In case you missed it:

Basic Niche:

Cloudflare makes the internet fast and secure. They have a massive global Content Delivery Network (CDN) to move traffic closer to the end user, which cuts web latency. They actively assist clients in optimizing traffic, speed and consistency as well. NET doesn’t sell physical firewall hardware, but instead a virtual, cloud-native “Magic Firewall” to supplant these hardware needs. It offers web application firewalls for app-level security and Magic Firewall is for network-level security. Magic WAN is Magic Firewall’s partner in crime; it connects networks while Magic Firewall protects them.

Workers Platform & AI Tools:

Workers Platform is its server-less (so fully managed by Cloudflare) product suite for millions of developers to build, maintain, secure and deploy applications. This enables caching of content and apps across Cloudflare’s global network for faster delivery. Its newer Workers AI product allows developers to access models and GenAI tools (like sentiment analysis) to build and customize apps hosted by Cloudflare’s network. Workers AI pairs seamlessly with its “Vectorize.” Vectorize offers a style of data querying that allows for visualization of patterns.

Another key example of Cloudflare’s GenAI tools is its R2 product. This allows cloud workloads and data to freely move among public clouds with no tax. This is key in a multi-cloud world and is popular for model building and implementation. Models are voracious users of data and data is routinely hosted in many clouds. That's where R2 comes in handy.

Zero Trust & More on Network Security:

Cloudflare also offers its Zero Trust Network Access (ZTNA) program. This directly competes with Zscaler and many others. Zero trust means that a user or device must be constantly verified (or never trusted). Cloudflare does this in a seamless manner, minimizing user friction. It considers device type, location, usage patterns (or signatures) and other contextual clues to better authorize permission requests. This way, it knows when to block those requests or when to require more information. It then deploys a minimal privilege approach to ensure only the necessary permissions are granted to workers. Nothing more, nothing less. Zero Trust ensures an adversary can’t breach the most vulnerable part of a tech stack and move freely throughout it thereafter.

Secure Access Service Edge (SASE) is a term for how Cloudflare conjoins web performance like SWG, Magic WAN with security use cases like data loss prevention (DLP) and Magic Firewall. This drives vendor consolidation, controls costs and augments performance. Cloudflare One is its overarching product bundle subscription combining this suite.

Cloud Access Security Broker (CASB) is a security tool to provide firms with a birds-eye view of application usage. This has both security and performance optimization implications. It hosts and secures client data and uncovers suspicious activity or deviations in typical usage patterns to flag threats. It plugs into NET’s Secure Web Gateway (SWG), which is essentially a digital security guard ensuring protection of a firm’s secure network and assets from the open internet. It ties closely to NET’s DLP and URL filtering tools.

More on GenAI:

Browser Isolation is Net’s managed service for providing users with a purely secluded environment to search and scrape the web. This will be an increasingly important tool for its GenAI inference products that are now building steam. Inference is where Cloudflare expects to realize the bulk of GenAI’s financial value. Models are trained once and periodically updated with new data. After that, the value of those models lies in their ability to connect dots and drive insights (or inference). That’s where Cloudflare thrives. It offers a managed cloud platform to do all of that app and model work in a secure and compliant fashion.

Growth was strongest in APAC at 54% Y/Y, which marks a convincing sequential acceleration compared to 39% growth last quarter. EMEA Y/Y growth was stable sequentially at 27%. USA revenue growth was 20% Y/Y compared to 23% last quarter.

Cloudflare sees NRR stabilizing around 111% despite a shift towards pool of funds contracts. Good to hear. As a reminder, pool of funds contracts allow customers to set spending levels at the beginning of terms and draw down on their commitments more flexibly at their convenience. There are no fixed minimums for usage over a period of time.

Gross margin was impacted by a mix shift towards paid customer traffic instead of free. This led to cost recognition shifting from cost of goods sold (COGS) to sales & marketing, which negatively and materially impacted the Y/Y GPM comp. No other margin line was impacted, as all others deduct both COGS and sales & marketing.

The guidance balances two things. First, trends remain strong and its business is executing at a very high level. Q1 results “underscore that their formula is working despite the highly volatile environment.” Secondly, despite what they’re actually observing, they approached 2025 guidance very cautiously (out of respect for the chaos). They’re taking an incrementally more prudent approach to modeling rest-of-year expectations.

