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Nu Holdings Ltd. misses on earnings expectations. Reported EPS is $-0.01 EPS, expectations were $0.02.
Operator: Good afternoon, ladies and gentlemen. Welcome to Nu Holdings Conference Call to discuss the results for the First Quarter of 2023. A slide presentation is accompanying today’s webcast, which is available in Nu’s Investors Relations website www.investors.nu in English and www.investidores.nu in Portuguese. This conference is being recorded and the replay can also be accessed on the company’s IR website. This call is also available in Portuguese. To access, you can press the globe icon on the lower right side of your Zoom screen, and then choose to enter the Portuguese room. After that, select mute original audio. [Foreign Language] Please be advised that all participants will be in listen-only mode. You may submit online questions at any time today using the Q&A box on the webcast. I would now like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer at Nu Holdings. Mr. Friedemann, you may proceed.
Jorg Friedemann: Thank you very much, operator, and thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the results intersection of our Investor Relations website. With me on today’s call are, David Velez, our Founder, Chief Executive Officer and Chairman; Youssef Lahrech, our President and Chief Operating Officer; and Guilherme Lago, our Chief Financial Officer. Additionally, Jag Duggal, our Chief Product Officer, will join us for the Q&A session of the call. Throughout this conference call we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for the Company, but are not financial measures as defined by IFRS.
Reconciliations of the Company’s non-IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on a year-over-year FX neutral basis. I would also like to remind everyone that today’s discussion might include forward-looking statements, which are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties and could cause actual results to differ materially from the Company’s expectations. Please refer to the forward-looking statements disclosure in the Company’s earnings press release. Today our Founder and CEO, David Velez will discuss the main highlights of our first quarter 2023 results and provide an overview of our Brazilian operations.
Subsequently, Guilherme Lago, our CFO, and Youssef Lahrech, our President and COO, will take you through our financial and operating performance for the quarter, after which time we’ll be happy to take your questions. Now, I would now like to turn the call over to David. David, please go ahead.
David Velez: Thank you, Jorg. Good evening, everyone, and thank you for being with us today. Once again, in a quarter marked by general concerns about economic activity and asset quality in the markets we operate. The soundness of effectively all our financial indicators remained very strong attesting to the resilience of our business model and the execution of our team. So I will show in the next few slides. We continue to deliver a rare combination of strong growth and increasing profitability through the ups and downs of our market. In the first quarter, our numbers continued to demonstrate the compounded effect of our platform’s high growth, combined with increasing profitability provided by our business model. Revenue surpassed $1.6 billion, expanding 87% year-over-year.
Our gross profit reached $651 million, a 124% year-over-year increase and our gross margin again surpassed the 40% threshold this quarter, reaching the highest level since 2021. This continued revenue growth with gross margin expansion enabled a significant increase in net income, reaching $141.8 million or 145% quarter-over-quarter growth rate versus last quarter’s DSA adjusted net income. Adjusted net income reached $182.4 million, an increase of 60% quarter-over-quarter. Meanwhile, we also continue to expand our customer base at a strong clip ending the quarter with 79.1 clients. Net ads were very strong in Brazil where we welcomed 4.4 million customers during the quarter. Our activity levels remain robust at 82% even as we add more and more customers demonstrating the intense engagement capacity of our platform.
This slide offers a high level overview of our recent financial performance trends, highlighting our ability to increase revenue, while expanding profits. Over the past two years, Nu was able to double the number of customers from 37 million in early 2021 to more than 79 million at the end of the first quarter of 2023 and already surpassed 80 million customers by April. The strong growth of our customer base associated with the rise in cross-sell and up-sell implied by the high engagement for platform resulted in our quarterly revenues multiplying by almost 7 times in only two years, a triple digit revenue CAGR over this period. The next chart of this slide illustrates our resilient underwriting capabilities. Quarterly gross profit, defined by total revenues, deducted by funding costs, transactional expenses and credit loss allowances, increased by more than 5 times in the period with gross profit margins expanding accordingly even though credit delinquency has increasing the market in which we operate over the past 12 months.
