• Cybercrime headwinds intensified in Q3 and drove a sharp revenue hit in Asia, not because of new attacks but because Evolution’s own countermeasures unintentionally blocked legitimate users. Management admitted they “over-extended”. The dilemma is unchanged: clamp down too hard and real players are hurt, clamp down too softly and pirates win. The company is deploying resources and believes it found a better balance late in the quarter, but the situation remains volatile and there is still no clear path to a full fix.

• Evolution posted its first ever YoY decline in net revenue, down 2%. FX-adjusted growth was modest at 4%. The core Live segment shrank 3%. RNG grew 4% and, for the first time, outpaced Live. Asia fell 6% YoY and 10% sequentially amid cyber countermeasures and regulatory shifts in markets such as the Philippines and India. Europe declined 7% YoY but returned to sequential growth.

• Operating margin fell to 58% from 63% as operating expenses rose 5% to €211 million, although the margin held sequentially. For the first time in recent memory, management stressed cost control rather than “grow to gain share”. Operating expenses fell 3% QoQ, suggesting a cost base reset. Personnel costs rose 6% YoY to €118 million on higher headcount but fell 5% sequentially. FTEs increased 11% YoY to 15,996 but were flat QoQ. Revenue per FTE fell to €32k, a five-year low. Operating leverage has been negative for three straight quarters, explaining the hiring pause.

• Free cash flow margin improved to 67% from 63% and cash conversion reached 83%. Management stated that cash generation is back on track after a seasonally weak Q2 when free cash flow fell to 37% due to timing effects. The company returned €187 million via buybacks in the quarter, bringing year-to-date buybacks to €406 million, and still ended with €656 million in cash. Evolution has many problems at the moment, but cash is not one of them.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Conclusion

1. Financial Highlights

• Net Revenue: €507 million (-2% YoY)

  • Live: €432 million (-3% YoY)

  • RNG: €76 million (+4% YoY)

• Operating Profit: €297 million (–7% YoY)

• EBITDA: €337 million (-5% YoY)

• Free Cash Flow: €342 million (+5% YoY)

2. Wall Street Expectations

• Net Revenue: €536 million (miss by 5%)

• Adjusted EPS: €1.33 (miss by 6%)

3. Business Activity

Cybercrime Headwinds

Cybercrime issues intensified in Q3 2025 and led to a sharp revenue drop in Asia. The decline was driven by the unintended fallout from aggressive countermeasures taken earlier in the quarter. This marks a clear change in tone. Until now, management had been cautiously optimistic about resolving the issue.

Management described the core challenge as a balancing act. Measures that are too strong hurt legitimate users. Measures that are too soft fail to stop pirates. In Q3 the company admits it “over-extended” and “did too much”, which directly harmed revenue because real users were affected.

Management said they are using “top-notch” resources and will spend whatever is required. The constraint is not money. They believe they found a better balance late in the quarter, but the situation remains volatile and unpredictable in the near term. The most concerning takeaway is that management does not yet know how to fully fix the issue and is effectively throwing resources at a problem that may not be fully solvable.

Ring-fencing Update

Revenue in Europe returned to sequential growth, indicating that the ring-fencing and regulatory adjustment phase is mostly complete and now supports growth.

Management believes they are in a “very good position” in Europe and do not expect further ring-fencing actions. One major European regulator singled out the company as one of the best B2B suppliers.

Separately, the UK Gambling Commission review of Evolution Malta Holding Limited continues. A conclusion is expected before year-end 2025. Management maintains that they have the “most sophisticated compliance framework” for the UK market.

Capacity

North America. Strong customer investment led to several large dedicated studios going live across the USA and Canada. Ezugi launched as the second Live Casino brand in the US. A second Michigan studio will open in H1 2026.

Latin America. The São Paulo Live Casino studio, opened in July, is scaling ahead of plan and already being expanded.

Asia. The new Philippines studio is off to a strong start. It suffered minor building damage due to an October earthquake, but operations continued.

Game Rounds Index

Despite capacity build-out, overall activity declined. The Game Rounds Index fell by 1 percent YoY.

New Games

The company continues to deliver on its full-year pipeline of more than 110 releases. Twenty-two new titles were launched on the RNG side in Q3.

Several notable late-2025 titles are still to come:

• Red Baron A hybrid Live and RNG title where players cash out before the “Red Baron flies away”, with winnings increasing the longer a player waits.

• Insurance Baccarat A Baccarat variant with an insurance mechanic designed to reduce loss severity.

Playtech Unmasking

After nearly four years of legal process, Playtech has been identified as the client that funded the defamatory smear campaign launched in December 2021. Playtech paid Black Cube, an intelligence firm, to produce the false report that harmed Evolution and its shareholders.

With the source now confirmed, litigation will proceed and is expected to run through 2026. The immediate step is to replace “Joe Roe” with Playtech in the lawsuit, followed by depositions and potential information disclosures.

The CEO emphasised that the objective is to protect shareholder value and seek “fairness and justice”. While damage estimates were not disclosed, the CEO described the amount sought as “a severe amount”.

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4. Financial Analysis

Revenue

For the first time in its history, Evolution reported a year-on-year decline in net revenue, down 2%. The collapse in revenue momentum has been astonishing, marking the twelfth consecutive quarter of deceleration. The CEO again said management is “not satisfied with the growth so far this year”. Adjusted for foreign exchange, revenue grew 4% YoY. FX is simply the price of admission for international expansion and I do not expect it to reverse.

The Live segment (85% of revenue), shrank 3% YoY. RNG (15% of revenue) grew 4%. For the first time, RNG outgrew Live. When RNG is no longer the problem child, you know performance has shifted in a historic way.

Regional Performance

• Asia (36% of revenue): Declined 6% YoY and 10% QoQ. Management described performance as “still very far from satisfactory” and “a bit worse” than expected. The decline was driven by “over-extended” cyber countermeasures and regulatory volatility in markets like the Philippines and India.

• Europe (35%): Declined 7% YoY, grew 1% QoQ, returning to sequential growth after the ring-fencing impact in Q2. Management saw “good momentum” despite summer seasonality.

• North America (14%): Grew 15% YoY but slowed from 23% in the prior quarter. Still one of the report’s bright spots, supported by customer investment in dedicated studios.

• Latin America (8%): Grew 6% YoY. This was underwhelming given Brazil’s new regulatory framework. Management said growth is “once again picking up” as the market adjusts.

  

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Operating Margin

Operating margin fell to 58%, down from 63%, as operating expenses rose 5% to €211 million. Sequentially, margin was stable for the third quarter. For the first time I can recall, management emphasised cost control and discipline, a sharp pivot from its prior “grow to gain share” approach. Operating expenses declined 3% QoQ which management cited as evidence of cost base adjustment to weaker revenue.

Personnel expense rose 6% YoY to €118 million on headcount growth, but fell 5% QoQ. FTEs rose 11% YoY to 15,996 but were flat sequentially. Management repeated its principle “we do not hire unless we grow”. It is a chicken or egg question: do they grow because they hire, or hire because they grow..

Revenue per FTE fell to €32k, a five-year low. Operating leverage, once the hallmark, has been negative for three consecutive quarters. No surprise hiring paused. Cost per FTE held at €7k. The revenue-to-cost ratio held at 4.3 times QoQ, down from 4.7 times YoY.

EBITDA margin fell to 66% to 68%, leaving EBITDA flat. The 66% is within the full-year range of 66 to 68 percent. Management is clearly fighting costs to defend the bottom of that range.

Cash Flow Analysis

CapEx held at 6% of revenue, in line with recent quarters. Management now expects full-year CapEx to come in “slightly lower” than the €140 million forecast, another sign of tighter spending.

Free cash flow margin rose to 67% from 63%, with cash conversion at 83%. Management said Evolution is “back on track” after a “seasonally and unusually weak second quarter” when FCF margin dropped to 37%. Timing effects matter.

After €187 million in buybacks in the quarter (€406 million year-to-date), cash ended at €656 million. Evolution has many problems, but cash ain’t one.

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5. Conclusion

I have been following Evolution for over two years and I can honestly say this is the worst quarter I have seen from the company in that time. Just when it looked like the business might have turned a corner last quarter, it now feels like one step forward, three steps back.

The key focus this quarter is Asia. The question is whether this is becoming an unfixable problem. Management adjusted its near-term outlook meaningfully and sounded far more cautious and frustrated than in prior quarters. The CEO acknowledged that Asia’s poor performance is a recurring theme and noted that this time it looks a bit worse. Last quarter they were “very cautiously optimistic” about the rest of the year. Now the CEO says they are being realistic and keeping expectations low. When asked for a recovery timeline, he said he cannot share any time frame and cannot comment on potential Q4 impacts given the volatility.

While management is cautious on timing, they do not suggest that the core cybercrime and technical issues are unfixable. This is where I have a problem. Evolution has been dealing with these cyberattacks for a year now since they first surfaced in Q3 2024. If they have not fixed them despite throwing all available resources at the issue, what evidence is there that they can fix them? At this point, it is a clear case of show me, not tell me.

Any company can experience issues like this, but when they persist for this long you have to question whether this is solvable or simply the new normal. Is this now the equivalent of pirated Sky Sports or Netflix streams that are widely accessible online? If so, there is very little Evolution can do to protect itself, especially in unregulated markets.

There are still some positives. The company is not at risk of bankruptcy, not even close. If management can stabilise the business, the valuation is undemanding. The cash pile is large and the combination of dividends and buybacks could deliver an 8-10% floor-type return, all else equal. Famous last words of course.

Over the past couple of quarters, I have maintained that Evolution would not return to double-digit growth until Q1 2026 at the earliest. That view was based on the impact of ringfencing measures and cyberattacks in Asia. Fundamentally, nothing has changed in Europe, so this part of the thesis is still on track. However, given the uncertainty in Asia, mid-single-digit growth in Q1 2026 now looks more realistic.

Asia is believed to be Evolution’s most profitable market, while North America is the main growth driver but at much lower margins. If Asia continues to face issues, earnings growth is likely to lag even the already reduced revenue outlook.

With no clear near-term catalyst, the stock is likely dead money for the next six months. The Evolution investment thesis today is meaningfully different to what it was twelve months ago.

A stock that was long considered a growth darling is now firmly in turnaround or value territory.

Rating: 1 out of 5. Significantly below expectations.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• Q3 2025 bookings revealed a clear shift in ASML’s demand mix. Memory orders surged 186% to €2.54 billion, while Logic bookings declined, reducing Logic’s share from 84% to 53%. Of the €5.4 billion total, €3.6 billion came from EUV systems, underscoring continued strength in advanced lithography. This pivot toward Memory reflects broader semiconductor trends as AI adoption drives higher lithography intensity across both Logic and DRAM. Management expects more critical exposures in both segments, suggesting AI-driven workloads may be ushering in the early stages of a new Memory super-cycle.

• Revenue rose slightly YoY to €7.5 billion, in line with guidance but down sequentially due to timing effects. Net system sales reached €5.6 billion, including one High NA system, while Installed Base Management revenue eased to €2.0 billion (35% of total sales). The revenue mix shifted modestly toward Memory (35%) and geographically toward China, which surged to 42% of net system sales on strong DUV demand. Gross margin contracted to 51.6% from 53.7% in Q2, mainly due to a higher share of lower-margin DUV systems and shipment timing.

• Management reaffirmed 2025 guidance, maintaining expectations for ~15% YoY net sales growth (around €32.5 billion) and a 52% gross margin, with a strong Q4 needed to meet targets. The company forecasts Q4 sales of €9.2–€9.8 billion and margins of 51–53%. Looking ahead, ASML refrained from setting explicit 2026 targets but stated that sales will not fall below 2025 levels. While Chinese headwinds are expected to weigh on results, management anticipates this will be offset by accelerating demand for advanced nodes driven by AI adoption.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Guidance

6. Conclusion

Be greedy when others are fearful.

Ask yourself this…

Would you rather have bought Meta shares for $378 in September 2021 or $90 in November 2022? Both purchases would have seen tremendous growth.

A $1,000 investment in September 2021 would be worth $2,014 today. But a $1,000 purchase when Meta pulled back in November 2022 would be worth $8,300.

Sometimes it can pay to wait for a pullback. Rebound Capital identifies high-quality companies undergoing drawdowns to capitalise on their eventual rebound. In the last few months, they have identified ASML (up 23%), Google (up 52%), and AMD (up 61%) as ideal rebound prospects.

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1. Financial Highlights

• Revenue: €7.52 billion (+1% YoY)

• Gross Profit: €3.88 billion (+2% YoY)

• Net Income: €2.13 billion (+2% YoY)

2. Wall Street Expectations

• Revenue: €7.74 billion (miss by 2%)

• EPS: €5.38 (beat by 2%)

3. Business Activity

Bookings and Demand

Bookings in Q3 2025 showed a slight decline in total net bookings compared to the prior quarter, alongside a significant shift toward Memory end use. Of the €5.4 billion in net bookings, €3.6 billion came from Extreme Ultraviolet (EUV) systems.

Logic customers accounted for 53% of bookings, down sharply from 84% in Q2 2025. In absolute terms, Memory bookings jumped 186%, from €887 million to €2.54 billion.

This shift toward Memory reflects broader market trends. The semiconductor industry is gaining strong momentum, driven by the widespread adoption of Artificial Intelligence (AI) across a growing range of applications. AI demand now extends to both leading-edge Logic and advanced DRAM customers, increasing the need for advanced lithography and higher litho intensity.

Management expects more critical lithography exposures for both Logic and Memory processes. My interpretation is that AI workloads are pushing demand for more sophisticated memory solutions, signalling potential beginnings of a Memory super-cycle.

Technology and Product Adoption

Management highlighted solid progress on the technology roadmap, marked by ongoing EUV adoption, a new product launch for Advanced Packaging, and the growing integration of AI across ASML’s lithography ecosystem.

EUV Technology

Customers have processed more than 300,000 wafers on High NA systems. Maturity levels are currently ahead of where Low NA was at a similar stage. SK hynix has started installing its first EXE:5200 (High NA EUV tool) in production, which is expected to be a key enabler for future DRAM development.

Strong EUV execution continues to drive down the cost of technology at advanced nodes. Management anticipates that the product mix will increasingly favour EUV.

Advanced Packaging and 3D Integration

ASML shipped its first product for the Advanced Packaging market, the TWINSCAN XT:260. This i-line scanner supports 3D integration and delivers up to 4x productivity versus existing solutions.

3D integration is viewed as the “other way to drive Moore’s Law,” complementing traditional 2D lithography. ASML’s holistic lithography technology can be extended to 3D integration to meet customers’ tightening performance requirements.

Integration of AI

ASML entered a strategic partnership with Mistral AI, becoming the lead investor in their Series C round and acquiring roughly an 11% stake. Management expects AI to accelerate product development and reduce time-to-market.

Personally, I believe this Mistral AI partnership is more political than practical, but time will tell whether it delivers tangible value.

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4. Financial Analysis

Revenue

Total revenue rose marginally YoY to €7.5 billion, in line with guidance, despite a slight sequential decline.

• Net system sales were €5.6 billion, including one High NA system recognised during the quarter. ASML’s quarterly results can appear “lumpy” due to the high unit cost of each system, one machine sale timing difference (for example, between September 30 and October 1) can shift revenue by around €400 million.

  

• Installed Base Management revenue (service and field options) fell sequentially to €2.0 billion, now representing 35% of total revenue. This recurring stream reflects ongoing productivity upgrades (such as on NXE:3800E systems) and higher service demand from the expanding EUV base.

• End-use mix: Logic made up 65% of net system sales in Q3 2025, while Memory accounted for 35%. This is a slight shift toward Memory from the Q2 split (Logic 69%, Memory 31%), consistent with booking trends.

  

• Geographic mix: China accounted for 42% of net system sales, up sharply from 27% in Q2. This likely reflects backlog conversion involving Deep Ultraviolet (DUV) systems. Taiwan and South Korea followed, contributing 30% and 18%, respectively. Geopolitical and regulatory risks remain notable factors.

Gross Margin

Gross margin contracted sequentially, as guided, landing at 51.6% (or €3.9 billion in gross profit), down from 53.7% in Q2 2025.

The decline was primarily driven by product mix and cost recognition. While Logic systems still dominated sales (65%), the higher proportion of lower-margin DUV systems sold to China diluted the overall margin. Although one High NA system was recognised, its impact was offset by this DUV-heavy mix.

My view: this contraction was expected and managed, mainly a result of shipment timing and revenue recognition.

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Net Margin

Net margin fell to 28.3% (or €2.2 billion in net income), down 150 bps from 29.8% in Q2 2025.

Operating expenses were broadly stable, so the decline reflects reduced revenue and margin compression:

• R&D costs: €1.1 billion, slightly down from €1.2 billion in Q2.

• SG&A costs: €303 million, slightly up from €299 million.

Cash Flow

Free Cash Flow was €244 million, down from €319 million in Q2 2025, mainly due to lower operating cash flow. ASML’s FCF tends to fluctuate by quarter given the large-ticket nature of its business.

ASML ended the quarter with €5.2 billion in cash and returned nearly €800 million to shareholders through:

• An interim dividend of €1.60 per share

• Share buybacks of about 218,000 shares for €148 million

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5. Guidance

Management reiterated and confirmed its full-year guidance for 2025:

• Total Net Sales: ASML continues to expect total net sales growth of around 15% for 2025 relative to 2024. Based on the reported Q3 figures, achieving this target will depend heavily on a strong final quarter. The full-year net sales figure is anticipated to be around €32.5 billion (using the midpoint of Q4 guidance).

• Gross Margin: The expectation for the full-year 2025 gross margin remains around 52%.

• Q4 Outlook: ASML projects a very strong Q4, with total net sales between €9.2 billion and €9.8 billion, and a gross margin between 51% and 53%.

The most notable update in guidance relates to the initial outlook for 2026. In typical ASML fashion, management avoided explicitly forecasting growth, instead stating that “ASML does not expect 2026 total net sales to be below 2025.”

Management plans to provide more detailed 2026 guidance in January. They noted that while geopolitical headwinds in China will weigh on results, these will be more than offset by growth in advanced technology nodes driven by AI adoption. ASML expects China’s total net sales to decline significantly in 2026, following the exceptionally strong levels of 2024 and 2025.

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6. Conclusion

ASML reported solid headline numbers, but this business is best assessed through its multi-year technology transition and order book stability, rather than quarterly performance. Since production slots are allocated months or even years in advance, the most valuable insights lie in structural trends shaping the outlook for 2026 and beyond.