Net trades for 167x forward EPS and 187x forward FCF. EPS is expected to grow by 7% this year and by 30% next year. FCF is expected to grow by 42% this year and by 40% next year. Very expensive name — and has been since the IPO several years ago.

Go-to-Market (GTM):

We’re now one year after Cloudflare founder/CEO Matt Prince ripped into his sales team and vowed to overhaul it for the better. And? Things have greatly improved. As Prince constantly says, Cloudflare has never been bottlenecked by its pace of innovation or product quality. Its limiting factor has been quality and size of go-to-market motions. That is changing. Sales productivity again rose 10% Y/Y for another consecutive quarter (I believe 3 in a row), while pipeline build was ahead of expectations, churn rate improved and Cloudflare secured its highest Y/Y net new average contract value (ACV) in 3 years. This isn’t because macro is improving or amazing. As we’ll get into later, it isn’t. This is because Cloudflare’s mission-critical platform is now being supported by its sales team… rather than held back by it. And? It’s because of a fantastic ability to consolidate hyper-efficient network solutions, security products and an end-to-end developer platform all in one. It’s consistently winning because it can do all of this while maximizing GPU utilization rates for customers and allowing their Agentic AI and GenAI spend to be much more productive. So… great products… more interoperable products… many complementary products… and cheaper products. Good recipe for a true platform play.

One of the biggest priorities for the go-to-market (GTM) overhaul was catering more effectively to large enterprise deals. There are many powerful examples of this working in the Q1 results. Cloudflare won a record-setting number of $1 million and $5 million contracts, as well as its first-ever $100 million contract with a large tech company. Competitive pricing pressure is waning while Cloudflare keeps winning banner deals (examples later). They think all of this is a direct byproduct of GTM improvements; NET will continue aggressively building out the sales staff in the coming quarters.

It signed its longest-duration contact for its Zero Trust service, with a large, 7-year agreement and shrunk the sales cycle despite average deal size significantly growing. That’s not normal in the best of ways. It does think sales cycles will naturally lengthen as this trend continues, but that’s not currently happening.

One more thing here. It’s strange to see 7-figure contract momentum so strong with the $100,000 ARR customer result missing estimates. This is solely a matter of timing, as the quarter had two fewer days in it; several clients were close to reaching that threshold and would have with a normal number of business sessions.

Platform-Level Wins:

Nothing lends credence to the ideas above quite as well as a series of large contractual wins. During the quarter, NET won the aforementioned 9-figure deal. It was a 5-year pool of funds contract to deploy its Workers Platform, as NET’s global network led to lower latency and higher performance for their software development needs. Prince sees this performance as a key differentiator vs. hyperscalers, with Cloudflare increasingly in the fold for securing cloud workload contracts like this one. This goes back to NET’s ability to vastly raise GPU utilization rates and lower the heavy waste associated with accelerated compute. It plans to drive the “kind of efficiency gains in inference that DeepSeek did in training” and it’s off to a great start. That GPU optimization capability is a wonderful complement to the compute, storage and database talents the Workers Platform possesses. This, along with integrated network security solutions, helped it win another 3-year, $3M+ annual contract.

“As people are looking to decide whether they're going to go with a traditional hyperscaler, we are increasingly in the decision mix. And we're seeing places where people are realizing that they can develop significantly faster.”

Founder/CEO Matthew Prince

There are several other potential 9-figure deals in the pipeline. A “large technology company” signed a 2-year contract worth nearly $5M annually. Cloudflare’s zero trust suite simply worked better than competitors and the client used its services to displace three disparate point solutions.

A large “international infrastructure provider signed that aforementioned 7-year contract. That’s trust. The contract is worth nearly $2M annually and includes deployment of its entire SASE platform including, DLP, Magic WAN, Magic Firewall, SWG, Workers Platform and more. All of these products and acronyms were defined in the first section of the piece.

A global 2000 company signed a 5+ year contract worth more than $1M annually for its end-to-end Zero Trust product kit. Three point solutions were eliminated, with better latency, broader security coverage and, simply put, more efficient operations.

As part of NET’s revamped GTM, it will try to work better with channel partners and is already finding traction. This quarter, a “large U.S. government entity” finalized a 2-year, $3M+ contract for ZTNA. NET made it very easy to comply with a mess of federal regulations.

