Klarna, Afterpay, Affirm Earnings: BNPL Startup Performance

Investor Confidence in Buy Now, Pay Later (BNPL) Continues

Venture capital firms are consistently investing in buy now, pay later (BNPL) startups, demonstrating sustained positive expectations for both the broader e-commerce sector and this particular financing approach for consumer spending.

Recent investor activity in the BNPL arena, particularly during the second quarter, highlights this ongoing confidence. Divido, characterized by TechCrunch as a “white-label platform for retail finance integrating with e-commerce systems,” successfully secured $30 million in funding.

Furthermore, Zilch obtained $80 million to support its “over-the-top” BNPL offering.

BNPL Valuation Growth

Zilch’s valuation has now reached $800 million.

While these are just a few instances, they effectively illustrate the current market sentiment. We will now analyze the financial results of established BNPL companies to gain further insight.

Similar to our analysis in February, which focused on Q4 2020 data, today’s examination centers on the recent performance of Klarna, Affirm, and Afterpay.

This review will provide a comparative understanding of their financial trajectories within the evolving BNPL landscape.

Growth versus Profitability

As companies, particularly startups, expand their operations, a greater emphasis is placed on achieving profitability. Early-stage ventures often prioritize growth over immediate net margins, as revenue streams are developing and expenses increase with staffing and product launches.

However, as these startups mature, potentially reaching “unicorn” status, scrutiny shifts to unit economics, cash burn rates, and overall profitability. The Rule of 40 serves as a common benchmark for evaluating startup performance.

Considering Affirm and Afterpay, we are analyzing publicly traded companies. This allows for a more rigorous assessment of their profitability compared to companies like Klarna, which are still awaiting an IPO.

Therefore, we will examine both growth and profitability for each company. Let's begin with Klarna:

Klarna’s most recent data, covering Q1 2021, presents the following figures:

• Global GMV reached $18.9 billion, a 91% increase year-over-year.
• Total net revenue amounted to 2.95 billion krona, up 42% compared to the previous year.
• A net loss of 650.1 million kr was recorded, representing a 41% increase year-over-year.

A closer look at Klarna’s results reveals some concerning trends. In Q1 2020, the company reported 91.1 million kr in operating profit before accounting for credit losses.

While write-offs resulted in an operating loss of over 600 million kr, some operating income positivity was still demonstrable. However, in Q1 2021, Klarna posted -11.7 million kr in operating profit before credit losses.

This figure deteriorated to -796.4 million kr in aggregate operating deficits after write-offs were factored in. Consequently, Klarna’s GMV growth is proving to be a costly endeavor.

Despite this, Klarna has the potential to become profitable. Improvements in its credit loss rate and careful expense management could lead to adjusted profits in the future. However, building a global BNPL business is a long-term and expensive undertaking, and profitability isn’t guaranteed.

Next, we turn to Afterpay, which recently reported its Q3 F2021 results (calendar Q1 2021). Due to Australian securities regulations, the company provides detailed numbers only on a half-yearly basis, limiting the available data:

• Global GMV totaled A$5.2 billion, a 104% increase year-over-year.
• The company noted that “Gross losses (unaudited) continued to remain below historical rates in all operating regions.”
• Net Transaction Losses (unaudited) as a percentage of underlying sales also remained low for the quarter.

Afterpay is experiencing faster growth in total platform spend than Klarna, while also incurring losses.

For context, in the last two quarters of calendar 2020, Afterpay generated A$9.8 billion in GMV, A$417.2 million in total revenues, and a post-tax loss of A$79.2 million.

Finally, let’s examine Affirm. According to its latest earnings report, covering calendar Q1 2021:

• GMV reached $2.3 billion, up 83% compared to the year-ago quarter.
• Revenue totaled $230.7 million, a 67% increase over the same period.
• A net loss of $247.2 million was reported.

Affirm recently went public through a direct listing, resulting in substantial share-based compensation expenses. Adjusting for these expenses, the company achieved a modest surplus of $4.9 million, a significant improvement over the $70.7 million adjusted operating loss from the previous year.

Furthermore, Affirm’s revenue less transaction costs improved considerably compared to Q1 2020. Thus, Affirm demonstrates growth alongside improving financial metrics.

However, a decline in revenue as a percentage of GMV during the quarter suggests a potential price war, which could constrain its ability to improve margins and achieve GAAP profitability.

Overall, the BNPL landscape remains characterized by strong consumer interest but limited profitability. Major players are competing for market share, alongside numerous smaller, specialized startups.

Additional competitors, such as PayPal, are also entering the BNPL arena. Consequently, the leading venture-backed BNPL companies face competition from both established players and emerging startups. This will be a protracted and costly battle.