven to $10 million. For the full year, we expect network volume in the range of $9.5 billion to $11 billion and are increasing total revenue and other income of $1.175 billion to $1.3 billion and adjusted EBITDA in the range of $290 million and $330 million. We are increasing our GAAP net income for the year in the range of $10 million to positive $45 million. With that, let me turn it back to the operator for Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. The first question comes from the line of John Hecht with Jefferies. Please go ahead.

Good morning guys. Thanks for taking my questions. And I really appreciate the focus on operating efficiencies and profitability. So thanks, so first question is, there's a lot of economic -- you guys talked about this on the call, but there's a lot of economic uncertainty with a variety of potential outcomes. And I know you guys have sensitized for some of those potential outcomes. But I guess, how do you position your business for that variability in outcomes at the product level?

Hi, John, it's Gal. Thank you for the nice words. I will take this question. So when we think about Pagaya, obviously, first and foremost, we're building a long-term business. And when you're building a long-term business, which relies on the profitability and the capability of your products, you are going through some times of macro uncertainty as the one we're expecting today. So to say, for us, it's normal to see the unnormal. If you recall to what we said in the call, when we came into 2025, we assumed a lot of uncertainty because so we guided to not very aggressive growth because we are balancing growth and profitability moving forward. And part of it is, as you think about the right balance, not to be too much caught up into a short-term situation of the macro economy that could drive you to do mistakes for the long-term. So the word for us is the right set of growth, which is aligning with the long-term growth is what we are after. Now specifically to your question, let me ask -- let me start with an answer on the statements. We do not see today in the data any impact whatsoever from any discussion about tariffs or macro and the resilience that we see in the consumer is purely stable. Having said that, we are looking to be very careful on how we are managing forward and uncertain these days are requiring us to pay even more attention to that. As you know, we have very strong data capabilities because we are one of the only ones who are seeing in live in real time, how the loan performance and the applications and interaction is coming through over 30 different partners in the U.S. across auto loans, point of sale and personal loan, which could give you a very specific view on spending, specific view on lending and specific view about consumer behavior. The way we think about so-called downside scenario, it will come, although we don't see any right now, we think about it in a -- case scenario, which there are two main things that could happen. Higher inflation or higher unemployment. On a theoretical level, you could have both, but it's so unlikely that we're not pricing or thinking to that. When you think about higher unemployment, the best way to think about it is we will reduce a little bit of production in areas where we believe that the unemployment is more meaningful or lower income borrowers and so on and so forth. On the other side, when you think about inflation, you always have the key to be able to price for higher. And therefore, even if you experience higher delinquencies or CNL, you will have enough spread to actually compensate for that through pricing through increase of the coupons to the borrowers. And putting the specific risk management aside, I want to take you a step higher to remind you the changes that Pagaya has been through the last few quarters on both funding and credits. So from a funding perspective, we are at the most diversified point in time we have ever been. The forward flows are important piece for that and other programs that we have on our hands. So if we were a full ABS shop just a few quarters ago, today, we're much more balanced from that perspective and targeting 25% to 50% to be not through ABS, which provides a little bit more stability. On the other side of the structural changes are a lot of the activities we did last year regarding our balance sheet, strengthening it, bringing more liquidity and capital that is giving us enough ample liquidity that even if will be a little bit softer capital markets, our ability to react and to hold different pieces are definitely doable from our perspective. The last two pieces are the risk management that obviously, after '22 and '23, we have very strong discipline to put that in place and to be able to react very quickly. And lastly, I want to remind you that from our perspective, the way we think about the business model of Pagaya is even if we enter into one of these type of environment, more likely than not, other type of lenders will close their credit box. And therefore, we see more flow running into our systems. And this is a very good balancing mechanism that makes the Pagaya business model to be more, I would say, stable through cycles and through uncertainties when they materialize. So all in all, the full diversification in between funding partners, in between different markets are giving us a very strong confidence that even if it will be some kind of a downturn, it will be inside the guidance that we have provided and nothing that is more severe.

That's very helpful. Thank you so much, Gal.

The next question comes from the line of Pete Christiansen with Citi. Please go ahead.

Good morning. Thanks for the question. Nice results. I have two questions. First, Gal, I know we talked about prescreening in the past. It's been kind of like a proof-of-concept for the company, not really representing too much of volumes, but it seems like this is a really interesting opportunity going forward. How should we think about that product scaling across your partners, your existing business over the next, I don't know, let's call it 12 to 18 months? And then my second question is for EP. I know on the last call, there was a scenario contemplated for fair value marks for the year, I think somewhere around $150 million. Are we still in that range? Should we still continue with that assumption? Thank you both.

