Klarna Group plc (KLAR) Earnings Call Transcript & Summary

Okay. Let's talk about the wallets. I mean, Apple Pay, Google Pay. I mean, you've been partnering there as well. Just talk a little bit more about how these partnerships are helping to drive ubiquity for Klarna.

I mean, like Apple Pay and Google Pay have been unbelievable for us. One, just as a form of payment, they're growing explosively. But more importantly, like it was all about putting Klarna where consumers are shopping, putting ourselves in the trusted channels. That trusted channel might be Stripe merchant checkout, it might be Apple Pay. And it's not even just Apple Pay and Google Pay, we just launched with Google Autofill. We launched it with Vipps. Many of you won't know Vipps. It's the leading payment platform in the Nordics. We just launched last year with Stripe Link, 200 million users. So this is going to be a really important part of our sort of go-to-market going forward. And it is exciting because it means that we don't have to be at the checkout at a Target. You can use this because we're at Apple Pay. I mean it just really, really increases service coverage.

Okay. Great. Talk about Walmart for a moment. I mean, last year, you guys announced a partnership with OnePay. It made Klarna the exclusive provider of installment loans at Walmart in the U.S. And just how has that partnership been progressing? Any color on traction you're seeing? And just how are Walmart shoppers actually...

I think of all of the deals I've done in the past 8 years, I've been in Buy Now, Pay Later, this is the deal I'm most proud of. I think, I love the OnePay team. I love the Walmart team. These are really high integrity people. They're really high integrity people. And everybody talks about being customer obsessed. Walmart is truly customer obsessed. They're truly customer obsessed. The adoption has been fantastic. We've rolled out online. But like I said, I feel like we're barely getting started. We have barely scratched the surface of these stores. We just announced the ability to take a debit transaction and turn it in -- post transaction, turn it into an installment transaction with OnePay. And the thing is when you have partners of this size and scale, the most iconic retailer in the world, it is impossible to not be successful. Like they just had so much opportunity in and around them, like the scale of them is so vast. So we are enormously excited. The initial traction is fantastic. But I really think it's tip of the iceberg stuff. We're talking the biggest retailer in the world. I think this will pay dividends for a very long period of time. And hopefully, we can add more and more value to the partnership.

Okay. Going to the U.S. more broadly now. I mean, the U.S. -- it continues to grow extremely well. It was up 58% year-over-year last quarter, and I know GMV was up over 40%. So I think you're serving almost 30 million consumers, which is incredible given when you really launched in the U.S. time-wise, right? Help us understand a little more what you're doing in the U.S. that's resonating so well.

Yes. I mean, look, to be honest, a big part of this is like as big as we are, we're still tiny. That's the truth. Buy Now, Pay Later is tiny relative to all payments. So when I think about why we're growing, like part of the reason we're growing is that these large enterprise retailers 5 years ago, was doing 5% of their business, 4 years ago, it was doing 7%, then it was 8%. This year, it's 10%. Next year, it will be 12%, right? Now 12% share of checkout sounds like a lot. In the U.K., I do 30%. In Germany, I do 60%. So there's just so much headroom. Like that's part of the reason like my installed base every year, consumer preference, more customers choosing us. If I think about last year, we added Gap, we added American -- even forgetting Walmart, eBay, DoorDash, we added Gap. We added American Eagle. We added Aritzia. We added Starlink. Like every single year, I'm always surprised by how many additional large -- 4 years ago, adding Gap would have been the biggest news in the world. It's just in context to some of the others that we're partnering with. And so we have this really good installed base that's growing year-on-year. Every year, new merchants entering the network, and that's before you talk about the card volume, before you talk about launching JPMorgan. The U.S., we just have so much room to grow. So it's big, but it's just -- we're still got a lot ahead.

I mean one of the things that we get asked about with Klarna a lot is really profitability levels and whether or not the deals you're striking. And since you're really striking the deals, I'm curious to hear your -- the way you handle that, right, the way you keep that in consideration, whether it's Walmart, which is a topic of conversation, how profitable that could be. If you could just comment on just high level, at least if you see that. And then even just more broadly, the new U.S. business, what kind of measurement do you keep in check around profitability when you sign new arrangements?

