Klarna’s Q1 results show that the fintech unicorn’s turnaround is in full swing

Last year wasn’t an easy one for European fintech giant Klarna. The company saw its valuation being truncated in an $800 million funding round, and coverage of its 2022 results focused on contrasting its stiff losses against a more conservative market. This column argued at the time of its earnings report that if we looked at Klarna’s quarterly results, things were looking up toward the end of last year:

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.

The good news for Klarna stans — founders, investors and employee shareholders — is that Q1 2023 data from the company supports our generally positive vibes. A few good quarters do not make for a comeback, but there’s lots to like about the company best known for its buy now, pay later services.

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This morning, we’re going to parse Klarna’s Q1 2023 results, compare that to where the company was during its time in the barrel, and then close with its notes on AI — an interesting cultural riff embedded in the Klarna investor report that is worth looking at. Sounds good? To work!

Holistic improvements

To understand Klarna’s results, we need to start one step up from revenue. What leads to revenue at Klarna? Gross merchandise value (GMV), or the total worth of stuff that consumers bought using Klarna services.

In the first quarter of 2023, Klarna’s GMV rose 13% to 210.7 billion Swedish Krona ($19.65 billion) from a year earlier. This number isn’t too impressive on its own, but it is significant considering that overall e-commerce growth has been lackluster in the last year. In its investor note, Klarna says the global e-commerce market actually shrunk by 2% between Q1 2022 and Q1 2023.

Put another way, Klarna managed to nab market share in a contracting market, keeping its own growth story afloat despite stiff headwinds.

Even better, the company managed to increase revenue at about the same pace as GMV: The top line rose 11.3% to 4.9 billion Krona ($457 million) in Q1 2023 from a year earlier. The company’s total operating income, or revenue less certain costs like commission expenses, rose 22% compared to the year-ago period.

So, Klarna has managed to increase GMV despite the tougher market and match its revenue growth as well. And, the company’s adjusted revenue increased even faster. What about profitability? Let’s find out:

  • “Total operating expenses before credit losses” declined 5% in Q1 2023 compared to Q1 2022, meaning that Klarna’s cost structure got worse despite its impressive growth.
  • Credit losses also narrowed to 800 million Krona ($73.6 million) in Q1 2023 from around 1.2 billion Krona ($110.4 million) in Q1 2022, a 35% improvement by the company’s calculation.
  • What happened at the company when its revenue rose and its costs fell? Its adjusted operating loss narrowed to 500 million Krona ($46 million) from 2.2 billion Krona in Q1 2022 ($202.4 million).
  • Klarna calculates that its adjusted operating loss narrowed by 78% (page two). That’s incredibly solid. Slightly less rosy was its net income over the same time period: net loss (“net result” in IFRS terminology) narrowed by a lower 51% compared to the year-ago period in Q1 2023.
  • Regardless, both key profit figures were dramatically better for Klarna in Q1 2023 compared to a year earlier.

Not bad! Klarna should easily clock revenue of more than $2 billion this year, putting its $6.7 billion valuation in a place where it might start to feel cheap.

The company can now fund itself, too. Klarna told shareholders that its free cash flow in Q1 2023 was 4.69 billion Krona ($431.6 million), a massive improvement over Q1 2022’s deficit of 7.32 billion Krona ($673.8 million). That’s a lot of cash flow! It helped bolster Klarna’s cash reserves, by our read of its financial data, which is a lovely change that indicates the fintech’s business is improving across the metrics that we care the most about. Well done.

What about AI?

Something very interesting to watch in the last few years has been the rise of Chinese apps on the American app store. This is part of a larger trend in which certain social and commercial trends from Asia are seeing strong traction in Western markets.

Helping to power the market shift, Klarna says, is the power of recommendations, which brings AI to the fore. Read the following:

The power of AI is reshaping the shopping landscape, shifting the traditional Western model where the majority of purchases come from search rather than recommendations. Instead it’s rapidly bringing us closer to the Chinese model, where a remarkable 80% of purchases are driven by recommendations. In line with this transition, Klarna recently launched our AI-powered personalized shopping feed and integrated ChatGPT plug-in. By delivering customized recommendations, we are enhancing customer loyalty, supporting retailers’ growth, and ultimately boosting Klarna’s revenues.

The company’s push to be both a sales tool for other retailers and a place where folks shop is probably a good bet. The more commerce Klarna can drive, the greater its GMV and, eventually, the more attractive its profitability. Here again, we’re seeing modern AI tools playing an active role in products used by lots of folks — a trend that feels well-worn by now.

We’ll have to wait a bit for Klarna’s AI work to potentially impact its results, but even without that boost, things are looking pretty good over in Stockholm.