Lastly, all of the aforementioned drivers combined with the strong operating leverage of our platform and the initial moderation for early products in Brazil resulted in a significant acceleration of net income growth, particularly over the past three quarters, as you can appreciate in the chart on the right. This compounded effect should continue to be observed over the coming periods providing a valuable combination of growth with increasing profitability in our platform. However, I want to dig a bit deeper into some core questions that we get from investors around growth potential and eventual steady state profitability of the platform. In Brazil, where we have been operating for nine years, our clients already account for a remarkable 46% of the total adult population of the country.
It’s staggering and at the same time gratifying to think that almost one in two Brazilians that own a smartphone is a Nu Bank customer. In Mexico and Colombia, where we have been for three years or less, our share of the total population is significantly lower, representing a tremendous opportunity for growth as we expand our product offering and create lasting relationships with our clients. But so far, the experience we’re having in Mexico and in Colombia is more positive than what we saw in Brazil in the first few years. With three years of operations in Brazil, we had 1.2 million customers, representing a penetration of less than 1% of the adult population of the country at that time. Lower than what we now have in Mexico and Colombia. So, so far in Mexico and Colombia are beating Brazil and effectively all metrics from customer growth to early monetization, and plans for these countries are ahead of expectations.
While our customer penetration in Brazil is significant, when we delve into the market share we actually own in each profit pool, it is clear that we still have substantial room to expand our presence. The first important insect from the chart on this slide is that two-thirds of all the profits of financial services in our three markets come from credit related products. These fact confirms that it’s virtually impossible to build a large financial services business in the region without having credit underwriting as a core capability. It is also one of the reasons we decided to start Nu with the Credit First approach in 2013. Starting with payments and then pivoting to credit generally carries significant execution risk. Over the past four years, we have started to establish new toeholds in every additional credit segment.
Today, our most mature products is credit cards, where we have only 11% market share in purchase volume across our three deals. We have resumed growth in our unsecured personal lending product in Brazil and expect it to be an important driver of revenue and earnings growth. Last quarter, we also launched [Brazilian Vida] (ph), our first secure lending product, but in Brazil is known as [Indiscernible]. We are very excited about the feedback we’re receiving from early customers and expect to see meaningful acceleration in this segment or the next four to eight quarters. In addition to building our core capability of credit in Brazil, we have also launched innovative products and investments, insurance and marketplace. Since we already have one of the largest fully digital consumer platforms in Brazil, we’re able to bring new customers to these verticals at virtually zero additional acquisition cost and serve them at an extremely efficient cost to serve.
This not only allows us to gain market share, but also increases the size of the addressable market as we bring in consumers that have been traditionally underserved by incumbents. We’re pursuing a similar roadmap in Mexico and in Colombia over the next few years, supported by internally developed technology platforms providing us both speed and quality. Beyond the significant growth runway we have ahead, the clear trend of the last nine quarters demonstrates the significant operating leverage of the platform and its potential to generate profits. Being the lowest cost manufacturer in an industry is a very important strategic position, and we believe we are reaching that point in Brazil. The charts on this slide illustrate this fact for our business in Brazil or most mature market.
On the left, we show the efficiency ratio for our Brazilian unit over time. In the short time we’ve been operating in the country, at least compared to incumbents, we have been able to deliver best in class efficiency ratios with our cost to income ratio running now at mid-30% level. Meanwhile, the chart on the right provides evidence of the operating leverage of our platform or monthly ARPAC or average revenue per active customer expanded by 2.5 times between Q1 ’21 and Q1 ’23, whereas our monthly cost to serve remained virtually unchanged. Impressive enough, but this is only the start of the process. The monthly ARPAC of our mature cohort is already upwards of $20, more than twice our current overall average. And the monthly ARPAC for incumbents is about $40.
As we grow, we’re sharing the profit pools, we’re targeting and close the gap in ARPAC to our peers. All while maintaining a multi-cost to serve below $1 per customer, we believe our efficiency ratio will set new records and our profitability will continue to increase. In talking about returns, I’d like to highlight the evolution of the key financial metrics we presented last quarter for both of our holding company and our Brazilian operations. The momentum continued into the first quarter, as you can see by the numbers on this slide. As our Brazilian operational mature, positive results continue to compound and profitability is accelerated. Our adjusted net income in Brazil reached an impressive $200 million in the first quarter, representing an adjusted ROE of 43%.