Key Takeaways:

1. Implicit Backlog Coverage: The implied order backlog exiting Q3 is €33 billion, suggesting 100% coverage for achieving flat revenue in 2026. ASML’s reaffirmation that 2026 sales will not fall below 2025 levels is noteworthy, especially given expected headwinds. This reinforces my belief that committed customer orders substantially de-risk the coming year.

2. China Headwind: Management expects a significant decline in China’s total net sales in 2026. They have consistently described the high levels seen in recent years as “very high and in no way normal.” This surge was due to ASML “eating into our backlog” to meet pent-up demand. The business is expected to normalise next year, returning to more sustainable levels.

3. AI as a Structural Growth Catalyst: The confidence that 2026 revenue will hold or grow despite lower China sales is fundamentally bullish. It reflects strong, broad-based investment in AI-related semiconductor demand, especially in leading-edge Logic and advanced DRAM. This trend requires greater lithography intensity and a broader customer base, reducing the risk of supply constraints and supporting long-term capacity growth.

4. Favourable Product Mix Shift: The expected 2026 dynamic is higher EUV sales and lower DUV sales (due to China restrictions). This shift toward higher-margin EUV systems supports earnings growth even if sales remain flat, highlighting the secular adoption of cutting-edge technology that is less cyclical than DUV.

Rating: 3 out of 5. Meets expectations.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• Customers with $100K+ in subscription ARR grew 27% YoY to 2,505 and now contribute 85% of total subscription ARR. Retention remains strong, with subscription NRR above 120%, driven by expanding data usage, adoption of additional applications, and rising demand for security functionality. Notably, 35% of NRR this quarter came from security feature adoption. CEO Bipul Sinha held over 125 customer and prospect meetings in Q2 FY26, underscoring strong engagement across industries. Wins included displacing both legacy vendors and next-gen competitors at Fortune 50 and Fortune 500 firms, government agencies, and global enterprises, often due to Rubrik’s faster recovery times, stronger cyber resilience, and lower costs.

• Rubrik delivered strong top-line performance with revenue of $310 million, up 51% YoY and above guidance, marking its fourth consecutive quarter of accelerating growth. Subscription revenue accounted for 96% of the total at $297 million, up 55% YoY, supported by a 36% increase in Subscription ARR to $1.25 billion. Non-recurring revenue tied to expiring material rights contributed about 7 percentage points to growth. Adjusted for this, revenue rose closer to 44% and the beat versus Wall Street narrowed from 10% to 5%.

• On profitability and cash flow, Rubrik showed clear progress despite remaining unprofitable. Operating loss narrowed to $95 million with operating margin improving to -30% from -82% a year ago, as operating expenses rose only 7% against 51% revenue growth. Rubrik also delivered $61 million in positive free cash flow, a sharp turnaround from negative $30 million last year, aided by early renewals, multi-year contracts, and refinancing high-cost debt with a 0% convertible. The main gap between operating losses and positive free cash flow stems from stock-based compensation of $88 million, which remains high but is trending lower as a percentage of revenue.

• Management raised guidance across all major metrics for Q3 and FY26. Full-year expectations now call for subscription ARR of $1.408–1.416 billion (+29–30% YoY), total revenue of $1.227–1.237 billion (+38–40% YoY, or +32–34% excluding material rights), and free cash flow of $145–155 million, more than double prior expectations. Non-GAAP EPS guidance also improved sharply to ($0.50) to ($0.44), versus earlier guidance of ($1.02) to ($0.96).

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Guidance

6. Conclusion

1. Financial Highlights

• Revenue: $310 million (+51% YoY)

• Gross Profit: $246 million (+64% YoY)

• Operating Loss: ($94 million) vs ($164 million) YoY

2. Wall Street Expectations

• Revenue: $282 million (beat by 10%)

• EPS: ($0.74) (beat by 33%)

3. Business Activity

Customers with $100K+ in Subscription ARR

Rubrik’s customers with $100K or more in Subscription ARR reached 2,505, representing 27% YoY growth. These larger customers have become increasingly strategic partners, contributing 85% of total subscription ARR, up from 82% in the prior year.

Average Subscription-Based Net Retention Rate

Rubrik’s subscription Dollar-Based Net Retention Rate (NRR) remained above 120%, underscoring the strength of its land-and-expand model.

Expansion drivers included:

• Growing data within existing applications

• Securing additional applications or identities

• Adding more security functionality

Notably, 35% of subscription NRR came from adoption of additional security features this quarter.

Customer Wins

CEO Bipul Sinha noted he held 125+ meetings with customers and prospects during Q2 FY26, signaling strong market engagement. Highlights include:

• A major North American oil and gas company selected Rubrik after a cyber-attack exposed the limitations of its legacy backup provider. Rubrik was chosen for faster recovery times and simplified, comprehensive cyber recovery across workloads.

• A Fortune 50 pharma leader replaced a 20-year legacy vendor and cloud-native backup tools with Rubrik, citing greater cyber resiliency and lower cloud storage costs.

• A global Fortune 500 transportation company expanded its Rubrik investment, adding M365 protection for Azure, cold-based recovery for GitHub and Azure DevOps, and broader cloud protections. This enhanced cyber resilience and shortened recovery times.

• A Fortune 500 logistics firm expanded protection to Azure and M365 apps and added identity recovery functionality, reducing Active Directory and Entra ID recovery from weeks to hours. This potentially prevented $65 million in daily downtime losses.

• A leading U.K. financial services company consolidated data and identity protection with Rubrik after industry attacks raised concerns over Active Directory. Rubrik is now one of its top three IT vendors.

• A U.S. Fortune 500 financial institution adopted identity recovery after an audit showed seven-day recovery times for Active Directory. Rubrik reduced this to under two hours.

• A U.S. federal agency replaced a new-gen competitor to protect mission-critical databases, citing Rubrik’s faster recovery.

• A European multinational replaced a legacy vendor after a third-party audit flagged poor cyber-attack recovery readiness.

Rubrik continues to win the majority of deals against both legacy and new-gen competitors thanks to its Rubrik Security Cloud and preemptive recovery engine.

Product Expansion and Innovation

• Cyber Resilience and Cloud Data Protection: Expanded coverage for AWS RDS and DynamoDB, plus new protection for GCP and OCI. Rubrik now offers multi-cloud simplicity with a single pane for IaaS, PaaS, and SaaS workloads.

• Identity Resilience: Over 200 customers have adopted Rubrik’s Identity Recovery since launch. Rubrik remains the only vendor offering rapid recovery of both Active Directory and Entra ID in hybrid environments. The general availability of Rubrik Identity Resilience integrates data security context with identity intelligence.

• GenAI Acceleration: Acquired Predibase to enhance secure, efficient GenAI. Predibase specializes in fine-tuning AI models and optimizing inference. Rubrik also launched Agent Rewind, a solution that lets customers undo AI agent mistakes without full rollbacks, enabling safer large-scale AI adoption.

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4. Financial Analysis

Revenue

Total revenue for the quarter was $310 million, up 51% YoY. This exceeded management’s guidance and marks the fourth consecutive quarter of accelerating revenue growth.

Subscription revenue reached $297 million, a 55% increase YoY, and now accounts for 96% of total revenue. Growth was driven by strong Subscription ARR, which rose 36% YoY to $1.25 billion. Net new subscription ARR added in the quarter was $71 million. If we look for weaknesses in the report, this metric has decelerated for two consecutive quarters and is now growing slower than total revenue. So what else is driving growth?

A significant factor this quarter was non-recurring revenue from material rights, which added ~7 percentage points to total revenue growth, a few points above management’s expectations. Material rights relate to subscription credits offered to qualified customers with "Refresh Rights" in exchange for giving up their entitlement to next-generation Rubrik appliances at no cost. As these credits expired, customers either used them to purchase new products or let them lapse, impacting accounting treatment and driving variability.

Adjusting for this benefit, total revenue grew ~44%. While Rubrik beat Wall Street’s revenue estimate by 10%, excluding this non-recurring boost, the beat would have been 5%. This is important given Rubrik’s ongoing shift toward subscription-based offerings.

Gross Margin

Rubrik reported gross profit of $246 million, up 65% YoY, far outpacing revenue growth. Gross margin expanded to 80% from 73% a year ago.

Key drivers of margin improvement included:

• Revenue outperformance, including higher non-recurring revenue.

• Reduced hosting costs from new cloud contracts (including a one-time hosting credit).

• Improved efficiency in customer support.

Based on these factors, the margin expansion appears more one-off than structural.

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Operating Margin

Rubrik reported an operating loss of $95 million, an improvement from a $168 million loss YoY. Operating margin improved to -30% from -82% YoY, and from -33% in the prior quarter.

Despite still being in the red, these improvements show Rubrik’s ability to scale profitably over time. Total operating expenses increased only 7% YoY, compared to 51% revenue growth. Sales & Marketing (S&M) remains the largest expense, accounting for more than half of total opex. S&M expenses rose just 8% YoY, reducing the S&M ratio from 82% to 59%. These ratios should continue trending downward as the business matures.

Another encouraging sign is the Subscription ARR Contribution Margin, which reached 9.4% over the past 12 months, up from (8.2%) YoY. This ~1,800 basis point swing highlights operating leverage, a metric management views as critical in its cloud transformation.

Cash Flow

Rubrik turned free cash flow (FCF) positive, generating $61 million compared to ($30 million) YoY. FCF margin improved from -14% to 20%, marking the fourth straight quarter of positive FCF.

Key drivers included:

• Early renewals, including multi-year contracts, often co-termed with customer expansions.

• Capital structure optimisation, where Rubrik refinanced higher-cost private debt with a 0% convertible, boosting cash and reducing interest expense.

The gap between negative operating margin and positive FCF is largely due to stock-based compensation (SBC). Rubrik recorded $88 million in SBC, down from $105 million YoY, reducing SBC as a share of revenue from 51% to 29%. While still high, this was inflated by IPO-related equity awards and should moderate over time.

As a result of SBC, weighted-average shares outstanding rose 8% YoY to 195 million. In other words, shareholders from 12 months ago now own 8% less of the company. However, with shares up over 200% during the same period, most investors are unlikely to complain.

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5. Guidance

Rubrik’s strong quarter led management to raise guidance across several metrics.

Q3 FY26

• Revenue: $319–321 million (+35–36% YoY), including a slightly higher material rights benefit.

• Subscription ARR contribution margin: 6.5%, seasonally lowest in Q3 due to expense timing and Predibase integration.

• Non-GAAP EPS: ($0.18) to ($0.16).

• Weighted-average shares outstanding: 200 million.

Full Year FY26

• Subscription ARR: $1.408–1.416 billion (+29–30% YoY), raised 2% from prior guidance.

• Total Revenue: $1.227–1.237 billion (+38–40% YoY, or +32–34% ex-material rights), raised 4% from prior guidance.

• Subscription ARR contribution margin: 7.0%, raised 100 bps from 6.0%.

• Non-GAAP EPS: ($0.50) to ($0.44), up sharply from prior ($1.02) to ($0.96).

• Weighted-average shares outstanding: 197 million, improved from 198 million prior.

• Free cash flow: $145–155 million, more than double prior guidance of $65–75 million.

Wall Street FY 26 estimates:

• Revenue: $1.217 billion

• Non-GAAP EPS: $(0.97)

Given the beat-and-raise quarter, analysts will likely revise estimates higher, continuing the quarterly trend since Rubrik went public.

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6. Conclusion

This was the first earnings release from Rubrik that I observed as an investor. I pitched the stock as a new idea in August, and it had run hot into this report, up almost 20% in less than a month. After the sell off yesterday, it’s back to where it was a month ago. In the Rubrik Quick Pitch link below, you will find my original investment thesis if you missed it.

Appraising management can be difficult and subjective, but one approach I use is comparing what management say they will do to what they actually deliver. In this quarter, Rubrik handsomely exceeded all guided metrics and raised forward guidance.

While it is hard to find fault in this report, there are some structural improvements and temporary tailwinds that merit attention.

Exceptional Free Cash Flow Performance (with a caveat): Rubrik’s 20% FCF margin is a standout metric despite the impact of SBC. The quarter benefited from favorable contract duration and more early renewals, including multi-year contracts often co-termed with active customer expansions. While positive for current cash flow, these timing benefits may not be consistently repeatable at the same magnitude in future quarters. Understanding the one-time vs. recurring nature of these drivers is crucial for projecting future FCF quality.

Non-Recurring Material Rights Revenue Tailwind: Q2 revenue was boosted by strong ARR growth, the cloud transformation journey, and higher non-recurring revenue accounted for as material rights. These contributed roughly 7 percentage points to revenue growth this quarter. Investors should strip out this non-recurring benefit when modelling organic revenue growth. While positive now, this tailwind will disappear in FY27, making YoY comparisons tougher and potentially slowing reported revenue growth. Subscription ARR growth is the more sustainable top-line indicator, though it showed minor deceleration.

Sales Compensation Changes and Seasonality Shift: Rubrik moved from half-yearly to annual sales compensation plans at the start of FY26. As a result, Q2 and Q3 should look more alike in terms of net new ARR contribution, without the Q2 accelerator seen previously. Q4, however, is projected to be seasonally strong, meaning investors should adjust quarterly expectations and watch closely how the new structure impacts Q4 performance.

While Rubrik trades at a premium valuation on conventional metrics, this may prove less demanding if the company continues to execute its beat-and-raise playbook over the coming quarters. With a differentiated platform, high win rates in cyber resilience, and a clear vision to evolve into a security and AI company, Rubrik’s long-term story is just beginning.

Rating: 4 out of 5. Exceeds expectations.

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Wolf of Harcourt Street

Contact me

Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• InPost delivered 324 million parcels, up 23% YoY, continuing to outpace e-commerce market growth across its core regions. In Poland, volumes rose 6% to 181 million, the slowest rate since the 2021 IPO, though diversification was evident with non-marketplace parcels up 17%. In the Eurozone, volumes increased 10% to 78 million, driven by B2C growth and 59% YoY APM adoption. The UK was the standout, with volumes up 177% to 65 million, largely due to Yodel’s integration. On a pro-forma basis, growth was 24% against a contracting market.

• InPost achieved record network expansion in Q2 2025, cementing its position as Europe’s leading OOH delivery provider. The total network grew 20% YoY to over 88,000 points, with APMs up 31% to 53,287. For the first time, international lockers surpassed those in Poland. Alongside organic expansion, InPost advanced internationally through acquisitions and partnerships. The Yodel integration has made the UK InPost’s second-largest market, while the Sending acquisition in Iberia adds full-service logistics capabilities. A minority stake in Bloq.it supports further growth, with battery-powered lockers enabling flexible deployment, 2,000 targeted by end-2025 and 20,000 within five years.

• Revenue rose 35% YoY to PLN 3.5 billion, with more than half now coming from outside Poland, highlighting the success of international expansion. In Poland, revenue increased 7% to PLN 1.7 billion, supported by repricing and a favorable parcel mix. The Eurozone grew 10% to PLN 885 million, driven by cross-border and to-door deliveries. The UK stood out with a 303% surge to PLN 954 million, now accounting for 27% of Group revenue, thanks to Yodel’s consolidation and network growth. International operations are boosting unit prices, with average revenue per parcel rising to PLN 10.91 from PLN 9.92 a year earlier.

• Adjusted EBITDA increased 13% YoY to PLN 1.0 billion, with a 28% margin, or a record ~35% margin excluding Yodel. Poland remained the standout, with EBITDA up 12% and margins improving to 49% on better cost control and mix shift. However, Group profit per parcel fell 8% to PLN 3.08, with a 25% international decline reflecting the trade-off between rapid expansion and near-term profitability. Net profit dropped 60% YoY to PLN 133 million, as integration costs, higher depreciation, financing expenses, and FX impacts outweighed operating gains. Management emphasised these headwinds are front-loaded and tied to Yodel integration, rebranding, and automation, with profitability expected to normalise by Q2 2026 as synergies take hold.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Guidance

6. Conclusion

1. Financial Highlights

• Revenue: PLN 3.53 billion (+35% YoY)

• Adjusted EBITDA: PLN 1.00 billion (+13% YoY)

• Operating Profit: PLN 382 million (-21% YoY)

2. Wall Street Expectations

• Revenue: PLN 3.47 billion (beat by 2%)

• Net Profit: PLN 303 million (miss by 56%)

3. Business Activity

Parcel Volume

InPost delivered 324 million parcels, a 23% YoY increase.

This growth once again outpaced the general e-commerce market across its key regions.

Poland

Parcel volumes grew 6% YoY to 181 million, slightly above the local market growth of 5%. However, this marked the third consecutive quarter of deceleration and the slowest growth rate since the 2021 IPO. Growth was driven primarily by a 17% YoY increase in non-marketplace volumes, highlighting successful diversification.

The company added about 2,500 new merchants YoY, bringing the total to over 55,000. These merchants contributed more than half of the non-marketplace growth.

Management noted a wave of attempted delivery preference changes on marketplaces in Q2 2025. For Allegro, most parcels were redirected to Allegro OneBox. Over 30% of Allegro volume was initially subject to these changes, with more than 80% of redirections going to Allegro OneBox and smaller portions to Orlen and DHL. Despite this, the estimated impact on InPost’s Q2 2025 volume was less than 2%, thanks to a loyal user base.

InPost Pay expanded to more than 9 million registered users and integrated with over 2,400 merchants by Q2 2025. The loyalty program grew to 12.4 million users, adding about 14 million incremental parcels since launch. NPS remains strong at 50 for merchants and 77 for customers, well ahead of competitors. Heavy users who order from more than 10 or 20 shops drive a significant share of Automated Parcel Machine (APM) volume.

Eurozone

Volumes increased 10% YoY to 78 million, double the e-commerce market growth of 5%. Growth came mainly from a 27% YoY increase in B2C, now 49% of total Eurozone volumes.

APM adoption continued to rise, with APM volumes up 59% YoY, while PUDO volumes declined after a strategic cut in pick-up points. Mobile app downloads reached 4.9 million, with launches planned in Spain (Q4 2025) and Italy (2026).

UK

The UK delivered the fastest growth, with volumes up 177% YoY to 65 million. This surge was largely due to the integration of Yodel in May and June 2025. On a pro-forma basis, organic UK volumes grew 24% YoY, far above the market decline of -1%.

