Pagaya Technologies Ltd. (PGY) Q2 2025 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Pagaya 2Q 2025 Earnings Call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Josh Fagen, Head of IR.

Thank you, and welcome to Pagaya's Second 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 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 full year of 2025. Our actual results may differ materially from those contemplated by those 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, Josh, and welcome, everyone. This was our second consecutive quarter of positive GAAP net income at a record high of $17 million. Total revenues of $326 million was also a record as well as our $126 million in revenues from fee less production costs. And lastly, our $86 million of adjusted EBITDA. Our strong results underscore the tremendous work we have done to provide increasing value to our existing partners while building our new partner pipeline. This also reflects our improved funding and operating efficiency with strong unit economics, which the team will walk through in more details later. Given the sustainability of our growth, unique economic attribution, improving corporate structure and increasing demand for our product, we are raising our full year financial outlook. Our unique data advantage and AI underwriting advantage continues to compound and enabling more precise credit decision, fueling model improvements and enhancing outcomes for our lending partners. These results are a strong reflection of our execution against several unique attributes delivered by extremely strong team. Before I discuss our results and our strategy moving forward, I do want to spend a few minutes just to remind the audience what it is that makes our business model and the company so unique. First, it's the way which we source assets. We are not a direct-to-consumer or a balance sheet lender. We help over 31 different lenders to acquire and retain customers. The benefit of the network to Pagaya is clear, sizable loan flow at almost $250 billion per quarter without spending a single marketing dollar. This allows us to remain highly selective while still profitably growing volumes, underwriting just 1% of applications over the past three years. Second is the value proposition we provide to our lending partners, especially to the banks. With a heavy regulatory burden and stringent capital rules, banks cannot truly respond to opportunities presented to them, leaving good customers and depositors behind. Pagaya ensures banks can serve such creditworthy customers without taking any credit risk. The third attribute is our ability to produce diversified assets at scale for large pools of capital raised by private capital funding partners such as Blue Owl and Castlelake. Over 150 sophisticated investors look to us to provide this flow in a consistent fashion. Last is the unique economic profile as we monetize this flow. Ours is a fee-based model, generating revenues from both sides of our network. That, coupled with a strong operational leverage, positions us to drive high levels of sustained long-term profitability. Turning back to our second quarter results. We have continued to diversify several key aspects of our platform. As such, 30% of originations come from point-of-sale and auto lending versus only 9% just a year ago. On the funding side, with our recent forward flow expansion with Castlelake, we have added roughly $5 billion in forward flow capacity since the end of 2024. This represents 25% of our overall funding mix. The increasing diversification and capacity for our funding sources adds much more resiliency and stability through cycles and better supports our growth and earning power. We have continued to demonstrate strong operational leverage with the second quarter core operating expenses near record lows as a percentage of FRLPC, thanks to the wide usage of technology and automation in our business, driving continued GAAP net income growth. While the operating environment is showing some stabilization and credit performance remains solid, we remain deliberately conservative in managing volumes and credit such that we can respond effectively to any macro shift. Pagaya is targeting strong and sustainable growth through all cycles. While these results were delivered in our second quarter, we continue to execute as we enter the third quarter. We successfully raised $500 million through our first corporate bond issuance. This was a strong external validation of our business model. Our appeal to an increasing [ era ] of capital providers would not have been possible without our relentless focus on the stability and consistency of our business and our disciplined execution on driving towards GAAP profitability. This bond offering is designed to grow our earning power, provide us access to less expensive capital and evolve our corporate capital structure to one that is more mature, diverse and sustainable. When I look forward towards the next 18 months of Pagaya, I see a disciplined focus on growing our enterprise. The main objectives of our growth strategy are simple: to land more partners and to offer additional value-added products to support our existing lenders' businesses. Our core technology advantages allow us to further support our partners' growth across the different markets in which we operate in. Today, our core program boosters our partners' ability to reach a large customer base. Recently, we have started to support our partners' ability to actually increase application flow into their funnels as well as to reduce the friction to fund loans through expedited verification. Initiatives and products such as the Pagaya direct marketing engine, the affiliate optimizer and the FastPass solutions are a crucial part of our future growth. Sanjiv, my Co-Founder and President, will expand on the way in which product innovation boosts the appeal to our network of lending partners as a growth solution. We are coupling product expansion with our strong and consistent funding network and underwriting capabilities. And it is important to mention that all of these loans, even from the new initiatives continue to be funded by the Pagaya funding network. We have made great strides in the past 18 months in stabilizing our funding, financing and operating structure through a disciplined approach. We will now shift to focus and execute of our growth strategy, which we are excited to share more about in the coming quarters. In closing, we continue to demonstrate that our greatest strengths lies in our ability to combine advanced data, AI capabilities and scaled infrastructure, making us a partner of choice to many leading lenders to drive sustainable, profitable growth. The result is a highly efficient cost model. And as bank and lenders look for new ways to expand and growth, we're helping them get there, sharpening our solution, scaling efficiently and delivering impact where it matters the most. With that, I would like to hand it over to Sanjiv for a review of our operating business and more on our product-led growth.

