“This was a pivotal and successful year for Disney, and thanks to the significant progress we’ve made, we have emerged from a period of considerable challenges & disruption well positioned for growth and optimistic about our future.”

CEO Bob Iger

This was a very short earnings report with little new detail. The total call lasted 31 minutes (normally these last 60-70 minutes). Here are all of the highlights:

In entertainment, linear revenue fell 6% Y/Y while EBIT fell 38% Y/Y. This remains in permanent decline. Fortunately, direct-to-consumer (DTC; streaming) revenue rose 15% Y/Y and is now more than 2x larger than the linear revenue base. EBIT for that segment also positively inflected to $253 million vs. -$400 million Y/Y. The 2027 streaming EBIT margin guide points to significantly more operating leverage left to enjoy. It had talked about this 10% margin goal for a long time, but this was the first time they gave us a schedule to get there.

Inside Out 2 and the new Deadpool movie both broke box office records and generated more than $300 million in incremental EBIT for Disney this quarter. They helped drive subscriber interest and powered 39% Y/Y growth in content sales, licensing and other. The success directly shows you how powerful of a weapon box office hits can be. They help Disney+... They help give it more intellectual property (IP) to leverage at its parks… They drive consumer packaged goods (CPG) revenue. So helpful. It was vital for this company to turn around the flailing, cash-burning film division. Disney has done exactly that. They slashed a great deal of their film pipeline, focused exclusively on story-telling over cultural influence… and it’s working.

Separately, the password sharing crackdown has begun. It’s starting in Latin America, and will roll out to its other 130 countries in the coming quarters. This was a powerful subscriber growth lever for Netflix to pull. Netflix has more loyal subscribers and lower churn, so the benefit to Disney will be smaller. It still should be a material tailwind.

“A successful Disney movie today drives more value than it ever has in the past with our increased number of consumer touch points extending the reach and impact of our world-class storytelling from streaming to Parks and Resorts, cruise ships, consumer products and games. This multiplier effect means that the system economics of our movie business has never been stronger.”

CEO Bob Iger

Lastly, Disney will likely accelerate content spend in certain international markets where it thinks its IP resonates and the competitive landscape is most compelling. These won’t be “enormous” investments, but will be larger than they’ve been in 2022 and 2023. This was likely a source of next year’s FCF guidance miss, especially considering OCF was ahead.

Revenue across the globe was flat, while EBIT fell 5% Y/Y in North America and 18% Y/Y abroad. Modest ESPN+ subscription declines as well as more college football rights were the two sources. Notably, ESPN+ subscribers returned to positive (3% Q/Q) sequential growth.

While ESPN+ is a decent asset, the content library is still quite underwhelming. Hulu’s live TV division does offer a great menu of live sporting events, but ESPN is still in the process of moving all of its content to streaming. The first step will be an ESPN/Disney+/Hulu bundle coming next month. Next year, ESPN will launch a standalone streaming service. That’s when we should expect its streaming business to realize its full potential while linear decay continues. The launch will infuse live stats, fully integrated betting, AI-enabled personalization and several other new fan experiences to deepen connections. If you’re a Yankees or a Dodgers fan (or a Tigers fan… go Tigers), you will be able to craft your own New York or Los Angeles-inspired ESPN experience. Love Real Madrid? They’ll have you covered.

One more note on the sports transition. I think this is going to be a strong driver of ad impression pricing. Why? Let’s go back to what Disney’s advertising partner (The Trade Desk) said this month about sports. Interest ebbs and flows by the minute. If my Michigan Wolverines somehow manage to complete a pass further than 10 yards down the field, that will excite (and shock) me. That incremental excitement will keep me more engaged, which will mean ad impressions becoming more valuable in real-time. Programmatic bidding within streaming environments can fully account for this. Pre-purchased linear impressions cannot.