We achieved this result from maintaining a regulatory capital ratio of 18.7%, a cushion of over 80% on top of the minimum required of 10.5%. As our 3GS scale, and we enjoy the benefits of operating leverage that is inherent to our model, or a holding company starting to convert its potential into profits. Nu holdings adjusted net income of $182.4 million in the first quarter implies an adjusted return of equity of 14%, while our current levels of profitability are already on par with many traditional incumbent banks in the Latin American region, it’s important to note that our excess cash of over $2 billion means that we’re extremely well capitalized. Also important to remember that we’re showing this level of profitability, even while continuing to invest significantly in future products and while growing revenues by 87% year-over-year.
Our revenue growth rate, the few financial institutions at scale are able to show. As seen, we’re very excited with the momentum of the business, and now I would like to pass it over to my partner and CFO, Guilherme Lago to dig in deeper into the numbers. Go ahead, Lago.
Guilherme Lago: Thanks, David. Good evening, everyone. As David mentioned, we deliver another quarter of strong operating and financial KPIs. We did so by leveraging the same simple, powerful value generating strategy that we have now employed for a few years. This strategy can be summarized by three guiding principles. First, continue to grow our customer base in the markets in which we operate and quickly converting new customers into active ones. Second, expanding average revenue per active customer or ARPAC through both cross-selling and upselling. And third, delivering growth while maintaining one of the lowest operating costs in the industry. Much like in prior periods, our first quarter results showcase how we continue to execute against each one of these pillars.
Let’s dive deeper. During the first quarter, our customer base increased at a solid pace, we added 4.5 million customers for a total of 79.1 million, a 33% increase year-over-year. In Brazil, our pace for monthly net adds continued at almost 1.5 million customers. The vast majority of which still come from referrals, which means lower acquisition costs, and faster activation. Our client base in Mexico and Colombia also evolved positively and will likely accelerate even further once we are able to have our checking accounts up and running in both countries. This has already happened in Mexico, where we have just crossed the level of 500,000 checking accounts open in less than a week after our official launch of Cuenta Nu. Once we add customers, our goal is to activate and have them engage with our platforms and love us fanatically.
On this base, the first quarter was also a success. Our monthly activity rate increased to 82.1%, up from 78.0% a year ago. The ninth consecutive quarterly increase. We are seeing positive and increasing momentum in activity in all of our three markets. The second pillar in our strategy is revenue expansion. The first chart is our primary banking relationship chart. It represents the percentage of our active customer, who transfer to us every month more than 50% of their post-tax income. Nearly 60% of our active customers are already primary banking relationship customers. And the pace at which our active customers become our primary banking relationship customer has happened faster and faster over time. Driven by two types of factors. First, external factors, such as COVID, PIX, and the overall growing adoption of digital banking.
Second, internal factors, such as the launching of new high quality products and features. The second chart is our product cross-sell chart, as we have launched new products, we have successfully cross sold them to our customers and earn the right to be the primary banking relationship with them. Now, the third chart is our ARPAC, and it represents the compounding effect of our expanding customer engagement shown in the first chart, with our growing product cross-sell shown in the second chart. In the last quarter, our monthly ARPAC reached a record high of $8.6. Yet, the monthly ARPACs of our more mature cohorts are already above $20 and the monthly ARPACs of the customers, who have bought our three core products, banking account, credit card, and personal loans are above $30.
We have a long runway ahead of us. On this slide, the chart on the left shows that our monthly ARPAC continues to grow sequentially and was up 30% year-over-year on an FX neutral basis. Our ARPAC growth together with the expansion of our customer base drove an 87% increase in revenues year-over-year to $1.6 billion also a record high. This slide provides some more details on our cards. For cards, purchase volumes are seasonal. Higher in the fourth quarter and lower in the first quarter of every year. Compared to the first quarter of last year, our purchase volume was up 48% on an FX neutral basis to $23.3 billion sustaining its strong growth path. The chart on the right shows how purchase volumes expand as cohorts of customers develop and mature.