With Yodel, to-door and B2C volumes now represent over 50% of UK volume, creating a major opportunity for Out-of-Home (OOH) conversion. InPost already holds the highest NPS among UK peers. A pilot program redirecting Yodel parcels to InPost APMs has been launched to accelerate OOH adoption.

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Network Development

InPost achieved record expansion in Q2 2025, reinforcing its position as Europe’s OOH delivery leader. The OOH network grew to 88,000+ points, up 20% YoY from 73,636. APMs reached 53,287, up 31% YoY from 40,671. For the first time, international APMs outnumbered those in Poland.

• Poland: The APM network expanded to 26,807 units (14% YoY growth), equal to about 70% market share. Pick Up Drop Off (PUDO) points declined slightly by 1% to 3,830.

• Eurozone: APMs rose 59% YoY to 15,392, while the broader OOH network reached 40,459 points (10% YoY growth). PUDO declined 7% YoY to 25,067 as focus shifted toward lockers. APM share of OOH volumes rose to 43% from 28% a year earlier.

• UK: PMs surpassed 11,000, a 48% YoY increase, with +3.6k added in 12 months (about 85 per week in Q2). Coverage now reaches over 50% of the UK population, and in the top three cities, 75% of residents are within a 7-minute walk of an InPost OOH point. PUDO points increased 175% YoY to 5,866.

Acquisitions and Partnerships

Management described 2025 as a year of strategic acquisitions and investments to strengthen InPost’s international reach.

• Yodel (UK): Integration was a key milestone, boosting UK volumes and making the market InPost’s second largest. Work continues on last-mile upgrades, process alignment, and depot consolidation (16 closed so far), with completion expected in 2026.

• Sending (Iberia): Acquired in July, this Spanish to-door logistics company adds a full-service offering in Iberia, including OOH, to-door, fulfillment, and cross-border solutions, along with valuable merchant relationships.

• Bloq.it (Battery-powered APMs): InPost took a minority stake in Bloq.it, whose lockers require no infrastructure or solar panels and last 6–12 months on battery power. Plans call for 2,000 new lockers by end-2025 and 20,000 within five years, enabling deployment in previously hard-to-reach urban areas.

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4. Financial Analysis

Revenue

InPost’s revenue reached PLN 3.5 billion, a substantial 35% YoY increase. Notably, more than half of the Group's Q2 2025 revenue was generated outside Poland, underscoring the success of its international strategy.

Poland

Revenue in Poland grew 7% YoY to PLN 1,694 million in Q2 2025. This outpaced parcel volume growth, supported by single-digit repricing and a favorable shift in volume mix.

Eurozone

Revenue rose 10% YoY to PLN 885 million in Q2 2025, or 11% YoY in local currency. Performance was driven by a favorable volume mix, including more cross-border and to-door deliveries, partly offset by higher returns.

UK

The UK posted the strongest growth, with revenue surging 303% YoY to PLN 954 million in Q2 2025. This made the UK the Group’s second-largest revenue contributor at 27% of total sales. Growth was fueled by the Yodel consolidation and continued network expansion.

There is a clear gap in average revenue per parcel (RPP) between Poland and international markets. In Q2 2025, Poland’s RPP was PLN 9.36 (up from 9.27 in Q2 2024). Internationally, RPP reached PLN 12.85 (up from 11.11). As a result, the Group’s average RPP rose to PLN 10.91 from 9.92 a year earlier, reflecting the strategic shift toward higher-priced international services.

Adjusted EBITDA

Adjusted EBITDA increased 13% YoY to PLN 1.0 billion in Q2 2025, with a margin of 28%. Excluding Yodel, the Group achieved a record-high margin of ~35%, a 120 bps YoY increase.

Poland

Adjusted EBITDA grew 12% YoY to PLN 83 million, with margin up 220 bps to 49%. Gains came from effective cost-per-parcel management (-2% YoY) and a greater share of non-marketplace volumes.

Eurozone

Adjusted EBITDA rose 7% YoY to PLN 145 million, with margin steady at 16%. Adoption of APMs reduced cost-per-parcel, though this was partly offset by higher SG&A expenses in sales and IT.

UK

Adjusted EBITDA increased 44% YoY to PLN 48 million. However, margin fell to 5% (down 920 bps YoY) due to transitional Yodel consolidation impacts. Excluding Yodel, the core UK business achieved a record-high margin above 20%.

Using Adjusted EBITDA as a proxy for average profit per parcel (PPP) shows that the Group's average PPP declined by 8%, from PLN 3.36 in Q2 2024 to PLN 3.08 in Q2 2025. The International segment saw a 25% decrease, falling from PLN 1.80 to PLN 1.35. This sharp decline reinforces the narrative of aggressive international expansion and the impact of the Yodle acquisition, which added significant volume but also brought initial losses in the UK. In contrast, Poland's average PPP increased by 5.7%, from PLN 4.36 to PLN 4.61. This highlights the continued strength and efficiency of InPost's mature Polish market.

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Net Profit

Net profit from continuing operations was PLN 133 million, a 60% YoY decline (vs PLN 336 million in Q2 2024). The margin dropped to 4%, down from 13% a year earlier.

This sharp decline occurred despite Adjusted EBITDA growth and caught the market off guard, with consensus estimates more than double the actual result. The drivers included:

• Heavy investments in international expansion (notably Yodel)

• Integration and restructuring costs

• Higher depreciation and amortisation

• Adverse FX movements

Depreciation and amortisation rose to PLN 528 million (from 354 million) due to Yodel consolidation, APM network expansion, and automation.
Net financial costs increased to PLN 130 million (from 74 million), driven by higher interest expenses and unrealized FX losses. A stronger PLN against the EUR also weighed on intercompany loan valuations at the Luxembourg parent level.

Additional non-cash and one-off costs also pressured results:

• Incentive programs: PLN 17 million (vs 1 million in Q2 2024)

• Restructuring: PLN 41 million (vs 23 million) from UK integration and Yodel

• M&A costs: PLN 7 million (vs 1 million)

Management noted these costs are front-loaded, tied to rebranding, operational rationalisation, and redundancies.

While the accounting impact is severe, the underlying operations remain solid. InPost is absorbing integration costs now, while benefits will accrue over the next several quarters. Management expects net profit margins to recover to pre-acquisition levels by Q2 2026.

Cash Flow

In H1 2025, InPost delivered positive free cash flow (FCF) of PLN 54 million, despite elevated Capex. However, in Q2 alone, FCF was negative PLN 9 million, compared to positive PLN 154 million in Q2 2024, reflecting intense investment activity.

Total Capex in Q2 2025 was PLN 471 million (+38% YoY). For H1 2025, Capex reached PLN 812 million (+38% YoY). Roughly 60% of FY 2025 Capex (~PLN 1.9 billion) is earmarked for APM production and deployment.

• Poland: Generated strong FCF of PLN 477 million, a 170% YoY increase, with FCF-to-EBITDA conversion of 57%.

• International: Recorded negative FCF of PLN 421 million, reflecting heavy upfront investment in network buildout, operations, and IT.

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5. Guidance

Management provided an updated outlook for FY 2025 and a trading update for Q3 2025, which includes revisions to prior guidance.

Parcel volume growth in the high 20s percent range for FY 2025 (+25–30% YoY).

• High single-digit growth in Poland.

• Mid-double-digit growth in Eurozone markets.

• UK volumes to almost triple, driven by Yodel consolidation and APM expansion.

Revenue growth in the high 30s percent range for FY 2025 (+35–40% YoY).

Adjusted EBITDA increase in the low to mid-20s percent range (+20–25% YoY). Overall margin will be lower YoY due to the rising share of UK operations.

• Poland margins at a high 40s level.

• Eurozone margins higher YoY due to core business profitability, slightly offset by Sending consolidation.

• UK margins temporarily lower YoY due to Yodel consolidation.

Management also plans to accelerate deployment of 15,000 new APMs across all markets.

In summary, guidance reflects dynamic market conditions and the push for international expansion, particularly the impact of Yodel and continued network rollout. While these investments weigh on margins and cash flow in the short term, underlying profitability in Poland and the Eurozone remains strong, and international growth is accelerating.

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6. Conclusion

Having reviewed countless earnings reports over the years, InPost’s Q2 2025 results tell a familiar story: strategic investment for future dominance at the expense of near-term profit.

The company delivered robust growth with group volume up 23% and revenue up 35% YoY. For the first time, more than half of revenue originated from its international business, underscoring the success of diversification efforts. Adjusted EBITDA reached PLN 1 billion. However, reported net profit fell sharply, down 60% YoY, reflecting front-loaded integration costs from the Yodel acquisition, along with higher depreciation and amortisation from aggressive network expansion and acquisitions.

Management reiterated confidence in restoring profit margins to pre-acquisition levels by Q2 2026. Strong underlying performance in Poland (49% Adjusted EBITDA margin) and across the Eurozone suggests these short-term sacrifices are the foundation for long-term leadership and profitability. Mature margins in Poland hint at what could be achieved as international operations scale, which is the key reason investors should remain excited about InPost.

Taking a step back, InPost is clearly executing a consumer-centric strategy, built on brand loyalty, innovative technology, and a measurable unit cost advantage that enables rapid pan-European expansion:

• Loyalization as a Core Asset: Management views loyalization as the company’s real asset and the foundation of growth, profitability, and long-term leadership. This is a sharp contrast to traditional logistics providers that prioritize B2B relationships. The metrics are striking: APM NPS of 77, an internal NPS of 96, and 14.6 million loyal app users who represent over 70% of APM customers and drive roughly 80% of total volume. These users are highly engaged, and their loyalty is a competitive edge.

• Innovative Network Expansion via Battery-Powered APMs: InPost’s minority investment in Bloq.it, a battery-powered APM technology company, is described as an “offensive play.” This removes infrastructure and solar panel constraints, unlocking highly attractive yet previously inaccessible urban locations in the Eurozone and UK. Deployment costs also fall significantly. InPost plans to roll out 20,000 units in the next five years, with 2,000 scheduled for this year.

• Focus on Out-of-Home Conversion: The Yodel acquisition is not about building a traditional to-door business in the UK. Instead, the strategy is to convert existing to-door volume into APM deliveries, which offer both higher customer satisfaction and lower costs. Integration has been swift, with logistics networks being consolidated into “one network,” operational discipline tightened, and 16 depots closed since the deal.

• Quantifiable Unit Cost Advantage: InPost highlights the significant unit cost gap between APM and to-door delivery. In Poland, APM is roughly 30% cheaper; in the UK, the gap is 20–25%. This structural cost advantage fuels the company’s aggressive rollout and provides confidence in its ability to disrupt mature markets. It not only supports competitive pricing but also strengthens profitability as volumes scale.

InPost is prioritizing market disruption and customer loyalty over short-term profitability. While this approach depresses earnings today, history shows that such strategies often lay the groundwork for outsized long-term success. Encouragingly, InPost’s organic growth already outpaces market growth in every region where it operates.

After falling 13% following the earnings, the stock now trades at a forward EV/EBITDA multiple of just 6. The implied expectations are consequently very undemanding, and with the business less reliant on Allegro due to its diversification efforts, the residual risk feels more than compensated for. From here, not much has to go right for the stock to perform.

Rating: 3 out of 5. Meets expectations.

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Wolf of Harcourt Street

Contact me

Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• Nu added 4.2 million new customers in the quarter, bringing the total to 122.7 million, up 17% YoY. The activity rate held steady at 83%, pushing active customers above 100 million for the first time. In Brazil, the customer base grew 12% to 107 million, representing 60% of the adult population. Mexico added 1 million new customers, reaching 12 million (13% of the adult population) as Nu continues building a full-scale retail banking platform. Colombia remains the smallest but fastest-growing market, with customer numbers nearly tripling over the past year to 3.4 million, now approaching 10% market penetration and a key inflection point.

• Total deposits rose 41% YoY (FXN) to $36.6 billion. Brazil remains the largest market at $27.8 billion, up 28% YoY and 14% QoQ. Mexico’s deposits doubled YoY to $6.7 billion, while Colombia’s deposits surged nearly tenfold to $1.3 billion within a year of launching checking accounts. The blended cost of funding rose to 91% of interbank rates from 87% last year, reflecting higher costs in Mexico and Colombia versus Brazil.

• Nu’s total credit portfolio grew to $27.3 billion in Q2 2025, up 40% YoY and 8% QoQ FXN. Credit cards rose 24% to $18.2 billion, unsecured loans increased 70% to $6.8 billion, and secured loans jumped 200% to $2.3 billion. Delinquency in Brazil outperformed seasonal norms, with 15–90 day NPLs down 30 bps to 4.4% and 90+ day NPLs up just 10 bps to 6.6%, both in line with or better than expectations. Management highlighted that asset quality remains resilient despite macroeconomic concerns.

• Revenue rose 29% to $3.67 billion, the fastest growth since Q3 2024, with FXN growth of 40% driven by customer expansion and a record ARPAC of $12.2, up 18% YoY. Gross profit reached a record $1.55 billion, up 24% FXN, with margin improving sequentially to 42%, though down from 48% YoY. Interest income margins fell to 35% due to higher deposit costs in Mexico and Colombia and a temporary impact from credit model upgrades in Brazil that front-loaded provisions ahead of related revenue.

• Operating profit grew 21% YoY to $879 million, with the operating margin slightly declining to 24% from 25% YoY but remaining flat sequentially. The margin dip was entirely due to lower gross margins, as operating expenses rose more slowly than revenue, demonstrating clear operating leverage. Customer service, G&A, and marketing expenses fell to 16% of revenue, down from 19% YoY. On the risk-adjusted side, Net Interest Margin (NIM) improved 100 bps sequentially to 9.2%, ending three quarters of contraction, driven by strong Net Interest Income that more than offset higher Credit Loss Allowances.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Conclusion

1. Financial Highlights

• Revenue: $3.67 billion (+29% YoY)

  • Interest Income: $3.13 billion (+31% YoY)

  • Fees: $540 million (+16% YoY)

• Operating Profit: $879 million (+21% YoY)

• Net Profit: $637 million (+31% YoY)

2. Wall Street Expectations

• Revenue: $3.67 billion (in line)

• EPS: $0.13 (in line)

3. Business Activity

Customers

Despite Nu’s scale, customer growth remains strong, with 4.2 million new customers added in the quarter, bringing the total to 122.7 million. Over the past 12 months, Nu has added 18.2 million new customers, representing 17% YoY growth.

The customer activity rate remained stable at 83%, resulting in active customers surpassing 100 million for the first time. The Nu platform has evolved into a powerful multiproduct, multisegment, multi-geo growth engine.

Brazil

The customer base grew 12% YoY to 107 million, reaching 60% of the adult population. Despite high penetration, almost 1 million new customers continue to join each month.

Mexico

Added 1 million new customers, bringing the total to 12 million, now covering 13% of the adult population. Nu is in the early stages of building a full-scale retail banking platform in Mexico.

Colombia

Remains the smallest but fastest-growing market for Nu. Customer count has almost tripled over the past year, reaching 3.4 million at the end of Q2. Nu is nearing a major inflection point, with almost 10% of the adult population now using its services.

Deposits

Total deposits increased 41% YoY (FXN) to $36.6 billion, with strong growth across all three markets:

• Brazil: Deposits reached $27.8 billion, up 28% YoY and 14% QoQ (FXN). Growth was driven primarily by higher customer engagement and share of wallet, rather than higher deposit rates. The cost of funding has remained largely unchanged at low 80s. Expansion into more affluent segments also contributed.

• Mexico: Deposits doubled YoY and rose 24% QoQ to $6.7 billion, despite a reduced spread over the interbank rate. In early July 2025, Nu redesigned and repriced its deposits, aiming to gradually lower funding costs while adding new features (e.g., OXXO distribution, cash withdrawal).

• Colombia: Deposits increased almost 10-fold YoY and 17% QoQ to $1.3 billion, just four quarters after launching NuColombia’s checking account. Like Mexico, Nu is gradually lowering yields, with the full impact expected over time.

The cost of funding for the quarter was 91% of the blended interbank rates, up from 87% a year ago. As noted in previous reviews, deposit costs in Mexico and Colombia are higher than in Brazil. The loan-to-deposit ratio fell slightly to 43% (from 44%), as deposit growth outpaced loan growth.

Management stated on the conference call that they are comfortable with this ratio across markets, given the resilience of retail deposits. Nu is actively reshaping deposit size and pricing in Mexico and Colombia to lift Net Interest Margin (NIM), while Brazil’s NIM is expected to remain stable.

Purchase Volume

On a reported basis, Purchase Volume (PV) grew 6% YoY to $33.3 billion. On an FXN basis, growth was 3% YoY. QoQ growth was 10%. Note that PV excludes other payment methods Nu offers, such as PIX transfers, WhatsApp payments, and wire transfers.

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Monthly Average Revenue Per Active Customer

Monthly Average Revenue Per Active Customer (ARPAC) reached $12.2 in Q2 2025, up 18% YoY (FXN), marking a new record and the first time above $12. The CAGR since 2021 is 34% FXN. For long-tenured customers, ARPAC reached $27.3.

Nu aims to lift ARPAC toward $30–$40, closer to incumbent banks (~$45). Credit is expected to be the main driver, given it accounts for 65–70% of the retail banking profit pool in Latin America.

Credit Portfolio

The total credit portfolio reached $27.3 billion in Q2 2025, growing 40% YoY FXN and 8% QoQ FXN. Diversification continues, with secured and unsecured loans now making up over one-third of the portfolio, up from 25% a year ago.

• Credit Cards: Grew 24% YoY to $18.2 billion. Brazil’s portfolio emphasizes instalment balances for more predictable returns, supported by new models and AI-driven risk tools. Nu gained over 100 bps of market share in Brazil’s credit card receivables during the quarter.

• Unsecured Loans: Grew 70% YoY to $6.8 billion, holding over 20% market share in new originations in Brazil.

• Secured Loans: Grew 200% YoY to $2.3 billion despite INSS disruptions that cut industry origination by 50%. Nu launched a private payroll loan product in April 2025, approaching the segment cautiously but with high long-term expectations.

Delinquency

Delinquency trends for Brazil’s consumer credit portfolio were better than seasonal norms:

• 15–90 Day NPL: Fell to 4.4% (down 30 bps QoQ), better than the typical 20 bps seasonal drop.

• 90+ Day NPL: Rose 10 bps to 6.6%, in line with expected seasonality.

