Nu Holdings Ltd. (NYSE:NU) Q3 2023 Earnings Call Transcript

Nu Holdings Ltd. (NYSE:NU) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good afternoon, ladies and gentlemen. Welcome to Nu Holdings Conference Call to Discuss the Results for the Third 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; Guilherme Lago, our Chief Financial Officer and Jag Duggal, our Chief Product Officer. Throughout this conference call we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for Nu Holdings, but are not financial measures as defined by IFRS and may not be comparable to similar measures from other companies.

Reconciliations of the our 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 to 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 our expectations. Please refer to the forward-looking statements disclosure in our earnings release. Today, our Founder, Chairman and CEO, David Velez, will discuss the main highlights of our third quarter 2023 results and provide an overview of our company flywheel.

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 Q3 ’23, NU continued its remarkable upward trajectory, demonstrating strong operating performance, fast growth and increasingly robust profitability. We remain focused on executing our business plan without distractions while keeping an eye on the significant growth opportunities we have as a company in the long run. Reflecting on one of the key milestones of the third quarter, our pace of customer growth exceeded our expectations, culminating in over 89 million customers at the end of the quarter. Once again, we witnessed robust customer acquisition in Brazil, Mexico, and Colombia with slightly more than 1.5 million new customers per month.

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Q&A Session

Over the past 12 months, our customer base growth in Brazil has outpaced that of the 5 largest incumbent banks combined. Additionally, we welcomed over 700,000 new customers from Mexico during the quarter, driven by the rollout and continued expansion of Cuenta Nu and the unlocking of our member can member referral programs potential. Our business model continues to demonstrate its ability to drive both growth and profitability. In the third quarter, our revenue surged to $2.1 million, marking a 53% year-over-year increase. Our gross profit reached $915 million doubling year-over-year, while our gross margin expanded once more, reaching 43% this quarter, solidifying the upward trajectory initiated last year. Sequential gross margin expansion, coupled with further efficiency improvements significantly boosted our net income, which reached $303 million and adjusted net income stood at $356 million, reflecting a 34% quarter-over-quarter increase on an FX neutral basis for both.

This slide provides a high level overview of our financial performance trends over the past 2 years. It underscores our ability to consistently expand our customer base and increase revenues while driving profitability. Notably, in October, we reached a significant milestone by surpassing 90 million customers, firmly establishing us as the fourth largest financial institution in Brazil in terms of the number of customers, whereas the second largest measured by the number of customers with access to a credit product. The robust growth of our customer base, driven by the growing cross-selling and upselling opportunities facilitated by our highly engaged platform resulted in a more than 4 fold increase in quarterly revenues in just 2 years on an FX neutral basis.

This translates to a triple digit revenue annual compounded growth rate over this period. The third chart of this slide effectively illustrates or prudent pricing strategy and robust underwriting capabilities, or quarterly gross profit calculated as total revenues minus funding costs, of transactional expenses and credit loss allowances also increased by more than fourfold in the same period. This growth was achieved while maintaining healthy gross profit margins despite increased credit delinquency observed in the market over the past 12 months. Lastly, we believe the synergistic impact of dimension factors combined with the potent operating leverage of our platform and the maturation of our early products in Brazil, has led to a significant acceleration in net income growth.

This growth is evident in the chart on the right covering the past 3 quarters. We anticipate this compounding effect to continue in the coming periods, resulting from the combination of sustained growth and enhanced profitability within our platform. As evident from this slide, our platform continues to showcase its cross selling potential, offering our customers comprehensive solutions as we continue to expand the scope and diversity of our product offerings. While our initial focus was primarily oriented towards unbundling financial services, as our platform has evolved. Today, we expect our most significant opportunities to line the rebundling of financial services by creating a diversified multiproduct, multisegment, and multicountry portfolio of businesses.

As illustrated on this slide, even our complementary businesses have successfully attracted millions of customers, highlighting our impressive cross selling capabilities. As we will delve into later in this presentation, we believe that critical product launches announced this year and in slated for 2024 will help further solidify our position as the preferred banking partner for an increasing number of customers. We expect this, in turn, will drive the expansion of our growth and profitability engines. I’d like to take a moment to delve into our company’s flywheel, a pivotal driver of our past growth and an essential foundation for future success. The core element of our strategy is very simple. We work extremely hard to make customers love us fanatically as we build what we think are the very best products and services in the markets we operate.

This obsession for our customers’ experience enables our customer base to expand, both in terms of size and engagement. By the end of Q3 ’23, we had achieved an impressive milestone with over 50% of Brazil’s adult population as part of our customer base and steadily increasing market shares in Mexico and Colombia. This level of scale allows us to aggregate both structured and unstructured data, which becomes an invaluable competitive asset as we currently accumulate over 30,000 data points on each active customer annually. And this is growing exponentially over time. Through harnessing cutting edge technology, we’ve transformed this data into actionable intelligence, continually enhancing our credit underwriting and customer insights models.

These model refinements, in turn, empower us to broaden the scope of our product offerings, reaching even larger segments of the populations we serve. This scale also allows us to reduce our operational costs, efficiency, which we then decide to pass to our customers via lower prices, helping us to provide better products and services at competitive rates and, thus, starting the virtuous cycle again. The momentum we’re seeing over the past 12 months is a direct result of this flywheel accelerating. And in Q3, we had the opportunity to throw fuel to the flywheel with the introduction of new lending products, such as payroll lending, where we decided to price at very competitive price points. The efficiency of our model also enables us to make these pricing decisions while maintaining healthy unit economics.

We’re seeing meaningful price elasticity in these products and are excited about the opportunity to use our efficient cost structure and data sophistication on our customers’ behalf. Now, I’d like to highlight how our flywheel isn’t just driving customer acquisition data growth, but also sustaining strong momentum in our key financial metrics. As our 3 geographic regions continue to expand, benefiting from the inner and operating leverage of our model, we’re holding companies effectively converting its potential into profits. In the Q3, Nu Holdings achieved an impressive adjusted net income of $356 million reflecting an adjusted annualized return on equity of 25%. We believe our current level of profitability already positions us ahead of most traditional incumbent banks in the Latin American region.