Klarna Group plc Ordinary Shares

Good morning, everyone, and welcome to Klarna's third quarter 2025 earnings call. My name is Andrea Ferraz, Head of Investor Relations and M&A, and I'm joined today by Sebastian Szymankowski and Niklas Nyglin. Our Q3 results were released at around 7.30 a.m. Eastern Time, and they are available on the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These statements are based on our current expectations and assumptions as of today. Actual results may differ materially due to various risks and uncertainties, including those described in our most recent filings with the SEC. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which is distributed and available to the public through our investor relations website, as well as filed with the SEC. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2024. During the Q&A portion of today's call, please limit yourself to one question. We will reopen the queue for more questions if there is time. To join the queue, please press star 1 on your keypad. Before we move to Q&A, we'll begin with a short presentation. Sebastian, please go ahead.

Hello, everyone, and welcome to Klana's first earnings report, quarterly earnings as a public company. Very excited. I'm Sebastian Simetkovsky, the CEO and founder of Klana. And with me, I have Niklas Niglian, our CFO. Let's get right to it. Most of you are probably familiar with Klana, 140 million active consumers, 850,000 merchants and above $100 billion in GMV. And we have grown this network quite extensively in the last few years. We are having users across all parts of life. These are female, male, all types of educational background, living in all areas. And as you may know also, Klana is today much more than just buy now, pay later. We offer pay in full, pay later, fair financing, and as you will see, more and more neobank features. Our reach is global. North America, Canada, US, most of Europe and Australia and New Zealand. But let's look at today's headlines. So today I'm very proud to focus together with you on three topics. Growth acceleration. It's fantastic that we're expecting to see above 30% revenue growth for Q4. We also have a record quarter for fair financing products. It actually grew over 139% year-on-year, and I'll tell you more about why. associated with the number of merchants that we're seeing growing there. And then we're celebrating that Klana has now actually issued over half a trillion over our 20 years. And thanks to our leading underwriting technology, we have continuously lower losses than industry standards. Those half a trillion has actually been issued with less than 70 basis points. Put that against any benchmark and you will see that's pretty impressive over 20 years and 26 markets. But let's go back first a little bit in time. 2015, Klana is about 10 years ago. We're sitting down with most of what is the current management team asking ourselves, what is the future of tech? What is the future of Fin? And we realize this world is about to change. Eventually, we will all have digital financial assistance that helps us save time, save money and be in control of our lives. And we realize this will also have large implications for both the financial industry, the retail banking and technology. And you can think about it this way. Both of these markets are pretty much malfunctioning. They have the classical fallacies of non-functioning markets, such as the fact that it's hard to search and find the right things. But that is going to an end now. AI is going to change and ignorance will stop being a business model. These lock-ins that people have been able to rely on, forget about them. They're going to go from strategy to nostalgia because now AI agents will be able to move all of my so-called proprietary data preference and all of that between different providers. And finally, this means the moats are drained, the gates are open. We're going to see a dramatic increase in competitiveness in both financial services and tech. We're very excited about this. And what it means is that trust is the new oil. Not data anymore, but trust. The one that customers actually trust to truly care to their best interests are going to be the ones that are going to gather the most following. In addition to that, customer service minimization is going to be something that we can forget about. Historically, banks have put us on 45 minutes holds, and the big tech companies, they don't have customer service at all, just FAQs. Forget about that. That's that thing of the past. So the quiet life that we have observed among the big tech and banking companies are over. Complacency means end of business. Marble offices are gone and the free gourmet cafeteria is no longer culture, it's overhead. This is what we're about to see, and we can see that it's already stopping to happening. Pre-AI tech, we saw tremendous perks, zero customer service, product skill without consequence, and now we're starting to see year efficiency, intense AI product shipping urgency, and the first real competitive threats in 20 years. That is quite exciting because if you look at those two sectors, FIN, retail banking, that's a 520 billion profit pool that is addressable to Klarna. We only cater to 0.6% of that today. And ads and technology companies are another 500. These two combined is a trillion dollars. Now remember, this was estimated by McKinsey, but also by Claude. And I have to admit that Claude was significantly cheaper than McKinsey making these estimates. now what does this mean well we say in sweden one person's dead another person's bread this is pretty much it because this means the klana is having a fantastic opportunity to go after these two massive profit pools and we're going to do that by 100 focus on customer obsession growth operational efficiency and leading the ai innovation and i think that here i want to highlight that Those days when tech companies and banks could not wake up every day like retailers do and restaurants do, focusing on how do I bring in