Despite concerns among investors about the macro situation in Brazil, Nu emphasised that there was no material deterioration in asset quality. The company continues to underwrite assuming future conditions will be worse than past cycles, ensuring each unsecured credit cohort remains NPV-positive even under higher loss scenarios.

“So far, and I say so far until now, August 14, we haven't seen kind of that deterioration playing out materially in our asset quality figures. All of our asset quality figures are performing largely as expected.”

Guilherme Marques do Lago, CFO

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4. Financial Analysis

Revenue

Nu’s quarterly revenue growth accelerated to 29%, the fastest rate since Q3 2024, reaching $3.67 billion. On an FXN basis, revenue grew 40% YoY, driven by continued customer growth and the compounding effect of rising ARPAC, which has grown at an 85% annualised rate since 2021.

• Interest income (85% of total revenue) rose 31% YoY to $3.1 billion.

• Fees (15% of total revenue) increased 16% YoY to $540 million.

Gross Margin

Nu posted a record gross profit of $1.55 billion, up 24% YoY FXN. The gross profit margin improved sequentially to 42% in Q2 2025 (from 41% in Q1), although it was down from 48% YoY.

• Interest income gross margin fell to 35% (from 40% YoY).

• Fees gross margin slipped slightly to 85% (from 86% YoY).

Two main factors drove the interest income margin decline:

1. Higher deposit costs in Mexico and Colombia reduce incremental gross margins compared to Brazil. While absolute profit dollars remain healthy, these markets will structurally carry lower margins.

2. Credit model upgrades in Brazil early in Q2 led to higher credit card limits and a front-loading of expected credit losses, creating a temporary mismatch where provisions were booked before the related revenue. Excluding this, credit loss allowance would have declined QoQ on an FXN basis.

A new disclosure highlighted that fees and float are now meaningful contributors to gross profit, adding resilience and consistency across economic cycles. Management described Nu’s “credit-first” model as fueling a “principality flywheel”, enabling cross-sell and broader gross profit diversification.

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Operating Margin

Operating profit reached $879 million, up 21% YoY. The operating margin slipped to 24% (from 25% YoY) but was flat sequentially. This decline was entirely due to lower gross margin, as operating expenses rose more slowly than revenue, indicating operating leverage.

• Customer service, G&A, and marketing expenses dropped to 16% of revenue, down from 19% YoY.

• Marketing expenses were flat YoY but up sequentially, reflecting strategic investment to strengthen Nu’s brand leadership in Latin America.

The cost to serve per active customer remained extremely low at $0.80, down 3% YoY FXN. Nu’s average revenue per active customer is 15x its cost to serve, underscoring one of its most important competitive advantages.

Risk-Adjusted Net Interest Margin

Risk-Adjusted NIM rose 100 bps sequentially to 9.2%, breaking a three-quarter streak of contraction. This improvement came from strong Net Interest Income growth, which more than offset higher Credit Loss Allowances.

• In Brazil, NIM continued to expand on healthy spreads and growing volumes.

• In Mexico and Colombia, margins remain temporarily lower due to ongoing investments, which management views as essential to unlocking long-term value.

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5. Conclusion

CEO David Vélez used this earnings call to introduce three major leadership hires:

• Eric Young (Chief Technology Officer) and Ethan Eismann (Chief Design Officer) were brought on to prepare Nu for the “next stage” and its internationalisation plans over the next few years, helping the company “play in the big leagues.”

• Roberto Campos Neto joined as Vice Chairman and Global Head of Public Policy. This is the most notable addition, as he previously served as Governor of the Central Bank of Brazil, bringing deep regulatory insight and strategic vision on how technology and policy can shape inclusive financial systems. Campos Neto played a pivotal role in implementing PIX, making him a highly strategic hire for Nu’s positioning in Latin America, particularly given its regulated entities in Brazil, Mexico, and Colombia, with more expected as Nu expands. Last week, Nu released a 40-minute interview between Vélez and Campos Neto, which is well worth watching.

Coming into this report, my two key watch points were NIM compression and the deliberate PIX financing slowdown. Both showed positive developments:

• NIM Compression: Nu reversed the compression trend and is well-positioned going forward, even with this quarter’s front-loading of expected credit losses in Brazil, which created a temporary timing mismatch between provisions and revenue.

• PIX Financing Slowdown: PIX financing, the largest part of Nu’s transactional financing products, resumed growth. As of Q1 2025, the PIX and transactional financing portfolio was already larger than in Q2 2024, and growth continued into Q2. Over 40% of Nu’s credit card customers are now active with some type of transactional financing, primarily PIX, indicating a very high and healthy attach rate.

I entered this earnings season slightly cautious, concerned that these two areas could again drag on revenue and earnings. That was not the case, Nu delivered a solid report with positive momentum in nearly every area.

A previous headwind, FX pressure from the Brazilian Real’s depreciation in late 2024, is now turning favorable. For Q3, FX may be a minor tailwind, but by Q4 it could become a material tailwind if current levels hold. The Real is up 14% YTD in 2025.

Over the past five years, Nu’s revenue and earnings growth came largely from adding new customers, a 4x increase in that time. Over the next five years, growth will depend more on monetisation and wallet share. Nu’s model, acquire at scale, deepen engagement, and monetise as cohorts mature, positions it well to maximise lifetime value from its large and engaged customer base by expanding product usage, increasing wallet share, and leveraging its highly efficient digital platform.

Rating: 3 out of 5. Meets expectations.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• Adyen processed €649 billion in volume during H1 2025, up 5% YoY and representing a 32% CAGR over the past four years. Growth was held back by a single large-volume customer, likely Cash App, which had little impact on net revenue. Excluding this customer, volume growth was 23%, and the effect should phase out in future periods. The take rate rose from 14.7 bps to 16.8 bps, reflecting a shift in merchant mix after reduced Cash App volumes, which carry lower rates.

• Net revenue rose 20% YoY to €1,093 million (21% on a constant currency basis), marking Adyen’s slowest growth since going public. The increase was mainly driven by higher wallet share among existing customers, consistent with its land-and-expand strategy. Regional revenue distribution remained stable: EMEA contributed 58% (+21%), North America 27% (+20%, impacted by U.S. tariff changes and a weaker dollar), Asia-Pacific 10% (+15% from growth in Japan and India), and Latin America 5% (+17%, its fastest since H1 2022, supported by wallet share gains in Brazil and Mexico and local product rollouts such as PIX).

• Adyen delivered strong profitability gains in H1 2025, with operating income rising 29% YoY to €483 million and operating margin improving from 41% to 44%, outpacing net revenue growth. Employee benefits, the largest expense, increased 8% to €376 million as the company added 223 hires (+8% YoY). Average monthly revenue per FTE dipped to €40k (from €42k in H2 2024) after a rebound last year, while average monthly cost per FTE has held steady at €12k for 18 months.

• Free cash flow rose 32% YoY to €475 million, with conversion improving to 87%. Adyen holds €12.5 billion in cash and equivalents, though this includes merchant funds, leaving €3.8 billion in net cash, up from €3.3 billion a year ago. With deposit rates at 2%, the large cash position raises questions about capital allocation, especially given Adyen’s asset-light model, preference for in-house development, and low likelihood of acquisitions. While management says the strong balance sheet supports long-term growth in financial products, there is a case for returning capital to shareholders via buybacks or dividends, which could offer higher returns than current interest income.

• Adyen tempered its 2025 outlook after lower-than-expected market volume growth in H1, now expecting full-year net revenue growth to match H1 levels on a constant currency basis rather than accelerate. Management noted a 2% Q2 drag from APAC merchants trading into the U.S., an effect likely to persist through H2. Despite this, Adyen reaffirmed its 2026 midterm guidance of low-to-high 20s growth, will maintain its hiring pace to support long-term expansion, and still targets an EBITDA margin above 50% in 2026, though 2025 margin gains will be more modest than in 2024.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Guidance

6. Conclusion

1. Financial Highlights

• Revenue: €1,093 million (+20% YoY)

• Operating Income: €483 million (+29% YoY)

• Net Income: €481 million (+17% YoY)

2. Wall Street Expectations

• Revenue: €1,105 million (miss by 1%)

• EBITDA: €547 million (miss by 1%)

3. Business Activity

Processed Volume

Adyen reported Processed Volume (PV) of €649 billion in H1 2025, up 5% YoY. Over the past four years, PV has compounded at a 32% CAGR.

Similar to H2 2024, growth was dampened by a single large-volume customer, believed to be Cash App, which had minimal impact on net revenue. Excluding this customer, PV growth was +23% YoY. While the actual reported results matter most, this is important context for future growth, since this effect will be lapped in coming periods.

Digital

PV for the Digital segment declined 9% YoY to €364 billion, primarily due to the same large-volume customer. Excluding this impact, Digital PV grew +18% YoY.

Management highlighted that growth was also affected by changes to U.S. tariffs, which weighed on online retail, particularly for large-volume merchants headquartered in APAC. However, momentum in the U.S. Digital customer base remained strong, especially in content, subscriptions, and on-demand verticals like delivery and mobility.

• U.S. debit volumes more than doubled YoY, supported by Intelligent Payment Routing (IPR) and direct connections to local debit networks. IPR reduced debit transaction costs by an average of 20% in H1 and improved authorization rates by +89 basis points.

• Adyen Uplift, the AI-driven optimization suite, is now fully embedded in Digital. Nearly all customers use its Optimize module, while 68% of enterprise merchants in the 2025 cohort adopted the Protect module from day one.

Digital is also becoming more diversified, with growth in sectors undergoing digital transformation such as insurance. Adyen now serves six of the world’s top ten P&C insurers and over 60 insurance customers globally, with new partnerships including Clearcover and Axa Partners. Clearcover, for example, saw authorisation rates rise +24% since partnering with Adyen.

Unified Commerce

Unified Commerce PV grew +35% YoY to €190 billion, making it Adyen’s fastest-growing segment. This reflects increasing demand for seamless cross-channel experiences as merchants replace legacy systems with modern infrastructure.

Adyen’s unified platform, actionable data, and scalable tools enable merchants to adapt quickly and expand confidently, even in uncertain macro conditions.

• Adyen now supports 591 Unified Commerce customers across multiple regions, up by 51 from H1 2024.

• 451 customers process at scale across channels (>€10 million on both POS and e-commerce, with >€50 million total volume over the past 12 months), up by 94 YoY.

• Active Unified Commerce terminals reached 402,000, an increase of 110,000 YoY.

Retail remains a key strength, with notable customers including Arhaus, Vans, North Face, and Kering. Momentum is also strong in hospitality, F&B, and entertainment, with recent partnerships including JOE & THE JUICE, HEYTEA, and ATG Entertainment.

Platforms

Platforms PV rose +20% YoY to €95 billion. Excluding eBay, PV growth was +59% YoY.

• 32 platform customers now process over €1 billion annually, up from 22 a year ago.

• Active business customers on Platforms grew to 193,000 from 104,000 in H1 2024.

• Transacting terminals increased to 255,000, up 89,000 YoY.

Platforms are expanding beyond payments, embedding financial products like issuing and working capital to deepen relationships and open new revenue streams. Adoption is particularly strong in issuing, with customer count nearly doubling YoY and processed volume surpassing €2 billion.

A standout case is Fresha, a global beauty and wellness platform. Fresha embedded payments into its platform, creating a new revenue stream and driving deeper engagement. Over 30,000 account holders now use its embedded payments (up 10% in six months), leading to a 12% increase in processed volume from €137 million in January 2025 to €153 million in June 2025. This represents just 23% of Fresha’s customer base, indicating significant runway. Fresha has also launched working capital via Adyen Capital, helping SMBs access financing and positioning itself as a financial partner.

On a personal note, the barbers I go to use Fresha, and I have been paying directly through the platform at checkout without taking out my card or phone. Only recently did I realise that Adyen powers it in the background.

Take Rate

Adyen’s take rate increased from 14.7 bps in H1 2024 to 16.8 bps in H1 2025, driven by a shift in merchant mix following reduced Cash App volumes, which carry a lower take rate.

Over the long term, the take rate is expected to gradually decline due to Adyen’s tiered pricing model, which captures more value through a land-and-expand approach rather than maximising rates upfront.

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4. Financial Analysis

Revenue

Net revenue reached €1,093 million, up 20% YoY (21% on a constant currency basis). This marks the slowest growth since Adyen became a publicly listed company. Growth was primarily driven by increased share of wallet with existing customers, in line with Adyen’s land-and-expand business model. Notably, net revenue includes €6 million of net interest income, up 136% YoY, mainly related to the Accounts product within the Financial Products suite. While not material today, this could become more significant over time.

Net revenue distribution by region remained stable YoY:

• EMEA: 58% (largest contributor, +21% YoY)

• North America: 27% (+20% YoY, moderated by U.S. tariff changes and a weaker dollar)

• Asia-Pacific: 10% (+15% YoY, driven by deeper relationships in Japan and India)

• Latin America: 5% (+17% YoY, fastest since H1 2022, supported by wallet share gains in Brazil and Mexico and local product investments such as PIX)

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Operating Margin

Operating income increased 29% YoY to €483 million, outpacing net revenue growth. Operating margin improved from 41% to 44%.

Employee benefits, the largest operating expense, rose 8% YoY to €376 million. Adyen added 223 net new hires in H1 (+8% YoY), accelerating from 4% in H2 2024. Management stated hiring remains closely aligned with strategic priorities, particularly financial products, tech, and commercial functions, and expects a similar hiring pace in H2 2025.

Rapid hiring in prior years pushed average monthly revenue per FTE to a record low in H1 2023, as new hires required time to ramp up. This metric rebounded in H2 2024 but declined again in H1 2025 to €40k (up from €36k in H1 2024). Average monthly cost per FTE, which had been rising due to higher North American talent costs, has held steady at €12k for the past 18 months.

EBITDA

EBITDA rose 28% YoY to €544 million. The EBITDA margin expanded from 46% to 50%, benefiting from operating leverage despite the faster hiring pace.

Net Income

Net income increased 17% YoY to €481 million. This was achieved despite a 22% YoY drop in finance income to €139 million, driven by a steady reduction in the ECB interest rate, which fell to 2% in June 2025 (from 3.75% in June 2024).

Cash Flow Analysis

Free cash flow (FCF) grew 32% YoY to €475 million, with FCF conversion improving to 87% from 85% a year earlier.

Capital expenditures (CapEx) totaled €47 million (4% of net revenue), consistent with Adyen’s long-term target of keeping CapEx at or below 5% of net revenue.

Adyen reported €12.5 billion in cash and cash equivalents, up €3.6 billion YoY. However, this includes merchant funds. On a net basis, Adyen holds €3.8 billion in cash (up from €3.3 billion YoY).

With deposit interest rates now at 2%, holding such a large cash balance is becoming a questionable capital allocation decision. Adyen’s asset-light model grows mainly through headcount investments, and acquisitions are unlikely given their preference for building a unified payments platform in-house. While management views the strong balance sheet as essential for scaling the financial products suite, I believe the company should now consider a buyback or dividend, both of which would likely generate better returns than 2%.

On the conference call, CFO Ethan Tandowsky reiterated management’s position:

“In terms of the cash position, I think what's really key for us is continuing to drive the growth that we expect over a number of years, as I mentioned earlier, I think the flexibility that the strength of our balance sheet brings is still the best use of cash to help drive that growth, and that's going to continue to be our focus.”

- Ethan Tandowsky, CFO

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5. Guidance

Following lower-than-expected market volume growth in the first half of 2025, Adyen now considers the previously anticipated slight acceleration in annual net revenue growth for 2025 unlikely. The company expects this trend of slower market volume growth to persist through the remainder of the year, with full-year net revenue growth projected to be broadly in line with H1 2025 on a constant currency basis.

On the conference call, management disclosed that the APAC merchants trading into the U.S. subset of customers reduced growth by approximately 2% in Q2 compared with what it would have been otherwise. This impact, concentrated in the latter part of the half, is expected to continue through H2 2025.

Adyen reiterated its midterm guidance for 2026, pointing to low-to-high 20s growth. It also plans to maintain its hiring pace in H2 2025 at similar levels to H1, signaling sustained investment in its team. This deliberate hiring aligns with expectations for EBITDA margin expansion in 2025, albeit at a more moderate pace than in 2024. The long-term objective remains an EBITDA margin above 50% in 2026, leveraging the operating efficiency built into the business model.

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6. Conclusion

This was a rather underwhelming report from Adyen. While the minor miss on revenue and EBITDA versus market expectations was, in my view, irrelevant, the lowered guidance for the remainder of the year clearly disappointed investors.

Adyen had anticipated a slight acceleration in annual net revenue growth for 2025, assuming stable market volume growth. However, weaker-than-expected market volume growth in H1 has made this acceleration unlikely. The consolation is that the drivers behind this guidance change were external factors, namely macroeconomic volatility, U.S. tariffs, and currency headwinds.

Cash App also added noise this quarter. PV growth appeared weak, but the revenue impact was more about a low take rate, and management’s focus remains firmly on net revenue.

There were positives. The fundamentals remain strong, with Adyen continuing to increase share of wallet with existing customers, and the 2025 cohort tracking well ahead of prior years. The accelerated hiring pace suggests confidence in the company’s future prospects.

The value proposition to merchants was also reinforced through case studies:

• Nord Security: 10% increase in conversion, 41% drop in fraud rates, and 35% reduction in manual risk rules via Adyen Uplift.

The market reaction was, frankly, puzzling. Algorithmic trading seems to have driven knee-jerk selling before the data was fully digested. The initial sell-off was likely due to lowered short-term guidance, while the recovery followed management’s quantification of the APAC tariff impact and reaffirmation of medium-term guidance.

Coming into this report, I felt Adyen was somewhat overvalued, having last valued it around €1,350 in my Adyen: 2025 Financial Model and Valuation Update analysis a couple of months ago, versus the then-price of about €1,450. Initially, the stock dropped 20% to €1,175 before rebounding 17% to €1,390. Given the reduced 2025 guidance, the stock now trades at or just above fair value.

When a stock carries a premium valuation ahead of earnings, any lowering of guidance almost inevitably leads to multiple compression. That said, I do not believe this update undermines the long-term investment thesis.

