Klarna Group plc Ordinary Shares

Hello everyone and welcome to Klarna's second quarter 2026 earnings call. 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 in 2025. During the question and answer portion of today's call, please limit yourself to one question. To join the queue, participants should dial pound key 5 on their telephone keypad. Before we move to Q&A, we will begin with a brief presentation. Sebastian, please go ahead.

Good morning, everyone, and thank you for joining. This was a good quarter. We delivered above the high end of our guidance on every line for the second consecutive quarter. Revenue grew faster than volume and transaction margin dollars, which is our most important metric, grew faster than both. Volume was up 18%, revenue up 27%, transaction margin dollars up 42%, adjusted operating income reached $91 million, up $62 million year-on-year, and net income was positive at $9 million. Our operating cost grew just 16%. We are investing in our business whilst delivering strong operating leverage, which is what we have been building toward. As I said, we measure our progress in transaction margin dollars. That number shapes how we build products, how we price, and how we underwrite. And because operating costs grew far slower, growth in transaction margin dollars is what, over time, turns into earnings per share. On our last call, we told you what to expect for the year. Transaction margin dollars compounding at roughly 30% ahead of revenue. That is the shape we described in May and is the shape the year is taking. I'd like to review our three business areas which cover the entire consumer wallet. Everyday spend with the payment option of Pay in Full for purchases under $75 with high frequency. In this business area we monetize through payment fees, subscriptions and deposit interest. Transactions here are no balance sheet risk. Pay in Full contributed $3.6 billion of volume this quarter and subscriptions reached 2 million subscribers. Lifestyle Spend, or Pay Later, is the payment option for purchases between $75 and $500 a purchase. This is our marquee zero-interest short-term fixed installments product. It is the equivalent of, and has the economics of, charge cards over 30 to 90 days. Spend-centric rather than lend-centric, and the reason why our book turn is 10 times a year. Pay Later grew 13% this quarter. and Big Ticket Spend or Fair Financing, which is designed for purchases between $500,000 to $10,000. These are fixed-term installments and it's our fastest-growing product, up 82% year-over-year to $4.7 billion, offered by 256,000 merchants now, up from 151,000 when we first spoke to you in November. In the US, it more than doubled. We're happy with the balance between these three, making sure we have an attractive offer for every purchase our customers make, and with the effect it has on transaction margin dollars. Worth highlighting, fair financing is now 13% of our total volume. In the early 2010s, it was roughly a fifth of Klana's volume, and in Sweden, our most mature market, it held 16-20% for a decade. So fair financing today, a share of volume, is still lower than historical averages. and the average fair financing balance is $400 on a fixed term with a known payoff date against a $6,700 average American credit card balance, which again reflects the fact that our customers borrow responsibly. We believe every market we operate in follows the same path and has the potential for strong transaction margins. Volume first, then scale, then the margin follows. We have run that sequence enough time to know what it looks like. In total, transaction margin reached 43% of revenue, up 4.5 points in 12 months. The US, our fastest growing large region this quarter, went from 14% to 23% in a year. Global ex-US sits at 54%, up 4 points. And the markets where we have operated longest run at roughly 60%. This quarter the margin expanded while volume kept growing in the US and everywhere else, both at once. We measure our progress in transaction margin dollars and we continue to convert more of our volumes into them. Five business updates to highlight this quarter. Klana membership reached 2 million paying subscribers eight times a year ago and subscription revenue grew over 600%. Recurring revenue like this is high margin and worth noting, almost no GMV with it. This decouples our growth over time from GMV. It grows transaction margin dollars directly, part of how transaction margin dollars grow faster than volume. The Klana card reached 6.5 million active users across 16 countries, up from 1.3 million a year ago. On our first earnings call in November, that number was 3.2 million. It has more than doubled in nine months. Last week, we launched new membership plans built on what consumers actually want, cashback and benefits. In