The Brazilian digital bank Nu Holdings (NU -1.69%) is still not profitable as it continues to invest in growth, but things are headed in the right direction. In the second quarter, Nu tallied an astonishing 65 million customers and generated record quarterly revenue of $1.2 billion, a 230% year-over-year gain. NuBrazil, the largest division of Nu Holdings, also turned a profit of $13 million in the first half of the year after losing nearly $20 million in 2021. And the company's core operations are continuing to scale quickly and effectively. Here are two welcome signs that Nu is getting closer to profitability.
1. ARPAC continues to grow
A key metric investors are watching at Nu is the monthly average revenue per active customer (ARPAC). While the company has grown customers very rapidly, Nu has done this by offering lower-fee products and services than traditional banks in Brazil and Latin America. This is naturally going to lead investors to wonder how Nu will monetize its massive base and build a moat.
Image source: Nu Holdings.
Nu boosted ARPAC to $7.80 in the second quarter, which is up from $6.70 in the first quarter. That's solid growth, but it still pales in comparison to the $40 of ARPAC that traditional banks in Brazil tend to generate. Management has acknowledged that ARPAC may never get this high due to the nature of the company's strategy, but they do expect to increase ARPAC a lot from $7.80. In Nu's most mature customer cohorts, monthly ARPAC has grown to $21.
Nu's Chief Financial Officer Guilherme Marques do Lago said on the company's recent earnings call that the company doesn't think ARPAC has topped out yet among Nu's most mature cohorts.
"Two things drive the expansion of ARPAC, product cross-sell and product upsell. And if you take a look, we are driving both upsell and cross-sell up quarter after quarter, including in our more mature cohorts," said Marques do Lago. "The penetration of personal loans, investments, insurance and the large number of additional products that we will launch has not -- is not even close to where we think it will be. So there's a lot of cross-sell and upsell still to come."
2. Improved efficiency ratio
For the first time, Nu shared the progression of its efficiency ratio with investors in its second-quarter earnings materials. The efficiency ratio is a very important metric for banks that shows a bank's total expenses expressed as a percentage of total revenue. So a lower efficiency ratio is better because it means the company is spending less to generate more revenue. Most investors consider a sub-60% efficiency ratio to be pretty good.
Image source: Nu Holdings.
As you can see, Nu has done an excellent job of reducing its efficiency ratio from nearly 92% in the beginning of 2021 to about 58% at the end of the second quarter of this year. And without stock-based compensation, which should go down over time, the efficiency ratio would have been a very strong 50%.
Marques do Lago said this could be the start of the company's efficiency story because Nu's cost to serve its active customers is expected to stay pretty low, while ARPAC will continue to expand. Furthermore, a lot of Nu's general expenses are driven by hiring, but the company expects to hire at a much slower pace going forward than it has previously. Both of these factors should continue to boost operating leverage, which is when a company grows revenue faster than expenses.
