Creditas Financial Results Q3-24
Creditas Reports Record Revenue and Historic Financial Performance in Q3-24
Business Context
After bringing the company to profitability in late 2023, we have utilized 2024 as a transition year to combine growth and profitability. Q3-24 is the 5th consecutive quarter with increasing origination which, combined with expanding margin, reinforces our ability to grow profitably. In Nov-24, we reached another important milestone for the Company: we now have a listed security (our European bond) in one of the largest and most well-established stock exchanges in Europe, Nasdaq Stockholm. This demonstrates the consolidation of the Creditas brand as a leading online financial solutions provider and the confidence international investors have in the business we keep developing.
Our main achievements in Q3-24 include (i) growing origination by 17% sequentially and 49% annually, (ii) expanding Gross Profit to a new record of R$237.4mn while (iii) maintaining operating profit within our acceptable breakeven range at -R$7.2mn. Since the end of 2023 we have been running the company with positive cash flow, being able to self-fund the company’s growth. We continue building on a company foundation that generates profits to reinvest in future growth, allowing the reacceleration of origination while benefiting from the continued repricing of our portfolio and the tight monitoring for strong credit quality, maintaining profitability and sustainable margins.
Our vision for building a company that provides consumers with easy, affordable, and fully digital solutions to access liquidity and protect their most important assets is stronger than ever. The market potential is massive and the geographies where we operate are significantly underpenetrated in high-quality credit, insurance, and investment products. This provides Creditas with unlimited growth potential in a journey that is just beginning.
Collateralized lending is our core product due to its significant impact on the lives of our customers and the strong economics underlying our business model. But beyond collateralized lending, we have been building a solutions ecosystem and have a long-term strategic commitment to build a complete platform around the customer assets:
- Collateralized lending: auto, real estate, and payroll-backed loans
- Insurance: auto, real estate, and payroll-related insurance
- Consumer solutions: supporting the customer through the asset journey including car services, mortgage marketplace, benefits card and salary advance
- Investments: investment funds (FIDCs), mortgage-backed securities (CRIs), real estate investment funds (FIIs) and our newly publicly listed European Bond
After building a solid foundation for our business with strong recurrence of clients and revenues and high margins, we are now combining growth of our core business while the building of our ecosystem. We have made significant progress in improving our user experience and automation in one of our core products: Auto Equity. Our customers have now a fully automated digital process to get liquidity from their cars in a remote transaction, doing virtual inspection using their mobile phones. The result has been increased conversion efficiency and productivity. We are replicating some of the learnings in the product for the rest of our ecosystem which will allow us to grow our user base with higher margins and more customer engagement.
While we prioritize investments in user experience of our core products, we are also paying attention to improving our ecosystem around these products. As an example, car insurance is a product that we have built to scale, becoming the largest digital car insurance broker in Brazil. We see tremendous potential in connecting the car insurance onboarding process with our lending underwriting. This will require significant effort to create a seamless customer experience, and we are committed to continued investments to address this very clear customer need.
These strategic investments in our ecosystem, combined with a solid economic foundation, position us to sustain both growth and profitability as we continue to scale the business. With gross profit margins now at 45.9% (above the 40-45% steady-state range that we anticipated 2 years ago), we are moving the company to a target annual growth rate of 25%+ in the coming years, while remaining profitable. In this new phase we will prioritize our technology investments in user experience as a mechanism to grow efficiently and deliver a best-in-class onboarding process for our customers. Q3-24 marks the consolidation of our reacceleration in growth, fueled by originations of R$815.4mn, reflecting a significant 17.4% sequential increase and +49.3% when compared to Q3-23. This performance contributed to a 2.5% quarterly sequential expansion in our portfolio, now reaching R$5.8bn. Revenues for the quarter hit a record R$517.4mn, generating a record Gross Profit of R$237.4mn, making Q3-24 our best-performing quarter ever. This highlights our continued momentum and reinforces our strengthened operational efficiency.
The focus of the 2022-23 plan was on increasing gross profit and reducing costs to avoid dependency on external capital to continue growing the business. Now having all core products delivering positive results, we are ready to continue investing in new geographies such as Mexico, new products in all our three verticals and making significant improvements in user experience that will payback during the next cycle. Our target market continues growing with hundreds of billions of dollars at 100%+ rates. We believe that asset-backed lending can not only refinance this debt into cheaper options but also expand total lending by increasing maturity to boost the average debt per capita in Latin America.
Core products
Auto Equity
We have continued investing in a simplified digital onboarding process that is delivering great results both from a customer experience and an economics perspective. Despite significant increases in new loan origination prices, with loan interest rates doubling from the low 2021 levels, conversion rates and productivity per employee are now at historical maximums. In Q3-24 the BU increased origination to the second highest level ever with 21% sequential growth), while maintaining CAC stable at the BUs lowest level and operating profit margin on revenues in the 20% range. We are extremely proud of the achievements in Auto Equity as our flagship product that combines high gross profit margin, low capital consumption and very high return on invested capital.