May, we told you JP Morgan Payments would launch later this year. It went live on August 6th, ahead of peak season. JP Morgan Payments is the largest merchant acquirer in the United States, processing $2.6 trillion of payments a year, and every merchant on their platform, from boutiques to big box, can now offer the full Klana suite, paying full, pay later, and fixed term installments, through their existing setup, with no new integration. We recently announced that Klana is the partner for Apple Upgrade, a new device leasing program available from Apple. This is a natural extension of our big ticket strategy. Consumers apply at Apple and then pay and manage with the Klana app, creating a direct relationship with new U.S. consumers that supports Klana's ability to grow engagement, RPAC and profitability. And consumer credit keeps performing better. Delinquencies improved again this quarter and provisions have declined the share of volume every quarter since our first report as a public company. Before a handover, I'd like to mention two things. First, we have adjusted our annual volume outlook to reflect a softer than expected German consumer and changes in FX. Niklas will explain both. Second, in early 27, we will make two leadership transitions. Niklas Neglian, our CFO, after six years at Klana and an extraordinary period of growth and transformation. He told me with plenty of runway, and I respect that. This is an early heads up, not a goodbye. Nothing changes tomorrow. Niklas remains CFO and will continue to lead the finance organization and investor engagement, supporting a transition into next year, including in his capacity as board member. The search for a New York-based CFO is underway. And... David Sandstrom, our CMO for nine years, will also hand over during next year in the same planned way. In those nine years, David built one of the most recognized brands in global finance, and he hands it over the same way Niklas hands over the numbers, deliberately and from strength. Both Niklas and David have been great contributors, and we are grateful for all the work. Nothing about them changes what we're building or how we run the company. The best evidence is the quarter we just delivered and The Transaction Margin Dollar Outlook we are raising today. Niklas will take you through it.

Thanks, Sebastian. It's been an extraordinary six years and I'm deeply proud of what we built together. I'm very pleased we've been able to plan the transition in a way that gives Klarna plenty of continuity. Now to the numbers. Let me take you through the financial highlights of the quarter and then spend some time on our outlook. Starting with the P&L summary for the second quarter, the business executed strongly and we delivered above our guidance. Total revenue was $1 billion and $42 million, up 27% and ahead of volume growth of 18%, as our mix continued to shift towards higher yielding products. Transaction costs were $596 million, up 17%, well below revenue growth, reflecting improved underwriting and scaling of our offloading programs. Transaction margin dollars were $446 million, up 42%, well above the $375 to $395 million we guided in May. Our transaction margin dollars was 42.8% of revenue, up approximately 450 basis points from a year ago, with both the US and our global X business expanding. Non-transaction related operating expenses were 490 million, up 16%, as we invested ahead of peak season and ramped marketing around the World Cup in the US. Our operating expenses growth is well below our revenue and TMD growth, and we expect to continue that, so TMD conversion is high. That gap of 42% TMD growth against 16% operating expense growth is operating leverage Sebastian described. Three years ago, our transaction margin did not cover our adjusted operating cost. Today, roughly 56 cents of every additional transaction margin dollar reaches the operating line. That takes us to operating income of $27 million, an improvement of $73 million, and an adjusted operating income of $91 million, up $62 million. Net income was 9 million with the basic diluted EPS of 1 cent against the negative 14 cent a year ago. We are delivering real operating leverage with volume, revenue, transaction margin and profit each growing faster than the last. Total GMV in the second quarter was $36.6 billion, up 18% year-over-year. This was 15% on a like-for-like basis, reflecting the lapping of the Q2 2025 fair financing launch and less of an FX tailwind than the first quarter. GMV growth was broad and we delivered growth in every geography. The US delivered GMV of $7.9 billion, up 27% year-on-year, and was our fastest growing large region. Global ex-US GMV was $28.8 billion, up 15% or 12% on a like-for-like basis. During the quarter, some markets, most notably Germany, grew at a more measured