customers through the door? How do I give them the best offer, the best service? And how do I make sure I operate very efficiently so I don't go out of business? Those days are gone. And the businesses in these industries that are willing to really pursue this and work effortlessly on these topics, they are going to win and they're going to grab a lot of market share in these markets. So let's talk about customer obsession at Klarna. Well, what we are doing is very simple. We give people back time, we give people back money, and we give back them control. And this goes far beyond. A lot of you will be familiar with Buy Now, Pay Later, but we do offer a number of other services like searching for products at the right price, making sure that it's easy to pay your bills and manage your finances to show you where your packages are in real time so you can go and pick them up and give you control and insights of your spending habits and in addition to that we offer you a lot of give back money i mean just this a number of money that our customers have saved on customer or not paying interest with our paying for interest free is in the billions and in addition that we offer cashback and other features as well so this was very complicated i think Something I would like to focus on today a little bit is that our form of credit is really the more sustainable solution. And if you would ask that digital financial provider, the digital financial assistant of the future in what they would argue is the best form of credit, I can tell you it's not going to be credit cards with 6,500 outstanding balance. with tremendous fees and never-ending payback over revolving. That's not going to be the one. It's not going to be point-of-sale financing. Yet again, another way to charge high fees, it starts as 0% financing, but then after a few months, they start to push you into 36%, and it's also not the best one. But the best one is going to be the buy now, pay later with Klana. Why? It's low average order value, so you're only borrowing about $100. Your average outstanding balance with Klana is $88 versus these others. the interest rate is zero and you pay back on fixed installments. This is a healthier form of credit, which is attracting an audience that is very aware and conscious about their spending. This is also visible in our credit losses and our charge-off rates, as you can see, are a fraction of these competing credit products. There are other ways in which Koana already today really distinguish itself. And just today, I want to focus on one to just highlight it to you. Klana is the only payments network in the world that collects SKU level data on basically a majority of all of our transactions, which means that when customers buy with us, when they buy with a credit card, they're used to seeing what you see on the left hand side. You will all recognize it from your banking apps. You barely understood where you spent. It's just some merchant name that you can barely read and some amount. With Klana, we have the full SKU level. We know exactly what you purchased, so we can show you images of the items that you bought. As you can see on the right-hand side, the Nike tech here and so forth, you can see the sizes, the colors. You can also then, as a consequence, report returns much more easily, or if you have warranties or other things that you want to follow up on. So that is a tremendous value and a differentiation in richness of information that we carry at Klana. Putting customer obsession is really what we've been focusing on a lot, and even more so in the last year. We have this very strict process where we start with insights. We do over 200 consumer interviews every week. We basically inspect visually 5,000 interactions in detail per week, and this drives a lot of what we call actionable insights. which are average actually about 75 currently per week the expected value of delivering on them are estimated at 300 million dollars of lifetime transaction margin and we're very very important to us that they are crystal clear on what is broken how could it be fixed and that we have these very quick estimates of the financial impact and the efforts to fix them And then we obviously work effortlessly to deliver these improvements to our customers. And currently we're shipping at a rate of about 20 improvements a week with an estimated lifetime value of about $15 million in transaction margin. And each of these shipped improvements is verified for impact, for quality and effort. This is the core of our customer obsession process to just effortlessly talk to customers, look at these recordings and then understand how we could improve on them. The fantastic effects of this are that numbers don't lie. We have 73 in MPS, 54% in global brand trust, and 41 in global brand awareness. Remember, as I said, trust is the new oil. More than data. Data will flow freely. Trust doesn't come freely. Trust only comes from hard work like the one I just displayed. And this is why we don't just have customers. We actually have fans. These consumers, when you talk to them, they rave about Klana, they rave about what we're offering them, and they exhibit a huge amount of trust for what we offer them. Now, this then brings us to growth. Now, with growth, we have our objective number one, and that is that Klana should be available everywhere Visa is. And we do that through what we call our default global distribution part and play. This means that we go to the biggest PSPs in the world, the ones that are doing over a trillion dollars worth of volume, And then we have worked with them to say Klana shouldn't just be an alternative that you add on as a merchant. It should be standard, default. When you sign up for these Stripe, Nexi, WorldPay, you should automatically get Visa, MasterCard and Klana in the default offering. And that is something that we have been pushing for years and are continuously pushing for. And you can see now this This quarter, we add Clover to this club of signed partners, and some of them