Domestic parks & experiences EBIT did modestly grow by 3% Y/Y thanks to more guest spending. The domestic consumer weakness that it called out last quarter is improving. Disney Cruise Line launches, more technology spending and input cost inflation offset this growth. Internationally, lower traffic led to a 32% Y/Y decline in EBIT. The Paris Olympic Games were the largest contributor here.

The quarter was fine. The streaming business was the standout, and its Experiences division seems to be turning a corner as macro brightens. Disney has fixed its content engine and resolved its pressing micro-level issues (everywhere besides Lucas Films). Now? Its issues are macro-based. That’s encouraging. It means Disney’s results can actually improve when macro gets easier for expensive vacations. That wouldn’t be the case if it were still releasing box office flop after flop.

The multi-year guidance is quite encouraging, with forward-looking bookings actually offering a degree of visibility and certainty for those forecasts. I continue to see this as a mispriced, high-quality business. 

Read my Nu Deep Dive here to learn about the company in detail.

Brazilian deposits rose by $1.8 billion Q/Q or by 24% Y/Y following a seasonal decline. Mexican deposits rose from $3.3 billion to $3.9 billion Q/Q. It was near $0 a year ago. Finally, its new savings product in Colombia is working quite well. Deposits jumped from $0 to $200 million last quarter and from $200 million to $900 million this quarter.

Note that Brazil and Mexico experienced significant currency weakening during the quarter. Devaluation in Brazil was around 5%, with Mexico’s currency devaluation at a whopping 11%. This makes real growth rates look a lot slower, which is why we will heavily focus on foreign exchange neutral (FXN) comps in the commentary. When eliminating this FX noise, deposits rose by 60% Y/Y, purchase volume rose by 21% Y/Y, monthly ARPAC rose by 25% Y/Y, and net interest income rose by 63% Y/Y. It grew purchase volume at 2x the pace of Brazil overall, card receivables by over 3x the pace of Brazil and took about 3 points of Y/Y credit card market share there too.

Marketing expenses rose 143% Y/Y FXN to “solidify and build brand trust.” It also spent $40 million to “reposition Nucoins” in a revamped loyalty program for customers. More data and infrastructure costs to support growth also led to 22% Y/Y FXN G&A growth. This also was due to $8 million in one-time expenses from Nucoin changes.

The balance sheet is beautiful. Nu Bank has a $1.6 billion capital excess cushion on top of its $2 billion requirement. This places its capital adequacy ratio well over legal minimums. And? This doesn’t even include $2.4 billion in cash just sitting on the holding company’s balance sheet. That can be allocated whenever Nu feels the need. There’s no need today. There won’t be a need tomorrow.

Nu expects more margin expansion and more NIM/risk-adjusted NIM expansion in the quarters and years ahead.

Entering this report, Nu traded for 36x forward GAAP EPS. EPS is expected to grow by 89% Y/Y this year, by 42% Y/Y next year and by 39% the following year. I think these valuation and growth numbers will be relatively stable following this report.

By any metric you want to look at, Nu is thriving.

In Brazil, customer count rose 18% Y/Y despite already having 56% of the entire nation in its customer base. 60% of these customers use Nu as their primary banking account (PBA) vs. 59% Y/Y, which comes with higher overall engagement, retention and lifetime value. In Mexico, it maintained a robust 1.2 million Q/Q net customer add pace to reach 8.9 million total. In its newest Colombian market, it nearly doubled the pace of Q/Q adds to 700,000 to reach roughly 2 million customers there. The reception in both Mexico and Colombia to its high yield savings offering is making leadership increasingly optimistic about the overall opportunity.

It’s not just overall customer growth that remains excellent, but customer engagement growth is equally strong. Again, average revenue per Active Customer (ARPAC) rose 25% Y/Y. Some wanted this to be faster, but we have to remember that 40% of Nu’s new customers this quarter came from outside of Brazil. In Mexico and especially Colombia, the high-yield savings product remains pretty much the entire offering. There has been more focus on locking in compelling funding for its loan book in those two nations; the next step is to a accelerate credit. More on this later.