Older cohorts continue to purchase in higher volumes spanning 3 times to 4 times more per month than recent cohorts. As we mentioned before, on average, a customer’s credit card expenditure three post when they have been with us for more than 24 months. We expect the compounding effect of adding millions of customers each month along with the maturation of these new customers into historically observed spanning patterns, to provide ample support for the growth in future purchase volumes. Looking into reported purchase volumes transferred the industry, Nu ended last quarter with a market share of around 13.6% adding both credit and prepaid cards, an increase of 40 basis points quarter-over-quarter. This quarter, our consumer finance portfolio composed of credit card and personal loans reached $12.8 billion, a 54% expansion year-over-year.
Despite negative seasonality in purchase volumes, total credit card receivables expanded sequentially and increase it 64% year-over-year, driven by client growth and the net revolution of our low and grow methodology. More importantly, our personal loan portfolio expanded significantly in the quarter. As you might remember, through most of 2022, we were cautious with originations in personal loans. A posture resulting from the increased risk we perceived in the product during the period. Starting late last year, as Youssef will explain later, our portfolio exceeded our expectations in terms of performance, which gave us confidence to take bolder steps with originations. As a result, our personal loan book increased 18% quarter-over-quarter to $2.3 billion.
Let’s now move to the breakdown of interest earning loans in our portfolio. We continue to pursue a strategy of increasing the share of our credit card loans that earn interest. This quarter, our interest earning installments balance once again gained share, representing a record high 16% of our credit card loan book. We prefer interest earning installments where we see attractive risk adjusted rates of return that allow us to further monetize our credit card business. Over revolving receivables, where we see a less favorable risk return profile and higher adverse selection. We have intentionally not expanded our share of revolving receivables, which continue at 7 percent of total credit card receivables for the third consecutive quarter. Because of this, new widened the gap versus the market.
Where revolving receivables accounted for 18 percent of credit card receivables as of the end of the first quarter. The performance of our personal loans cohorts improved over the last several months, given as the conviction necessary to increase loan originations. As our portfolio continues to show strong resilience and performance, we progressively increase our risk appetite deploying capital, profitably and consistently. Our launch of payroll lending would add to this strategy, reinforcing our opportunities for growth in originations. We are confident in our ability to drive responsible growth in lending. This belief is supported by our best-in-class underwriting platform, our strong capital base and our ample liquidity position. Moving to funding.
Supported by the growth in our customers’ base, total deposits expanded 34% year-over-year. It’s important to note that fourth quarters are seasonally strong for deposit inflows, while first quarters are seasonally weak. Our loan-to-deposit ratio achieved 32% this quarter, showing the Nu optimized the use of those deposits quarter-after-quarter. In the fourth quarter of 2022, our cost of funding dropped to an all-time low of 78% of the interbank deposit rate, driven by three factors: the full impact of the recently launched Money Box; the change in the remuneration of Nu Accounts; and the seasonally higher levels of deposits at the end of the year. As we had anticipated previously, our cost of funding should also lay upwards to approximately 80% of CDI over the initial three quarters of the year.
In this context, the level of 81% of CDI observed this quarter is in line with our expectation and also shows that we are starting to unlock the value of the strong liability franchise we have been able to build. With the recent launch of Cuenta Nu in Mexico, which in less than a week after its official launch, already surpassed 500,000 accounts open. We are offering a more compelling value proposition for customers in the country and should be able to onboard more individuals month after month, helping to further strengthen our deposit franchise in the country. We expect the same to happen soon in Colombia. The combination of the continued growth of our credit portfolio with the Nu normal in our funding costs have contributed to the expansions of our net interest income, or NII, and net interest margin, or NIM, to record high levels.
