Klarna Group plc (KLAR) Earnings Call Transcript & Summary

Thank you, everyone, for being here at the next session. We're very excited to have Klarna's CFO, Niclas Neglen here. So thank you very much. We appreciate your time. A lot of topics to kind of hit on, but I did want to start by congratulating you guys on a milestone yesterday, 1 million merchants, a lot.

We're very pleased to -- thanks for having me here.

Yes.

Thanks, everybody, for coming.

Yes. Well, that's a big accomplishment. And I guess maybe to just kind of dive in on market opportunity for Klarna, we think about buy now, pay later adoption in some of your key markets, right? We think about Germany, Sweden, the U.S. Tell us how you're thinking about penetration in terms of percent of e-commerce that buy now, pay later now represents? And what's kind of the upper limit? Where can this go over time? Because it feels like there's still a lot of runway, but maybe the answer in terms of how much runway varies a bit by region.

Jason, I think it's a great question. And the way that we think about ourselves in Klarna is really about being spend centric, right? And that means that we have a payments product that is relevant for every type of vertical, right? And that's a key, I think, differentiator and a strategy of ours. So last year, we had 118 million consumers purchasing goods and services for $128 billion across now almost 1 million merchants at the time. And really, the focus is less than buy now, pay later. That's just a component of what we do. It's about having a payments product that is relevant for every vertical, right? And so what that really means for us is that from our perspective, we're looking at expanding our ability to serve customers wherever they are, whether that be online, offline. Whether it be with the card or whether it be through the merchants, Apple Pay, Google Pay, et cetera. And I think that's really our focus. So while obviously, buy now, pay later is a part of that, and I think it will grow as part of e-commerce. If you take Sweden as an example, we have 80% population penetration in Sweden and around about 40% of e-commerce there. But we're still growing at double-digit teens last year in the fourth quarter, driven by the fact that we're continuously expanding because we have relevant payment products for every type of vertical.

Okay. Okay. Yes. I know it is important to remember, you've obviously diversified the business model pretty materially over time. So just as you've scaled both sides of the network, right, the consumers and the merchants, have you seen any noticeable shift in the demographics of the consumers that are coming on to the platform?

I think it's a great question. From our perspective, because we have a broad-based adoption, like I said, 80% population penetration in Sweden, we have 30% plus in Germany, 20% plus in the U.K. And even here in the U.S., we've got 10% of the population, right? So it is a very broad-based thing. And really what drives that is the expansion of our -- continuous expansion of our network, right? So you mentioned the 1 million, which we're obviously very proud of, the 1 million merchants that we now have. And it's all about ensuring that we have that relevant payment product to be able to allow us to do that. So in 2025, we had key wins Walmart, DoorDash, eBay, Apple Pay, but also those default PSPs. And that really allows us -- default PSP basically means that we are just being part of the standard offering for a merchant that comes and connects with one of these PSPs. So we're live with Stripe, and I'm sure we'll talk more about it later. But ultimately, what that means is that we have an evolution of the channels, the verticals, distribution as well as product expansion. And all of those things together is really what's driving the expansion of usage.

Okay. I wanted to hit on competition. I mean, we get this question all the time because as buy now, pay later has obviously become a lot more mainstream, including in the U.S. It's natural for more competitors to kind of come into the market. With that said, Klarna clearly remains the largest player globally. And so I wanted to get your take on, have you seen any notable shift in the competitive landscape, whether that's just from other kind of buy now, pay later providers or even for traditional financial institutions or credit card companies that are offering some form of installment payment options? How do you see the landscape?

Yes. I don't think there necessarily has been a shift in the landscape of -- on the competitive landscape. I do think that the reality is you should think about this more as how are consumers wanting to spend? How do they want to spend? They want to save time. They want to save money. They want to be control of their finances, right? So they're looking for that versatility. And I think Klarna brings that to the table in a way that others don't, right? And what I really mean by that is having that kind of broad-based offering, having being spend centric. And finally, I think it's really key point is also is that I think kind of a pure buy now, pay later doesn't have is that focus on consumer preference, right, ensuring that one really builds the right type of product with the right type of experience and allowing consumers to choose between how they want to manage their money.