Home Equity
Home Equity was the first product that we launched in 2016 through a structured fund (FIDC) and since then it has become a core part of our business model. Our focus on streamlining the user experience and constantly reinventing the customer journey to deliver a simplified digital solution allows us to operate with low acquisition cost in the retail segment, avoiding risk concentration and maintain a relatively low average ticket. We intend to continue growing both our direct-to-consumer and affiliates networks during 2024 while returning to more steady-state underwriting policies as credit cost in the product continues at low record lows. Origination in Q3-24 reached a new record level, demonstrating the strength of the product in the market.
Private Employee Benefits
Our payroll loan product, targeting employees of private companies, has benefited from significant improvements in customer onboarding and pricing algorithms. This is allowing us not only to increase penetration but also to increase utilization of our approved credit limits. Similar to Auto Equity, the price repositioning during 2022-23 has allowed us to build a very strong foundation to resume portfolio growth since Q1-24 and to continue expanding gross profit generation, achieving 33% margin on revenues in this quarter. We will continue developing the ecosystem of solutions around the employee including salary advance and our benefits card that are delivering very promising results, helping to increase penetration of our core payroll product.
Auto Finance
This is the only product that operates in a very mature industry with already high penetration and competitive margins. After launching our own car financing product in 2020 and attempting a first escalation in 2021, we slowed down our originations= during 2022 and 2023 to understand our potential sources of competitive advantage and how we can deliver value to the customer. We believe the product has a good fit within Creditas ecosystem of solutions as our customer base demands a car financing as well as obtaining liquidity through a pre-owned vehicle. In 2024 we continue in discovery mode with multiple initiatives running in parallel to identify the best angle to expand our market share.
Insurance
After the acquisition of Minuto Seguros in 2021, we have successfully integrated the company into the Creditas Group. We have managed to continue growing the business, consolidating Minuto as the leading independent car insurance broker, while bringing the company to profitability. There is a lot of work to be done to explore the potential of our insurance franchise in multiple fronts: (i) growing our share in the Brazilian market, helping more consumers quote and manage car insurance online, (ii) gaining scale in newer products of our portfolio, including life, health, salary-protection and residential insurance and (iii) combining car insurance onboarding with our Auto Equity product to deliver a full solution to car owners. We continue investing in these fronts during 2024 and expect insurance to become more important in the Creditas ecosystem over time.
After passing through many testing and product improvement cycles, we are now ready to navigate a new chapter of massive sustainable and profitable growth opportunities ahead.
Financial results
Quarterly results for the period Q3-23 through Q3-24
Operating performance
In Q3-24 we delivered strong volume growth with origination volumes reaching R$815.4mn in the quarter, up 17.4% sequentially and 49.3% year on year, ending the quarter with portfolio under management of R$5,798mn. Growth occurred mostly in Auto Equity and Home Equity business units, the more mature products, generating the best economics that we have seen so far as we are combining (i) lower acquisition costs, including production and distribution of our products, (ii) progressively higher up-front fees and (iii) better pricing and margin structure.
Growth acceleration has a negative accounting impact related to the up-front recognition of customer acquisition costs which impacts expenses below gross profit (including marketing, sales, personnel and third-party costs related to loan origination) and the frontloading of IFRS provisioning which impacts our gross profit even though this has nothing to do with our actual credit quality. These two impacts in gross profit and expenses below gross profit, common in all high-growth companies, are especially relevant for Creditas due to the long-term nature of our loans, as we frontload expenses for transactions with an average 8-year maturity, while the margins will be recognized in the future.
Due to our growth reacceleration, in Q3-24 we have also recognized expenses that will fuel further origination growth in the following months. On the other hand, our improved economics with significantly reduced payback period, have allowed us to grow with no cash consumption. We expect to continue compounding portfolio growth by reinvesting the profits of our existing portfolio, creating a virtuous cycle to expand a self-sustainable business.
We continue to be very restrictive in our Auto Finance product while mostly keeping our standard policies in Auto Equity, Home Equity and Private Payroll loans, where we are seeing low volatility at this point in the cycle. Given the low loan-to-value of these products, we believe our product category is ideal to maintain resilience in the current environment.
As discussed, the new pricing strategy initiated in 2022 is allowing us to significantly improve the economics of our products. Customer stickiness allows us to maintain higher financial margin with no impact on credit quality nor customer conversion due to the competitive advantage of our products compared to unsecured lending. With the growth reacceleration, we have been able to post our strongest quarter in top-line revenues at R$517.4mn, positively impacted by the gradual decay of the older, lower-priced portfolio, which is being replaced by newer, higher-priced cohorts. Additionally, the growth in our portfolio and higher up-front fees, driven by stronger origination volumes, have further contributed to this positive trend.