Rating: 2 out of 5. Below expectations.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• E-commerce delivered a record-breaking quarter, with GMV reaching $29.8 billion (up 28% YoY) and gross orders exceeding 3.3 billion (up 29% YoY), marking the fastest growth since Q2 2024. The implied take rate rose to 11.1%, driven by improved monetisation, particularly in advertising, where the ad take rate climbed nearly 70 bps YoY as more sellers adopted ad products and increased spending. Technological upgrades, including improved traffic allocation and seller tools like “GMV Max,” lifted purchase conversion rates by 8%, with long-term potential for the ad take rate to double. Shopee also strengthened its logistics capabilities, cutting delivery times and costs in Asia and Brazil.

• Digital Financial Services saw its loan book grow over 90% YoY to $6.9 billion, supported by rapid customer acquisition as active users passed 30 million (up more than 45% YoY). The 90-day NPL ratio improved slightly to 1.0%, underscoring strong asset quality despite aggressive expansion. Growth is being driven by deeper integration with Shopee, a large and maturing user base, and AI-driven credit models. Malaysia became Monee’s third market to exceed $1 billion in loans, while in Brazil, strong uptake of SPayLater and personal loans doubled both the borrower base and outstanding loans.

• Digital Entertainment recorded a 3% YoY increase in quarterly active users to 665 million, the highest level since Q3 2021. The paying user ratio climbed from 8.1% to 9.3%, lifting quarterly paying users 18% to 62 million. This marks six consecutive quarters of growth above 18% following a two-year decline. Free Fire remains the flagship title, maintaining over 100 million average daily active users after eight years, while other titles such as Arena of Valor, EA Sports FC Online, and Call of Duty: Mobile achieved double-digit growth. This pushed bookings up 23% to $661.3 million, and ARPPU to $0.99 from $0.83 a year ago.

• Total revenue accelerated 38% YoY to $5.26 billion, the fastest pace in over three years. Growth was driven by e-commerce (+34%), digital financial services (+70%), and digital entertainment (+28%). Gross margin improved to 46% from 42% a year earlier, with e-commerce margins rising 400 bps to 36%, reflecting Shopee’s pricing power and competitive moat. The growing share of high-margin digital financial services could push overall company margins above 50% in the coming years.

• Sea posted record operating income of $488 million, with its operating margin rising to 9% from 2% a year earlier. Revenue growth of 38% outpaced a 28% rise in operating expenses, highlighting strong operating leverage. Sales and Marketing expenses increased 30% in absolute terms but fell to 19% of revenue from 20% a year ago. Notably, an additional $80 million in spending generated $418 million in extra revenue, underscoring improved efficiency.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. E-Commerce

4. Digital Financial Services

5. Digital Entertainment

6. Financial Analysis

7. Guidance

8. Conclusion

1. Financial Highlights

• Revenue: $5.30 billion (+38% YoY)

  • E-commerce: $3.31 billion (+34% YoY)

  • Digital Financial Services: $883 million (+70% YoY)

  • Digital Entertainment: $559 million (+2% YoY)

  • Other: $45 million (+52% YoY)

  • Sale of Goods: $461 million (+34% YoY)

• Operating Income: $488 million (+488% YoY)

• Net Income: $414 million (+418% YoY)

• Adjusted EBITDA: $829 million (+85% YoY)

2. Wall Street Expectations

• Revenue: $4.97 billion (beat by 7%)

• Earnings per Share: $0.73 (miss by 11%)

3. E-Commerce

Shopee delivered a record-breaking quarter with Gross Merchandise Volume (GMV) reaching $29.8 billion, up 28% YoY, the fastest growth rate since Q2 2024. Gross orders exceeded 3.3 billion, up 29% YoY. The platform saw a sustained increase in active buyers and purchase frequency, reinforcing its leadership across all markets and driving improved profitability YoY in Asia and Brazil.

With GMV at $29.8 billion and marketplace revenue of $3.3 billion, the implied take rate was 11.1%, up from 10.7% in Q2 2024, marking a notable improvement amid rapid GMV and order growth. How did Shopee achieve this?

Improved Monetisation
Growth in advertising revenue was the primary driver, with the ad take rate improving by nearly 70 basis points YoY. The number of sellers using ad products rose by around 20%, while ad-paying sellers increased their average quarterly spend by more than 40% YoY. Technological enhancements, such as better traffic allocation algorithms and seller tools like “GMV Max,” lifted purchase conversion rates by 8%. The current ad take rate is about 2%, with significant potential to reach 4% to 5% in the medium to long term as new AI technologies are rolled out.

Logistics and Cost Leadership
Logistics cost and delivery speed improved YoY across Asia and Brazil. In Brazil, delivery speeds are now two days faster than last year and logistics costs are believed to be well below competitors’. Shopee piloted “instant delivery” in Indonesia, enabling delivery in as little as four hours, and has expanded it to Vietnam and Thailand.

Shopee reinforced its price-competitive value proposition with the “Cheaper, Faster at Shopee” campaign. Buyers ranked Shopee as the most price-competitive e-commerce platform in Qualtrics surveys across Asia and Brazil.

VIP Membership Program
In Indonesia, VIP GMV grew nearly 50% QoQ, and monthly purchases rose by around 30% after subscribing. Retention rates were about 20% higher for VIP members. The program has expanded to Thailand and Vietnam, reaching 2 million subscribers by June. Initial investment requirements are not expected to materially affect the cost structure in the medium to long term.

Content Ecosystem and Live Streaming
Shopee’s content ecosystem remains a strong engagement driver. AI tools help sellers create quality video content without large studio setups. In Southeast Asia, over 20% of physical goods orders in Q2 came from live-streaming and short-form videos. Collaboration with YouTube remains strong, with more than 7 million videos featuring Shopee product links by June, up over 60% QoQ.

Brazil
Brazil remains a key growth driver, with monthly active buyers up more than 30% YoY. Logistics costs per order fell 16%, and delivery times dropped by over two days YoY. In São Paulo, one in four parcels arrived next day, and 40% within two days, up sharply from a year ago. Over 100 well-known brands joined the platform, boosting average basket sizes. Despite MercadoLibre’s strong quarter, Shopee’s performance shows both platforms are thriving, with smaller competitors losing share.

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4. Digital Financial Services

Monee’s loan book grew over 90% YoY to $6.9 billion ($5.9 billion on-book, $0.9 billion off-book). The company added 4 million first-time borrowers in Q2, taking active users past 30 million, up more than 45% YoY.

The 90-day NPL ratio improved slightly to 1.0%, maintaining high asset quality despite rapid expansion. Key growth drivers include deep integration with Shopee, a large user base with improving credit histories, and AI-enhanced credit models.

Malaysia became Monee’s third market to surpass $1 billion in loans after Indonesia and Thailand. In Brazil, strong adoption of SPayLater and personal cash loans doubled the active borrower base and outstanding loans YoY. The business secured an SE license and initial SCI FI license approval in Brazil, improving future funding options.

Monee’s two-pillar strategy is:

• On-Shopee SPayLater loans: Entry-level credit with GMV penetration in the mid-teens. Initiatives like one-month interest-free options, tier-based pricing for prime users, and higher credit limits drove record new borrowers in June.

• Off-Shopee loans: Larger, longer-tenure loans for users with established credit histories. In Malaysia, this portfolio grew over 40% QoQ and now accounts for more than 20% of the market’s SPayLater portfolio, helped by integration with the DuitNow QR network. A similar setup was launched in Thailand with PromptPay.

Personal cash loans nearly doubled YoY by targeting reliable SPayLater customers. With penetration still relatively low, both SPayLater and personal loans have significant growth runway.

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5. Digital Entertainment

Quarterly active users reached 665 million, up 3% YoY, the highest since Q3 2021. The paying user ratio rose from 8.1% to 9.3%, lifting quarterly paying users by 18% to 62 million. After eight quarters of YoY declines, QPUs have now grown by 18%+ for six consecutive quarters.

Free Fire remains the anchor, sustaining over 100 million average daily active users after eight years. Titles including Arena of Valor, EA Sports FC Online, and Call of Duty: Mobile delivered double-digit growth, driving bookings up 23% YoY to $661.3 million and ARPPU to $0.99 (from $0.83 in Q2 2024).

Free Fire’s 8th anniversary featured the launch of the Solara map during the World Series. The first new map in three years, Solara blends nostalgia (return of the iconic train) with innovation (full-map slide rail). It quickly became the best-performing new map, and a new camera mode quadrupled daily gameplay shares within a month.

Management sees AI as a major growth enabler:

• Development: AI accelerates content creation with quality art assets at scale.

• Engagement: AI game agents support solo players, improving retention.

• Generative content: Early experiments aim to let players create in-game assets for a more immersive experience, with focus on scalability and quality.

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6. Financial Analysis

Revenue

Total revenue growth accelerated in Q2, increasing 38% YoY to $5.26 billion, the fastest growth since Q1 2022 (thirteen quarters ago). This was driven primarily by GMV growth in the e-commerce business and continued expansion in digital financial services.

• E-commerce revenue grew 34% to $3.8 billion, supported by GMV growth and improved monetisation, largely due to strong advertising revenue gains.

• Digital Financial Services revenue jumped 70% YoY to $883 million, driven by credit business expansion and higher lending activity.

• Digital Entertainment revenue rose 28% to $559 million, benefiting from a larger active user base and deeper paying user penetration.

Gross Margin

Sea reported a very healthy 46% gross margin for the second consecutive quarter, up from 42% in the prior year.

The digital entertainment division, which historically enjoyed margins above 70%, had been shrinking for several years but held firm at 11% of total revenue this quarter. The standout change came from Digital Financial Services, which rose from 14% to 17%.

Since the business mix remained relatively stable YoY, the overall gross margin improvement was driven by gains across all segments. Most notably, the e-commerce division’s margin rose by 400 basis points, from 32% to 36%, likely reflecting adjustments in pricing structures and merchant fees. Since early 2024, Shopee has raised seller fees, yet GMV growth continued accelerating through 2025, clear evidence of Shopee’s value proposition, pricing power, and economic moat in action.

Of particular note is the Digital Financial Services segment, whose gross margin improved from 85% to 87%. Until the end of 2024, Sea combined this segment’s results with e-commerce, so this standalone disclosure is a positive development that gives investors insight into the future. Given its sky-high gross margins and status as the fastest-growing business area, Digital Financial Services is set to contribute an even greater share of revenue, suggesting overall gross margin will continue to improve. I expect Sea’s overall gross margin to exceed 50% in the coming years.

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Operating Margin

Sea delivered record quarterly operating income of $488 million, with the operating margin improving to 9% from 2% a year earlier.

Operating expenses rose 28% YoY to $1.92 billion, well below the 38% revenue growth, a textbook example of operating leverage in action. The largest component, Sales & Marketing (S&M) expenses, increased 30% in absolute terms but grew at a slower rate than revenue, indicating improved efficiency. As a percentage of revenue, S&M expenses declined from 20% in Q2 2024 to about 19% in Q2 2025.

Sea’s targeted and efficient marketing efforts, especially within e-commerce, are becoming more effective at generating revenue per advertising dollar spent. On a sequential basis, Sea invested an additional $80 million in S&M, resulting in $418 million in incremental revenue.

The rise in operating expenses was also driven by:

• Provision for credit losses: Up 93% YoY to $324 million, reflecting a 94% expansion in Monee’s loan book.

• General & Administrative: Up 6% YoY to $323 million.

• Research & Development: Flat YoY at $297 million.

Cash Flow Analysis

Sea generated $2.4 billion in operating cash flow (OCF) in H1 2025, more than doubling from $1.1 billion YoY. However, OCF is increasingly distorted by rapid credit business growth, so Adjusted EBITDA is a better profitability proxy:

• Digital Entertainment: $368 million in OCF despite comprising only 11% of revenue, annualising at nearly $1.5 billion. This implies an OCF margin of 66%.

• Digital Financial Services: Contributed 31% of total OCF while representing only 17% of total revenue. The implied OCF margin here is already 29%.

• E-commerce: Breakeven OCF for the fourth straight quarter, with a 7% margin and improving trend.

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7. Guidance

Management does not issue formal guidance but shared the following expectations:

• E-commerce: Q3 GMV growth of 25%, in line with H1 2025 and above prior guidance of ~20%.

• Digital Financial Services: Loan book growth expected to outpace Shopee’s GMV growth rate.

• Digital Entertainment: Full-year bookings growth raised to over 30% YoY.

Wall Street 2025 estimates:

• Revenue: $21.42 billion (+27% YoY)

• Adjusted EPS: $3.82 (+167% YoY)

Given the Q2 beat, analysts are likely to revise estimates upward, continuing the trend of the past 18 months.

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8. Conclusion

This was another superb quarter for Sea, something investors have become accustomed to over the past eighteen months. The company delivered strong, healthy, and profitable growth across all three of its core businesses. These results highlight what I call the holy grail of growth investing: accelerating revenue growth combined with operating leverage. After many years of burning cash, Sea has reached a stage where it can pursue growth opportunities while improving profitability. At the same time, growth is accelerating rather than slowing, as management raised guidance for all three of its core segments.

I added to my position last month, and despite the market’s 20% pop yesterday on earnings, the stock remains attractive given its growing market share, steadily improving margins and long runway for growth.

Rating: 4 out of 5. Exceeds expectations.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• MAPCs rose 15% YoY to a record 180 million, the fastest growth since early 2024, driven by 10 million new customers. Trip volumes increased 18% for the third straight quarter to 3.3 billion, averaging 36 million trips per day, while higher engagement lifted trips per customer to a record 6.1 per month. Uber One membership surged 60% to 36 million (now 20% of the customer base), supported by geographic expansion and new benefits. Gross Bookings accelerated 17% to $46.8 billion.

• Revenue grew 18% YoY to $12.7 billion, accelerating from 14% in Q1 2025, with constant currency growth matching this pace. Mobility revenue reached $7.3 billion, up 19% (18% constant currency), driven by record engagement and slower price growth as insurance costs eased. Delivery revenue grew 25% (23% constant currency) to $4.1 billion, its fastest pace since Q2 2022, fueled by higher membership adoption and robust G&R services growth.

• Operating margin rose to 11% from 7% a year ago, with operating income hitting a record $1.5 billion. Sales and Marketing, the company’s largest operating expense, has dropped from nearly 40% of revenue at its peak to just 9–10% for the past two years, reflecting greater efficiency in customer acquisition. An additional $95 million in S&M spend generated $2 billion in incremental revenue (a 20x return), aided by cross-platform engagement, where customers using both Mobility and Delivery show 35% higher retention and triple the gross bookings and profits of single-service users.

• Cash generation was strong, with operating cash flow up 41% to $2.6 billion and free cash flow up 44% to $2.5 billion, driving a record $8.5 billion in trailing twelve-month FCF. Uber’s asset-light model, low CapEx, and disciplined capital allocation, including a new $20 billion buyback program and a goal to reduce share count, have transformed its FCF margin from -10% to +20% in just four years.

• While autonomous vehicles remain seen as the company’s largest existential risk, Uber is actively leading commercialisation through partnerships with 20 AV companies and expanding high-performing deployments such as Waymo. Its unmatched ride-hail dataset positions it as a key player in real-world AI, with plans for multiple AV business models, from merchant and agency structures to outright ownership.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Guidance

6. Conclusion

1. Financial Highlights

• Revenue: $12.65 billion (+18% YoY)

  • Mobility: $7.29 billion (+19% YoY)

  • Delivery: $4.10 billion (+25% YoY)

  • Freight: $1.26 billion (-1% YoY)

• Operating Income: $1.45 billion (+82% YoY)

• Net Income: $1.36 billion (+33% YoY)

• Adjusted EBITDA: $2.11 billion (+35% YoY)

2. Wall Street Expectations

• Revenue: $12.47 billion (beat by 1%)

• EPS: $0.62 (beat by 2%)

3. Business Activity

Monthly Active Paying Customers (MAPCs)

MAPCs grew 15% YoY to a record 180 million, the fastest growth rate since Q1 2024. Ten million new MAPCs joined during the quarter, driving growth acceleration.

Trips

Trip volume rose 18% YoY for the third consecutive quarter, reaching 3.3 billion. Uber averaged 36 million trips per day.

Frequency

Trips grew faster than MAPCs, leading to a 2% YoY increase in trips per MAPC to 6.1 per month, a new high.

Membership

The Uber One program grew 60% YoY to 36 million members, now 20% of MAPCs (up from 18% at the end of 2024). Growth potential remains large, supported by geographic expansion and new benefits. In Q2, Uber One launched in Argentina and extended Mobility benefits to seven more countries.

Post-quarter, Uber introduced surge savings in the US to improve affordability during peak demand, added micromobility perks (10% credit back on Lime trips and free unlocks), and continued building high-value benefits for members.

Uber’s platform strategy focuses on acquiring new users, converting them into cross-platform customers, and deepening engagement. Cross-platform users produce more than 40% of combined Delivery and Mobility Gross Bookings.

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Gross Bookings

Gross Bookings accelerated 17% YoY to $46.8 billion (+18% constant currency), with balanced growth across Mobility and Delivery.

Mobility Segment

• Gross Bookings: $23.8 billion (+16% YoY, +18% constant currency)

• Take Rate: Above 30% for six straight quarters

Growth was driven by record engagement and easing price pressures from lower insurance costs, which Uber passed on to customers, boosting re-engagement, especially in the US. US Mobility trip growth is expected to accelerate in Q3.

The Mobility strategy uses a barbell approach:

• Affordability: Expanding low-cost modes (two- and three-wheelers, Wait & Save, shared rides) and keeping UberX prices stable through subscription products like Price Lock Pass. Moto bookings now exceed $1.5 billion annually with 40%+ trip growth.

• Premium: Comfort, SUV, and Black exceeded $10 billion in annualized Gross Bookings with 35%+ trip growth. Reserve and corporate travel grew nearly 60% and 30%, respectively. Uber is also targeting seniors through simplified accounts and expanding in underpenetrated regions like Europe and the Middle East, where trip growth is near 30%.

Delivery Segment

• Gross Bookings: $21.7 billion (+20% YoY)

• Take Rate: 19% for the past four quarters

Delivery exceeded expectations, fueled by Uber One adoption and gains in Grocery & Retail (G&R). Selection growth was the fastest in nearly three years, led by the US, Canada, Taiwan, and Japan. Notable US additions included Family Dollar, Five Below, DICK'S Sporting Goods, At Home, and Pet Food Express. Partnerships expanded with Costco (LatAm and APAC), Sobey's (Canada), and Oxxo (Mexico).

Uber holds a top-two position in most of its 30+ countries, with significant upside in user frequency and restaurant delivery penetration. The Uber app drives 30% of first-time Delivery customers and $10 billion in annualized Delivery Gross Bookings. However, around 30% of eligible Mobility riders have never tried Delivery, and 75% have not tried G&R. Uber is also cross-promoting Mobility through the Eats app in Delivery-heavy markets.

