Venture capitalists continue to fund buy now, pay later (BNPL) startups, evidence of ongoing optimism regarding not only e-commerce, but the specific model for financing consumer purchases as well.
Evidence of continued investor confidence in the BNPL space cropped up several times in the second quarter. Divido, a startup that TechCrunch described as a “white-label [BNPL] platform for retail finance that integrates with e-commerce platforms,” raised $30 million. And Zilch raised $80 million for an “over-the-top” BNPL solution.
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Zilch is now worth $800 million.
There are other examples, but those will suffice to get us into the correct mindset for today’s work as we look back at data points regarding the financial performance of more mature BNPL tech companies. So, as in February when we were looking at Q4 2020 numbers, today we’re looking into the more recent performance of Klarna, Affirm and Afterpay.
Growth versus profitability
As startups scale, they focus a bit more on profitability. Super-early-stage startups aren’t often too worried about net margins, for example, as their revenues can be nascent and their costs rising as they staff up for a product launch or another similar event.
But as those same startups mature into unicorn territory, questions about their model’s profitability on a unit basis, operating cash burn and aggregate profitability will start to pop up. The Rule of 40 is a startup rubric for a reason.
And in the cases of Affirm and Afterpay, we’re in fact examining public companies. So we can safely care even more about their profitability than we might if they, like Klarna, were still waiting for an IPO.
For each, then, we’ll consider growth and profitability. Let’s start with Klarna:
Klarna’s latest data, dealing with Q1 2021, breaks down as follows:
- Global GMV of $18.9 billion, +91% compared to the year-ago result.
- Total net revenue of 2.95 billion krona, up 42% compared to the year-ago result.
- Net loss of 650.1 million kr, up 41% compared to the year-ago result.
If you dig more deeply into Klarna’s results, there are some troubling indicators. For example, in Q1 2020, the company had 91.1 million kr in operating profit before credit losses. Write-offs pushed the company to an operating loss of just over 600 million kr, but at least the company could demonstrate some operating income positivity from a single angle.
In Q1 2021, however, Klarna posted -11.7 million kr in operating profit before credit losses. And that figure rose to -796.4 million kr in aggregate operating deficits after write-offs were included. In short, the growth that Klarna is seeing in GMV terms is not cheap.
Not that Klarna can’t make money eventually: Modest improvements to its credit loss rate and some spending control should allow the firm to roll into adjusted profits at some point in the future. But Klarna’s results also detail that it’s an expensive, long-term project to build a global BNPL business. The model itself is not a straight path to net income.
Next, Afterpay, which reported its Q3 F2021 numbers recently. (That’s calendar Q1 2021 for us.) Sadly, the company only provides in-depth numbers on a half-yearly basis due to Australian securities rules, so the following data is somewhat limited:
- Global GMV of A$5.2 billion, up 104% compared to the year-ago result.
- And regarding deficits: “Gross losses (unaudited) continued to remain below historical rates in all operating regions. Net Transaction Losses (unaudited) as a percentage of underlying sales likewise remained low for the quarter.”
Afterpay, then, is growing total platform spend more quickly than Klarna, and also loses money.
For reference, in the last two quarters of calendar 2020, Afterpay posted A$9.8 billion worth of GMV, total revenues of A$417.2 million, and a post-take loss of A$79.2 million.
Finally, Affirm. From its most recent earnings report, which deals with calendar Q1 2021:
- GMV of $2.3 billion, up 83% compared to the year-ago quarter.
- Revenue of $230.7 million, up 67% over the same time frame.
- A net loss of $247.2 million.
Affirm recently went public via a direct listing, which meant that its most recent quarter has huge share-based compensation expenses that are abnormal. If we allow the company to heavily adjust its operating profits in light of its flotation, the company actually squeaked a surplus of $4.9 million in the quarter, far better than its year-ago adjusted operating loss of $70.7 million. And Affirm’s revenue less transaction costs improved dramatically in its most recent quarter, compared to Q1 2020’s recorded results.
So with Affirm, we see yet again a BNPL company that is unprofitable, growing and with a mixed bag of financial indicators. In the company’s case, it posted strong growth and some improving financial metrics. But with falling revenue as a percentage of GMV in the quarter, Affirm could be hinting at a price war over time that could limit its ability to juice margins and turn in GAAP profits.
In total, the BNPL space is mostly as we left it: flush with consumer interest but not yet awash in profits as its major players battle not only one another for global spend share but also a glut of smaller, often more sector-focused startups hot on their heels.
There are other competitors. PayPal, for example, is working to edge into the BNPL arena. So for the big three of the venture-backed BNPL space, there’s competition from above and below. It’s going to be a long, expensive fight.
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