Our NII reached $815.3 million this quarter, growing an impressive 138% year-over-year. Our NIM increased by 2.2 percentage points quarter-over-quarter and 7.2 percentage points year-over-year to 15.7%. Let’s now turn our attention to the last pillar of our overall strategy, maintaining a low cost to serve. We continue to believe our platform is one of the most cost efficient in serving customers in the markets in which we operate. In the first quarter of 2023, our cost to serve per active customer was $0.80, largely flat year-over-year, while over the same period, our ARPAC increased 30%. This illustrates the strong operating leverage of our business model. Looking ahead, as we said in past quarters, we expect our cost to serve to remain at or below $1 level as the scale gives us significant operating leverage and bargaining power with our suppliers.
We recorded $651 million in gross profit in the first quarter. This was up 124% year-over-year, representing an important acceleration, compared to the growth posted last quarter. Following a similar trend, our gross profit margin reached 40.2% in the first quarter, almost 7 percentage points higher year-over-year, consolidating the acceleration in the pace of expansion that started in the third quarter of 2022. We achieved this result even with a higher amount of provisions this quarter as a result of the expansion of the originations of our lending portfolio as with upfront provisions and a slightly higher cost of funding in comparison to last quarters, due to previous mentioned seasonal patterns. We continue to see operating leverage as a defining feature of our strategy.
It is best illustrated by our efficiency ratio, which in the first quarter improved for the fifth consecutive time to reach another all-time low at 39% or 33.5%, excluding share-based compensation. This level of efficiency would already rank Nu Holdings as one of the most efficient players in Latin America. That said, we see this as only the beginning as we expect to benefit from the full potential of our platform’s operating leverage, as we continue to grow our customer base, upsell and cross-sell products, launch new features, earning flat results in our Nu geos of Mexico and Colombia, which still run at deficits. In fact, looking into Brazil only, we would already be running at levels of cost to income in the mid-30s, which would likely place us as the most efficient among the big players in the country, although it’s still in the early stages of our ramp-up.
Finally, moving to net income. We posted yet another quarter of improved bottom line performance. Our adjusted net income and net income amounted to $182.4 million and $141.8 million, respectively. To us, these encouraging results are validating our strategy and business model. While we are encouraged by the results in the first quarter, it’s important to reinforce that we manage our business with a view towards long-term value creation. This can require additional investments in the short-term aimed at optimizing our long-term opportunities. To review our performance in the first quarter from a different viewpoint, I would like to highlight the sustainable advantages we are maintaining across four cost pillars. On cost to acquire, we added more than 4 million customers in the quarter with the same low CAC as in prior periods.
On cost to serve, despite persistent inflation in the countries in which we operate as well as two business that are yet to reach scale, our cost to serve remains below $1. On cost of risk, we successfully managed the risk in our credit portfolio, aiming a very challenging backdrop and continue to outperform competitors when comparing apples to apples. Youssef will provide more detail shortly. And lastly, cost of funding. We began to unlock the potential of our deposit franchise, closing the negative gap we had against incumbent banks and widening the positive gaps against fin techs. We are very excited about what we have been able to achieve and are confident in our ability to develop and scale best-in-class products, expand internationally and operate at very low costs.
Now I’d like to turn the call over to Youssef, our President and Chief Operating Officer, who will walk you through some highlights of our asset quality.
Youssef Lahrech: Thank you, Lago, and good evening to you all. Let me take you through some of the key indicators of asset quality and credit portfolio health for the first quarter of 2023. Let’s start with NPL trends. Seasonally, the first quarter represents a high point for early-stage delinquencies. Specifically, 15 to 90 NPLs rise on average by 80 basis points going from Q4 to Q1 based on our historical data and in line with the rest of the market. In Q1 2023, our 15 to 90 NPL ratio came in at 4.4%, increasing by 70 basis points from the fourth quarter of last year, which is 10 basis points lower than our historical trend. This slightly lower than seasonal norm increase was mainly driven by the improvement in our personal loan portfolio itself a result of the actions we took last year.
Our 90-plus NPL ratio increased from 5.2% to 5.5%, as a result of the normal flow through delinquency buckets. As we discussed in the past, 90-plus is a stock rather than flow metric, so you get this sort of stacking dynamic over time. And since we do not and have not sold any delinquent loans, we do not get the purging effect of asset sales, which would artificially lower NPLs. With respect to loan renegotiations, they remained at around 8% of the book in the first quarter, with approximately half of those coming from customers who are current and not past due at the time of renegotiation. This is a result of us making it very easy for our customers to have active control over their finances. Many of them take advantage of that feature and go directly to the Nu app to edit their loan and payment schedule and make them more convenient and better synchronized.
