How much progress is Klarna making toward profitability?

Klarna, a well-known private tech company working in the consumer credit and e-commerce market, dropped its 2022 annual report today. The document contains a wealth of information about its financial performance and recent operating philosophy. We care about both.

The former startup has had a publicly difficult few quarters. From seeing its valuation cut sharply to layoffs, the news around Klarna has been negative for some time. Now that we have the company’s financial data, we can take a more detailed look at how it performed amid all the noise.

Most coverage of Klarna’s results focused on its full-year totals, which show rising deficits and net losses growing more quickly than revenue. The rest looked at quarterly trends, which can paint a more nuanced picture of a company’s trajectory.

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Our work today is simple: We need to parse the company’s growth compared to its market, and then we need to dig into its quarterly profitability to see how well it is managing to control costs and work toward profitability. This is where operating philosophy comes into play, as you’ll see.

You can find the full document here and more historical data on Klarna’s results here, in case you want to read along. Now, to work!

Klarna’s 2022

Starting with full-year numbers, here’s how Klarna’s 2022 shaped up compared to 2021 (data in billions of Swedish krona, with TechCrunch conversions using present-day exchange rates to U.S. dollars shared in parentheses for illustrative purposes; percentages calculated using data on page four of the Klarna report):

  • Gross merchandise volume (GMV): SEK 837.3 billion ($79.9 billion), up 21.5%.
  • Revenue: SEK 19.3 billion ($1.84 billion), up 21.4%.
  • Credit losses: SEK 5.7 billion ($544 million), up 23.9%.
  • Total operating expenses before credit losses: SEK 21.5 billion ($2.05 billion), up 35.2%.
  • Net result: Loss of SEK 10.4 billion ($992.5 million), up 46.5%.

Taken as a whole, Klarna’s 2022 looks like an old-school unicorn year. Costs are rising quickly, losses are up even more, and it appears that the company is far from turning the corner toward profitability. Luckily for Klarna shareholders, there’s actually quite a lot of good news inside the full-year results that you can’t quite make out in the above:

  • Klarna’s GMV grew from SEK 202.7 billion in Q4 2021 to SEK 242 billion in Q4 2022, more than double the pace at which global e-commerce activity grew. That implies a growing piece of the larger e-commerce pie is landing on Klarna’s plate and indicates that it is able to grow more quickly than its underlying market. That’s good.
  • Klarna’s credit losses and operating expenses apart from credit losses both fell on a year-over-year basis in Q4 2022. This gave the company a net result of -1.9 billion Swedish krona in the final quarter of 2022, an improvement on the -4.6 billion Swedish krona that it earned on a net basis in Q4 2021.
  • Klarna recorded its smallest loss of any quarter in 2022 in Q4 and mostly showed falling losses on a quarterly basis during the year, with a bump in costs making its Q2 results something of an outlier.

More platform usage (GMV) leading to more revenue, contrasted with falling credit losses and modest improvements to operating costs, yielded a much less unprofitable Klarna at the end of 2022 than at the beginning. This is the company actually managing what every unicorn is supposed to do today: keep the growth coming and cut the losses. You could argue that Klarna should be growing faster and reducing costs more quickly, but at least the numbers are moving in the right direction.

Last week on Equity, TechCrunch fintech leader Mary Ann Azevedo pointed out to your humble servant that Klarna is a bit more than a buy now, pay later company. It’s done a lot more, she said, in terms of expanding its product remit. Armed with that knowledge, I went hunting in the Klarna report to find out more. This stood out:

In 2022, the launch of multiple new and enhanced products that add real value to consumers and retailers such as search, loyalty card wallet, and digital receipts is making Klarna an intrinsic part of people’s lives, saving them time, money, and worry. Klarna’s marketing revenue increased by 131% YoY to SEK 1.6bn as we diversify revenue streams, driving over 600m clicks to retailers during the year, up 111% YoY.

Naturally, 1.6 billion Swedish krona is only so high a fraction of the 19.3 billion Swedish krona in full-year revenue that Klarna earned, but the growth rate thereof is impressive at a part of the business that operates at relative scale (1.6 billion units of the local Swedish currency is worth around $153 million today).

This is where operating philosophy comes into play; Klarna did not retreat from its nonpayment work, it appears, even as it cut costs. It didn’t have to do that, perhaps able to chart a faster ramp to profitability if it narrowed its focus more sharply. Instead, its marketing revenue wound up providing good growth even while overall costs were controlled. In retrospect, it was a winning decision but one that came with more than an ounce of risk.

We should not be too generous to Klarna. It remained very unprofitable as the year ended. It has, however, shown a real ability to drive growth while cutting costs. That’s spelled operating leverage in business terms and is the very sort of lever that builds the financial results of truly great companies.

The question is whether Klarna can use the cash it raised last year to keep the trend alive; if it can keep costs flattish while expanding GMV and revenue from nonpayment sources in 2023, it could get within spitting distance of at least adjusted profitability. That said, while it has made good progress thus far, it’s still too early to call the game in Klarna’s favor.