It's a very fair question. And I think the message from investors is really, really clear, like what's the priority for this year, for next year, for the near term, like it's just be profitable. Like that's a really clear message. We've heard it loud and clear. Every deal we do needs to be economic. Just to be very clear. Every deal we do needs to be economic. I think when you think about some of the near-term impacts of some of these deals and businesses, it's all about the growth of their financing. Like I think the surprise for us this year was -- candidly, we didn't expect their financing to grow at 193% in December. And the nature of that model, as you guys all probably know better than me, is we take all of those losses upfront. We recognize that revenue over time. I didn't expect consumer adoption would be as high as it was. Like to put it in relative terms, we also grew pay in full adoption by 60% last year. Now that seems -- that ballpark seems reasonable to be. We just got caught off by how quickly it was growing. But the deals we do like -- I forgot to sound like -- but somebody else, they're great deals. There -- it's important for us that we do economic deals like for sure.

Okay. From a competitive standpoint, I mean, again, we talk about what you're doing that's resonating in the market. We are seeing -- I was talking to you about all the different Buy Now, Pay Later companies here at our conference, right? There's quite a few of them. PayPal, for instance, is talking more and more -- trying to be more promotional in the market to try to buy themselves placement at merchants because I think they know they need that, right, for one of their growth pillars. Do you see any changes from a competitive landscape, whether it's from pricing or others trying to buy more placement of the merchant?

It's funny, like having been in the industry for a while now, it is less competitive than it has ever been, quite honestly. Like in 2021, every deal was like a 5-sided knife fight and the subsidies that were being thrown around were insane. And I definitely did a deal or 2 in 2021 at the peak that I probably wouldn't do now. I can't think of a deal I've done in the 2 years that I wouldn't happily sign again tomorrow, right? It is less competitive than it was. And the primary reason for that is, back then, you had a bunch of venture fuel companies, us being one of them, who were only focused on growth. That's all it was. And now what you have is a small number of much more disciplined publicly listed companies that are very focused on doing deals that make sense. And I know there's a lot of players in the mix, for sure. But the reality is if you didn't escape 2022 at like escape velocity, if you were subscale coming out of 2022, it's not that you can't be relevant, it's just you're not in the conversation with Walmart or Gap or American Eagle. That's the reality of it, right? So you have a smaller number of companies, much more disciplined. Again, when I think about competition, when I think about what -- it's not me versus one of my peers to try and win a net new merchant, it's like its share of wallet. How do I -- I'm competing for that customer against 100 other payment options. That's where I think the competition is.

Okay. Look, it sounds like it's from a competitive standpoint, you're still doing well and differentiating. Are there other big new deals we can expect that we could hope for some announcements around...

No, I was going to say like I'm new to this.

No. So I don't imagine names, but I mean, anything that you're excited about for this year.

Yes, every year, every year. I mean that's the thing that, again, surprises me is like we are -- guys, we are still so small. The opportunity is so untapped. Like I go into markets where every single person not only knows Klarna, they use it. If for whatever reason, the service is down, it makes national news. Like we are still so underpenetrated in the U.S. And so I just have a way of going like, yes, there will be some very exciting things that will happen this year. And then that's going to happen the year after and the year after until we get to something like the type of scale we operate on in some of our mature markets.

So you're in 26 markets now, mostly across Europe, North America and Australia and New Zealand. Just when you think about expanding the presence even further, what markets are you looking at? And where do you see the most opportunity?

Yes. Look, without announcing anything, I think the reality is what does it take for us to be in a new market, right? That market needs to be large enough for it to make sense to our existing partnership base. So one of our durable competitive points of advantage is when I launch in a new market, like I'm not starting from scratch. On day 1, I launched some of the biggest brands in the world. If I go live in Italy, day 1, unlike with SHEIN, day 1, I'm live with Nike, Airbnb. So like it's important that the markets that we launch are important enough for the brands that we support. That's one important factor. Two, we've got to be able to underwrite a consumer. There's a whole heap of markets in the world where I think our product would resonate, but they don't have a sophisticated enough series of data points that I can draw from to underwrite a consumer or underwrite a merchant. It has to be an e-commerce heavy market, doesn't want to be cash. So there's -- you could type those variables into any LLM, and they're going to come up with 7 or 8 markets. That's probably a pretty good indicator of where we want to go. But for us, I don't need to launch a new market tomorrow to grow. Like if I -- like we see in the U.S., like there's nothing I'm going to do tomorrow that's going to compete with 50% growth in the U.S., right? So I think near term, just doubling down on what's in front of us today, like really executing well is the big focus.

Yes, that makes sense. And just growing with your existing customers into new markets. I mean how much of that has been a trend for you?

