Klarna shows that BNPL growth is not cheap

The tech world has been a touch busy in the last few days, so you will forgive me for missing that Klarna dropped its 2021 financial results last week. We’re remedying that oversight today.

Klarna is an interesting company. It’s incredibly well-funded, richly valued, and, despite remaining a private company, reports its earnings on a regular basis. This means that we can check in on how it is performing and learn quite a lot about the larger buy now, pay later (BNPL) market that is awash with startup activity and venture dollars.

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The mega-unicorn, in other words, provides us a window into a market replete with smaller companies yearning for both niche and mass-market BNPL adoption.

And what do Klarna’s earnings tell us? Two things: First, that the BNPL market continues to expand, with consumers happy to transact more and more with the spending model. And, second, that growth in BNPL land is not cheap; Klarna’s operating costs are scaling rapidly and the company’s profitability is suffering.

Let’s talk about it!

Inside’s Klarna’s 2021

In 2021, Klarna had revenues (“total net operating income”) of 13.75 billion Swedish Krona, leading to an operating loss of 6.58 billion Krona, and a net loss of 7.09 billion Krona. In U.S. dollars at today’s exchange rate, those figures translate to $1.375 billion in revenue, a $658 million operating loss and a $709 million net loss.

Klarna had posted a 10.0 billion Krona revenue result in 2020 and a net loss of 1.376 billion Krona. So Klarna grew by around 36% last year in revenue terms, but its net losses multiplied by around 5.

What happened? Here’s Klarna discussing its 2021 results from a cost perspective:

In 2021 we have accelerated our ambitious market and product expansion plans entering five new markets and growing our product offering to include the shopping app in 18 markets, the shop anywhere browser extension, current and savings accounts as well as enhancing Klarna’s suite of retailer growth services through organic growth and complementary acquisitions. As a result, Operating expenses have increased to SEK 15,688m and average FTEs at the end of the year were 4,789 as we scale to provide Klarna services globally and continue to support significant growth in existing markets, while integrating new colleagues joining from acquired companies.

Let me translate a bit: “Accelerated” here means greatly increased, and “ambitious market and product expansion plans” means cost growth. So the company accelerated spend at a pretty rapid clip last year. How much?

Klarna said that it had operating expenses of 15.69 billion Krona last year. In its 2020 report, Klarna said those expenses rose by 43% from the year-ago period, reaching 9.1 billion Krona From 9.1 billion Krona in 2020 to 15.69 billion Krona in 2021 is growth of 72.4%.

We can now see why Klarna’s profitability got so much worse in 2021: The company’s revenue grew by 36%, but its costs grew at roughly double that rate. As the company was already unprofitable before those changes, its deficits got far worse last year than the year before.

However! You can make a bull case at this juncture. Klarna is building new stuff, attacking new markets and is a pretty darn big brand. If you consider its operating and net losses more investments than deficits per se, you might not mind the company’s overall financial picture.

However, racking up growth by adding markets is, it appears, very expensive. So will Klarna’s overall growth remain as expensive as we saw last year? It looks that way. How can we tell? The following:

  • Klarna H1 2021 operating expenses: 6.258 billion Krona
  • Klarna H2 2021 operating expenses: 9.429 billion Krona

Over the same time period, here’s how revenue shook out:

  • Klarna H1 2021 total net operating income (revenue): 6.35 billion Krona
  • Klarna H2 2021 total net operating income (revenue): 7.41 billion Krona

You can see rising deficits in those numbers pretty easily, and the gap is only widening as time passes — we are not seeing the company’s costs come closer to revenues; instead, we’re seeing the opposite.

It may bear out that Klarna’s high spend in 2021 set the groundwork for a strong 2022, with the company’s cost growth slowing and its revenue growth maintaining pace. If that happens, Klarna will slowly claw back toward breaking even or generating the sorts of profits it managed back in 2017 and 2018.

But until then, with U.S. rival Affirm worth around $34 per share this morning, off from a 52-week high of $176.65 per share, and Klarna’s profit picture deteriorating, per the most recent data, the BNPL market appears more expensive and less valuable than it did in mid-2021.

What’s the startup lesson?

Simple: Expect more competition, more new-market costs, and lower valuation generation per dollar of revenue than you expected.

That’s not great news, but it’s also not lethal. Especially for more niche BNPL providers, there may be more efficient growth paths available.