Okay. Okay. So it sounds like things are pretty much status quo in that regard. I mean, look, it feels like from our perspective, like there's still a rising tide that's going to lift multiple boats, right, again, coming back to our point around penetration so far. So we touched on some of the differentiation you see for Klarna. Why don't we turn to guidance for 2026, which you guys obviously provided in February? So there's a couple of different dynamics in play here. We know that the fair financing product continues to ramp. And so the guide in terms of your transaction margin dollars, I think, is somewhat back half loaded. So if you can comment just on the visibility on that second half acceleration because I think the compares actually get a little tougher. And then as part of that, maybe just remind the audience -- I know you've done this a lot before, but just remind the audience around the accounting mechanics of fair financing because since you're still relatively new to the public markets, it's important for people to understand the impact on the P&L over the short term.

Okay. That's, great.

There's a lot there.

I'll take the 2 parts. I'll start with kind of the guide and then let's spend some time on the fair finance accounting dynamics, if you want to call them that. So basically, we added about $20 billion worth of volume in 2025 versus 2024. In 2026, we're guiding to greater than $27 billion, right? So I think that's a meaningful increase on the base, right? And it's really driven by what we talked about before, the merchant expansion, right, ensuring that we're ubiquitous in more places, the card expansion, which allows us then to be in more places as well as the fair financing piece, right? So I think we have a kind of solid line of sight towards where our growth is on those dynamics, right? What we saw in the fourth quarter, particularly was an accelerated shift towards fair financing, particularly in the U.S., which that coupled with the fact that we've seen an accelerated increase in our direct-to-consumer volumes, primarily our card, but also Apple Pay and Google Pay, et cetera, means that we've kind of -- we've factored that kind of trend into 2026, taking a view of what that means for us, right? And that has a couple of fundamental dynamics, right, which you saw play out in the fourth quarter and which we then have baked into '26 guide. So firstly, on the fair financing, right, just as a nature of how this is, is that you provision for your expected credit losses upfront, while you earn prudently your revenues over the life of the loan, right? So that's simply what we're doing, right? So you take the call it cost upfront in simple terms and then you earn the revenue of life, right? So as you're ramping a portfolio, this is very natural and it's happened with any fintech or any financial company that expands, right? But if you're expanding at our pace, what it means that you're actually provisioning a lot more than you're earning from a revenue perspective until you bake that in over time. So it's the compounding nature of things, right? And obviously, given the fact that we have on an absolute basis, a very strong growth, still the comp-over-year becomes a bit tougher right from a percentage perspective as you normalize this book, what you will see is that revenue compounds above and then basically overtake that provision, right? And that's basically what we factored into 2026 and how we're thinking about it. So hopefully, that answers the question, but happy to.

Yes. And maybe just to kind of to follow up on guidance as sort of a general topic. So I mean, you've now had 2 quarters as a public company, right? And maybe give us a sense of how your approach to providing guidance to the investment community is evolving because there's always going to be parts of the business, right, where your visibility is inherently more limited, especially at the start of a given year. So I would just love to hear a little bit about how you're thinking about evolving that. I think every company like post their IPO, they go through that process, right, or kind of figuring out adjustments they may want to make and ultimately finding the right balance between how much guidance to give versus not giving too little, not giving too much.

No, I think a good question. So if you think about our focus has really been on giving as much clarity and transparency in the guidance as possible, right, appreciating and recognizing, I think that we have this evolving business that's growing, right, in the right ways towards that spend centricity, and we're expanding the amount of payment products that we have so that we're relevant in every type of vertical, right? And so fair financing and card adoption, like I just said, are really the big dynamics of that. So again, fair financing really driven by that upfront provisioning, earning over time and the book then normalizes sequentially over a number of quarters. On the card, right, we've seen the strong adoption rates, and we're assuming into the guide, expecting that, that to continue -- that adoption rate to continue. That comes with a certain level of upfront costs, which again, issues, et cetera, right? But also what we see with things like the card is a higher frequency of use, right? So on average, in the cohort that we see today, about 3x higher frequency than if you are not a card user, right, which has a great opportunity for expanding Klarna's network and being that everyday spending partner, right? Building that habit of using us for multiple different types of spending is an important element of our strategy.