“These Q1 wins not only serve as a great springboard for the rest of 2025, but are also reminders that while the world may be uncertain, what's absolutely certain is that innovation wins and no company out innovates Cloudflare.”

Founder/CEO Matthew Prince

Another Customer Win and DDOS Strength:

Another government agency in Asia-Pacific signed a 3-year $5M deal for its app services and also Magic Transit. The security product provides coverage from DDOS attacks – with higher success rates, scalability and cost efficiency. Speaking of which, NET saw a large acceleration in network DDOS attack volume during the quarter, with 300% Y/Y growth. Not the kind of growth that its customers want to see… but the kind of growth that makes NET’s products even more needed.

It sees itself as basically the only network that can handle this kind of spike with ease and without costing its customers more money. As Prince explained, most alternatives run totally separate networks for DDOS-specific functions. This diminishes inter-company communication, interoperability and success with protecting stakeholders from this inundation-based threat. This architecture creates scaling bottlenecks that force other competitors to charge clients for extra usage of its service. NET doesn’t have that same requirement because it’s that much more efficient at gracefully fielding this form of attack.

“And that is that we made it so that every single server that makes up our network is capable of running every single one of the different functions that we have, including attacks… this means that we can defend against these attacks without having to pass any costs on to our customers because we don't suffer any additional costs to be able to defend them. That architectural difference is radically different than what anyone else in the industry does, and it's part of why we're able to defend against it.”

Founder/CEO Matthew Prince

Macro:

Considering NET is directly involved with ⅕ of the World’s internet traffic, its view of digital trends as a hint for the overall macro backdrop is a great one. As the team rightfully said, this has “given them an ability to make macro calls that turned out to be prescient.” But? These are especially weird times. With the strangeness of today’s macro volatility, it thinks it has “less of a unique view.” It also thinks the world is undoubtedly getting a bit more volatile and fragile, which does impact overall software budgets. At the same time, that impact is felt far less for platform-wide vendors that allow companies to save costs by consolidating point solutions. It’s an idea we talk about constantly (because it’s such an important one).

Through the first part of May, Cloudflare has seen zero changes to traffic volume or any patterns. Considering the incremental prudence baked into their guidance, this could yield upside if the backdrop cooperates a bit.

Interestingly, tariffs may have actually been good for its business. This supply chain shock pushed modernization holdouts to more pressingly question whether they wanted hardware-based solutions. It forced them to pontificate on whether or not an out-of-the-box piece of hardware (that needed to be physically shipped) was ideal. It made it even more clear that a scalable, software-native platform was ideal. They think this trade war drama has accelerated the drive to modernize infrastructure for many customer holdouts.

Media Companies and GenAI:

With Google and every other search-based chatbot now giving answers directly on the pages, rather than routing consumers to a relevant site, media companies are flocking to Cloudflare. They’re interested in using it not only to perfect the user experience via things like lower latency, but also to make sure their sensitive data is shielded from model-builders. This is turning media into a much bigger business for Cloudflare than it has been in the past.

Product Innovation & Momentum:

Cloudflare talked about two products as traction standouts this quarter. First, its Workers Platform continues to kill it. AI inference requests (a great measure for demand) are up 4,000% Y/Y. That’s still comping over a small base, but that will not be true for long if this keeps exponentially scaling. They’ve been telling us that the Workers Platform will not materially move the financial needle for a while. But? It’s now comfortably ahead of schedule in getting there.

Secondly, its AI gateway enjoyed 12x Y/Y query growth. The AI gateway builds upon SWG as a bridge between AI-native applications and the models they pull from. To nurture this momentum, it’s working hard to build its model context protocol (MCP). This is the product that actually frees AI models to communicate and share information with 3rd-party applications/agents. In the world of agentic AI, where agents conduct multi-step tasks and need information from a wide array of sources, MCPs help a lot. They’re how the agents can jump from needed source to source and glean the context needed to actually complete a task. They bolster the ability for these agents to race across the web and secure what they need. Anthropic was the driving force behind popularizing MCPs, while NET has been instrumental in bringing them to the cloud. NET’s global network paired with its security suite (to ensure models and agents don’t access impermissible data) makes it the perfect candidate to bring these cloud-native tools to the masses.