For now, the savings tool is among its lowest ARPAC offerings, so the mix shift away from Brazil is currently a large headwind here. Still, 25% Y/Y expansion is excellent and Nu is adamant that Mexican and Colombian monetization will ramp over time – just like in Brazil. And to point to the runway here being miles long, its most mature cohort has a $25 ARPAC.

While the demand picture remains immensely positive, the profit picture is perhaps even more encouraging. FXN net income more than doubled Y/Y and it continued to deepen its average cost to serve moat vs. the competition. Specifically, when removing a one-time benefit from reclassifying some customer costs to G&A, cost to serve was $0.80 vs. $0.90 Y/Y (+2% Y/Y FXN & -10% Q/Q FXN). This builds on an already massive 80%+ lead vs. incumbents. That’s how you profitably offer lower rates on loans or more yield on savings accounts. It’s how you win in banking;

Many thought the G&A reclassification helped the net income beats. That’s not accurate. Net income is profit after all income statement expenses. Moving one expense to a different part of the statement has zero impact on net income. 8 - 1 - 2 = 5. 8 - 2 - 1 = still 5.

Nu’s shift to interest-earning, installment-based credit slowed down this quarter as expected. The process of shifting to interest-earning assets (called balance sheet optimization) has temporarily turbo-charged Nu’s revenue and profit growth. Excluding this noise, rapid customer and product growth directly offer evidence of this company not needing a balance sheet optimization sugar high to deliver robust compounding. Growth will slow next year as it loses this temporary tailwind; when it's slowing from a starting point of 56% at this scale… that’s not just entirely fine… it’s inevitable. Law of large numbers.

Nu’s interest-earning portfolio (IEP) rose 81% Y/Y to reach $11.2 billion in total size, and remained at 28% of its total credit portfolio. Nu is putting a pause on rapid PIX growth, which impacts IEP expansion. As a reminder, PIX is essentially a nationalized Venmo in Brazil. Customers can borrow from Nu to conduct transactions similarly to a credit card. Pix financing demand remains strong and credit models “remain resilient.” Still, it wants to “slow the pace of eligibility expansion to more closely monitor performance” for the time being. As long as things remain as strong as they currently are, it will likely lean back into growth. There’s pent-up demand to be unleashed at some point. For now, it’s taking the same conservative approach that every lender should be practicing. Things can turn ugly very quickly if you rush originations. Just like it was prudent for SoFi to be overly conservative through 2023 and with its new credit card business, it’s prudent to be overly conservative right now for Nu. Forgoing a few quarters of extra revenue over risking balance sheet health is an easy decision. It is being proactive here and that tells me that management’s priorities are in the correct place.

“The demand for this product is very clear, and we are strategically managing supply to safeguard credit quality and maintain portfolio resilience.”

CFO Guilherme Marques do Lago

NIM actually fell Y/Y for Nu for the first time in a while. On the surface, that’s concerning. When digging in, it is not. This was related to improving overall credit card risk scoring and lowering yields for that product. This means lower NIM, but is a positive for loss metrics and risk-adjusted NIM, which deducts credit loss allowance expense (CLAE). This is why risk-adjusted NIM only fell by 90 bps Q/Q. The NIM fall was offset by a 50 bps Q/Q improvement in risk pricing accuracy. The result directly shows us that poor underwriting isn’t the source here, with an improving Y/Y risk-adjusted NIM adding to the evidence pile.

Two more factors hit NIM this quarter. First, a mix shift to secured credit means lower overall asset yields. Secured credit is now 15% of its Brazilian portfolio vs. 14% Q/Q and a little over 0% Y/Y. Next, a mix shift to Mexico and Colombia, where cost of capital is higher, affected things as well. It has already cut its savings rate in Mexico from 400 bps over the benchmark to 200 bps, and plans to keep eliminating excess yields there as its value proposition improves. Again, none of these things are concerning. If anything, better credit card underwriting, secured credit traction and successful expansion beyond Brazil are all large positives.