pace, whilst our performance across our more mature Nordic markets accelerated. I will speak in more detail to the volume outlook in a few pages. U.S. share of GMB rose 2 percentage points year-over-year to 22%, while U.S. transaction margin grew 9% points to 23% of revenue. Exactly the trajectory we want, and a structural reason why TMD growth outpaces revenue growth. Byproducts, our fair financing, our point-of-sale installment product grew 82% year-over-year to $4.7 billion in GMB, with continued merchant and market rollout, and is now offered by 256,000 merchants. Higher engagement products like Fairfinance and the card generate stronger transaction margin per dollar of GMV as they mature and, as you have seen, are a key reason for a strong profit growth in the quarter. PayLater, our charge card equivalent, grew 13% and PayMFull, our everyday spending product, contributed $3.6 billion. Now to revenue in more detail. Transaction and service revenue was $707 million, up 17%, broadly tracking volume with continued strong growth in membership fees, with subscription revenue up over 600%. Interest income was $266 million, up 21%, driven by new originations and continued recognition from loans originated in prior periods and the lapping of the launch of Fair Finance in the second quarter of last year. Gain on sale was 69 million, driven by both the US forward flows and the German back book sales. US revenue grew 37% to 376 million, ahead of US volume growth of 27%. The higher take rate in the US reflects the contribution of interest income and gain on sale of originations from previous quarters, where fair financing is most established. Global ex-US revenue grew 22% to $666 million, or 18% on a like-for-like basis, ahead of volume growth of 15%, with fair financing, the card, and membership fees driving this faster growth. Transaction costs were $596 million in the second quarter, up 17%. Within that, processing and servicing was $233 million, or 18%. 0.64% of GMV, down from 0.79% in the first quarter, which carried the servicing of a higher fourth quarter originations. Provisions for credit losses were 192 million, growing slower than volume, so provisions declined as a share of GMV to 0.52%. That rate reflects continued underwriting improvements, growing forward flow arrangements, and the natural maturation of our fair financing book. The dollar growth follows the size of the book. Funding cost was 171 million, broadly flat sequentially at 0.47% of GMV. We delivered a strong transaction margin dollar result of 446 million, up 42% or 39% on a like-for-like basis. As a percentage of GMV that is 1.22% or 1.14% adjusted for the one-off sale. In the US, transaction margin dollars was $88 million, up 126% year-over-year, more than three times the pace of revenue growth, which was 37%. That takes the US margin from 14% of revenue a year ago to 23% in the second quarter. Sequentially, it was modestly below the first quarter as we completed a backbook receivable sale in Q1 that we did not repeat. Global ex-US transaction margin dollars was $358 million, up 30%, and a 54% margin, up 4 percentage points year-on-year, and sequentially higher than the first quarter as we executed a backbook sale alongside the launch of our German forward flow during the quarter. Ex-US volume grew 15%, revenue 22%, and transaction margin 30%. Our most established markets run at approximately 60% transaction margin. The 450 basis point uplift we delivered this quarter closes more of that gap. Consumer delinquency rates remain healthy across both product lines. Here are the US delinquencies. The green dots represent our newest course of origination from 1Q26. As you can see, they are lower than our 4Q cohorts, representing a sequential improvement. Comparing each vintage at the same point in life, Fair Finance and Delinquency 30 plus days past due fell approximately 20 basis points quarter over quarter. Pay Later improved approximately 30 basis points on the same measure, in line with the same period last year. Our Global Ex-US book improved on the same basis, with recent cohorts down both quarter over quarter and year over year. You can find those metrics in our supplementary data pack. This is a short-duration, high-frequency credit with a portfolio turning over 10 times a year with an average consumer balance of just $124. We underwrite every transaction individually, starting customers with small balances and scaling exposure only as we build confidence. Where we have taken a more measured view of volume, that is a conscious choice to hold our underwriting standards and stay within our credit box. We would rather protect our risk-adjusted returns than chase marginal volume. Before the outlook, the scoreboard on what we told you in May. We said provisions would keep declining as a