Klarna losses triple after aggressive US expansion and massive layoffs

The logo of Swedish payment provider Klarna.

Thomas Trutschel | Photo library | Getty Images

Klarna reported a dramatic increase in first-half losses on Wednesday, adding to a deluge of negative news for the “buy now, pay later” pioneer.

The Swedish payments company generated revenues of 9.1 billion Swedish krona ($950 million) in the period from January to the end of June 2022. This represents a 24% increase compared to a year ago. year.

But the company also racked up heavy losses. Klarna’s pre-tax loss more than tripled year-on-year to almost 6.2 billion crowns. In the first half of 2021, Klarna lost around SEK 1.8 billion.

The company, which allows users to spread the cost of purchases over interest-free installments, has seen increased operating expenses and defaults. Operating expenses before credit losses were SEK 10.8 billion, compared to SEK 6.3 billion year-on-year, due to administrative costs associated with its rapid international expansion into countries such as the United States. United. Credit losses, meanwhile, increased by more than 50% to SEK 2.9 billion.

Klarna had previously been profitable for most of its existence – that is, until 2019, when the company first dipped into the red after an increase in investment aimed at expanding the business to worldwide.

The company’s ballooning losses highlight the price of its rapid expansion after the onset of the Covid-19 pandemic. Klarna has entered 11 new markets since the start of 2020 and taken a number of costly moves to expand its presence in the US and Britain.

In the United States, Klarna has spent heavily on marketing and user acquisition in an effort to get rid of Affirm, its main rival in the United States. In the UK, the company acquired PriceRunner, a price comparison site, in April. He has also engaged in a charm offensive with UK politicians and regulators ahead of upcoming regulations.

More recently, Klarna has been forced to cut spending. In May, the company cut about 10% of its global workforce in a rapid round of job cuts. This was after raising funds at a valuation of $6.7 billion – an 85% discount from its previous valuation – in an $800 million investment deal that defined the capitulation of high-growth technology companies as investors were wary of a possible recession.

The steep discount reflects gloomy fintech investor sentiment in both public and private markets, with publicly traded fintech Affirm having lost around three-quarters of its market value since the start of 2022.

“We have had to make tough decisions, ensuring we have the right people, in the right place, focused on the business priorities that will allow us to accelerate our return to profitability while supporting consumers and retailers for a period of time. more difficult economy,” said Sebastian Siemiatkowski. , CEO and co-founder of Klarna.

“We needed to take immediate and preventative action, which I think was misunderstood at the time, but now, unfortunately, we’ve seen many other companies follow suit.”

Klarna said it planned to tighten its lending approach, particularly with new customers, to account for the deteriorating cost of living situation. However, Siemiatkowski said, “You won’t see the impact of this on our finances yet in this report.”

“We have a very nimble balance sheet, especially compared to traditional banks due to the short-term nature of our products, but even for Klarna, it takes a bit of time for the impact of decisions to be felt.”

Fintech companies are cutting spending and delaying listing plans amid deteriorating macroeconomics. Meanwhile, consumer-facing services are losing appeal to investors while so-called business-to-business fintechs are gaining attention.

Klarna claims it is now used by more than 150 million people, while the company has 450,000 merchants on its network. Klarna primarily generates revenue from retailers, not users, by taking a small slice of each transaction processed through its platform.

“At the end of the day, they proved there could be a profitable business there, but they doubled their growth in the US market, which is costly,” chief strategy officer Simon Taylor told CNBC. of the fintech start-up

“The market share there will be significant for long-term revenue. But it takes time and the funding sources aren’t what they used to be.”

But the company faces fierce competition, with titans in tech and finance looking to capitalize on industry growth buy now, pay later. Apple is set to launch its own BNPL product, Apple Pay Later, this fall that will allow users to spread the cost of their purchases over four equal monthly payments.

Meanwhile, proposals are underway to place the BNPL market under regulatory scrutiny. In the UK, the government has announced its intention to enforce stricter accessibility controls and a crackdown on misleading advertisements. In the United States, the Consumer Financial Protection Bureau has opened a market surveillance investigation into BNPL companies.

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