Thank you, Gal. Our business continues to benefit from robust consumer demand, a healthy consumer, continued improvement of our credit modeling as well as Pagaya's unique data advantage and network benefits. Existing lending partnerships remain the primary source of near-term volume growth. We see very significant expansion potential through our product solutions, given our now proven track record of success and the strong demand from existing partners for incremental growth opportunities. With the credit environment stabilizing, our lending partners are actively pushing growth opportunities. However, many initiatives are constrained at our lenders by their limited technology resources and competing internal priorities. Anticipating this challenge, Pagaya began investing nearly 18 months ago to build marketing capabilities designed to accelerate our partners' growth without them taking any incremental risk. In recent quarters, we successfully piloted Prescreen marketing initiatives as part of our direct marketing engine and have since initiated long-term commercial discussions to scale these programs. Additionally, we are working with leading affiliate platforms to develop plug-and-play solutions that require minimal integration effort, enabling lending partners to launch growth initiatives quickly. Our embeddedness in our partners' technology enables seamless expansion into new product solutions. Pagaya is expanding the way in which it works with its lending partners beyond decline monetization. We are growing our product suite to include marketing products to further accelerate their customer growth. Our direct marketing and affiliate optimizer engines help our lending partners expand their application funnel, which in turn creates a significant growth platform for Pagaya. As we expand our product offerings, we consistently leverage Pagaya's core capabilities, underwriting advantage and funding efficiency. Demand also remains robust for new partner additions, a longer-term growth driver. We see continued interest from regional banks and leading FinTechs. With several term sheets signed, we expect a few announcements in the coming quarters. Importantly, all of these current and evolving business drivers remain within our B2B2C core competency and focus. We have no plans to go directly to consumers. And as Gal said, it is something that uniquely differentiates our model in the world of consumer lending. Now let me provide some highlights for each of our product offerings. Within our personal loan segment, our value proposition continues to mature and partners are keen to embrace expansion into newer product offerings such as direct marketing and affiliate optimization. Pagaya is increasingly aligned with our lending partners as our products continue to evolve to best drive higher volumes, higher revenue and expanded customer lifetime value. It is worth spending a bit of time on each of our evolving product solutions. Direct Marketing engine for our lending partners, including our Prescreen solution, encapsulates Pagaya's continued efforts to help lending partners capture more application flow. It represents Pagaya's next generation of products designed to help partners not only monetize declines but also grow their application flow. We are helping to Prescreen existing customers using our models and send them offers through e-mail, direct mail and other channels. We are on track to sign multiple new Prescreen term sheets with existing lending partners over the next few quarters, all of which completed successful pilots earlier this year. Next, our affiliate optimizer engine for lending partners, which leverages our unique data advantage to help lending partners grow volumes through major affiliate programs such as Credit Karma, Experian, LendingTree and others. This enables partners to attract new customers at scale via a major source of customer acquisition. We are also expanding the market opportunity for affiliates by introducing new lending partners to their platforms. Our goal is to further streamline the onboarding process for lending partners, accelerating their growth with a plug-and-play solution on affiliate platforms. This eliminates the need for significant technology resources for onboarding, which is currently a challenge for our lending partners. This will, in turn, drive accelerated growth for Pagaya. Moving to our auto lending business, which is building on strong growth trends, optimizing and growing existing partnerships such as Ally and Westlake. First, we are growing our decline monetization programs and expanding our lending partners access to high-quality application flow by assessing applications that would be approved by partners. Further, we are rolling out value-added features, including tailored income, employment and other verification strategies via a new feature known as FastPass. These features under our partners' brands have already demonstrated promising results with potential to scale auto volumes. This improves the dealer and customer experience without incremental credit risk and drives cost savings for our lending partners. In terms of our pragmatic and balanced approach towards growth in auto lending, we have notably improved our underwriting model performance. The performance of our RPM ABS shelf and improved funding efficiency have led to lower cost of funds and capital requirements. We achieved our first AAA-rated auto ABS this quarter, a testament to our prudent underwriting. This has driven unit economics on par with the more mature personal loan segment. Our point-of-sale segment continues to demonstrate strong volume growth. Similar to the auto loan segment, we are enabling decline monetization for our lending partners and providing offers on application flow that could otherwise be approved by them. We have made notable progress on both sides of this business. Starting with the lending side, we have demonstrated profitable growth with Klarna, our anchor partner. We are helping Elavon grow their Avvance product while making advancements with new partners. On the funding side, our innovative POSH ABS offering was AAA rated out of the gate and oversubscribed. We continue to explore additional long-term growth levers from multiple verticals, ticket sizes and terms. In terms of our new partner pipeline, demand for our solutions remains robust. Among areas of focus, we see ongoing strong demand from U.S. regional banks. In this market, we are in several late-stage discussions, spanning personal and auto lending as well as point-of-sale financing opportunities. With several term sheets signed, we expect a few announcements in the coming quarters with some banks already in the process of onboarding. In particular, we are in the onboarding stage with a top 20 U.S. bank by assets to help in the relaunch of their personal loans business as well as some of the largest U.S. private banks to help expand their point-of-sale financing business. And now it's my pleasure to turn the call over to EP to cover the quarter's financial results and outlook.