Pete, this is Sanjiv. Let me take the first part of the question, and obviously, EP will take the second. With respect to prescreen and affiliate, those are two very specific initiatives or products, as we call them at Pagaya that we have invested very heavily over the last, I'd say, two years. And the initial proofs-of-concept that we have done so far have been extremely encouraging. Conceptually, what these two initiatives do is that they essentially help our lending partners grow their customers in a very, very meaningful way, both existing customers and prospectively new customers. And what they do is in a prescreen, essentially we have the Pagaya models that we apply on the huge amount of data that our partners provide on their existing customers, and we are able to harvest this data, implement the Pagaya models, which, as you know is our core, core, core strength across vast amounts of data and provide loans to customers -- unsecured loans to customers in a completely frictionless way, which allows our partners to not only grow more customers, but also enable existing customers to get more credit in a frictionless way. So this is a huge part of how Pagaya will grow its PL business, personal loans business. And as you know, we are embedded already in 31 partners. And so think about it as a massive line extension in addition to what we have done so far. Today, we serve only 3% of our customers in our existing lending partners base. The TAM is almost 60 million customers with our existing partners. But the whole idea is to help them grow, help our lending partners grow and we grow when they grow. And the three proofs of concept we've done so far have been super exciting and super encouraging. On the affiliate channels, which generally refer to platforms like Credit Karma, LendingTree, Experian, what we call the big lead aggregators. Just to remind everybody, our existing lending partners today at Pagaya get about 50% to 60% of their loans through these aggregator platforms. What Pagaya has now done is we sort of started integrating our models onto our lending partners that are on these platforms and have started to show scale and sophistication in acquiring more customers through these aggregator platforms in a way that we can help our lending partners across the spectrum of sophistication to leverage these platforms to acquire new and incremental customers. That, again, is a very, very significant way to help our lending partners grow their businesses on platforms that they use, using Pagaya's capabilities in terms of our modeling and data analytics capabilities, which as you know, are very, very huge. So in our personal loans business, this is a very important growth path in terms of how we grow from where we are embedded already into helping our partners grow in a very meaningful way. And I called it earlier a line extension or a product extension, as you would typically call them, where we're already embedded in our partners. So net-net, this is how we will grow in our personal loans business in a very significant way. Our proofs-of-concept has so far have been very successful. We expect to roll it out in the second half. With that, let me pass this over to EP.

Hey, Pete, thanks for joining us. Yes, I think what we put in the supplement should be sort of your guidepost for potential losses, if any, in the future. Think about that rolling forward over the next four quarters. And you see how the losses came in this quarter, which we consider normalized levels and things that you would expect in any business that's in the consumer lending space.

Thank you both. Super helpful.

Thank you. Next question comes from the line of Rayna Kumar with Oppenheimer. Please go ahead.

This is Jake Kooyman on for Rayna Kumar. Thank you for taking our question. So firstly, I was just hoping you could please talk about some of the key drivers behind your three addressable markets of personal loans, auto and POS. And then just as a follow-up, I was hoping you could talk about what you're seeing out there within capital markets, specifically if you're seeing any changes in pricing? Thank you.