are already even live, like Stripe and Apple Pay, that are basically ramping up now with this new offer. And you can see that that's having a real, real impact on the number of merchants that we're adding. Because if we're ever going to hit the 150 million acceptance points that Visa has, this is only through global distributions that this will happen. And you can see that it's starting to pay off the strategy as we went. We added a record of 235,000 merchants this quarter up and it's now growing at 38% compared to a year ago at 13%. Obviously, we're also still expanding with the world's best brands as well. So some of the renewed or expanding partnerships you can see on this, and that is obviously still a big important part of our strategy. But the distributions of our PSPs, acquirers and technological platforms is the key one that's going to drive the most of the millions of merchants that we want to attract. attract to Klana to be on par with Amex, Visa, Mastercard. Objective two, and this may be something that you're not familiar with, and that is that a lot of merchants offer Klana, as we said, about 850,000, but not all of them have been offering all of our payment methods. And this is also an important thing. We want customers to be able to expect that each of the payment method that they recognize with Klana, which is the pay in full or pay now, it is the pay later, and it is the fair financing, should be available at every merchant. And we have made Fantastic progress here, especially on the fair financing side. As you can see, just between last year, we were 80,000, now we're 150,000 merchants. It means that still only 18% of our merchants actually offer fair financing, but it's a significant improvement. And this is what is the explanation for driving that fast growth in the fair financing product. We just doubled in our merchants that offer it. And so consequentially, you can see more than almost doubling the volume as well. We're also working effortlessly to improve our paying full offering. This is really, if you would like to call it, the big wallet competitor to some of our big wallets out there because this allows you to pay the full amount. Currently, we have about 43% coverage and it is growing, which is great. We do a lot of things here to make sure that debit is an important payment method available at every checkout out there when people see Klarnav. now then we have our third objective which is to go from payments to full neobank and in order to explain to you how we do that i will take you quickly just through the customer acquisition channel that i think is totally revolutionary and very different most banks will acquire customers through promotions through standing in the airports and bug you when you're running to your flight What Klana does is we're available in all of these millions of checkouts and people will see us. We are associated there with fantastic brands, be it a Nike, a Macy's, and Sephora, and we bug you and say, hey, you know what? Why don't you use us to pay this time around rather than your card? It turns out it is so simple to start using Klana. It's almost as simple or even as simple as using your existing card. This is what has allowed us to accumulate 114 million active users. which is fantastic but obviously they only use us some of them only use us for a single purchase so what we then start doing is telling hey you know what if you download our app you will unlock a world of additional features additional things that you can do like we saw on how you can see your purchase history and understand exactly what you purchase or make it easier for you to return so about 49 million monthly active users and 76 with a total have downloaded our app So that's the next step. And then we say, hey, when in that app, beyond just seeing your purchase history, you can actually use it for shopping. We have our shopping browser. We have cashback. We have tons of things. And what you can start seeing happening now is there's about 10% of the population that uses these features. So it's much smaller. But look at what's happening on the average revenue per customer. It's going from $28 to $90 on that segment of audience. And now here comes the card, which we're super excited. I'm going to show you some more amazing metrics on our card. And what's interesting here is only 3% so far has picked it up, but it's starting to pick up rapidly. And you can see that when people start using our Klana card, then the average revenue per customer jumps to $130, which is actually... four times as much as the average active user. And in addition to that, we're also expanding the bank offer, the balances to store a positive balance, to be able to use our savings products and so forth. And you can see there as well, the average revenue per customer is very, very different. So each one of those are very early, but we can say the funnel is working. This channel is amazing. It brings in customers at a fraction of the cost that our competitors are spending to attract the same users. We're now seeing that we are able to transform them into a richer relationship that gives consumers more value, but also allows Klana to generate more revenue per customer. First, what about the card? People ask me about why should I get the card? Well, first and foremost, the purpose of our card was to bring back the control of debit or credit. Some of you may remember when you were kids, at least when I was a kid working at Burger King, you would swipe your card and would press one for debit, press two for credit. People really loved that. But the problem was banks didn't love it because you weren't borrowing enough money when you did that. You weren't building up a balance. You weren't putting all of your purchases per month on a balance. And then you were less likely to revolve, less likely to build up that balance. So banks remove that, but we know there's a big segment of customers in the US, we call them the self-aware avoiders, which McKinsey has said is about 20% of the