SASE Update:

While NET didn’t start as a SASE company and entered the market long after many others did, it now feels like it has a world-class solution and all of the table-stakes products needed to compete.

Fine quarter for an elite company. It’s interesting to me that the Workers developer platform is beginning to take some deal volume from hyperscalers. That’s happening while Cloudflare’s fantastic product suite is finally supported by an effective go-to-market engine. While these headline numbers weren’t amazing, there were many signs of great progress under the hood. The biggest example is thriving large enterprise adoption.

While that’s great, it still trades for more than 150x forward EPS and FCF. And its growth multiple still makes nearly every other expensive company look cheap. I cannot bring myself to pay that price tag despite finding it very easy to consistently praise Matthew Prince and his great company. I think of Cloudflare very similarly to Palantir. Both are world-class organizations with world-class teams and long runways to take advantage of. But? Both are so expensive that I continue to watch from the sidelines. Risk/reward just isn’t there in my opinion but I do hope the stocks keep rising for those who are involved.

On Running is a premium athletic shoe and clothing company.

On beat revenue estimates by 6.9%. Wholesale and direct-to-consumer (DTC) revenue were both comfortably ahead of estimates.

Again, net income is a noisy byproduct of FX gains/losses. FCF is heavily influenced by changes in inventory levels. For these reasons, I actually think EBITDA is a good metric to use here. I included net income because I know it would be asked for if I didn’t.

ONON trades for 27x forward EBITDA and 50x forward EPS. EBITDA is expected to smoothly compound at a 30% clip over the next two years. Net income is expected to grow by 2% this year due to FX headwinds and by 33% next year.

Global Demand:

In Europe, the Middle East & Africa (EMEA), FXN revenue rose by 33% Y/Y. New markets like Spain and Belgium performed very well and France continued its strong momentum following the end of the Olympic Games. That’s important. It’s clearly looking like success there is not a flash in the pan.

In the Americas, revenue rose by 28.6% Y/Y FXN. The Miami retail store is thriving and its new store in Newport Beach, California is also killing it. That will be a theme throughout this piece.

In Asia-Pacific (APAC), traction is palpable. Revenue rose by 129% Y/Y FXN. The business is now nearly 75% as large as its EMEA business, yet continues to enjoy this fantastic rate of expansion. Success was felt across all markets, with its Tokyo store the highlighted standout. China accelerated thanks to rising brand awareness and successful Tmall advertising campaigns. It just opened its first flagship store in that nation 2 weeks ago.

Higher-Quality Revenue Mix:

Gross margin expansion was driven by a mix-shift towards DTC revenue and better supply chain execution. They’re still fulfilling some excess demand at higher costs from the LA facility, but their automation work in the Atlanta facility is progressing nicely. That’s still a future margin tailwind to look forward to. Credit for ongoing operating leverage was also given to great end-to-end execution. They continue to obsessively look through every single facet of their business to find subtle opportunities for heightened productivity. These opportunities compound over time; that’s what enables bold innovation and compelling margin.

More Guidance Context:

Guidance was lowered due to tariffs. The new targets are also incrementally conservative via heightened uncertainty for the rest of the year. There is upside potential to forecasts if macro doesn’t fall off a cliff, which seems increasingly likely.

And so far so good for the 2nd half of the year, with strong pre-order rates from its key wholesale partners despite the chaos. This wholesale strength and high sellout rates for them are letting On enjoy great segment growth while remaining very picky about the retail partners they work with. The brand has to be careful to grow wholesale while also maintaining the premium niche they’ve worked so hard to build. I think they’re effectively threading that needle.

On’s premium niche is helping insulate it from macro cyclicality. The same should be true for other brands like Lululemon, yet On continues to outperform them and take more market share from everyone. So while it’s fair to say their demographic is helpful during uncertain times… their elite execution is too.

Existing Product Line Innovation:

Success was broad-based across On’s core footwear franchises. The launch of its CloudSurfer 2 shoe went extremely well. It’s enjoying strong sell-through rates and also creating a positive “halo effect” for the rest of its Surfer shoes. For example, the Cloudsurfer Next enjoyed a “notable lift in momentum” following this launch. On will look to amplify this traction with its “Cloudsurfer Max” launch later in the year. 