So hi, Jay, it's Gal here. So let me start taking it from a value proposition perspective, and then EP will supplement that with a little bit drivers on the business financial outcome, if that's okay by you. So from a value proposition, think about the Pagaya network as a way to enable lenders to have bigger, better business for themselves. And then the question is, what does that entail in each of the different markets as we think about personal loan, auto loan, and the point of sale? So for personal loan, I think Sanjiv covered that rather well, which at the end of the day, there are lenders with two parts of their business. Number one is a big marketing spend that they are putting out there in order to increase the number of customers that are going through their brand and channel and lending facilities. Our value proposition there is to help them to acquire more customers through the online marketing channels, let it be the affiliates as we spoke and many other permutations of that. The second piece in the personal loan is once you already have customers, there are many of them that actually didn't take loans from you in the past or the engagement level with them is rather low. So as a company, as a bank, as a big lender, when you're thinking about increasing your customer experience, increasing your customer satisfaction, what you're trying to do is to provide more loans and credit to these folks. So the proactive product is an ever-ending engine that goes through the portfolio of customers that each lender bank has and asking the question, who could we provide them a proactive approach to do that. So we moved from just helping lenders get more customer booked on their book when they are coming through the door to two very big initiative products that's helping them either to bring more customers proactively or to engage with them as they see fit. On the auto loans, the story is a little bit different. On the auto loans, the actual customer of most of our auto lenders are actually the dealerships. The dealerships are the one that are guiding the offers to be relevant for different consumers. And when you are thinking about serving these dealerships at the best way, there are two main factors. The first factor is to have the highest approval rates. It means that the lender will sit in front of the dealership and the dealership will be able to get the highest amount of application approved through them. And the second one is the seamless experience. So it will be easy for them to move. So it will be that they don't need to submit a lot of documents. And from a value proposition, that's exactly where we are coming. We are helping these auto lenders to provide higher amounts of self-activation or more applications that are being approved through the dealerships and doing it in a way which is easier for them, frictionless. And therefore, they are pushing more flow to the auto lender that they are connected to the Pagaya network. So if you think about it, there is a propel engine that when they become more relevant, they could actually go after more dealerships and the business of the auto lenders is growing. Lastly, but not that differently exists for point-of-sale. When point-of-sale lenders are going after merchants to embed their point-of-sale solution in their checkout, let it be online or let it be physically, they are being measured very much by the activation rates, how many of the borrowers that actually were looking to get the checkout, they actually got an offer. So we are a very good extension to be able for them to get a higher approval rate and therefore, to win more of the merchants business and win more of the merchants agreements. So point-of-sale on the Buy now, Pay later like Evalon or Klarna, looking on Pagaya as an enabler for their ability to close more deals on the merchants. So that's the business in generality in between the three different markets. And maybe EP, if you want to give a little bit of high-level themes around financials on that.

Yes. Just quickly how that translates to some of the financials. Again, we're focusing on prudent and profitable growth. Year-over-year, these three verticals, personal loans, auto and POS have grown by, call it 25% year-over-year, 6% sequentially. We're very pleased with the contribution of auto into the overall profitability now getting to a similar level of FRLPC margin like personal loans. And we expect to see POS as well to continue to grow its contribution on the overall FRPC margin. So we are in line with our strategy, as I said before, on prudent and profitable growth, executing with a very disciplined capital allocation.

Great, thank you. Appreciate the details.

Thank you. The next question comes from the line of Joseph Vafi with Canaccord Genuity. Please go ahead.

Hey guys. Good morning. Great results and nice to see the outlook here for 2025. Just circling back to the prescreen product. Just wondering if that's a driver of FRLPC expansion. It feels like I heard Sanjiv say frictionless, you're hitting your existing customers. It feels like it should be a kind of lower cost opportunity. Wondering how that may affect FRLPC over time? And then secondly, without kind of providing any guidance or anything, just wondering when the implementation of some of the forward flow agreements here into your funding mix may start to make their way into us being able to see some changes in fair value adjustments moving forward. Thanks a lot.

This is Sanjiv again. I'll take the question -- the first half of the question and I'll pass it on to EP again. But I will say that with respect to prescreen, you're absolutely right. Essentially, prescreen will have the impact of significantly lowering the acquisition cost for our partners in order to acquire more customers and give loans to existing customers at a significantly lower acquisition cost. Now that's a proven model. We all know that that's what prescreen campaigns tend to do. How we think about the economics of those relative to us and how it strengthens our FRLPC, we definitely think that it will have a positive impact. And the fact that we are making it, again, as Gal pointed out, there are two parts to this. One is that it's prescreened and the other part is that it is frictionless. And so that will -- think about the really successful Fintechs in the consumer lending business that have been really successful are those that have made the process completely frictionless from the point-of-sale or point-of-purchase to the point of getting the loan. That whole process is completely frictionless. So we expect that it will have a very positive impact on our earnings and FRLPC. EP, if you want to ask?

Yes, as it relates to the guidance, again, it goes back to disciplined allocation. We continue to focus on our key verticals, personal loans, auto and POS, which have both the highest sort of growth potential as well as higher profitability. And obviously, that mix is changing. It's a targeted mix, targeted change in the mix in order to drive profitability. And also, just keep in mind, this is profitability and growth without necessarily taking incremental risk. We talk about conversion ratios and how that has been steady over the last multiple quarters. To your other questions around the fair value, you actually see that a little bit even this quarter when you look at the total portfolio, while the business continues to grow, the sort of -- the portfolio is of investments loan and securities has not grown as much. You'll see a little bit more of that going forward to your point. And as we get into the later part of the year, again, without making any projections on what will happen elsewhere, I think you'll start seeing on a relative basis, relative to the overall volume, you'll see that being reflected in the risk retention, while the impact of those forward flows is already embedded into our FRLPC guidance, which we increased now to -- from 4% to 5% range for the year.