That's probably my #1 KPI is like Airbnb, we're live in 24 of the 26. Why not the other 2? Because it's the easiest upsell to a partner is take us live in another market. There's no additional contracting, no additional tech work. It's a really, really simple thing to do, and it adds immediate value. Again, part of the reason we're growing so fast is it's the installed base, doing things like that, adding a new product, adding a new market, adding on-site messaging, adding Express checkout. I could never add another merchant and still grow for the next 10 years just with my current installed base using all of our products, all of our markets, it would be a very, very successful business.

We've talked to Sebastian about AI for a while. But just remind us again, how is Klarna actually utilizing AI internally first? And then I want to talk about agentic commerce as well.

Yes. I mean, look, it sounds like a cliche, but like it's almost now like going. So what are you using electricity for? Like it would be -- I would be harder pressed to find a part of the business that isn't using AI to really transform how we work. And Sebastian talks a lot about this. We were a 7,000-plus company. We're a 3,000-plus company. Honestly, even if we hadn't saved $1, we still would have made that transition. And the reason is we are a more effective business now. The people who are with us are using these tools. Talent density has increased. Time and chair has increased, so you know your business well. Like we would have done it even if you didn't save $1. And I just say that by way of going, AI and the tools that you can now use, whether you're in sales, whether you're in the CFO office, whether you're in an operational frontline role, it is transforming. It's turning people into super humans, right? And so it's hard to say a single use case because it is now, there's nothing. There's almost no part of the business where it's not touching.

Okay. Agentic, obviously, is an area that we get brought up. It's brought up to us as a risk potentially for anyone that has a wallet for model, right? What do you think about that? I mean is it -- is there data something that's going to help you? Is the extension of credit really going to help differentiate and keep it as a barrier?

Yes. Look at the risk of belaboring the point, like I actually think consumer preference is what will matter most. And what I mean by that is if you think about my business today, like it's just a war of the buttons. You go to a checkout, you see us, you see PayPal, you see Affirm, you see Alipay, you see Bitcoin Pay. All I think about now is like why do you, as a human, pick the pink Klarna button, and it's going to be brand. There's a variety of reasons right? That's all I think about. I actually don't think about winning merchants as much as I think about winning the consumer in that point of time. In an agentic commerce world, it's exactly the same. It's just why does the agent pick that button? Why does the agent pick? And I don't think they're going to care about brand. I don't know if that's going to be the deciding factor. What will be a deciding factor is if that agent knows that, that customer has used Klarna 2 or 3 times before, 1 million percent they click our button before they start an application process with somebody else. Assuming all things being equal, the offer is equal, the fees are equal and all the rest. And so when I think about our urgency and our intensity to win consumer preference to get those 30 million in the U.S., the 10 million in Italy, the 7 million in France, 12 million in the U.K., like 20 million in Germany, the urgency, the intensity there is that consumer preference isn't just winning today, it will be a defining factor in an agentic commerce world. They're going to pick your preferred brand for sure. They're going to pick whoever you use last. They're going to pick whoever you're a member of. And so we actually think that, that is part of what you need to have. If all you've done is built a utility play, which is just a financial infrastructure product, but you haven't got a relationship with the consumer, I think you're going to be in a really tough position because then you're competing on price, that's it. That's going to be tough.

All right. That makes sense. Last one for me, and then guys, I'll take a question or 2 from the audience. But apparel and accessories has really been the areas in the U.S. that you've succeeded in. But if I look in Europe and other markets where you've done more -- you're a little more mature, it's much more diverse. So just thinking about going forward, how do we see that shape up in the U.S. and really mirror what you've done in the [ past ].

Yes. I mean it's already become a focus for us. And some of -- there's a lot of focus on the big PSPs that we take live. Like a real area of focus for us is like the -- what I would describe as almost like the vertical PSP/software plays that have just won certain industries. We're live with like Mindbody, for example, like that's been a big, big focus for us. How do we win those platform plays? The truth is, in every market, we just start where we win market share easiest. That's always been fashion, then we move into cosmetics and apparel and footwear and pretty soon, we're in homewares and then we're in electronics. And it is a natural progression to now we're doing on-demand and now we're doing hair clinics and now we're doing Botox. I don't know what you described as Botox [ vials ] whatever. But that's a big part of our business in other -- not even us, you go into Australia, you walk into a hair salon and there's an Afterpay sticker there, right? So it's just this natural progression that you just cascade into the next vertical. You're definitely going to see that happen in the U.S. It already is.