Thank you, Sanjiv. As always, I will cover our financial and operating results and provide updated guidance for Q3 and full year 2025. But first, I want to take a moment to highlight a pivotal milestone in our journey as a public company, our inaugural corporate credit rating and successful execution of our unsecured notes issuance. This marks a key step in the continued optimization and maturity of our capital structure and serves as a strong validation of our team's execution. Let's revisit the foundation we laid in early 2024 when we introduced our revised financial strategy. At that time, we committed to two core goals: achieving GAAP net income profitability and generating positive cash flow. Having delivered on both with continued momentum, we shift our focus towards fully leveraging our next-generation product-led financial platform, one that is resilient, increasingly capital efficient and built to support great scale. These attributes are what enable us to drive compounding value for our partners and shareholders, supported by disciplined underwriting, strategic capital deployment and structural operating leverage. To that end, the successful completion of our $500 million senior unsecured notes offering, supported by all three major credit rating agencies was a step toward that goal and the evolution of our long-term financial strategy. You can find the details in our shareholder letter, but I want to highlight some of those benefits. First and foremost, we have reduced our cost of debt from approximately 11% to approximately 9% without effectively altering net leverage. Second, we improved GAAP profitability with approximately $12 million in expected annualized interest savings. Third, we enhanced cash flow by an estimated $40 million annually, driven by both interest savings and the retirement of secured debt that would otherwise amortize. Fourth, we simplified our capital structure by eliminating legacy restrictive covenants, extending debt maturities to 2030 and releasing valuable liquid assets, improving both liquidity and flexibility. Finally, this transaction is an endorsement of our strategy and opens access to the deepest pockets of institutional capital. It elevates our positioning across all of our constituents from funding partners to lending institutions. I'm incredibly grateful for the trust placed in us by top-tier investors. Turning to our financial results. We reported record results across all our key metrics, each at or above the high end of our original second quarter guidance. Most importantly, our results underscore the consistency and profitability of our network volume growth. Network volume grew 14% year-over-year to $2.6 billion, above the high end of our guidance. Personal loans were the largest contributor of volume in the quarter, up 23% year-over-year. At the same time, our results are increasingly diversified with POS and auto volumes comprising 30% of total volumes versus 9% one year ago. In line with the past three years, our conversion of applications to funded loans was at approximately 1%. We expect this level to remain steady in the near term as our increasing flow of partner applications enable us to adhere to our stringent underwriting standards and through the cycle profitable growth. Total revenue and other income was a record $326 million this quarter, up 30% from a year ago levels, with revenue from fees growing by 31%. FRLPC reached a record $126 million, up 30% year-over-year, outpacing network volume growth. Our focus on profitable growth drove FRLPC as a percent of network volume up 61 basis points year-over-year to 4.8%. FRLPC contribution from lending partner fees continues to grow at 81% of total FRLPC in the quarter versus 69% in 2Q '24 and only 1% in 2022. Adjusted EBITDA reached a record $86 million, an increase of 72% from the second quarter of 2024, representing 6 points in margin improvement at 26.4%. This was due to a combination of strong top line growth and our unique operating leverage with core operating expenses as a percent of FRLPC near the lowest level since going public. In fact, incremental EBITDA margin as a percent of FRLPC topped 100% on a year-over-year basis. Core operating expenses have risen sequentially in the second quarter due to higher ABS issuance of $2.3 billion versus $1.4 billion last quarter and our inaugural POSH ABS. These excess issuance drove expenses higher, which we expect to normalize next quarter. Excluding ABS setup costs, comp and all other non-comp combined as a percent of FRLPC continued to decline, demonstrating the inherent operating leverage of our business. These same factors drove GAAP net income growth of $9 million sequentially and $91 million year-over-year to $17 million. This represents a 5% margin in our second consecutive quarter of GAAP net income profitability versus 3% last quarter and negative 30% a year ago. Credit-related fair value adjustments reported in our other expense net amounted to a loss of $11 million in the quarter versus $24 million in the prior quarter. In addition, there were $4 million in loan-related losses versus $6 million in the prior quarter. Interest expense was $23 million in the quarter, which is up approximately $2 million, but down nearly 16% from third quarter 2024 levels when we undertook a set of balance sheet optimization actions. We expect interest expense to decrease meaningfully going forward following the recent unsecured note issuance. Adjusted net income was $51 million, which