Nu Holdings Ltd. — FY2021 Form 20-F
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a quarterly filing; selected fourth-quarter results are included below. Financial statements are audited and prepared under IFRS as issued by the IASB, in U.S. dollars.
Business context
Nu operates a digital financial-services platform primarily in Brazil, with newer operations in Mexico and Colombia. Its products include credit and debit cards, accounts and deposits, personal loans, investments, payments and insurance. At year-end it reported 53.9 million customers, including 1.4 million in Mexico and 114,000 in Colombia; 41.1 million were monthly active. Nu reported 6,068 employees, up from 2,929.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | US$1,698.0 million | US$737.1 million |
| Gross profit / margin | US$732.9 million / 43.2% | US$326.9 million / 44.3% |
| Operating expenses | US$903.1 million | US$418.9 million |
| Loss for the year | US$165.3 million | US$171.5 million |
| Adjusted net income (loss), non-IFRS | US$6.6 million | (US$26.8 million) |
| Cash and cash equivalents at year-end | US$2,705.7 million | US$2,343.8 million |
| Customer deposits at year-end | US$9,667.3 million | US$5,584.9 million |
| Total assets / equity at year-end | US$19,858.7 million / US$4,442.5 million | US$10,154.3 million / US$438.1 million |
Revenue rose 130.4% (138.0% on the company’s FX-neutral basis). Interest income and gains on financial instruments increased 173.4% to US$1,046.7 million; fee and commission income rose 83.9% to US$651.3 million. Credit loss allowance expense increased 183.5% to US$480.6 million. Interest and other financial expenses increased to US$367.4 million, principally with higher deposit balances and interest rates.
Cash flow from operating activities was a use of US$2,924.3 million, compared with US$974.5 million generated in 2020. Nu attributed the outflow mainly to increases in securities, card receivables and customer loans, partly offset by higher deposits and card-network payables. Investing activities used US$154.2 million, including acquisitions; financing activities generated US$3,336.0 million, primarily from preferred-share financings and the IPO. Management said available cash and projected operating cash flows should cover ordinary working-capital and capital-expenditure needs for the next 12 months and beyond.
At year-end, deposits were US$9.7 billion, with 96.9% payable on demand. Cash, cash equivalents and securities were approximately US$11.7 billion, composed substantially of liquid government bonds. Total indebtedness was US$176.9 million, comprising US$147.2 million of borrowings and financing, US$12.1 million of capital-eligible instruments, US$10.0 million of securitized borrowing and US$7.6 million of lease liabilities.
Fourth-quarter results and changes versus prior periods
For the three months ended December 31, 2021, revenue was US$635.9 million, gross profit US$226.9 million and net loss US$66.2 million. In fourth-quarter 2020, the corresponding figures were US$202.6 million, US$76.5 million and a US$106.8 million loss. Quarterly figures are unaudited.
Annual gross profit grew faster than operating expenses, and operating expenses declined as a share of revenue to 53.2% from 56.8%; nevertheless, gross margin narrowed to 43.2% from 44.3%. The annual loss improved modestly, while adjusted net income turned positive. Customer count grew 62% to 53.9 million, purchase volume increased 95% to US$43.8 billion, deposits increased 73% to US$9.7 billion, and the interest-earning portfolio rose to US$2.0 billion from US$0.5 billion.
Credit loss allowance expense rose with portfolio expansion and higher risk exposures. The year-end allowance for card receivables and loans was US$588.2 million; the allowance represented 8.0% of gross card and loan receivables, versus 5.5% a year earlier. Nu reported a 90-day consumer-finance delinquency rate of 3.5%, below its stated Brazilian industry comparison of 5.0%.
Outlook, commentary, risks and unusual items
- Outlook: No quantified revenue, profit or margin guidance is provided. Management expects near-term losses as it invests in employees, marketing, products, acquisitions, international expansion, infrastructure and public-company compliance. It plans continued product and geographic expansion and expects higher capital expenditure to support growth.
- Share-based compensation: General and administrative expense increased substantially, including US$225.4 million of share-based compensation expense. The 2021 contingent award for the CEO had a stated fair value of US$422.6 million, to be recognized over 7.5 years; the company recorded approximately US$28.7 million of related expense in 2021. The awards’ expense is recognized regardless of whether their market-price milestones are ultimately met.
- IPO customer program and convertible instruments: The NuSóscios customer program reduced 2021 revenue by US$11.2 million. No convertible-instrument finance cost was recorded in 2021 after conversion of the senior preferred shares; 2020 included US$101.2 million of such costs.
- Regulatory exposure: Brazil’s proposed interchange-fee changes could affect revenue. Nu estimated that Public Consultation 89, if applied to 2021 activity, would have reduced revenue by US$86 million; a separate proposed Mastercard prepaid interchange change was estimated to reduce revenue by 2.4%. A new payment-institution prudential framework could also increase capital requirements; the filing estimates a US$97 million increase versus then-current requirements using year-end 2021 figures.
- Controls and reporting: Management concluded disclosure controls and procedures were ineffective at year-end because of material weaknesses in IT change management and IT user identity/access controls. A previously identified financial-reporting-close weakness was reported remediated; the IT weaknesses remained, with remediation planned during 2022. Management had not completed implementation and effectiveness testing of the remaining remediation steps.
- Other risks and contingencies: Principal risks include credit-loss estimation, deposit withdrawals, FX and interest-rate volatility, regulatory changes, competition, technology and third-party service disruptions, cybersecurity and data privacy, rapid growth, and expansion execution. Nu reported US$18.1 million of provisions for legal proceedings and approximately 4,474 active consumer-related proceedings with PROCONs and small-claims courts. It reported no off-balance-sheet arrangements and no cash dividends paid or expected in the foreseeable future.
Important facts for investors to verify
- Reconcile rapid revenue and portfolio growth with the higher credit-loss expense, allowance coverage and subsequent delinquency trends.
- Review operating cash-flow outflows, deposit demand concentration, liquidity composition and the availability and terms of funding.
- Track progress and independent testing of remediation for the IT control weaknesses, given management’s conclusion that disclosure controls were ineffective.
- Assess the actual impact of Brazilian interchange and prudential-capital rule changes against the company’s disclosed illustrative estimates.
- Evaluate the dilution and future expense effects of share-based and contingent awards, including the CEO awards and post-acquisition share commitments.
- Confirm acquisition integration, purchase-price allocations and returns, particularly for Easynvest and Spin Pay; Olivia closed after year-end.
- Consider the non-IFRS nature of adjusted net income and FX-neutral measures, which Nu cautions are not substitutes for IFRS results and may not be comparable across companies.