Freight Segment

Freight accounts for under 3% of Gross Bookings and has plateaued in recent quarters, with minimal impact on overall results.

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4. Financial Analysis

Revenue

Revenue grew 18% YoY to $12.7 billion, accelerating from 14% in Q1 2025. Growth was also 18% on a constant currency basis.

The revenue mix differs from the gross bookings mix due to varying take rates. While Delivery accounted for 47% of gross bookings, it represented only 32% of revenue.

Mobility revenue increased to $7.3 billion, up 19% YoY (18% constant currency), driven by record consumer engagement and slower price growth, aided by moderating insurance pressures.

Delivery revenue grew 25% YoY (23% constant currency) to $4.1 billion. This was the fastest growth rate since Q2 2022, supported by increased membership adoption and strong G&R services growth.

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Operating Margin

Uber’s financial transformation continued, with an operating margin of 11%, up from 7% in Q2 2024. Operating income reached a record $1.5 billion, nearly double the prior year.

Sales & Marketing (S&M) remains Uber’s largest operating expense. It includes customer promotions but excludes driver incentives, which are recorded as cost of revenue.

At its peak, Uber spent nearly 40% of revenue on S&M, contributing to high cash burn. This has improved significantly, with S&M now between 9% and 10% of revenue for the past two years.

In Q2 2025, an incremental $95 million in S&M spending generated $2 billion in additional revenue, a 20x return on investment. This demonstrates the operating leverage Uber now enjoys, acquiring customers more cheaply by leveraging its platform and driving cross-platform engagement.

Consumers using both Mobility and Delivery are far more valuable, with 35% higher retention and 3x the gross bookings and profits compared to single-service users. This allows Uber to outspend competitors to acquire high-value customers, making acquisition more efficient.

Net Margin

Uber reported net income of $1.4 billion, up from $1.0 billion in Q2 2024. Net margin improved from 10% to 11% YoY. Results included a $17 million pre-tax headwind from equity investment revaluations, compared to a $333 million benefit in Q2 2024.

Cash Flow Analysis

Operating Cash Flow rose 41% to $2.6 billion. Free Cash Flow (FCF) grew 44% to $2.5 billion, with trailing twelve-month FCF hitting a record $8.5 billion, up 80% YoY.

Uber’s asset-light model keeps CapEx low. Despite being one of the largest transportation companies globally, it owns no vehicles. This has driven FCF margin from -10% to +20% in just four years.

Uber holds $6.4 billion in cash and announced a $20 billion share repurchase program. Management maintains a balanced capital allocation approach, reinvesting in growth, making selective acquisitions, maintaining liquidity, and returning excess cash to shareholders. Historically, around 50% of FCF has been allocated to buybacks.

The key difference between FCF margin and operating margin is share-based compensation (SBC). In Q2 2025, SBC was $475 million, up 4% YoY but now appearing to have stabilised. Uber has committed to reducing its share count, already down 1% this quarter.

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5. Guidance

For Q3 2025, management expects:

• Global trip growth to remain near 19%, with similar pricing trends to Q2. In the U.S., Mobility trip growth should accelerate due to affordability initiatives.

• Gross Bookings growth of 17% to 21% constant currency (between $48.25B and $49.75B). Excluding the Trendyol Go acquisition, growth would be 16% to 20%.

• Adjusted EBITDA of $2.19B to $2.29B, representing 30% to 36% YoY growth.

This remains well within Uber’s 3-year outlook issued in February 2024.

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6. Conclusion

Uber delivered another exceptional quarter with highly profitable growth, driven by record platform audience and frequency. My biggest takeaway is the strength of Uber’s platform strategy for customer acquisition and engagement:

• Cross-platform engagement is a major advantage. Consumers who use both Mobility and Delivery services have retention rates more than 35% higher and generate 3x the gross bookings and profits compared to single-service users.

• The Uber (rides) and Uber Eats apps function as essentially free acquisition channels. For example, the Eats view within the Uber app generated $10 billion, or 12% of annualised Delivery Gross Bookings, and acquired roughly 30% of first-time Delivery customers.

• The Uber One membership program continues rapid growth, with over 36 million members. Members spend 3x more and generate over 40% of combined Delivery and Mobility Gross Bookings.

• Uber is also deploying larger, more sophisticated AI models to drive personalised, targeted cross-platform promotions, such as suggesting coffee on the way to work, which improves efficiency and engagement.

The market still views autonomous vehicles (AVs) as Uber’s biggest existential risk. Yet Uber is actively leading AV commercialisation, now partnering with 20 AV companies across Mobility, Delivery, and Freight. New collaborations with Baidu, Lucid, and Nuro were announced this quarter, while Waymo deployments in Austin and Atlanta are outperforming 99% of drivers in daily trip counts. Uber plans to expand OEM partnerships, recognising that while AV software advances quickly, hardware platforms must be built at scale and at lower cost.

Uber positions itself as central to the real-world AI revolution thanks to its unmatched ride-hail dataset, billions of trips across 70 countries, critical for training advanced AV systems. The company is exploring ways to externalise these technical capabilities to help partners.

Uber anticipates three main AV business models on its platform:

• Merchant model: Uber pays a predictable fee per trip or day to a partner, taking on monetisation risk.

• Agency model: Revenue share, similar to the current driver-partner structure.

• Ownership model: Uber or a financing partner owns the vehicles and licenses the software, either monthly or per mile.

In my opinion, CEO Dara Khosrowshahi ranks among the best non-founder CEOs in the public markets. He has delivered strong operating leverage and revenue growth while pursuing bold long-term strategies, including maximising the platform’s potential and leading AV commercialisation. I believe AV adoption will lead to a fragmented market, yet Uber’s distribution network and platform infrastructure remain under-appreciated.

Rating: 4 out of 5. Exceeds expectations.

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Happy investing

Wolf of Harcourt Street

Contact me

Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• MercadoLibre’s GMV reached $15.3 billion, up 21% YoY and 37% on an FX-neutral basis, marking the second consecutive quarter of growth acceleration and the fastest pace since Q3 2023. Unique buyers grew 25% to 71 million, the highest growth rate since Q1 2021. In Brazil, expanded free shipping eligibility drove higher engagement and a 26% increase in items sold.

• Mercado Pago’s ecosystem continues to scale rapidly, with monthly active users up 30% YoY to 68 million. Assets under management more than doubled YoY to $13.8 billion, representing the platform’s largest sequential increase to date. Acquiring TPV rose 31% YoY to $44.4 billion, with share gains across all major markets.

• Mercado Crédito’s portfolio grew 91% YoY to $9.3 billion, marking its fastest revenue growth since Q3 2022 and the third consecutive quarter of acceleration. The portfolio has more than tripled since Q3 2022, when it stood at $2.8 billion. Credit cards were a key driver, up 118% YoY to $4.0 billion and now comprising 43% of the credit book, up from 37% a year ago. Asset quality continues to strengthen, with a shift toward lower-risk products. The 15–90 day NPL ratio improved to 6.7%, and provision coverage remained steady at 105%.

• MELI reported net revenue of $6.79 billion, up 34% YoY. Commerce revenue grew 29% YoY to $3.8 billion, supported by a higher 3P take rate of 21.3%. Fintech revenue increased 40% YoY to $3.0 billion, driven by growing credit penetration, although the overall take rate held steady due to a lower mix of financing fees relative to TPV. Gross margin declined 105 basis points to 45.6%, primarily due to strategic investments such as expanded free shipping in Brazil, reduced shipping charges on mid-priced items, and a greater mix of lower-margin 1P sales.

• MELI delivered record operating income of $825 million, though the operating margin declined 210 basis points YoY to 12.2%. This margin compression was driven by several factors, including higher sales and marketing spend linked to high-profile campaigns with Neymar and Ronaldo in Brazil, and a rise in provisions for doubtful accounts, reflecting upfront provisioning needs in the fast-growing credit business.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. MercadoLibre Marketplace

4. Mercado Pago

5. Mercado Crédito

6. Financial Analysis

7. Conclusion

1. Financial Highlights

• Revenue: $6.79 billion (+34% YoY)

• Operating Income: $825 million (+14% YoY)

• Net Income: $523 million (-2% YoY)

2. Wall Street Expectations

• Revenue: $6.66 billion (beat by 2%)

• EPS: $11.89 (miss by 13%)

3. MercadoLibre Marketplace

MercadoLibre (MELI) reported Gross Merchandise Volume (GMV) of $15.3 billion, up 21% YoY, marking the second consecutive quarter of growth acceleration and the fastest growth rate since Q3 2023. On an FX-neutral basis, underlying GMV growth reached 37%.

Growth was driven by logistics scale, platform enhancements, AI-powered search, and value-added services like instalments and MELI+.

• Brazil: MELI expanded its free shipping offer to include millions of items priced from R$19 (previously R$79), boosting engagement and attracting new buyers. These changes, combined with AI-powered search, drove 26% YoY growth in items sold, with June growth accelerating to 34%. FX-neutral GMV rose 29%, maintaining eight straight quarters of ~30% growth despite tougher comps. Its logistics advantage, built on a managed network (since 2017) and more than 30 fulfilment centres, enabled 57% of regional shipments, supporting demand for both fast (paid) and slower (free) delivery options.

• Argentina: Buyer growth exceeded 30% for the second quarter in a row, with items sold up 46% and FX-neutral GMV up 75%, aided by premium financing options, rising fulfilment penetration, and record same-day delivery performance.

  Mexico: Items sold rose 36% YoY, the strongest growth in two years, driving GMV up 32%. New facilities expanded logistics capacity, pushed fulfillment penetration above 75%, and enabled faster delivery. Improved pricing, financing, and assortment reversed prior weakness in consumer electronics and led to a rebound in first-party (1P) sales.

Unique buyers accelerated to 25% YoY growth, reaching 71 million, the fastest rate since Q1 2021. MELI’s value proposition is resonating more clearly as it brings offline retail online and deepens engagement with its existing base.

MELI's 1P business surpassed $1 billion in GMV for the first time, growing 103% YoY FX-neutral, demonstrating the strategic role of 1P in closing assortment and pricing gaps, especially in underpenetrated categories like consumer electronics.

The company also integrated with Google Ad Manager and AdMob in April, expanding ad reach beyond its ecosystem while leveraging first-party data and campaign attribution to enhance full-funnel performance. Advertising revenue rose 38% YoY (59% FX-neutral), led by strong search growth and nearly doubled Display & Video revenue across markets, narrowing regional gaps.

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4. Mercado Pago

Monthly active users (MAU) grew 30% YoY to 68 million. MELI’s Fintech Services continue to gain traction, underpinned by years of focus on user experience and satisfaction, reflected in leading net promoter scores across Brazil, Mexico, Argentina, and Chile.

Mercado Pago launched broad marketing campaigns to promote its yielding accounts and savings products. These offerings, which often outperform traditional deposit rates, have proven effective for user acquisition and engagement, akin to the role free shipping plays in e-commerce. This strategy has helped:

• Build the largest retail money market fund in Argentina

• Draw capital from Brazil’s large “poupança” market

• Accelerate digital payments adoption in Mexico

As a result, assets under management (AUM) posted their largest-ever sequential increase and more than doubled YoY to $13.8 billion.

Acquiring total payment volume (TPV) rose 31% YoY to $44.4 billion (35% FX-neutral), with share gains across all key geographies.

Growth was driven by large merchant solutions, particularly in Argentina, where MELI’s move upmarket outpaced inflation. In Chile, the shift from Redelcom to Mercado Pago devices improved processing speeds and growth. Brazil's Instore segment achieved its fastest TPV growth since Q1 2023, driven by a focus on higher-quality volume. In Mexico, new features like bill payments and dynamic currency conversion supported store traffic and monetisation.

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5. Mercado Crédito

Mercado Crédito grew 91% YoY to $9.3 billion, marking the third straight quarter of accelerating revenue growth and the fastest pace since Q3 2022. For context, the portfolio grew 146% to $2.8 billion in Q3 2022, meaning it has more than tripled in less than three years.

The credit card portfolio stood out, up 118% YoY to $4.0 billion, now accounting for 43% of Mercado Pago’s $9.3 billion credit book (up from 37% a year ago). Brazil led growth across credit card, consumer, and merchant segments, while Mexico posted its largest ever quarterly increase in both consumer and credit card portfolios.

Spreads remained healthy with NIMAL stable at 23%. Profitability continues to improve, particularly in Brazil, where the entire 2023 cohort is now NIMAL positive, consistent with past cohorts that reached this milestone within two years. These profitable cohorts now represent 51% of the Brazilian credit card portfolio, with the larger 2024 cohort also tracking positively.

Asset quality is strengthening as the portfolio expands and shifts toward lower-risk products. The 15–90 day NPL improved both QoQ and YoY to a low of 6.7%, while provision coverage remained stable YoY at 105%.

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6. Financial Analysis

Revenue

Net revenue reached $6.79 billion, marking a 34% YoY increase on a reported basis, maintaining strong momentum. On an FX-neutral basis, revenue grew 53% YoY despite lapping shipping reporting updates, incremental investments in free shipping, and reduced shipping charges for sellers.

Commerce revenue grew 29% YoY (or 45% FX-neutral) to $3.8 billion, as the 3P take rate rose to 21.3%. Flat fees, advertising, and loyalty programs helped offset lower shipping revenue as a percentage of GMV.

Fintech revenue reached $3.0 billion, up 40% YoY (63% FX-neutral). The take rate remained broadly flat YoY, with higher credit penetration offset by lower financing fees as a percentage of TPV.

Gross Margin

The reported gross profit margin declined by 105 basis points (1.05%), falling to 45.6% from 46.6% YoY, driven by several strategic investments and business shifts:

• Increased Free Shipping: MELI expanded its free shipping offer in Brazil, lowering the threshold from BRL 79 to BRL 19 for millions of items. This "forgone revenue" reduces operating income and margin but is seen as a long-term investment to drive engagement and frequency.

• Reduced Seller Fees: MELI also cut shipping charges for sellers in Brazil on items priced between BRL 79 and BRL 200. This eliminated a “cliff edge” in the take rate, encouraging lower prices and greater selection. Most of this reduction was passed through to consumers.

• Negative Mix Impact from 1P Business: MELI’s 1P business, where it sells its own inventory, surpassed $1 billion in quarterly GMV for the first time, growing 103% YoY FX-neutral. While strategic for assortment and competitiveness, lower-margin 1P sales diluted the gross margin.

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Operating Margin

Operating income hit a new record of $825 million, yet the operating margin declined by 210 basis points to 12.2% from 14.3% YoY.

Key drivers of margin compression:

• -1.0 percentage point Higher COGS: Due to the free shipping and 1P mix shift.

• -0.8 percentage point Higher Sales & Marketing Expenses: Campaigns across key markets, including celebrity promotions with Neymar and Ronaldo in Brazil, were effective in driving user growth and AUM but pressured short-term margins.

• -1.3 percentage point Higher Provisions for Doubtful Accounts: The faster-growing credit business required higher provisions, which are recognized upfront while revenue accrues over time. This creates a temporary mismatch.

Offsetting these pressures, MELI reduced G&A expenses (0.4% margin improvement) and product development costs (0.7% margin improvement).

Net Margin

The net margin declined 280 basis points, falling to 7.7% from 10.5% YoY.

Key drivers of contraction:

• +2.1 percentage points: Combined effect of higher COGS and operating expenses.

• +0.7 percentage points Higher FX Losses: Net FX losses doubled YoY to $117 million, driven by April’s Argentine Peso devaluation. This impact was magnified by MELI’s larger net asset position in Argentina.

• +0.1 percentage point Normalised Tax Rate: The effective tax rate increased as prior deductions related to inflation adjustments in Argentina normalised.

Cash Flow Analysis

MELI reported $454 million in adjusted free cash flow, shaped by:

• Net Investment in Fintech Funding: A substantial $816 million was deployed to expand Mercado Pago’s credit portfolio. This lowered the proportion of receivables discounted and increased leverage.

• Capital Expenditures (Capex): Capex totaled $287 million in Q2 2025.

Despite these investments, MELI optimized funding by using lower-cost alternatives and discounting fewer receivables in Brazil. This prudent approach led to a credit rating upgrade to investment grade (BBB-) by S&P in July, following Fitch’s similar upgrade last year.

MELI’s balance sheet remains healthy with:

• $3.9 billion in cash and restricted cash

• $4.6 billion in short-term investments

• $3.5 billion in long-term debt

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7. Conclusion

This earnings report feels like déjà vu. Once again, MELI has prioritized long-term growth and market leadership over short-term profitability. Several strategic takeaways stand out:

• Free Shipping as a Strategic Lever: Lowering the free shipping threshold to BRL 19 is a clear example of forgone revenue that sacrifices short-term profitability for long-term gains. Management views it as essential to drive conversion, retention, and customer satisfaction, similar to successful initiatives dating back to 2017.

• Investing in Fintech Reach: High-profile campaigns for Mercado Pago, while costly, have significantly expanded its user base and AUM, with the yielding account strategy described as the "Fintech equivalent of free shipping", removing friction and attracting deposits for long-term engagement.

• Scaling the 1P Business: The rapid rise in 1P GMV, despite its lower margins, strengthens MELI’s value proposition in key categories, addressing assortment gaps and price competitiveness.

• Disciplined Credit Expansion: Credit issuance is accelerating, but MELI remains focused on quality and profitability. Improved models and successful cohort performance underscore a strategy that balances growth with risk.

MELI is borrowing from Costco’s playbook, choosing to reinvest scale efficiencies into lower prices and better services instead of short-term profit maximization. Whether it is free shipping, market-leading yields, or credit offerings, MELI is doubling down on its value proposition to expand market share and entrench its leadership in Latin America.

This revenue beat and earnings miss was no surprise, I predicted it in the July 2025 Portfolio Review. Having followed MELI for years, I’ve seen how Wall Street repeatedly fails to understand its model well enough to forecast short-term performance.

Take Q3 2024 as an example. MELI missed EPS estimates by 21%, the stock dropped 16%, and then rallied 35% over the next nine months. This quarter, MELI once again focused on the long term and the stock opened down 6% before finishing the day green. This time won’t be different.

Rating: 3 out of 5. Meets expectations.