share of GMV. They did, from 55 basis points to 52. The third consecutive quarterly decline. We said transaction margin dollars would continue to compound faster than revenue, and they are. Now let me take you through our outlook. We are guiding to GMV of $149 to $151 billion, adjusted from above the $155 billion previously. That is a growth of approximately 17% year-over-year. Of that revision, approximately $600 million is currency movement since our previous guidance. The remainder is a more measured view of European volumes concentrated in Germany, our largest market by volume, where retail sales grew less than 1% in real terms in the first half. This is consistent with what you have heard across German retail this season. Our guidance simply assumes Germany stays softer rather than recovering. We expect GMV growth in the U.S. to be strong in the second half, as we scale five significant integrations, JP Morgan, Adyen, Worldline, Worldpay, now part of Global Payments, and Pfizer's Clover. And we are excited by the launch of the Apple upgrade program. U.S. volume assumptions are unchanged, and the U.S. remains our fastest-growing large region. On revenue, we expect $4.08 to $4.16 billion against above $4.34 billion previously guided. From the second half of 2026, we expect to manage a larger share of our US and German fair financing books with intent to sell. That shifts substantially all new originations for these products and regions from booking provisions upfront to fair value through P&L, with fair value recognized in the gain on sale line at origination as required under IFRS 9. The effect is presentational. Reported revenue and transaction costs each reduced by approximately 10 basis points of GMV. Which is why the reported take rate is down to 2.74 to 2.75%, while the comparable take rate rises to 2.84 to 2.85%. And because prior periods are not restated, reported revenue in the third and fourth quarters will understate the underlying business. The revenue lines move, the margin line does not. Turning to transaction margin, we are raising our full year outlook $1.62 to $1.65 billion, or 1.09% of GMV, up from the 1.04% we guided in May. Given the fair value presentation change, more of the economics are recognized earlier. There is a small timing benefit, equivalent to expected approximately two basis points positive impact to full year 2026 transaction margin as a share of GMV. The rest comes from our better economics. Excluding the presentation change, stronger unit economics are expected to contribute between 40 and 50 million dollars of TMD for the year on lower volume. This change applies prospectively to new originations from the second half of 26. Prior periods are not restated and loans already on our balance sheet continue to recognize interest income and provisions as previously. A video explaining this concept is available on our investor relations website. We are earning more on every dollar we process, driven by fair financing volumes, our offloading programs, the card and the growing membership fees. We expect adjusted operating income of $280 to $300 million at 6.9 to 7.2% of revenue. For context, we delivered $65 million of adjusted operating income in the whole of 2025. We have delivered $159 million in the first half of this year alone, and this guide is more than four times the 2025 full year. On costs, individual quarters move with the timing of our investments. For the full year, we are guiding to roughly 15% growth in our adjusted operating expenses versus a transaction margin dollar growth of over 30%. We are investing to compound growth over the long term through the second half's launches. In dollar terms, adjusted operating income moves with the revenue base. On margin, we are guiding in line to modestly above May. The third quarter is deliberately our investment quarter. It funds the largest set of launches in our history. We're guiding to volume of 35 to 36 billion, revenue of 940 to 980 million, transaction margin dollars of 340 to 360 million, and an adjusted operating income of 5 to 15 million. The third quarter will be the highest level on our share-based payments in 2026, reflecting our vesting and our grant of our annual compensation review. Fourth quarter is where we expect that investment to show with PSP and Marquee Merchants live ahead of peak season. We expect it to be a strong transaction margin quarter with strong drop through to adjusted operating income. We exit this year with a wider network, five PSPs enabling Klarna as a default on payment option, our leasing program and a structurally higher margin mix. We measure our progress in transaction margin dollars. Every dollar of volume we process is worth more to us today than it was a year ago. With that, Sebastian and I are happy to take your questions.