excludes share-based compensation and other noncash items such as fair value adjustments. Credit performance remains strong and stable, consistent with the last two years. Starting with personal loans, second half 2023 and first half 2024 vintage cumulative net losses are trending approximately 30% to 40% lower than peak levels in the fourth quarter of 2021 at month on book 11 to 20. For auto loans, CNLs across second half 2023 and first half 2024 vintages are trending approximately 30% to 60% lower than levels during comparable 2022 periods at month on book 11 to 20. In terms of our funding, we continue to execute at scale, taking advantage of the strong momentum we are experiencing while remaining disciplined in our credit underwriting. During the second quarter, we issued $2.3 billion in our ABS program across 6 transactions. Our institutional funding network currently stands at 153 unique partners, up from 120 last year. We closed our first AAA-rated auto ABS transaction and maintained our AAA rating on our personal loan ABS. Additionally, we closed our inaugural $300 million AAA- rated point-of-sale ABS transaction. With its revolving feature, as loans are repaid, funds are redeployed into our new loans during the 18 months tenure of the facility, thus equating to over $1 billion in prospective funding capacity over the life, fueling significant growth potential in our POS business. We expect ABS net risk retention requirement levels to continue to range at 4% to 5% of the notional size of our personal loan ABS deals and may opportunistically increase retention levels to the extent it lowers our cost of funding and is accretive to our earnings. Following the quarter, we announced a new forward flow agreement with Castlelake, a testament to the success of our initial agreement in 2024. The new agreement represents a total of up to $2.5 billion in personal loan purchase commitments over 16 months, a notable change from the 2024 commitment of $1 billion over 12 months. We expect to continue to diversify our funding to favor capital-efficient structures and other strategic funding partnerships. Turning to our balance sheet. As of June 30, we held $242 million in total cash and cash equivalents and $870 million of investments in loans and securities. The quality and composition of our balance sheet was improved materially over the last 12 months, providing enhanced access to liquidity. We will continue to proactively evaluate our balance sheet for further optimization opportunities, particularly within the context of our recent success in the public debt markets and the broader environment. In the second quarter, the fair value adjustment of the overall investment portfolio and allowances, net of noncontrolling interest and prior to any new additions was $21 million versus $45 million last quarter. We also added $122 million of new investment loan and securities net of paydowns from prior investments, the majority of which was discretionary. This is part of our accretive deployment strategy, which drives our overall cost of funding lower and increases the buffer against any future losses. Turning to our outlook. Our full year and third quarter outlook reflect both the momentum and resilience in our business to-date. At the same time, we remain cautious due to the protracted uncertainty. We will continue focusing on driving profitable prudent growth, not chasing any growth at all costs, while monitoring the macro environment closely. Notable drivers include consistent levels of personal loan production and continued growth in auto and point-of-sale products. We expect FRLPC to continue growing as we focus on our most profitable and growing verticals. We continue to expect FRLPC as a percent of network volume to range between 4% and 5% for the year. Profitability trends will continue, reflecting our scale and operating leverage. We expect credit-related impairments, if any, to be in line with the scenarios laid out in our earnings supplement and already reflected in our guidance. Interest expense is projected to trend lower as a result of our recent refinancing of unsecured notes transactions. Our third quarter and full year GAAP net income guidance includes the impact of several onetime items, including approximately $24 million in costs associated with the issuance of our corporate bond and costs associated with the early retirement of existing credit lines. Partially offsetting this loss, we expect to record a onetime benefit associated with the resolution of certain tax-related matters. The combined impact of these items is expected to be a net loss of approximately $5 million to $10 million already reflected in our 3Q and full year net income guidance. With that in mind, for the third quarter of 2025, we expect network volume in the range of $2.75 billion to $2.95 billion, total revenue and other income in the range of $330 million to $350 million and adjusted EBITDA in the range of $90 million to $100 million. We expect GAAP net income in the range of $10 million to $20 million, reflecting the aforementioned one-time costs. For the full year, we are increasing our expected network volume range to $10.5 billion to $11.5 billion, total revenue and other income in the range of $1.25 billion to $1.325 billion and adjusted EBITDA in the range of $345 million to $370 million. We are increasing our GAAP net income for the year in the range of $55 million to $75 million. With that, let me turn it back to the operator for Q&A.