David, the stock has obviously been a little tough since the IPO. And I think investors are a little hung up on the growth of lending, right, fair financing and the provision and the modeling around it was confusing to some folks. But your growth underneath the surface has been extremely strong really across the business. What do you think is underappreciated by investors that they should help -- really should help get the stock going if they really understood it better.

I mean, look, a part of it is, well, as a business, we need to understand investors better. So we need investors to understand our business, but let's be candid, we need to understand investors better. And I think we've transitioned from being a private company to being a public company. And the truth is we hear you very loud and clear, like profitability needs to be a focus for us, for sure. No question. I think what's -- I would always say we're in like a good company when I look at other fintechs who've gone from -- and there's a lot of them who have gone from IPO to nadir, it's a 90% drop and 80% drop. I'm not going to mention their names, but you all know who they are. I really do think investors, and I understand why, struggle, one, to put Klarna in a box, and it's because we haven't made it easy to put us in a box. But I also think investors struggle with companies that are banks doing what we do at the scale that we do, growing as fast as we do. Now it would be a lot easier if we're also profitable and I get that. But like it is not easy to grow at our rate across 26 different markets, 118 million consumers. I'm not sure any bank has ever done it, in all seriousness across so many markets, so many consumers at the rate we're doing. And I think that's hard to digest. I don't know why public markets do what they do. You guys are all better placed. In the last 5 days, I'm up 18%. I don't understand that. I don't know why I was down as much as I was. You guys will all be better judges of those sorts of things. We are -- and it's a very trite thing to say. I have absolute conviction that if we just do our job, like if we just execute, it is going to be a very different conversation a year from now, 18 months now, 24. 0, 0 doubt about that. What that means in terms of multiples and the share price, I have no doubt about. I don't -- sorry, no idea about. Actually, I can't give -- I genuinely don't know. But I know if we just do what we're supposed to doing. This is one thing I would say, we've lent out $0.5 trillion over time, $0.5 trillion. Like this isn't new to us. We've done it in multiple currencies, multiple locations, multiple products, multiple price points. Like this is our bread and butter. But we -- it's easy for me to say you want to see the action, and I think that's what we've got.

Excellent, David. Thanks. Guys, maybe we have time for 1 or 2 quick questions.

Thanks, David. You mentioned the DoorDash partnership earlier. There's obviously been debates around BNPL usage for lower ticket, more everyday purchases, certainly a number of headlines around that partnership being launched. Can you just touch on the trends you're seeing in verticals like these, how consumers are engaging with Klarna, what types of consumers doing from a credit perspective? And then what types of payment plans are really being used and stuff like this?

Yes. I mean, very fair question. And look, DoorDash is a perfect example. You can't use Buy Now, Pay later on DoorDash. It doesn't work that way. Like the threshold starts at $35. And what's really important is that $35 threshold is consistent across almost every Buy Now, Pay Later company around. What we encourage you to use below $35 is paying full. We're live with Uber here in the U.S. Buy Now, Pay Later is not a part of it. That's not part of our offering. And so 20% of our business globally is paying full. And I think it's really important, like you think about the transition of a customer. And again, I remember this from being in Australia and just hearing dynamics about Afterpay's business. And I remember someone going, hey, our frequency in Australia is now 14x. By the time you're using that payment method 14x, it's not about delayed payments because you've actually -- now it's coming out of your cycle a couple -- I use American Express if I'm buying a $4 coffee or a $4,000 Airbnb, I'm not kicking the $4 into next month. There is a muscle memory that comes with these payment products. Why do people use PayPal? Why is protection? One click. I'm on the couch. I don't want to get off and go across and get my debit card. Instant refunds. In the U.S., if you're a debit card user, which I doubt anybody in this audience is, you might wait 10 business days to get a refund. And so I think about what we're trying to solve for is that debit cards were designed to be put into an ATM and get money out. They weren't meant for online e-commerce. And so a lot of the reasons that we build our product the way we built it is we want a true proxy for that debit card. And so when it comes to DoorDash, that was a long-winded -- a lot of the way people are using for is like you can get Home Depot on DoorDash delivered. And that was part of the reason DoorDash wanted a solution. It's high-ticket items, not a lot of burritos. And that was never part of the value proposition, to be honest, yes.

Okay. Guys, why don't we stop there? David, thank you very much for joining us.

Thank you.

I appreciate it.