audience. We think it's even bigger. But the point is that that's an audience who have tried those credit cards, realize that they're a debt trap, realize that they're a product of the devil, as some of them call them, and that they're all about pushing you into debt. So they really enjoy this control of press one for debit, press two for credit, and we're bringing that back and we see tremendous demand for that. But the most common thing I hear when I say that is people tell me, yeah, that would be a nice feature, but what about my perks? What about my loyalty points? What about all the other perks that I get on my credit card? That's what you're seeing here is now, not only have we launched the card with one for debit and two for credit, but in addition to that, we're now rolling out the debit card with credit card perks. And the demand for this has been through the roof. We're very excited about this. It's just about to roll out and get launched, but I can give you a funny example. I tweeted about this. and said that anyone who would produce these funny memes will actually give us you know we'll have an early access code and it was just a you should go to x and watch these memes it's really really funny and then one of our customers suggested look if you personally cut my amex i'm there and we said fine i'll do that so we had almost a thousand people who indicated that they wanted us to sign up to get the credit card cut by me personally. So we think that's showing some very good promise to the demand of this product and we're seeing across social media there's tons of interest as we present these products to our audience. so this objective number three from payments to full neobank what is the numbers what is it looking like well the fantastic thing is thanks to the success of the last quarter we have now surpassed one of our main competitors in global active card users hitting 3.2 million which we're very excited about and we can see that us obviously has been a big contributor to that with going from virtually zero to 1.4 million active card holders in the us market so uh it's starting to uh to really really work and we're excited about trying to continue to accelerate this and in in additional markets you should be aware here that europe was a little bit later to the game so us was first and we we expect to see even more great success here in europe as well And that is also being seen in our card volumes. As you can see, on a year-to-year basis, they're now growing almost at 100% rate. And that also has contributed. So I would say doubling the number of merchants offering financing has grown financing product a lot. You can see here what we have done through the card. And all of this is paying off in an acceleration of our revenue growth. So here again, what you can see now is for the US. that we are now actually this quarter reporting 51% growth year-on-year. We're very excited, which means that we're far outpacing our local competitor in growth. And in addition to that, you can see that it's also picking up across the board in all markets. And also the strong growth in the US is contributing a lot to the growth overall of the company, meaning that we're now almost on par in global growth as well. We've picked up to 28%. And this is while increasing take rates, which is a strong sign of the preference and interest in our products. So finally, a few words on operational efficiency. It's fantastic now that we're celebrating that we have underwritten $0.5 trillion since inception. And we've done that with, you know, south of 70 basis points credit losses. And this is partially due to the fantastic short durations of our credit. That means that through the macroeconomical cycles that we have gone through over those 20 years, issuing all of this in over 26 markets, when macroeconomical swings happen, we can change our underwriting models and adjust our more than half of our balance sheet is underwritten according to the new model. That's a level of agility that none of the large banks can compete with. Most of them with their credit card portfolios and their mortgages and so forth will sit and try to refresh their balance sheet for years after economical changes have had implications on how you should underwrite. We have also continued to transform Klanos productivity. You can see here that our revenue per employee, as we've been talking about previously, has continued to increase. We're now at $1.1 million per employee, and we hope to continue to do that acceleration. Part of that is due to AI and just a focus on operational efficiency, which not through layoffs, but through natural attrition as we haven't hired for a few years, has now led to the number of employees to shrink by about 47 percent. But we want to highlight here as well is that not all of that comes through on the total staff cost. The reason for that is we have made a commitment to our employees that all of this efficiency gains, and especially the applications of AI, should also to some degree come back in their paychecks. so that they are fully aligned and and and they are incentivized aligned with the investors to drive these changes through the company and that's uh you're seeing as the compensation per employee has risen from 126 dollars to 203 through their process which gives us a perfect alignment between our employees and our investors in driving the financial goals of klana So we continue to see very demonstrable value from Klarna's AI assistant. This has been reported before with the update. As you can see, it used to do about 700 full-time jobs. Now it's doing about 853 full-time jobs of a saving of 60 million. So we continue to invest in this. And you can see also that the focus on operational efficiency that we said in these AI times will be so important has led us to allow us to do about 108% revenue growth while keeping OPEX flat, which I think is pretty remarkable and unheard of as a number among businesses. With that said, I'm going to hand over to Niklas for the financial update.