[Operator Instructions] We'll take our first question from Peter Christiansen with Citi.

Wow, really impressive results, great execution this quarter, a lot to like. Gal, you talked earlier in the call about banks not having the technology, particularly when it comes to things like point of sale. I was just wondering if you could share some of the conversations that you've been having with potential new partners on the banking side. I'm thinking particularly some of the large card issuers where it may seem logical for them to diversify their offerings and perhaps add BNPL capabilities. Are you seeing some traction there potentially seeing some new partners on this side -- on the BNPL side coming in?

Pete, thank you for the kind words. So yes, it's Gal. I'm going to take it. So the short answer is yes. I think in general, in the U.S., there is a lot of enthusiasm about buy now, pay later as it relates to the ability to provide to customers the ability to have additional way to pay their bills. And to your point, banks who have a big credit card businesses are looking to that to make sure they are going to stay in the game. So in the last few quarters, I would say on that. And generally, even broader on banks, thanks to a regulatory environment that has been shifting a little bit to the positive side. And in the same time, with the stabilization of the environment that we are seeing out there, more and more banks are actually asking the question, how do we grow? And part of these growth initiatives are coming in the form of collaborating with Pagaya. And if you've noticed, we did mention that we signed a few term sheets just in the last quarter and hoping to do some progress in the [ next ] few quarters, and we can tell you all about that. But to sum it up, the answer is yes. Buy now, pay later is one of them, but we see that actually across the board in PL in buy now, pay later and in auto loan.

That's helpful. And then I certainly want to double tap into the successful oversubscribed bond offering you had in the quarter. It seems like this changes the glide path for capital structure planning as we think forward and certainly a reputational benefit here. Just wondering if you want to -- if there's anything you can add there on how you see this deal being transformational for Pagaya.

Sure. Thanks, Pete. This is EP. Yeah, we're obviously very happy with the execution of this transaction, and we laid out all the benefits that we get out of it, which I encourage you to go through because it's truly a transformational transaction for us. Maybe another way to think about it is that this bond effectively is a step function in our evolution and provides probably the biggest, call it, risk reduction in our business and our franchise as a whole. We have -- when you think about the corporate debt structure that we have in place now in combination with the convert, we put that out 4, 5 years and get a lot of, call it, cash savings out of that, which we can really plow back into the business and focus on sort of growing the business. That's one way to think about it. And it opens up obviously access to capital. And down the line, if we need to get access to capital, we can do it through this venue and obviously, in a nondilutive way. So very pleased with the transaction and what it does for us. And obviously, it provides for all of the constituents an extra layer of scrutiny now that we're basically engaging with the rating agencies.

Congratulations again on the great execution.