So it kind of sounds like as you guys thought about issuing the initial 2026 guidance, you said, hey, fair financing and card have really ramped even better than we thought in like the back half of '25. Let's just assume that those trends continue so that we're less likely over the very short term to see any kind of negative surprise on transaction margin?

Yes. So the way we think about it -- yes, we think about the trends and obviously, what we think we're going to achieve and we have plans and other on that. I think the key thing here to me is that the consumer momentum is there. The merchant expansion momentum is there. And the engagement levels are there with the application of more opportunities for consumers to spend with us in more places. And I think that's a very important structure because it sets the right foundations for continuing to build on what we've been building for the last 20 years.

All right. Now we're going to hit agentic commerce, right? Big topic. I mean, we've written a lot about it. We think it's probably the biggest theme in this sector over the next 3 to 5 years. We're actually going to have a panel on it right after your session. But talk to us about how Klarna is laying the groundwork to participate in agentic commerce. We've been trying to think through a lot of different scenarios for like branded button presentment and prominence in a world where consumers are transacting more in an agentic context. So would love to just hear how you're approaching that and really how Klarna can arguably continue to differentiate in an agentic world?

Yes. So I think to some extent, and we think obviously a fair bit about this ourselves. We just launched with Stripe partnership in this area as well. At its core, fundamentally, whether it's an agent or a consumer directly, the fundamental principles still hold, right? Are you relevant and available in all the different places where the agent goes, i.e., where the consumer goes, right? And so are you available at all these checkouts? Are you available using the card? Are you available on Apple Pay, Google Pay, et cetera, right? The second piece of this, think is the fact that you want the preference because ultimately if you are a high frequent user of Klarna then the agents will most likely look at that and compare that to, okay, well if I have a set of products that are all equal from an economics perspective, then I will follow the preference of the consumer. And I think that's why it's important to build the network that we're building today with or without agentic commerce, right? I think we are well positioned for that going forward.

Okay. Yes. I mean we agree. I mean, I think ultimately, it's still going to be the consumer that's kind of making the ultimate decision, right, perhaps providing some instructions to the agent, right, but then ultimately making the call. So -- and we saw the announcement you guys had with Stripe last week, too, which I think was important. I mean do you guys have a view just in terms of like are we going to hit like a specific tipping point where agentic commerce is going to really inflect? Or does it feel like a very gradual blocking and tackling process because you got to get merchants on board and issuers on board and figuring out how they're going to interact with the LLMs?

I think there's always going to be questions about how to kind of develop. It's a little bit like driverless cars. We don't know when the tipping point is, but it will come, right? And so the question is more being relevant in that conversation upfront by being in as many checkouts as possible and building relationships, consumer preference as well as with the merchants.

Yes. I mean I thought it was interesting, too. I guess it was last week or the week before that OpenAI announced that they're not doing embedded native checkout within ChatGPT anymore, and they're going to actually have the merchants integrate their apps into the LLM. I thought that was kind of telling because they hadn't really gone down that path very long. And now all of a sudden, they seem to be backing away from that a bit, which I think is kind of favorable for merchants. And then by extension, those that the merchants partner with branded solutions such as Klarna as opposed to the LLMs kind of disintermediating the status quo.

Yes, that makes sense.

Yes. Okay. So the other angle with AI, I wanted to hit on is just how Klarna is using it internally, coding, customer support. I guess it was -- obviously, prior to your IPO, there had been some widespread media reports about how much cost you had taken out, I think, the customer support function and maybe some tech functions, too. Maybe just update us on where we are there because, I mean, your growth in revenue per employee has been pretty impressive.

Yes. No, I think to some extent, the numbers speak for themselves there, $1.24 million of revenue per employee, I think that's increased over the last few years. The last 5 years since 2022, we've increased our revenues by 104% and our adjusted operating expenses have gone down by 8%, right? And partially AI, partially efficiency, et cetera, right? I think though that it's a little bit like where do we use electricity, right? I mean AI is now so spread out within the organization. And what's really helping is to -- this talent base we have allow them to be even more effective, right, in what they're doing. And I think that is super exciting, whether it be within my area of finance or whether it be in customer services or helping to write code. It doesn't really matter where it is. I think it permeates the organization, and we're trying to lean in. There's really not an area where it isn't being touched right now, I think.