This is counted and reported as a renegotiation, even though it’s not necessarily representative of a credit stress situation. The six graphs on this slide show the time series of NPL for credit card loans by income band where the purple line represents Nu and the gray line represents the industry. Much like in prior quarters, we continue to outperform the industry on a like-for-like basis. For the lower income bands, our comparative advantage continues to be even more pronounced. Provisions have continued to grow, primarily driven by the growth in our portfolio, following the same dynamic as in prior quarters. We front-load provisions when we originate loans based on the expected losses for the life of the credit in accordance with IFRS 9’s expected loss methodology.
The increase in provisions in the first quarter, therefore, is directly related to the increased volumes of origination we recorded in the quarter. Despite the higher provision volumes, our risk-adjusted NIM reached another record high of 6.6%, expanding by 120 basis points quarter-over-quarter. Compared to a year ago, the improvement is even more pronounced with risk-adjusted NIM up almost 4 times compared to the levels of the first quarter of 2022. Having shared these data and perspectives on credit and asset quality, let me now turn the call back over to our Founder and CEO, David Velez, for his concluding remarks.
David Velez: Thanks, Youssef. As we wrap up, I wanted to leave you with some thoughts about the future. This week, we’re turning 10-years old, and we couldn’t be more excited about what’s ahead for Nu. In 10-years, we’ve been able to amass a combination of skills and capabilities that position us at a very differentiated place. As a result of working extremely hard on our mission of fighting complexity to empower our people, we have built one of the most loved and trusted brands in Brazil and increasingly in Mexico and Colombia. We have reached significant scale in Brazil, allowing us to reach a level of operating efficiency that we can pass now on to our customers we have better and better products at lower prices, enabling an accelerating flywheel.
We have gathered significant data sophisticated data infrastructure, which is increasingly a key piece of our product design and artificial intelligence strategy. We have built unique capabilities in credit underwriting and financial services, helping us to develop a profit engine that we will use to reinvest in our services, verticals and geographies. And finally, we believe we have assembled one of the best technology and product teams in the world, unique for a Latin American company. These ingredients are important pieces to what we decide to now go build over the next 10 years. And as we plan for the long run, we think there is an opportunity to see ourselves more as a consumer platform that enables the optimization of money on behalf of its users.
We have named this new category Money platform. The Money platform is a technology platform that has the optimization of money on behalf of its users at its core, the same way that a social platform has social interactions such as texts or photos or videos as its core. The Money platform’s mission is to help consumers and small businesses fully optimize the creation and usage of their wealth across every single financial decision from investing to lending to day-to-day spending. Not only do most individuals and small businesses make poor financial decisions whereby investing in suboptimal products, overspending on goods or ever borrowing, but also, they often be excessive or unnecessary interest charges and fees to intermediaries. These costs can be determined to the economic welfare of an entire society.
Just imagine the amount of additional wealth that could be created for every member of society if every money-related decision, including purchasing the right goods at the lowest cost, was always optimist. This is a vision we have been pursuing for quite some time now, but we’re very excited about how the advances in generative AI will help us to accelerate reaching this goal and we intend to make investments methodically to seize this opportunity. Our strategy to get there is to continue building a comprehensive digital financial platform that provides the best financial products fully digitally across the five financial seasons: spending, saving, investing, protecting and battery. And in parallel, we use the brand, scale, data, process, and talent we have to go beyond financial services and enable our customers to purchase products and services from our marketplace partners.
As we think about the next 10-years, we truly feel that it is early days for Nu, and we hope to keep you positive as this vision progresses. We would like to take your questions now. Thank you very much.
Operator: We will now start the Q&A session for investors and analysts. [Operator Instructions] I would like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.
Operator: The Nu Holdings conference call has now concluded. Thank you for attending today’s presentation. You may now disconnect.