And we'll go next to Kyle Joseph with Stephens.

And yeah, echo congratulations on really strong results. Gal and Sanjiv, you guys talked a lot about kind of your focus on new products in your prepared remarks, whether it's prescreening or affiliate optimization. I'm just thinking how does this kind of impact your growth profile with the partner model, you had good growth, but it could be fairly lumpy. Is this something where you think about kind of smoothing out results? And then in terms of the impacts on the P&L, where are we on it? And then how are you thinking about kind of the timing and magnitude?

Sure. Thank you, Kyle. This is Sanjiv. So yes, you're right. We have spent a fair amount of our time, in fact, over the last 18 months in investing in our new products. In some ways, we anticipated that our partners in this cycle would be looking for growth. And so we essentially shifted -- if you really think about Pagaya's products, our core flagship product was always the decline monetization product based on which we built our core flagship personal loans business, auto business and POS business. And if you really think about what we've done in the last 18 months is we've invested heavily now in the growth initiatives with our partners. So the direct marketing engine and the affiliate optimization engine essentially does two things. The direct marketing engine enables our partners to now grow the personal loan side of their business with existing personal loans customers who could take a second loan or existing personal loan customers that may have applied in the past but have paid off that personal loan and are good performers. What we do using Pagaya's direct marketing engine is using the analytics, we select the best customers that our partners should reach out to under their brand, and we offer them the same full-scale Pagaya solution of underwriting those loans and eventually funding those loans. So the partners continue to grow and continue to earn fees. Same thing with the affiliate side. As Pete mentioned earlier, our partners play very heavily in cards. So they use affiliate programs like Credit Karma and Experian. But on personal loans, they don't use Credit Karma and Experian as much. And what we are doing is essentially connecting them to Credit Karma and Experian on the personal loan side to grow that side of the business, again, providing our engine for them to optimize their results and show their growth. And then we fund -- we provide them a funding solution on those loans so they earn more fees through those capabilities as well. So moving much more from a decline monetization engine to now a direct marketing engine and an affiliate engine to help our partners grow. Why does it matter to them? Because our partners care about growth a lot. Why does it matter to us? Because from a personal loan standpoint, think about it this way, we have 31 existing partners, and we are showing each one of them how to now grow given that we are already embedded into their ecosystem. So it's a very powerful value proposition for them. We've done pilots with 5 of our top partners, as I mentioned, as we mentioned in our shareholder letter as well as in our announcement today, we're in the process of signing about 5 term sheets so that we can start to roll this out. But to answer your question, we absolutely expect it to impact the growth in our PL business very soon. We expect to roll this out by the fourth quarter. So we expect 2026 is when we'll start to see the full impact of this. And we totally expect it to smoothen out the lumpiness, as you mentioned, of the franchise, which is seasonal and so it'll become much more programmatic because they're so tuned to our partners' success in terms of their growth.

Just one thing to add, it's Gal here. From a P&L perspective and from a network perspective, I think we are reaching to a point of scale that we are choosing products that are onetime investment for us but then could be utilized with many of our partners. So if you think about the marketing -- direct marketing engine that Sanjiv has mentioned, we are building it once, but then we can offer that to 6, 7, 10 and up to 31 partners. So even from the cost that is needed to happen in order to provide that value from a P&L perspective on the Pagaya side is very accretive. And the same goes to the affiliate. When you think about Experian is going very strongly into creating a marketplace like Credit Karma has. So our ability to connect to them and to deliver that direct instant connection to many of our partners is becoming a very strong added value that with the Pagaya capabilities in between, making it much easier for them to add them to the platforms and make it seamless through the integration. So both from the investment time and from the expenses versus the benefit that we get, these things should be very accretive now that we got to a scale of 30-plus partners that it makes sense to do it better.

Correct. And I'll just add one more thing, which is if you think about it, we've sort of served 2.5 million consumers already in the years that Pagaya has been there. The TAM in this market of existing customers with our existing partners is about 60 million customers. So it's a massive TAM. And as Gal said, investment that is made, but it's replicating exactly the Pagaya model of the analytics, supporting the partner and then providing them a funding solution for more.

Sounds like an exciting opportunity.

And we'll go next to John Hecht with Jefferies.

Great quarter. Gal, you mentioned -- you talked about your unique model early in your prepared remarks. I'm wondering, do you guys see others entering? And what do you think the market direction is and the competitive dynamics are, especially kind of considering your kind of first-mover advantage?