For lifestyle shoes, the Cloud 6 launch was its “largest ever.” Wholesaler demand was called “exceptionally strong,” as the product started materially benefitting its revenue growth immediately. Interestingly, it’s more expensive than the predecessor model, but that doesn’t seem to be impacting demand at all. On is showing us that its premium niche is fostering the kind of price elasticity of demand that we’d expect – despite a volatile macro backdrop.

Future Product Line Innovation – LightSpray

As a reminder, LightSpray is On Running’s new automated manufacturing technique. It uses robotic arms to (as the name indicates) spray a light material right onto the sole of the shoe to form a single-piece model. It’s quite cheap to manufacture, yet should still fetch a premium price point to likely raise this firm’s margin ceiling down the road. There are no laces or seams, with a test model worn by Boston Marathon winner Hellen Obiri last year to offer proof of concept. 

2025 was called the “year for testing and optimizing” the profoundly new technology to set the stage for future commercial scaling. They’re already putting needed engineers in place to prepare for that moment. It will continue to tease the new technology at pop-up shops before eventually creating a CloudBoom Strike LightSpray shoe for the masses.

Brand-Building:

Through partnerships, pop-up shops and involvement in the most impactful global sporting events, brand awareness keeps rising. Its “Soft Wins” advertising campaign worked as planned, as it gears up to remain aggressive with marketing for the remainder of the year. A big piece of brand-building is communicating to the masses that ONON is not just shoes. They want to dress athletes “from head to toe.” Through campaigns with Zendaya and also FKA Twigs, the team observed a directly attributable acceleration in its apparel business.

Team:

Marc Maurer is stepping down as a co-CEO at the company, while Martin Hoffman will become the company’s sole CEO going forward. This will be about as smooth of a leadership transition as one could hope for.

This is the most impressive story in apparel and shoes across public markets today. Their elite team continues to deliver fantastic growth across a wide array of backdrops. And? They continue to do that while investing in future growth and delivering increasingly impressive margins. There is nothing to do with this report but praise it… so that is what I will do. Another fantastic showing.

If I had to pick a single company to own in this sector, it would be ONON. But? I don’t have to. As I’ve said in recent months, I’m gravitating more strongly towards food service rather than clothing for my consumer discretionary exposure. I find that to be less unpredictable in terms of changing consumer tastes and more durable across cycles – considering we all need to eat. That’s my personal preference. If yours motivates you to have exposure to this sector, this is currently a clear winner in my opinion.

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

There was some conflicting estimate data I saw used by some across social media. My data is from the Bloomberg Terminal minutes before this report happened. I’m confident this is accurate.

As you can see in the second chart, there was a massive 21-point FX headwind recorded this quarter. Last quarter was the only period in the last few years with a larger headwind. If Latin American currencies cooperate a bit better like they recently have, that gap should quickly narrow and actual revenue growth should again approach FXN growth. Things currently look good in that regard.

It’s easy to compare this to MELI’s 60%+ FXN growth and wonder why Nu’s isn’t that rapid. But? Important to keep in mind MELI is aggressively expanding into a large, hyper-growth financial services niche as we speak. Gross merchandise value (GMV) growth for MELI’s established businesses rose 40% Y/Y FXN, which is identical to Nu’s FXN growth. They are both killing it and can both kill it for a very long time as they become more direct competitors. Share gains will mainly come from incumbents.

Operating expenses rose 3% Y/Y FXN and fell 13% Y/Y. Impressive cost control outside of their core input costs associated with the credit business. Customer and support costs were flat Y/Y despite rapid scaling, G&A fell Y/Y (again despite rapid scaling) and marketing was basically flat Y/Y. Lack of OpEx growth paired with 40% FXN revenue growth will yield fantastic results going forward. That’s currently being masked by the temporary GPM weakness (we’ll talk about soon) and also massive FX headwinds, which will not be permanent.

Nu trades for 23x forward EPS. EPS is expected to grow by 23% this year and by 38% in each of the next two years.

Rapid Growth Despite a Large Base:

Nu continues to deliver impressive growth across the board. Even in Brazil, where it already has 59% of the adult population in its ecosystem, customer count rose 14% Y/Y, FXN revenue rose 36% Y/Y and 60% of actives are now using Nu as their primary bank. As the team told us, that represents a 30% share of primary banking accounts in Brazil. But? As the image below shows us, its gross profit market share is just 5%. It has miles to go with monetizing customers it has already won. 