After seeing our Gross Profit margins bottoming in Q2-2022 due to aggressive pricing, the impact of the sharp increase in SELIC and the impact of IFRS provision frontloading related to our high growth strategy (accounting impact not related to credit quality), we have brought our Gross Profit margin levels back to steady-state, posting 45.9% gross profit margin-to-revenues. In Q3-24 we produced yet another record Gross Profit of R$237.4mn as the front-loading of IFRS provisioning is compensated by stronger economics, higher upfront fees and growing portfolio amount.
We expect credit quality to remain strong during the rest of 2024, with interest rates 250bp below peak levels and unemployment rate dropping to 6.4%, the lowest level for the third quarter in the historical series.
Below Gross Profit and above Operating Profit we recognize 3 types of costs:
(i) Customer Acquisition Costs (CAC), which include marketing, sales, personnel and other third-party costs. Despite the fact that our loans generate gross profit over many years, we recognize CAC upfront;
(ii) overhead costs, mostly related to product technology, a cost that unlike some incumbents, we do not currently capitalize; and
(iii) other operating income and expenses, as well as sales taxes.
As we continue building our portfolio, the impact of both CAC and overhead comes down on a relative basis as we gain operational leverage thanks to scale. Operational leverage is becoming critical in this new phase as we continue growing our revenue base to absorb existing overhead that will grow at a significantly slower pace than our portfolio. In addition, improvements in user experience continue paying off as we see CAC dropping due to higher conversion efficiency and productivity per employee.
In Q3-24 we maintained CAC-to-Origination at its lowest level and G&A-to-Revenue continued gaining efficiency and scale. Despite these improvements, Operating Costs and Expenses have increased from R$222mn in Q2-24 to R$245mn in Q3-24 as we are now rapidly deploying our growth strategy (higher costs on an absolute basis despite lower costs relative to new loan origination), recognizing all manufacturing and distribution costs of our products upfront, even though margins of these loans will show in our accounting over many years. This trend will continue during the rest of the year.
Combining Gross Profit and Operating Costs and Expenses provides us with a guideline on the plan that we are executing. We expect to maintain both numbers in the 40-50% range when compared to revenues to keep the company roughly at break-even while maximizing our future growth. We don’t plan to optimize on the short-term net income level for 3 reasons:
- Net income under IFRS does not accurately reflect the economic value being generated by our loan book. Under IFRS, all Customer Acquisition Costs and a significant portion of future credit allowances are recognized upfront, while the recognition of our products' margins is deferred due to the average 7-year maturity;
- We focus on long-term value creation which may not necessarily correlate well with short term profit optimization as we believe that the investments we are currently making provide significant return over the life of our loans;
- Due to the frontloading of IFRS provisions and other non-cash items such as non-cash long-term incentive plans, our cash flow differs from our net income levels, hence our investment and growth decisions may not be based exclusively on accounting metrics.
We expect to keep the company cash flow neutral in the following quarters, with increasing top-line and gross profit numbers.
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Definitions
We present all our financials under IFRS (International Financial Reporting Standards). The key definitions of our financial and operating metrics are below:
Portfolio under management – Includes (i) Outstanding balance of all our lending products net of write-offs and (ii) outstanding premiums of our insurance business. Our credit portfolio is mostly securitized in ring-fenced vehicles and funded by both institutional and retail investors. Our insurance portfolio is underwritten by 14 insurance carriers.
New Origination – Includes (i) volume of new loans granted and (ii) net insurance premiums issued in the period. If new loans refinance outstanding loans at Creditas, new loan origination reflects only the net increase in the customer loan.
Revenues – Income received from our operating activities including (i) recurrent interest from the credit portfolio, (ii) recurrent servicing fees paid by the customers from the credit portfolio related to our collections activities, (iii) up-front fees charged to our customers at the time of origination, (iv) take rate on the insurance premiums issued, (v) other revenues from both lending and non-lending products. (Note: before Q2-2023 we were reporting revenues from cars sold which, giving the change in strategy, is not included since Q2-2023.)
Gross Profit – Gross Profit calculation adds or deducts from our revenues (i) funding costs of our portfolio comprising interest paid to investors, and (ii) cost of credit including credit provisions and write-offs related to our credit portfolio which under IFRS are significantly frontloaded to account for future losses.
Operating Profit – Operating profit deducts from our Gross Profit (i) costs of servicing our portfolio, including headcount, (ii) funds’ operational costs (e.g., auditors, rating, administration fees, etc.), (iii) general and administrative expenses, including overhead, (iv) customer acquisition costs, (v) sales taxes, and (iv) other operating income and expenses. This metric represents a closer view of the company’s operational cash generation, though it is still influenced by IFRS accounting items, such as the frontloading of provisions, customer acquisition costs (CAC) recognized at the time of origination, and the non-capitalization of technology investments, including third-party services, platforms, and the salaries of our product and technology teams.
Adjusted Net Income – Adjusted Net Income adds (i) expenses related to long-term incentive plans, as well as (ii) financial income and expenses, (iii) extraordinary operating items, and (iv) income taxes to Operating Profit.
For more informations, details, or questions, please reach out to our Investor Relations team at investor-relations@creditas.com or our Public Relations team at imprensa@creditas.com.br.