Sticking with Mexico for a moment, recall that this is currently an ARPAC headwind as the product suite matures. That also means Mexican growth is a NIM headwind, as (again) deposits are growing much more quickly than its credit business there. That may be changing. In October, loan volume jumped higher. A sell-sider with access to this LatAm alt-data fortunately asked about that in the Q&A, and leadership did not push back at all.

“Mexico could be another Brazil for us.”

CEO David Vélez Osorno

Notably, Brazil has begun to raise interest rates again. And while this should be a modest help to overall NIM, its continued balance sheet optimization (at a slower pace), will be the main factor powering continued NIM expansion. Furthermore, while secured loans have lower overall yields and spreads than unsecured, growth there will still be a NIM tailwind. Why? Because its loan-to-deposit ratio is still at 40%. That’s far lower than peers, and means assets are just sitting in treasury bonds. Secured credit yields and spreads are better than those assets.

For review, there are three intentional trends playing out that pressure loss metrics in the near term. First, more rapid credit growth with front-loaded provisioning has a negative near-term impact on loss rates. Next, it’s expanding to riskier credit buckets, where it has consistently outperformed its expectations. The two charts below show you that while loss metrics are rising, loss metrics as a percent of its interest-earning assets look great. Meaning? It is being more than fairly compensated for taking this added risk.

Moving on from credit expansion, the third factor is its portfolio shifting away from credit cards and towards unsecured loans. This pressures loss ratios, as unsecured loans are riskier assets. Secured growth is helping offset this, but only a bit. Concretely speaking, personal loans are 27% of its $20.9 billion credit portfolio vs. 20% Y/Y (overall lending +97% Y/Y FXN). Focus on GPM, NIM and risk-adjusted NIM to gauge whether or not NU is accurately pricing risk.

With all of this said, credit metrics actually looked pretty good. The leading 15-90 day NPL indicator actually improved Q/Q from 4.5% to 4.4%. This was in line with seasonality despite it getting bolder on some originations. This worsened from 4.2% Y/Y, but the rise was very modest and well within target ranges. 90+ day NPL rate continued to tick higher, as credit rapidly grew and that metric stock-piles graduated 15-90 day NPL pools. And as you can see above, CLAE is actually trending lower despite it getting more aggressive with its credit book. They’re executing.

Whether it's the newer travel or telecom partnerships, Nu has its sights set on becoming a digital super-app. This vision extends well beyond financial services to areas like entertainment, e-commerce etc. That should also create wonderfully sticky opportunities to stand up broad-based subscriptions or loyalty programs to boost overall loyalty, ARPAC and retention.

In telecom specifically, it sees this opportunity similarly to financial services. The market is massive, net promoter scores are awful and disruption is inevitable. Its contract with Claro “fully aligns incentives” in a way that allows it to share in revenue upside. Meaning? It can effectively and completely extract value from its massive base of traffic to cross-sell existing customers with virtually zero incremental customer acquisition cost.

“As we make progress in our execution, we are preparing ourselves to consolidate Nu as the world’s leading digital services platform, going beyond financial services.”

Shareholder Letter

“This opportunity is substantial in terms of revenue and diversifying the business model away from credit, and having a more robust, less cyclical revenue base. We are just now taking the first baby steps in that direction.”

CEO David Vélez Osorno

I thought this was an excellent quarter. To see loss ratios improve as it gets more aggressive with underwriting shouldn’t be overlooked. To see it continue to rapidly compound revenue and deliver explosive operating leverage shouldn’t be overlooked either. This is a special company with a special team delivering special results. There is every reason to believe that product expansion within massive, inefficient markets will continue to bear fruit; there’s every reason to believe this company is just getting started… even with 56% of Brazil already in its member base.

I didn’t add to my stake today (I wouldn’t sent an update before this if I had). I’m happy with what I own.