Definitely. So let me try to answer this question, John, from both a product and a company perspective. I think from a product perspective, let's talk about what it is and design it. So when we are speaking about what we build, we build an extended platform that is actually allowing many lenders in the U.S. to be able to provide more consumer credit offers to their people. Now in short, let me tell you this. I believe that everyone, every bank, every lender should have a version of this business of the extended platform. And this is really the message that we have been trying to provide to The Street for the last few years since we started or since we became known. This is, in fact, Pagaya, the product we have built and brought to the world. Now you may see in different occasions, specific lenders that are building partially by their own extended platform that are mainly around funding platforms that allowing for a part of the of their application to be funded through other pieces. And we're actually very bullish and happy about it because we think that this is a tremendous big opportunity. And we think that as long as it becomes more known, more relevant, more mainstream, it actually makes our job to attract many more lenders to our solution easier and more explainable. So we are welcoming any type of ability of anyone to do and to go after that. Now the interesting part, and that's what we love the most, is that the way we do it is very, very different. We are connecting directly to the loan origination systems. We are connecting directly to the affiliate, as Sanjiv said before. There is a very hard coded tech stack that is needed to be built and integrated through these organizations to make sure that our business is sustainable, efficient and growing over time. So I think that major first differentiator is allowing us to have the right margins and the ability to be scaled across the spectrum meaningfully. And the second piece is when you're thinking about the extended platform of Pagaya that is providing funding stability to these lenders, and this is maybe the most important thing, we are never relying on one funding partner. Behind the API connectivity of Pagaya, you have 150 sophisticated investors that partially they will have more appetite or less over time. But as a whole it's a very strong and stable solution and one that you should and should be able to offer to a bank. Lastly, I would say that we have so much mastered that concept that we have managed to do it in three major different asset classes. So the unique capabilities that we have is not just being delivered to the FinTechs that part of you are more familiar with, but it's across industries and markets that even much more traditionally haven't been doing these things in the past. And if you think about it from a company perspective, as I said, we think that Pagaya can become the biggest extended platform in the United States and the capabilities and the tech that we have built are an absolute capable of dominating the majority of this market. For us, the evolution that we are talking about and hopefully leading well is the same evolution that corporate debt has been grant through the last 20 years with the concept of syndication. So we consider ourselves as the leading and the category leaders in the ability to create the concept of a syndication market into the consumer credit. So from here, I'm truly calling for every bank, every lender in the U.S., big and small, who wants to make their product to the customers more efficient and more valuable to contact us and to start working on their similar strategy. And I will add with maybe the most important thing, don't forget that the result is neither us nor the bank. It's really about helping consumers getting the credit.

And we'll go next to Sanjay Sakhrani with KBW.

Sanjiv, maybe we could talk a little bit about the health of the consumer. Obviously, you mentioned credit is doing quite well. And obviously, we've seen those marks come down encouragingly. But maybe just a little bit more detail around what you're seeing and what the path forward is in terms of credit quality?

Sure, Sanjay. Yeah, so we have seen across all our principal asset classes, but definitely in personal loans and auto that the consumer performance has been extremely good. We are seeing based on the work that we are doing is that consumers continue to make -- not only continue to make their payments, but we are watching -- but still watching very carefully on a couple of things, especially the impact of student loans and what we are reading in terms of consumers increasing their savings rate. But their performance rate has been -- their performance with respect to loan repayments have been very good. And I say that -- I put the caution in there because our risk management, we particularly tightened up. And it's one of the reasons why I would say that the discipline that we've put in at our side, even though we have the ability to potentially dial up more we are being very careful about making sure that we approve only those loans that are -- that continue to be solid credit quality. Having said that, what we did in our Auto business was we started this construct of essentially using sophisticated models to see where we could remove some of the steps that were very intense for high credit quality customers, and that we saw has actually not only increased our volumes, but we look at the credit quality there, that's also been pretty steady. So net-net, that's kind of how we think about today in terms of responsible lending, but also how we think about not necessarily opening up the credit box, but making sure that we make the process more friction-free in order to [indiscernible]. So we are being very cautious, but also very, I would say, tactically very smart in terms of making sure [indiscernible].