Great, thanks guys.

Thank you. The next question comes from the line of David Scharf with Citizens Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. I'll echo the congrats on all of the achievements thus far. Two questions for EP. The first, just focusing on expense levels. Obviously, the operating leverage has been coming in considerably stronger than expected. When I look at just the core OpEx, I think it was in the mid-40s this quarter. I mean EP, that's a full 20% lower than just the last two or three quarters. Is there anything that's artificially suppressing it in this Q1? Or is that actually, even with all the investments you're making, a pretty sustainable level?

Yes. Thanks for the question. No, I think the current levels are sustainable. You should continue to see some of that percent improvement coming through as the business grows on the top line and expenses are held reasonably flat. You should continue to see that improvement. What I would point out is the great thing about the business and differentiator is the operating leverage. I want to focus on the fact that we are now in a position to grow the business by twice as much, let's say, relative to the current level because we have already built out the infrastructure associated with our ability to do that and also the disciplined capital allocation. The mix also comes through the fact that as we're changing a little bit the funding mix and structure -- funding mix, you see lower overall ABS setup costs. So that's what you see some of the benefit keeps trickling in even this quarter.

Got it. That's helpful. And just a follow-up on funding, notwithstanding the diversification and increased flow partners. Maybe if you can just get a little April update or post-April 2 update on the ABS markets. And specifically, I know you got a few large deals done. Our understanding is that spreads have probably widened about 60, 70 basis points since all the tariff noise began. But notwithstanding the slightly wider spreads, has there been any change in the market for residuals? Like have you've been required in April to retain maybe more a percentage in the form of residuals than in March? Or is that largely steady?

Hi, David. Definitely. So two questions in one. First of all, I would say that, as you know, Pagaya is one of the leading, if not the leading ABS securitizer in the space. We were the first one to open the auto loan market. We were the first one to open personal loan market. So by some definition, Pagaya is the market in that perspective. There are two phenomena. The phenomena of the very short, short term, like a few weeks after things like announcement, a big announcement in the macro happens. It takes time for the market to find its place. So the 60 to 70 basis points that you have just mentioned are in line with what happened, but could go very quickly back to 25, 30 basis points. And then I think it will remain a question of how much uncertainty there is in the environment and then what we call people will price for volatility. In any way, for Pagaya, these type of small changes because we are doing the ABS deals before we actually pricing the loans because of prefunding nature, it's something that we are taking into account and therefore, pricing that on the assets and the borrowers in order to maintain the profitability and the discipline. So you could expect that flowing through to the assets themselves and therefore, mostly neutral in the effect on us. On the other piece of the retention, it all comes to the question of price. So again, in the very high life of day, you might don't want to have the capabilities and the liquidity and the balance sheet, you might don't want to sell that in that price in that moment, but it means nothing after a few months where performance is kicking in and people could see that the production is as expected. So I would think about it more as a buffer rather than a capability because there is a lot of demand out there, a lot of people that are looking to put money to work, and they just want to get a little bit more reassurance on this type of market short-term volatility, but there is no big waves that are happening around the corner, which we feel good about.

Got it. That is very helpful, Gal. Thank you and congrats again.

Thank you. Due to time constraints, ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Gal Krubiner for closing comments.

So in closing, I obviously first want to thank all of you for your time and the opportunity to talk about not only our results, but also our vision and product strategy. I'm extremely proud of our results and the team and all the work that we have put inside to make this day possible. And it's really truly demonstrating the earnings power of our assets and our model. We want to leave investors with a simple message. We have built the business for the long-term that is profitable and will scale profitability over time, thanks to our nimble and unique model. I also want to underscore what Pagaya is in the long-term journey. And it's easy to focus sometimes on the short term and sometimes to miss the big picture. We have everything we need to reach our long-term aspirations, which is to add every possible lending partner to our network and to help them to fully leverage the value of the Pagaya network to grow their businesses and better serve their customers. We are positioned with the best possible team, assets and technology to win in a market with a massive TAM to drive strong results over the next decade that will bring the gap between Wall Street and Main Street to become smaller. I'm fully confident that Pagaya and what we have achieved in the past will be just a blip of what we are going to achieve in the next decade. Thank you very much, everyone for joining us.

Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.