Thanks, Sebastian. As you mentioned, Q3 was a landmark quarter for Klarna, a quarter where our investments and growth, especially in the US and fair financing, started to compound exactly as we expected. And I'll take a few minutes to walk through the financial update. Let's start at the top line. GMV grew to $32.7 billion, and the US grew 43% year over year. Consequently, revenue grew to $903 million, And in the US, we saw revenue growth of 51%. The transaction margin dollars came in at 281 million, reflecting that a planned accounting lag from fair financing that I'll talk more about. Importantly, the lag is temporary. We're actually guiding to 109 million plus increase in Q4 on transaction margin dollars as those revenues start compounding. So this slide really captures the story of the quarter. Faster growth now, with profitability accelerating right behind it. The foundations for our growth remain the same. It's the building blocks you see on the right. Growing with our strategic partners, scaling with the large global merchants, ensuring consumers have the Klarna card, and building out that full suite of Klarna's flexible payments at more merchants. As we've already said, fair financing is a key contributor to Q3 2025 performance. In the US, it's up 244%. Fair financing is now available at 151,000 merchants, an increase of 3x over the last two years. Couple that with the new forward flow agreement that we put in place enables a very capital efficient way for us to continue to expand this product set. Overall, revenue growth is outpacing the market. We continue to see an acceleration based on the foundations of our building blocks. We're coupling that with an increase in take rate in a very sustainable way. This page is central to understanding the impact of our success in accelerating growth through the US fair financing. It creates a short-term profitability lag in Q3 2025. On the left-hand side P&L, we show the transaction margin dollars based on realized losses increasing by 25% year-over-year. You can see that correspondingly on the right-hand side chart, where you see 297 million going up by 25% to 371 million based on those realized losses. In fact, the $91 million of upfront provisioning is primarily driven by fair financing and drives the $280 million transaction margin dollars you see in Q3-25. While that be the case, we're guiding towards a Q4-25 of $390 million to $400 million of transaction margin dollars, driven by the fact of that revenue from the success of the fair financing compounding over time. So let's just recap how accounting for fair financing works. Here's this illustrative example of a consumer who has a six-month loan. We provision for the potential credit losses up front, while we actually earn revenue over time as the consumer pays us back. As planned, our numbers reflect the growth in fair financing and the associated accounting processes. You can see that in the chart below. The gray parts of the bars show the upfront provisioning from the success of our fair financing product. While you can see the realized losses, the actual losses that we have recorded, are actually very stable and coming down by one bit in Q3 2025, based on that continued improved underwriting. In fact, when you look at fair financing, you can see delinquencies falling 5% year over year, while GMV has been growing at 139%. Similarly, U.S. charges remain stable within expected ranges. In summary, we have strong top-line growth with GMV and revenue driven by an acceleration in the U.S. and in fair financing. That's driven a planned profitability lag in Q3 2025, and we're guiding towards an acceleration in transaction margin dollars in Q4, driven by us being able to continue to compound the revenue that we've seen from the success of our growth.