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Wolf of Harcourt Street

Contact me

Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

Financial Analysis

Revenue

Auto Partner achieved 8% revenue growth in Q1 2025, reaching PLN 1.073 billion. This marks a continued deceleration from its 33% peak in Q2 2023.

The contribution from domestic and export sales remains balanced, with Domestic sales up 8.1% and Export sales growing 7.9%. Export sales now account for 51% of total revenue, up from 50% previously. The company is currently establishing a new logistics and storage center in Zgorzelec, expected to be completed in early 2026. This expansion in western Poland is designed to support future export growth. While this may explain the recent export slowdown, the weakness in domestic sales is more concerning.

Management has cited a challenging environment, marked by ongoing deflation and an unfavorable exchange rate, which is placing downward pressure on euro-denominated sales.

A key strength of Auto Partner's business model has been its branch network, with products distributed from central warehouses to branch offices, which then deliver to customers. Up until 2023, most of the company’s revenue growth came from better utilisation of the existing network. For example, in 2023, branch count rose only 2%, yet average monthly revenue per branch jumped 27%.

However, that trend has reversed. In 2025, the branch count again increased by 2%, but average revenue per existing branch rose just 6%. Has Auto Partner squeezed all the efficiencies it can from its existing network? If so, future growth may now depend on opening new branches, a far more capital-intensive strategy than increasing existing branch utilisation.

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Gross Margin

Gross margin declined to 25.4% in Q1 2025, compared to 26.2% in Q1 2024 and 28.9% in Q4 2024. This represents a record low, with margins steadily deteriorating since peaking above 30% at the end of 2021.

Management attributed the decline to the weakened EUR/PLN exchange rate, which reduced the value of euro-denominated sales when converted into PLN. Additionally, deflation meant goods purchased last year were sold at lower prices, further compressing margins.

Operating Margin

Operating margin also fell, echoing the gross margin trend. It dropped to 5.3% in Q1 2025, down from 5.6% in Q1 2024 and 8.4% in Q4 2024.

This margin pressure was primarily driven by sharp increases in the minimum wage: up 20% in 2024 and another 8.5% in January 2025. These hikes raised salary expectations for a large portion of employees and pushed up external service costs. Management noted that Q1 margin was further impacted by the absorption of lease and training costs related to the new Zgorzelec hub, which is not expected to be operational until late 2025 at the earliest.

To counteract these rising costs, the company halted workforce expansion at the beginning of 2024. In fact, headcount declined by 3% in Q1 2025. This raises an important question: Has revenue growth slowed because headcount hasn’t grown, or has headcount been cut because revenue isn’t growing as fast anymore?

One likely driver of the hiring freeze is the 17% rise in cost per FTE in 2024, followed by another 8% increase in Q1 2025, bringing the average to PLN 8,400. These increases align closely with the minimum wage hikes. Looking ahead, cost pressures are set to continue, with the Polish government proposing a further 3% increase from January 2026.

Cash Flow Analysis

Operating cash flow dropped to PLN 106 million in Q1 2025, down from PLN 151 million in Q1 2024. This decline was driven by increased working capital needs, especially in inventory. While closing inventory rose 18% YoY, inventory turnover worsened from 127 days at the end of Q1 2024 to 132 days in Q1 2025, meaning more cash is tied up in stock.

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Guidance

Auto Partner doesn’t provide formal guidance but does release monthly sales updates. Preliminary revenue for Q2 2025 was PLN 1,140 million, indicating further growth deceleration to 7% YoY.

Why I Sold

I’ve held Auto Partner shares since November 2023, adding a couple of times, most recently in September 2024. My average cost basis was PLN 22.90, resulting in a 8% loss on the overall position. Over the same period, the market returned 43%.

My original thesis was based on three expectations:

• Sustained high-teens revenue growth for the next 3 to 5 years

• Stable or improving margins with operating leverage

• Efficient scaling through existing infrastructure

However, several developments have since undermined this thesis:

1. Revenue Growth Stagnation

Management cited the new distribution center and export strategy as reasons for soft growth, but this doesn’t explain why both domestic and export growth have stalled. Explanations like deflation and currency effects were vague. Management’s 2023 target of 20% revenue growth has not been met. Given the broader inflationary backdrop, I find it counterintuitive that auto parts prices are falling while other input costs are rising.

2. Realization of Over-Earning

It’s now clear that 2021 and 2022 were outlier years, boosted by inflation. The company benefited from selling older, lower-cost inventory at higher prices, inflating margins. That tailwind has vanished.

3. Margin Compression Due to Wage Inflation

The company is more labor-intensive than I anticipated. Costs per FTE have jumped 23% in just 15 months. Staff reductions may offer temporary relief, but are unlikely to be a long-term solution if the company intends to grow.

4. Low Margin Sensitivity

This is a low-margin business, so even minor contractions are significant. For example, while net income margins falling from 25% to 23% might be minor for a high-margin company, a drop from 7% to 5% here was material. Despite a 45% revenue increase between 2022 to 2024, net income remained flat due to this margin squeeze. Today, the stock trades at a similar earnings multiple to when I first bought it, despite weaker margins and lower future growth expectations. Theoretically, these factors should warrant a lower multiple, all else being equal.

5. Insufficient Management Communication

The company only holds two earnings calls per year, and they aren’t recorded. As an active participant, I’ve found this increasingly problematic. If I miss a call, I lose timely access to management’s insights during uncertain periods.

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Conclusion

The underlying fundamentals have deteriorated to the point that I no longer believe Auto Partner can meet the expectations of my original investment thesis. I can’t say with any degree of certainty that the company will return to high-teens revenue growth or restore net income margins to 2021’s 8% level.

I now believe that what we’re seeing is a reversion to the mean. Holding onto the company despite this shift would require thesis creep, something I’ve been actively reflecting on, not just with Auto Partner, but across my entire portfolio.

I would consider reentering the stock if revenue growth decisively reaccelerates to the mid-teens and there is clear evidence of renewed operating leverage, potentially driven by a successful ramp-up of the new distribution centre. However, I do not expect either of these catalysts to materialize before mid-2026. Given this uncertainty, I believe there are better opportunities to deploy capital elsewhere.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• Net revenue grew 3% YoY, with underlying growth of 9% excluding FX headwinds. This marks the 11th consecutive quarter of revenue growth deceleration, driven by increased ring-fencing that is accelerating the shift toward regulated markets. Segment-wise, Live grew modestly (4% YoY), while RNG remained weak. Regionally, Asia rebounded with 4% QoQ growth despite cyberattacks, North America posted its strongest growth since Q1 2023, and Europe underperformed with steeper-than-expected declines.

• Operating margin declined to 58%, down from 61% YoY, due to a 10% increase in operating expenses, largely driven by an 11% rise in personnel costs amid headcount growth. However, the sequential margin deterioration was arrested after two quarters of decline. Revenue and cost per FTE remained stable, keeping the revenue-to-cost ratio steady at 4.2x. While EBITDA margin softened slightly to 66%, management maintained its full-year guidance of 66%–68%, expecting margin improvement in H2 as cost pressures ease.

• Free Cash Flow margin dropped to 37%, down from 55% YoY, primarily due to higher tax payments and a €35 million increase in receivables, which reversed the timing-related benefit seen in Q1. CapEx remained stable at 6% of revenue, with full-year guidance unchanged at €140 million. Following significant shareholder returns, €572 million in dividends and €65 million in buybacks, Evolution still holds €505 million in cash, suggesting potential idle capital, especially given that its €500 million buyback program is already 44% complete.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Conclusion

1. Financial Highlights

• Net Revenue: €524 million (+3% YoY)

  • Live: €454 million (+4% YoY)

  • RNG: €71 million (flat YoY)

• Operating Profit: €306 million (–2% YoY)

• EBITDA: €345 million (flat YoY)

• Free Cash Flow: €192 million (-31% YoY)

2. Wall Street Expectations

• Net Revenue: €517 million (beat by 1%)

• Adjusted EPS: €1.26 (miss by 3%)

3. Business Activity

Asia Cybercrime Challenges

Evolution continues to face cybercrime issues in Asia, particularly the hijacking of its video streams. The company is deploying advanced technologies and ongoing protective measures to safeguard its intellectual property. While progress requires time and resources, early signs of success are emerging as regional revenue returns to growth. Evolution remains cautiously optimistic about the remainder of 2025 and is committed to being fairly compensated for its innovations.

European Ring-fencing Impact

In Europe, Evolution recorded another quarter of negative growth due to ring-fencing measures, especially outside the UK. Although the financial impact was greater than expected, the company continues to view regulation as a long-term positive. However, it cautions that overly restrictive frameworks may reduce player protection and shrink the regulated market. Evolution believes its proactive regulatory compliance puts it ahead of peers and positions it well as the industry evolves

Capacity

Evolution launched two state-of-the-art studios in June, one in the Philippines and one in Brazil. The Philippine studio, the company’s first in Asia, marks a key milestone targeting the region’s first licensed iGaming market. The Brazilian studio is larger and supports the country’s newly regulated market. Both openings reflect Evolution’s global expansion strategy and growing studio network.

Game Rounds Index

The Game Rounds Index rose 2.7% YoY, primarily driven by continued growth in game shows, which remain highly popular.

New Games

Evolution plans to release over 110 new games in 2025, its most ambitious product roadmap to date. In Q2, it launched four new Live Casino titles, Super Color Game, Lightning Bac Bo, War, and First Person Bac Bo, designed to deliver high-quality, immersive entertainment. Additionally, 20 new slot games were launched during the quarter.

Looking ahead to Q3, three more Live Casino titles will be introduced, including Ice Fishing, which has attracted strong interest from operators due to its unique concept.

Hasbro-Evolution Agreement

Evolution secured an exclusive worldwide agreement with Hasbro to develop online gaming content based on iconic brands like Monopoly. The deal builds on the success of MONOPOLY Live and MONOPOLY Big Board, two of the industry's top-performing games.

Starting January 1, Evolution will be the exclusive provider of Hasbro gaming content. This is a major milestone and a clear competitive differentiator.

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4. Financial Analysis

Revenue

Net revenue grew 3%, a continuation of the slowdown driven by ring-fencing. Importantly, revenue did not decline sequentially for the second consecutive quarter, alleviating investor concerns. Underlying revenue growth, excluding FX headwinds, was 9%.

This marked the 11th consecutive quarter of revenue growth deceleration. Regulated markets now account for 44% of total revenue (up from 39% in Q2 but down slightly from 45% in Q1). Regulated revenue rose 16% YoY, while unregulated revenue fell 6% YoY. Much of the regulated growth likely stemmed from Brazil’s full market regulation as of January 1.

The Live segment (87% of revenue) grew 4% YoY. RNG, which accounts for 13% of revenue, was flat YoY but declined 2% QoQ. RNG remains a disappointing segment, with management attributing the decline to the largest payout in its history. However, details were limited.

Regional Performance

• Asia (40% of revenue): Grew 4% YoY and 4% QoQ despite ongoing cyberattacks. After a flat Q1, this sequential rebound in its largest market is a positive signal.

• Europe (33%): Declined 6% YoY and 5% QoQ due to ring-fencing. Given last quarter’s guidance, this sharper-than-expected drop is surprising. Management admitted the financial impact outside the UK was larger than anticipated.

• North America (14%): Grew 23% YoY, its fastest rate since Q1 2023. This was one of the bright spots in the report, supported by expanded offerings and studio plans in Michigan.

• Latin America (7%): Grew 3% YoY, which was underwhelming considering Brazil's new regulatory framework. Management acknowledged a gradual ramp-up as operators and players adjust to the changes.

  

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Operating Margin

Operating margin declined to 58%, down from 61% YoY, as operating expenses rose 10% to €218 million. Still, the sequential decline was stemmed after two quarters of deterioration.

Personnel expenses rose 11% YoY to €124 million due to headcount growth. Average FTEs rose 4% YoY to 15,965, a new record.

Revenue per FTE and cost per FTE held steady at €33k and €8k respectively. The revenue-to-cost ratio held at 4.2x, stabilising after Q1’s decline.

EBITDA margin dropped to 66% from 68% last year, resulting in flat EBITDA YoY. Management reaffirmed FY 2025 EBITDA margin guidance of 66%–68%, expecting improvement in H2 following H1 cost pressures.

Cash Flow Analysis

CapEx held steady at 6% of revenue, in line with recent quarters. Full-year CapEx guidance remains at €140 million.

Free Cash Flow margin fell to 37%, down from 55% YoY. This quarter’s result was impacted by tax payments and higher working capital needs.

As noted last quarter, Q1’s elevated FCF margin was due to timing-related receivables collections. This quarter saw the reverse, with receivables increasing by €35 million.

Excluding working capital changes, operating cash flow declined 6% YoY, compared to a 31% drop in FCF. This is a timing issue, not a structural concern, and should normalise in coming quarters.

After €65 million in share repurchases and €572 million in dividends, Evolution ended the quarter with €505 million in cash. Interestingly, the company clarified that the €500 million share buyback approved earlier was for the entirety of 2025. With €219 million already deployed, Evolution may end the year with excess idle cash.

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5. Conclusion

Last quarter was an ugly one for Evolution. Coming into this quarter, there was a lot of pessimism around the stock, much of it justified. If I had to describe this quarter in one sentence, I’d say it was the quarter that Evolution stopped the rot. The following positive outcomes were achieved:

• Revenue returned to growth, avoiding a second consecutive quarterly decline. Underlying revenue growth was 9%.

• Asia, Evolution’s largest and most profitable market, resumed sequential growth.

• North America grew over 20%, its fastest rate in more than two years.

• Operating and EBITDA margins held steady, avoiding further decline from Q1.

That said, several negatives remain:

• Europe declined sequentially for a second straight quarter. Management admitted the ring-fencing measures had a larger financial impact than expected. This either reflects a lack of deep understanding of the business or that management was deliberately misleading last quarter.

• RNG revenue declined, and while management attributed this to a payout event, they failed to provide enough data to quantify it.

• Latin America remains sluggish, showing little momentum despite the newly regulated market in Brazil.

Low single-digit revenue growth was not part of my original investment thesis, and trying to suddenly pass this off as a positive feels disingenuous at best.

I did, however, find management’s candor refreshing again this quarter, which is rare from the CEO of a publicly listed company:

“To be clear though, we are not satisfied with this quarter’s growth, and we are working hard to increase the pace. However, operationally speaking we are where we set out to be at the beginning of the year.”

Martin Carlesund, CEO

Speaking of the CEO, on June 13, he made a significant open market purchase of €6 million. At the time, I speculated that, with just two weeks left in the quarter, he may have had visibility into something positive before the blackout period began.

Fast forward to today, and the stock is up 25% since that purchase, meaning his €6 million is now worth over €7.5 million in just over one month. Insiders can sell for many reasons, but they only buy for one, they think the price will rise. And they usually know.

While this report did not meet my long-term expectations, or management’s, the difference between this quarter and last is that I can now see a corner being turned. The company appears to have reassured investors that the slide is over and Q1 marked the bottom. What’s in the rear-view mirror no longer matters for forward returns. All that matters now is the future.

Evolution is not out of the woods yet, and there’s much more work to do, but I can at least see a path back to double-digit growth in 2026.

Rating: 2 out of 5. Below expectations.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

After such a strong start to 2025, what is Uber’s fair value today, and is it still a buy?

In this update, I present a financial model and fair value assessment, using the 2024 financial results as a starting point. I’ve already shared a detailed Q4 2024 earnings analysis, which can be accessed via the link below.

Financial Model

Future earnings are projected over ten years using a 10% discount rate. This reflects Uber’s strong cash-generation capabilities as a mature technology platform, while also accounting for execution risks, particularly around autonomous vehicle deployment and regulatory challenges. A terminal growth rate of 2% has been applied.

Between 2019 and 2024, Uber’s Gross Bookings grew at a 20% CAGR. This forecast assumes Gross Bookings will grow at a 10% CAGR, reaching $433 billion by 2034. This growth trajectory reflects:

• Market expansion: The global ride-hailing market is expected to grow at a 15.1% CAGR from 2025 to 2035.

• Service diversification: Continued growth in delivery and emerging mobility services.

• Geographic penetration: Expansion into underserved markets and continued international growth. Uber currently operates in over 10,000 cities, and I expect this to continue increasing.

Uber’s overall take rate was 27% in 2024. I anticipate it will rise to 29% by 2034, driven by two key growth levers:

• Uber One membership: As of the end of 2024, Uber had 30 million Uber One members, representing just 18% of monthly active customers. Membership grew 60% in 2024, and I expect continued penetration as users recognize the value proposition.

• Advertising: In Q1 2025, Uber’s advertising revenue surpassed a $1.5 billion annual run rate, growing 60% YoY. The company is expanding its offerings, such as Journey Ads and Sponsored Items on Uber Eats. High-margin advertising has the potential to materially boost the take rate.

The combination of Gross Bookings growth and take rate expansion results in a projected 11% revenue CAGR from 2024 to 2034. For context, Uber grew revenue at a 28% CAGR between 2019 and 2024.

The EBIT margin is forecast to expand from 6% in 2024 to 24% in 2034, as Uber continues to benefit from operating leverage, having transitioned from a cash-burning start-up. Key drivers include:

• Economies of scale: Leverage of fixed costs as the platform scales globally.

• Operational efficiency: Tech investments reducing per-transaction costs.

• Autonomous vehicle impact: As driver expenses, Uber’s largest cost component decline, margins will expand.

Free cash flow is forecast to grow from $6.9 billion in 2024 to $36.7 billion by 2035, with FCF margins improving from 16% to 29%. Uber’s asset-light model keeps capital expenditure requirements low.

One factor contributing to higher FCF margins relative to net income is Uber’s significant stock-based compensation (SBC). In 2024, Uber incurred $1.8 billion in SBC. A 2% annual dilution rate is assumed, consistent with recent trends, resulting in ~24.7% total shareholder dilution over the forecast period.

Based on these assumptions, Uber’s fair value is approximately $115.03 per share, implying a 36% upside compared to its $84.76 share price on 17 June 2025.

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Conclusion

This analysis suggests Uber is undervalued, offering an attractive margin of safety. The biggest existential risk remains the emergence of autonomous vehicles. However, I believe this will ultimately act as a tailwind, not a threat. The AV market is likely to remain fragmented, with many players, not just one or two dominant ones. Uber’s distribution network and infrastructure position it to benefit in this scenario.