“We're doubling down. We're investing our earnings to close the distance between principality and market share and to expand the size of the market itself.”

Founder/CEO David Vélez

Mexico jumped from 10M to 11M customers Q/Q (70% Y/Y growth) to reach 12% of the population just 6 years after its launch. Revenue nearly doubled Y/Y FXN to $245M. They just got a needed banking license in that market, which should set the stage for more rapid product introductions and monetization. Mexico also added $900M in sequential deposits, matching its best result since Q2 2024. As the team has laid out in recent quarters, Mexico is ahead of Nu’s fantastic proliferation at apples-to-apples stages of maturity.

And impressively, Nu also has 8% of the Colombian population as its customers just 4 years into its launch. It has racked up $1.8B in deposits in that country despite having basically $0 a year ago.

There’s reason to believe this rapidly growing base of highly sticky direct deposit customers (across 3 markets) will keep delivering more growth for Nu in the years ahead. ARPAC progress remains strong on an FXN basis, but $11.20 still compares to $26 for its most mature cohort. Incumbents are closer to $40 and Nu’s daily user to monthly user ratio is higher than any of those competitors. That means the ceiling is likely higher than $40. They just need to keep building the product suite and originating more credit, with an inherent data advantage thanks to its more engaged user base. Newer cohorts are ramping towards $26, just like the older ones did. Simply put, market share is still very low (despite great success) and the runway is still very long… even in Brazil.

“The largest customer cohorts from the past three years are only now beginning their monetization curves.”

Founder/CEO David Vélez

Risk Spreads, Pricing & Credit Health — Mind the Seasonality:

GPM and NIMs are inherently connected for this business. Both show us how accurately NU is pricing credit risk, how much it’s paying for liquidity to supply its credit business and how much yield it’s extracting from that credit business. GPM and NIM aren’t identical but are tightly correlated.

GPM and NIM fell sharply Y/Y for some unconcerning reasons and more very good reasons. First, the majority of the decline was seasonality. As you can see from Q4-2023 to Q1-2024 (chart above), NIM and risk-adjusted NIM generally decline. That happens every year. Not concerning, but that’s not enough to explain the full decline.

Risk Spreads, Pricing & Credit Health — The Cost of Winning:

Now onto the other very good reasons that make me think “go for it.” When digging in, the rest of the declines are largely related to successful expansion to Mexico and Colombia. They do not have the brand awareness or network effect that makes growth far easier like they do in Brazil. So? They’re building it as quickly as they can with more favorable deposit rates to secure needed data & set the stage for future credit growth. The NIM/GPM weakness (beyond seasonality) is the effect of them executing flawlessly in those countries.

“We remain steadfast in our commitment to long-term value creation, not short-term earnings optimization… we will continue making significant investments aimed at maximizing sustainable shareholder value over time, even if that means accepting near term pressure on margins.”

Founder/CEO David Vélez

Is this at all related to credit health deterioration? No it isn’t. Credit loss allowance expense (CLAE) did grow materially, but that’s because originations grew materially and they front-load provisions. As the credit book matures and a lower percentage of it comes from new originations, this headwind will dissipate.

Mexico and Colombia expansion impacted things too, but CLAE as a percentage of the portfolio improved Y/Y despite all of this. That’s why the risk-adjusted NIM decline (which is NIM - CLAE) mirrored the NIM decline. That wouldn’t happen if loss rates were spiking higher. And for more evidence of this not being related to credit health, the Q/Q rise in non-performing loan (NPL) rate was a bit better than typical seasonality, while 90+ day NPL rate also beat seasonal patterns.

“As you may recall, in late 2022, we deliberately pulled back from some personal loan originations in response to adverse credit conditions. Since then, we have fine-tuned our credit models and acquisition funnels. And today, we are seeing the strongest momentum yet in both origination volumes and unit economics.”

CFO Guillermo Lago

One more NIM and GPM headwind to call out is that Nu hasn’t repriced deposits and credit following rate hikes in Brazil. They’re working on it… but this was a very small factor compared to what we’ve already talked about.