That's great. And maybe just a follow-up for Gal, EP. Obviously, you guys have made substantial progress on funding and all the liquidity you have. The credits, as Sanjiv mentioned, is moving in the right direction. And then the GAAP profitability also helps the flywheel in terms of your capacity to originate. I guess as we look forward now, and I know you guys have provided and upgraded sort of the network volume assumptions. Like what's your capacity now? Like I mean, can you just give us some dimensions because you have a lot of growth vectors that you're trying to tap into. So how should we think about what the growth profile today could be over the next couple of years?

Sure, Sanjay. So I want to take a specific definition of the word growth. That is the way we think about it and connect it to the great question you had about capacity. So the way we think about growth is really how much our platform is connected to many more lenders and how many more solutions we are providing to our partners inside of this -- inside of their channels that they are originating through. And we are doing that, as we said, in personal loan, in auto loan and many others. On the other side, the same type of like growth is actually funding capacity. So making sure we have more AAA buyers on the ABS. We have more forward flow buyers from that perspective. So it's really about growing the enterprise and trying to build the, so to speak, a perfect extended platform for all the different types that a lender will might need, even if it's to grow their business with a direct mail like Sanjiv said or help them get accelerated on the affiliate channels or just help them capture more of the applications coming through their door, but they didn't have a real solution for and everything through our credit underwriting and funding. The short answer to how much capacity we have, I would say that we can easily see for the next 18 months or so, the ability to have a 2x capacity at least. So it's not anymore a capacity question. The question is when you are lending more partners and it takes time to integrate them and to perfect them and to bring them to the profitable growth that you want to see without having years and years of investment without actually creating any marginal profits. So we want to make sure we are actually in a very disciplined profitable growth. So the way we think about growth from that perspective is to continue to actually generate higher GAAP net income numbers. So this is what we are focusing on. We are focusing on having a very healthy organization that we have enough capacity as an organization to [ expand ] even potential downside in the future, and that has been our focus. And in order to do that we are doubling down on all the heavy infrastructure that you need to do in these deals in between connecting to more partners and our pipeline is very solid and into extending our funding partners to build more channels that are sustainable and diversified to be able to do that. So that's the overall overarching thing. And then as you think about the goals, the double digits usual as we are planning and targeting for, that's what you should expect going forward.

And our last question comes from Hal Goetsch with B. Riley Securities.

Great quarter, guys. A quick question on just the affiliate program you mentioned. And I just wanted to know more about when you're onboarding a bank partner with limited technical resources, what are some of the workflows and assets you bring to do that? So we just want to understand like the process it takes to get through an onboarding from -- after signing a term sheet. Just any color you could give us would be super helpful, just understanding what you guys are going through to bring on new partners.

Hi Hal. This is Sanjiv. So yes, so when we sign a term sheet with a bank and we get into the onboarding process, generally, people assume that we jump straight into the tech integration, but that's not quite true. What happens is because it's a bank, we first have to go through a very rigorous process of making sure that our models relative to the banks, both the risk management process as well as the bank's compliance process in terms of model approval, how the models work, how the model variables, that goes through that complete -- a very, very deep analysis. So first, the risk guys, the compliance guys on both sides sort of connect with each other to make sure that the model review process is done with a great deal of detail. Now we consider that part of the onboarding process. It's a very fundamental process, making sure that it's regulatorily compliant. As you know, we've passed muster on that with U.S. Bank and several other banks. So that happens first. Then the issue gets on to the legal side. So how does the bank qualify as a true lender. We go through that process, make sure that there's an extensive test of about 8 or 10 items for a lender to qualify as a true lender. We go through that with a great deal of detail, make sure that the bank on the other side is completely comfortable. I just want to say thank you, everyone, for all the audience and all the investors supporting us throughout the years. And we are hoping take about 6 months, 6 to 9 months. And so that whole process -- what happens is it's one of the reasons why when we sign a term sheet with a bank, we don't necessarily announce it. We announce it as soon as we get into the onboarding phase, which is kind of where we're at with a couple of banks right now. And so just want to make sure that, that answers your question.

Okay. That's some great context on the heavy lift it does to get something live after a long discussion.

The good news in that is that because the entry barriers are so high, once you're in, you're in.

This does conclude today's question-and-answer session. I will now turn the program back over to Gal for closing remarks.

to see you soon again in our next early quarter announcement. Thank you very much, everyone.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.