As CEO Dara Khosrowshahi put it: "AV technology is the single greatest opportunity ahead for Uber." My research shows Uber has already established partnerships with 18 autonomous vehicle companies, including WeRide and Waymo, a number I expect will only grow.

Let’s consider a thought experiment: what if AVs completely disrupt Uber’s mobility business, which currently accounts for half of Gross Bookings? Even then, I don’t expect a full replacement of human drivers for at least another 10 years. If we cut the terminal value in half, from $180 billion to $90 billion, this would still leave Uber’s delivery business untouched, a segment often overlooked by analysts.

In that scenario, Uber’s fair value would be around $80, suggesting the market today is already pricing in most of this risk.

If you'd like to support the work of an independent analyst, you can buy me a coffee. The proceeds will contribute to covering the annual running costs of the newsletter.

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Wolf of Harcourt Street

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Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

Business Activity

Nights and Experiences Booked

After strong momentum in Q4, when growth accelerated to 12%, Nights and Experiences Booked slowed to 8%, reaching 143.1 million. Management cited the unfavourable comparison to Q1 2024, which included Leap Day. This was the slowest growth rate since the COVID lockdowns.

Gross Booking Value

Gross Booking Value (GBV) reached $24.5 billion, up 7% YoY or 9% on an FX-neutral basis. The increase in bookings was partially offset by a slight decline in Average Daily Rate (ADR), due to FX headwinds. Even excluding FX impacts, GBV growth remained the lowest since the COVID period.

Average Daily Rate

ADR was $171 in Q1 2025, down 1% YoY. Excluding FX, ADR increased by 1% and was up across all regions, largely due to price appreciation.

Take Rate

The implied take rate was 9.3%, slightly down YoY. This was due to the benefit from additional cross-currency service fees being offset by the timing of Easter in Q1 2024.

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Financial Analysis

Revenue

Airbnb reported revenue of $2.23 billion, a 6% YoY increase, representing a clear sequential deceleration. Management noted that excluding FX and calendar effects (Leap Day, Easter), revenue growth would have been 11%. Still, even adjusting for those, growth momentum was lacking.

Management guides Q2 2025 revenue between $2.99 to $3.05 billion, implying 10% growth at the midpoint. After adjusting for the Easter benefit, underlying growth is just 8%.

Operating Margin

Operating income came in at $38 million, equating to a 2% operating margin, down from 5% in Q1 2024.

What caused the 3-point margin contraction? Primarily, an increase in Product Development (PD) and Sales & Marketing (S&M). PD rose from 22% to 25% of revenue, and S&M ticked up from 24% to 25%. Both increases were tied to the 2025 Summer Release, which I’ll discuss shortly.

Net Margin

Net income was $154 million, for a 7% net margin, down from 12% YoY.

A key driver of net income is interest income which was $173 million in Q1 2025, down from $202 million in Q1 2024 due to lower interest rates. Without this, Airbnb would not have been profitable in the quarter.

Cash Flow Analysis

Airbnb generated $1.79 billion in operating cash flow. With just $8 million in CapEx, free cash flow (FCF) was $1.78 billion representing a 78% margin. Due to Airbnb’s role as the Merchant of Record, FCF is seasonally strongest in Q1.

TTM FCF reached $4.4 billion, with an FCF margin of 39%. This allowed for $807 million in share buybacks in Q1 2025. The diluted share count dropped from 677 million (Q1 2024) to 660 million.

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2025 Summer Release

After a mediocre Q1, I was eager for the 2025 Summer Release on 13 May. Airbnb announced an expansion beyond home rentals, launching:

• Airbnb Services: Professional offerings (chefs, photographers, massages, hair/makeup) in 260 cities.

• Reimagined Airbnb Experiences: Local-led tours and classes in 650 cities.

• All-New Airbnb App: Redesigned to integrate homes, services, and experiences.

Overall, I found the updates underwhelming. Nothing here was new, Brian Chesky had hinted at all of this earlier 2024. What I was really hoping for was a loyalty program, something that’s driving strong results for Booking.com, Uber, and Amazon. Airbnb appears to be missing a major opportunity here.

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Why I Sold

I’ve owned shares of Airbnb since July 2021, adding to the position several times, most recently in July 2024. My average cost basis was $134, and I broke even on the position. Over the same period, the market returned 45%.

The decision to sell wasn’t easy. I admired how Chesky reshaped the business during COVID. I gave him the benefit of the doubt throughout 2024, despite persistent deceleration in key growth metrics.

After Q1 and the lacklustre Summer Release, my optimism faded. Is Airbnb a bad business? Absolutely not. It’s a cash-generating machine. But I now have serious doubts about its ability to accelerate revenue growth toward 20%.

The rebranded Experiences might make strategic sense, but they were originally launched in 2016. If they haven't meaningfully moved the needle since, why would they now?

The Airbnb Services segment seems even more questionable. I personally can't imagine booking a haircut via Airbnb. And once someone finds a good local service provider, Airbnb is easily cut out. Unlike short-term stays, local services don’t benefit from repeat, location-agnostic usage. Ben Thompson has an excellent take on this that I recommend reading.

From a margin standpoint, I suspect these new verticals are lower-margin than the core homestay marketplace. Airbnb intends to vet service providers, incurring overhead it doesn't face with hosts (where reputation is community-driven via ratings).

While the TTM FCF margin is 39%, this is inflated by stock-based compensation (SBC). Adjusting for SBC, the margin is closer to 28%. Long-term, I think Airbnb can push this to 45%, but that’s not a huge leap from where it is today.

In short, future returns will need to come primarily from revenue growth, not margin expansion. Given continued deceleration and my skepticism about the new initiatives, I decided to exit the position.

While I don’t believe Airbnb is wildly overvalued at these levels, I’m simply not interested in holding a growth stock that’s not growing at above-average rates.

If you'd like to support the work of an independent analyst, you can buy me a coffee. The proceeds will contribute to covering the annual running costs of the newsletter.

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Wolf of Harcourt Street

Contact me

Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com

• Evolution’s net revenue growth slowed to 4%, reflecting ongoing FX headwinds and the impact of ringfencing, which has accelerated the shift toward regulated markets. These now account for 45% of total revenue, up from 39% a year ago. While regulated revenue rose 19% YoY, unregulated revenue declined 6%, contributing to a deceleration in overall growth for the tenth consecutive quarter.

• The operating margin declined to 58% due to rising costs, particularly a 12% YoY increase in personnel expenses stemming from headcount growth following labor disruptions in Georgia. Although cost per employee remained flat, productivity fell, as revenue per FTE declined, highlighting a less efficient resource mix caused by the partial relocation of operations out of Georgia. This shift, along with continued ringfencing and cyberattack-related costs, compressed margins in H1 2025, though management reaffirmed full-year EBITDA margin guidance, anticipating a stronger second half.

• Free cash flow margin expanded to 63%, up from 53% YoY, despite ongoing investment and margin pressure. This increase was entirely driven by favorable working capital movements, specifically an €18 million reduction in accounts receivable. Excluding these effects, operating cash flow actually declined 2% YoY. CapEx remains elevated at 6% of revenue, split evenly between game development and platform upgrades, with full-year guidance unchanged at €140 million. Despite repurchasing €154 million in shares, Evolution ended the quarter with a robust €958 million cash balance, earmarked for dividends and further buybacks.

Contents

1. Financial Highlights

2. Wall Street Expectations

3. Business Activity

4. Financial Analysis

5. Conclusion

1. Financial Highlights

• Net Revenue: €521 million (+4% YoY)

  • Live: €449 million (+4% YoY)

  • RNG: €72 million (+3% YoY)

• Operating Profit: €303 million (–3% YoY)

• EBITDA: €342 million (–1% YoY)

• Free Cash Flow: €294 million (+23% YoY)

2. Wall Street Expectations

• Net Revenue: €543 million (miss by 4%)

• Adjusted EPS: €1.38 (miss by 10%)

3. Business Activity

Proactive Ringfencing Measures

Evolution has implemented new technical controls to ensure that its games are only accessible via locally licensed operators in regulated markets, beginning with the UK and expanding across Europe.

While there was limited impact in high-channelization markets, revenue declined in low-channelization markets where regulation tends to discourage legal play (e.g., due to high taxes or complex rules).

Evolution continues to support regulation, asserting that it is beneficial over the long term. However, the company emphasises that channelisation effectiveness is determined more by the regulatory framework than by the supplier's efforts.

Capacity

A new studio in Romania opened during the quarter, with additional studios planned in Brazil, the Philippines, and a second location in Michigan. Expansion is also ongoing in Malta, Colombia, Argentina, New Jersey, and Philadelphia.

An intentional decision was made not to expand capacity in Georgia to reduce over-reliance on the Georgian studio. A review by one of the Big Four accounting firms confirmed that:

• Salary levels are competitive

• Past workplace issues were addressed promptly

• Code of conduct violations were appropriately handled

• Media reports overstated strike participation

Game Rounds Index

The Game Rounds Index, which tracks total activity across Evolution’s network, increased by 10.9% in the quarter driven primarily by continued growth in game shows, which remain highly popular.

New Games

Evolution is entering what it calls its "product-led years," marked by a heightened focus on innovation and new releases. More than 110 games are planned for launch in 2025 across the full portfolio.

Early 2025 saw the debut of several standout titles:

• War – A modern take on Casino War

• Race Track – An RNG game with a live host

• Bet Stacker Blackjack – A creative twist on the classic

• Marble Race – Launched in April, a fast-paced, engaging title with strong early reception

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4. Financial Analysis

Revenue

Evolution’s net revenue grew by 4%, reflecting a material slowdown due to the practice of ringfencing. Foreign exchange headwinds persist, with underlying revenue growth at 6% versus the reported 4%. This marks the tenth consecutive quarter of revenue growth deceleration.

As a result of ringfencing actions, revenue from regulated markets now accounts for 45% of total revenue, up from 41% in Q4 2024 and 39% in Q1 2024. Regulated revenue increased 19% YoY, while unregulated revenue declined 6% YoY.

The Live segment (86% of total revenue) grew 4% YoY, while RNG (14% of total revenue) grew 3% YoY.

Regional Performance

• Asia (39% of revenue) grew 2% YoY but was flat sequentially, impacted by ongoing cyber-attacks that continue to affect video distribution. Mitigation measures are progressing but continue to weigh on network performance and revenue, consistent with recent quarters.

• Europe (36%) was flat YoY and down 6% QoQ due to ringfencing activities during the quarter. Management emphasized that underlying demand remains strong in the region.

• North America (14%) grew 15% YoY, marking the third consecutive quarter of mid-teens growth, driven by expanded table capacity and new game launches in Live.

• Latin America (7%) grew 10% YoY. The outlook remains positive, bolstered by Brazil’s 2025 regulation, despite initial teething problems affecting Q1 performance.

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Operating Margin

Evolution’s operating margin declined to 58%, down from 62% a year earlier, as total operating expenses rose 15% YoY to €218 million.

Personnel expenses, the largest cost category, increased 12% YoY to €120 million due to headcount growth. Average full-time equivalents (FTEs) rose 10% YoY to 16,368, surpassing the Q2 2024 record, following labor disruptions in Georgia.

The cost per average FTE remained flat at €7k, but the revenue per FTE declined to €32k, from €34k in Q1 2024 and €36k in Q4 2024. Due to ringfencing, Evolution served a similar number of players with more employees, resulting in lower productivity. The revenue-to-cost ratio fell from 4.9x in Q4 2024 to 4.3x in Q1 2025..

“It's also worth while reminding that compared to last year, we are now running our studios with a less favorable, more costly resource mix as a consequence of the measures we took last year in connection with the strike in Georgia. This partial move of operations out of Georgia is having a negative impact when comparing the cost base and profitability year-on-year.”

- Joakim Andersson, CFO

The EBITDA margin declined to 66%, down from 69% in Q1 2024, resulting in a 1% YoY drop in EBITDA. In Q4, management guided for a 66%–68% EBITDA margin for FY 2025. On the Q1 call, they reiterated that margins would be softer in H1 due to ringfencing and cyberattack-related costs but maintained full-year guidance, expecting stronger H2 performance.

Cash Flow Analysis

Evolution remains in a heavy investment phase, which pushed the CapEx ratio to 6%. CapEx was evenly split between new game development and platform/studio upgrades (including tables, servers, and equipment). Full-year CapEx guidance of €140 million remains unchanged.

Despite margin compression, free cash flow (FCF) remained strong, with a 63% margin, up from 53% YoY, a counterintuitive result.

On closer inspection, this free cash flow (FCF) boost was driven entirely by working capital movements. Accounts receivable declined by €18 million due to improved collections. Excluding working capital changes, operating cash flow actually declined 2% year-over-year.

Typically, one would expect accounts receivable to increase in line with revenue. In this case, however, revenue increased while receivables decreased, due to the timing of FY 2024 collections.

As such, this elevated FCF margin should not be extrapolated into future periods.

Even after €154 million in share repurchases, Evolution ended the quarter with a cash balance of €958 million, allocated as follows:

• €573 million for dividend payments

• €385 million for the buyback program (targeting €500 million in 2025 repurchases)

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5. Conclusion

On the face of it, this was an ugly quarter for Evolution, so let’s start with the negatives:

• Revenue growth decelerated for the tenth straight quarter, with higher-margin unregulated revenue being forfeited.

• Profit margins compressed due to cyber-attacks in Asia and a costlier resource mix post-Georgia strike.

• Employee utilisation hit a four-year low, with more staff serving roughly the same number of players.

What about the positives?

• Management’s candor was refreshing as they acknowledge the issues and are committed to fixing them.

  “I'm, of course, not happy with our current growth, but the measures behind it are important for our overall work to increase the gap to competition. We face challenges that we meet. Any issues we see, we fix.”

  Martin Carlesund, CEO

• Regulated revenue growth of 19% indicates the long-term opportunity is intact as markets mature and regulations solidify.

• The cash balance has swelled to nearly €1 billion, or 8% of Evolution’s market cap.

I’ve been an Evolution investor for almost two years. I’ll admit: my thesis hasn’t played out yet. If you told me in 2023 that revenue growth would fall to 6% by 2025, I wouldn’t have even considered it a bear-case scenario. For context, revenue grew 31% in Q1 2023.

Of course, few could’ve predicted a labor strike in Georgia, persistent cyber-attacks in Asia, material FX headwinds, and the deliberate pivot to regulated markets. As they say: "Risk is what’s left over after you think you’ve thought of everything."

That’s all in the past. What matters now is the forward return.

I don’t believe the thesis is broken, but I now have one key question: With unregulated revenue down 6% this quarter, how much of that segment could Evolution ultimately lose?

This is critical, as 55% of current revenue still comes from unregulated markets. Even if regulated revenue grows at a mid- to high-teens pace, continued erosion in unregulated markets would weigh on total growth and shareholder returns.

This reminds me of how Meta cannibalized its own ad revenue in 2022 by promoting Reels, which reduced time spent on Feed and Stories. For a time, revenue declined but by focusing on long-term strategy, Meta returned to 20%+ growth as Reels monetisation improved.

Evolution’s decision to ringfence unregulated markets is a similarly strategic move. Growth hasn’t slowed due to competition, it’s slowed because they chose to exit those markets.

The question now is: Can Evolution weather this storm and return to double-digit growth, or is low-single-digit growth the new normal?

Rating: 2 out of 5. Below expectations.

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Wolf of Harcourt Street

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With the stock trading at its IPO price, what is NU’s fair value today, and is it a buy?

In this update, I present a revised financial model and fair value assessment. The starting point for this analysis is the 2024 financial results. I’ve already shared a detailed Q4 2024 earnings analysis, which can be accessed via the link below.

Financial Model

Unlike most companies I follow, NU’s reported cash flows are distorted because cash functions as both an input and output of the business. As a digital bank, NU is focused on growing its balance sheet by expanding its credit and loan portfolio. This expansion appears as negative cash flow, which can misrepresent the company’s financial health.

To address this, I’m using net income instead of free cash flow in the model. This approach simplifies the analysis while still capturing NU’s underlying profitability and operational efficiency.

Future earnings are projected over ten years using a 15% discount rate, reflecting NU’s exposure to credit risk and an emerging market risk premium. A terminal growth rate of 2.5% has been applied, acknowledging NU’s potential to benefit from inflation-driven interest rate increases that typically improve bank profitability.

Between 2019 and 2024, NU’s customer base grew at a CAGR of 42%. This forecast assumes total customers will reach 250 million by 2034, representing a CAGR of 8%. With Latin America's population expected to hit 700 million by 2034, NU would account for 36% of the total population, up from 17% today and just 3% five years ago.

Average revenue per customer (ARPU) is projected to nearly triple from $101 in 2024 to $285 in 2034. For comparison, incumbent banks in Brazil generate an ARPU about 4.5 times higher, leaving ample room for NU to grow its share of wallet and cross-sell more products. This, combined with customer growth, results in a projected revenue CAGR of 20% from 2024 to 2034.

The EBIT margin is forecast to rise from 24% in 2024 to 35% in 2034, benefiting from the operating leverage inherent in NU’s scalable model. Similarly, the net income margin is expected to improve from 17% to 26% over the same period. For context, Itaú Unibanco, Brazil’s largest bank, posted a 25% net income margin in 2024.

A 1% annual dilution rate has been assumed, consistent with recent trends, resulting in total shareholder dilution of approximately 10.5% over the forecast period.

Based on these assumptions, NU’s fair value is approximately $15.46 per share, implying a 55% upside compared to the $9.97 share price on 8 April 2025.

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Conclusion

This analysis suggests that NU is undervalued, offering a high margin of safety. The forecast conservatively assumes NU will continue to gain market share, but still trails incumbent banks in ARPU and overall revenue market share. It also assumes NU’s net income margin only reaches levels broadly in line with traditional banks, despite its superior, asset-light digital model.

Key risks, such as credit exposure and emerging market volatility, are reflected in the 15% discount rate, adding further conservatism to the valuation.

One final point worth noting in light of recent U.S. tariff developments: NU offers exposure to an asset class unaffected by U.S. trade tensions. NU is exempt from these tariffs because it operates entirely outside the U.S. market. As a Brazil-based digital bank focused on Latin America, NU does not depend on the cross-border trade of physical goods, which are the primary target of recent tariffs.

If you'd like to support the work of an independent analyst, you can buy me a coffee. The proceeds will contribute to covering the annual running costs of the newsletter.

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Happy investing

Wolf of Harcourt Street

Contact me

Twitter: @wolfofharcourt

Email: wolfofharcourtstreet@gmail.com