So? Seasonality and global expansion are the main culprits here. For context, Y/Y NIM endured a 290 bps headwind from global expansion. Brazilian NIM rose from 20.1% to 21.8% Y/Y as its higher loan-to-deposit ratio drove the expansion. Meaning? NIM would be expanding if they weren’t so effectively investing in growth and taking advantage of typical credit demand seasonality. How dare they… I say sarcastically.

Nu has explicitly shown us how successful its growth playbook can be in Brazil. To date, this approach has been even more successful in Mexico. I personally don’t want them to slow down just to preserve short-term NIM and GPM instead of vastly raising the ceiling for future value creation. They will optimize down the road just like they did in Brazil and have already begun to do a bit of that, with an expectation of falling credit costs in those markets going forward.

“The evolution of our asset mix, coupled with a gradual increase in our loan-to-deposit ratio, or LDRs, is expected to drive further NIM expansion in the coming years.”

CFO Guillermo Lago

Credit Portfolio Growth:

Brazilian unsecured originations soared higher from $9B to $17.3B Y/Y, with secured nearly tripling Y/Y from $1B to $2.9B Y/Y. As discussed last quarter, through agreements with the Brazilian Institute of Social Security (INSS), SIAPE (big public payroll service for public workers in Brazil) the Brazilian Army and a few other public partners, it now has payroll lending coverage for 70% of its addressable market. They see this as a massive and untapped opportunity.

Its older FGTS (mandated savings account in Brazil) is also up to a more than 30% market share and represents 60% of its overall secured lending volume. Clearly consumers are responding, and that’s despite an API issue on the FGTS side that halted originations for 10 days during the quarter. Hard to tell with 50% Q/Q FGTS growth.

Just as another quick reminder, despite secured coming with lower profit spreads than unsecured, this is still a NIM tailwind going forward (following the large batch of front-loaded provisioning). It’s not replacing unsecured demand with secured demand. It’s predominately catering to incremental demand and using excess cash to do so.

Finally, they spoke about AI upgrades to credit models expanding the origination capabilities of the team. That always makes me nervous, but this team does have a phenomenal track record for prudent credit growth and AI certainly can help when deployed in the right way.

Interest-Earning Portfolio (IEP) Resumes Proliferation:

It continues to effectively shift to interest-bearing credit, following a pause of PIX-style financing last quarter. As a reminder, Pix is like nationalized Venmo in Brazil. The pullback last quarter had nothing to do with credit performance. They were noticing issues with product-market fit and suboptimal churn levels for lower-income cohorts. They had 12 tests running throughout the quarter and have since improved conversion rates. They still haven’t fully turned funding back on for sub-prime cohorts, despite record March originations, but things are progressing nicely. It’s always good to be prudent when dealing with non-prime borrowers… even if that prudence is preemptive in nature like it was here. The interest-earning portfolio (IEP) rose 62% Y/Y and interest-earning installments resumed their upward trajectory as a % of the total portfolio (29% vs. 27% Q/Q).

Preserving Edges:

I’ll keep the broken record alert part of this piece short. Banking is a commodity. You win in commodities with incremental cost advantages over your competition. Nu continues to have that. Cost of funding remains 10% below its blended interbank rates. Monthly cost to serve of $0.80 was already far better than $5+ for incumbents. It’s now $0.70 and has fallen by 80% over the last few years. That’s the luxury of a branchless, tech-native business model with a highly capable team fixated on driving automation-based efficiency gains. They “expect this trend to continue” as ARPAC keeps rising. Hello, more operating leverage.

Great quarter. I know there was some headline noise, but that’s related to successful global expansion and fantastic execution. I’m not going to get mad at them for sacrificing a quarterly NIM metric to masterfully expand throughout Mexico and Colombia. That is what they should be doing and what they are doing. I’m also not going to get upset with them for large FX headwinds that they have zero control over.

Everything that needs to look good looks great. Rapid customer expansion and FXN demand growth. Effective underwriting. Growing competitive advantages. Strong net income leverage despite the near-term GPM/NIM headwinds. Fantastic operating efficiency in Brazil, which shows you what Colombia and Mexico will look like in the future. This team is excellent. This market is compelling. The execution is impressive. Nothing that went wrong this quarter on some margin lines does anything to diminish my confidence in them. If anything, it grew even larger tonight.