Are there certain areas where you've seen the most productivity gains or the most cost saves from AI that then makes you lean in a little bit more in those specific areas or...

To be honest, I just think like there is very few use -- there's very few places where there isn't a use case. And I think it's more up to helping our talent learn how to use it effectively irrespective of where they are.

Okay. So presumably, you've trained most everybody at this point in some way, shape or form?

Yes, it's learning by doing, right? What's nice with AI, in my opinion, is that you have the ability to actually talk to AI about teaching -- teaching yourself how to use it better. When people ask me a question, I can say, have you asked AI? If they ask me how to do this, AI will do it.

Yes, sort of tell my kids. So you touched on this a little bit, but I wanted to ask you kind of the open-ended question of how this broader push into banking services is really driving ARPU growth and engagement. And you can kind of take that in whatever direction you want. I think there's probably a lot to say there.

Yes. I think at its core, right, spend centricity it is our focus, right? And so if you think of it from that perspective, all the kind of banking services that we're trying to put in place is really supporting that everyday spending plan, right? So that means we want to be sure that we have an effective card that you can use debit sometimes, credit when it's appropriate. We underwrite every single transaction, but you get the flexibility and you have the control, right? At the same time, we've launched [indiscernible] balance where you can engage your refunds back onto your card, right? We have a very effective savings product in Europe, about $13 billion worth of deposits and we have been billing that since 2013. And this is all about finding ways and moods for our consumers who help them save time, save money and have more control of their finances while they are doing their everyday spending, right? And that's really the focus that we've had and with -- I think it's interesting is that what you are seeing is that what you want to see, which is an average revenue per user expansion overtime. So if I take 2 examples, right, one is that in the 2022 cohorts, there average revenue per user that year was $12, today it is $52, right? So you see that expansion of consumer piece is more. The second piece is that because we were launching these services, and we're getting that higher adoption that we have more vertical expansion, so we're more ubiquitous, and we also have more product expansion or more products, right? What we're also seeing is that the average revenue per user for the first year has also accelerated. So -- and it was $12 in 2022. Today, it is around about $21, right? It just shows that people are adopting more of our services and seeing the benefits of us trying to take a holistic view to being their spending partner.

So you're getting more of that upfront attach with some of the banking products. Okay. Good. Let's talk a little bit about the card specifically, 209% GMV growth in Q4, still scaling quite incredibly. 4.2 million active users. Talk to us about the mix of transactions you're seeing there in terms of pay in full versus pay later. And then I would also be curious to hear about Klarna card usage in-store versus online. How is that evolving?

Yes, sure. No, look, we're very excited about the card. And I think it just shows an amazing growth over the last 6 months, 4.2 million cards. What you see here to me is really a question of increased frequency and engagement that obviously is important for that spend centric model that we have, right? So we have about, on average, I said, 3x higher frequency on the card. If you look at it, generally, a consumer will start their journey with a merchant, a buy now, pay later product. And then as they expand their preference, they then choose the card, right? And that then starts giving us a different shape of form of spending, right? So I mentioned Sweden already, but I'll do so again just because, but I think it is an important kind of benchmark, right? 80% population penetration with continued growth because people are using the card. And what's interesting here is that you have this card that has the flexibility of debit and buy now, pay later, pay later in 30 days or for a larger purchase of fair financing product, right? And what we're seeing even in Sweden is that people that were maybe very frequent users of our buy now, pay later are now starting to use us also for pay in full as well as when they're making larger purchases, right? And that's habit forming. And that's a really critical part of a network like ours that we're building. So we feel very good about that. I mean the card in the U.S., just to comment, maybe 25% of all of the purchases are now offline, which shows ability for us to continue to expand through those things. So I feel very good about where the card is as a product set, and I think it's going to be very accretive over time.