There was a lot to like in Nu Holdings' (NU -3.01%) recently released first-quarter earnings report. The Brazilian fintech company generated record revenue of more than $1.6 billion and record net income of close to $142 million, representing Nu's third-straight profitable quarter. The company also added another 4.5 million customers, bringing total customers to more than 79 million and effectively banking 46% of the Brazilian adult population, which is incredible.
But despite all of this success, there is one thing that makes Nu better than most other fintech companies. Let's take a look.
Nu Holdings operates with tremendous efficiency
Nu got its start offering credit cards with no annual fees and using a very sleek digital platform to make it easier for Latin American citizens to access the banking system. The company has pretty much followed this path as it unveiled other products as well, which led to the bank having a lower monthly average revenue per active customer (ARPAC) than incumbent banks in Brazil.
But this model also allowed Nu to scale by growing customers very quickly and serving those customers at a very low cost while maintaining high customer satisfaction. The results have been excellent.
Image source: Nu Holdings. Notes: All data presented is for Brazil only. Net Interest Income (NII) is calculated as Interest income and gains (losses) on financial instruments minus Interest and other financial expenses. F&C = Fee and Commission Income. Costs include transactional costs and operating expenses. Efficiency Ratio = Total Operating Expenses plus Transactional Expenses divided by NII and Fees and Commission Income. SBC = Share-based compensation. ARPAC = Average revenue per active customer. Monthly ARPAC is calculated as the average monthly revenue (total revenue divided by the number of months in the period) divided by the average number of individual active customers during the period (average number of individual active customers is defined as the average of the number of monthly active customers at the beginning of the period measured, and the number of monthly active customers at the end of the period). Cost to serve = The monthly average of the sum of transactional expenses, customer support, and operations expenses (sum of these expenses in the period divided by the number of months in the period) divided by the average number of individual active customers during the period (average number of individual active customers is defined as the average of the number of monthly active customers at the beginning of the period measured, and the number of monthly active customers at the end of the period).
As you can see in the right chart, Nu managed to gradually grow ARPAC while keeping its cost to serve customers at just $0.80 per customer and very low customer acquisition costs as well.
This translates into a ton of operating leverage in which the company grows revenue at a much faster clip than expenses, which then drives down the company's efficiency ratio. The efficiency ratio looks at expenses expressed as a percentage of revenue, so lower is better because it means a company is spending less to generate more revenue.
Nu's efficiency ratio in Q1 dropped all the way to 36.9%, and it would have been below 33% if you take out share-based compensation. Still, below 37% is among the lowest in the industry, especially for a bank or fintech company the size of Nu.
There's also good reason to believe that Nu can maintain this efficiency and even drive it lower by achieving more operating leverage. On Nu's recent earnings call, management said it thinks it can keep the cost to serve customers at or below $1, while also realizing further revenue synergies.
"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," said Nu's CFO Guilherme Lago.
While ARPAC across Nu companywide is only $8.60, it has reached $24 for some of Nu's most mature customer cohorts and there should be other ways to increase ARPAC by catering to Nu's higher-income customers.
Operating leverage is key
The key to Nu's story is the incredible operating leverage it's able to generate, which translates into an industry-leading efficiency ratio. While you will hear a lot of other fintech companies boast about customer growth, not many boast about profitability or operating leverage, especially to the extent that Nu has been able to deliver.
And the exciting thing about Nu is that there really does seem to be a lot more room for growth, which is likely a big reason for the company's high valuation.
