Klarna IPO Update: A Mix of Good and Hmm…
Welcome to Cautious Optimism, a newsletter on tech, business, and power.
Happy Tuesday, friends. The childcare crisis is over, and CO is back! And there’s so much to get into. So, without my needing to warm up one more bottle, let’s get to work! — Alex
📈 Trending Up: Microsoft, discovering … domestic debt-to-GDP … LiveKit … South Korean IPOs … open markets … Waymo’s reach … networking as a service … Hinge Health’s IPO, coming later this week …. no shit, Sherlock … domestic borrowing costs …
Political Patronage: Musk’s Grok models are now available on Microsoft silicon. The Verge’s Microsoft-whisperer Tom Warren writes that Microsoft CEO Satya Nadella was pushing for his company to support the xAI models because he’s “eager for Microsoft to be seen as the hosting provider for any popular or emerging AI models.” That, and, doing something nice for Musk is probably a good political move for the company.
Are we being too cynical? I don’t think so. Musk got a sheaf of deals as part of POTUS’s recent MENA trip, while other nations are under pressure to approve Starlink. This is why we don’t mix business and politics.
Microsoft + AI: Speaking of Microsoft, we might want to start giving more time to the company’s AI efforts that are not part of its deal with OpenAI. Its latest run of new tech is pretty darn impressive.
📉 Trending Down: Privacy … Chinese iPhones? … Coinbase’s ability to not speak with the government … quantum’s commercial timeline? … licking Russia’s boots … free speech in the United States …
Klarna IPO Update
Swedish BNPL giant Klarna has yet to file an updated IPO filing here in the United States, but it dropped its Q1 numbers online all the same. Having read Klarna’s regular reports for ages, it’s good of the company to keep them coming, even as its public debut remains on hold for the moment. (Though, with eToro successfully launched, surely we’re on the cusp of an F-1/A?)
The reported data is a mix of good and hmm. Let’s take a look (all data YoY unless specified):
The Good:
Revenue growth of 15% to $701 million, putting the company on a $2.8 billion run rate.
Adjusted operating expense growth of 2%, to $267 million.
Active customers grew 18% to 99 million.
Merchant count grew 27% to 724 million.
Revenue take rate grew 6 basis points.
The Hmm:
Transaction margin dollars grew just 4%, on higher processing costs, consumer credit losses, and funding costs.
Operating loss effectively doubled to $90 million.
Net loss grew 110% to $99 million.
GMV grew just 10%.
Klarna did a better job ripping revenue out of its total payment volume than it did growing that volume. But while its effective gross profit (transaction margin dollars) rose, it failed to keep up with the pace of overall transaction incomes. Similarly in the positive-and-negative column, Klarna’s GMV growth was pretty lackluster, while its cost control is legendary.
I am magnificently curious how the company will price. Get on with it, Klarna!
Something to fix
CO has beat the drum in recent months, arguing that Europe is doing a better job at working to foster, instead of impede its domestic technology industry than it gets credit for. While Europe certainly spent more time in the last decade or two regulating instead of innovating, I’m encouraged by Project Europe, efforts to limit red tape, and nation-level investments in computing infra.
There’s still so much to do. In a summary article — not a diss, but the piece is an overview of sorts — from the WSJ, a few datapoints stood out:
European businesses spend 40% of their IT budgets on complying with regulations, according to a recent survey by Amazon. Two-thirds of European businesses don’t understand their obligations under the EU’s AI Act, which came into force last summer, the survey found.
Of course, any study by an American technology company that isn’t a fan of regulation noting that regulation is a problem is hardly an unbiased source. But cut the above numbers in half, and they are still way too high for reasonable business comfort. So, I suspect that the point stands, regardless.
It’s good that France and Germany are getting along, trade relations with the UK are improving, and the pro-Russia right in Romania just got its ass handed to it on a plate. But there’s still a lot to do be done across the pond when it comes to helping tech shops build instead of filling in forms.
AI is ready to fix the code problems that AI coding tools made
I recently took a walk on a beach with my brother in law, a physicist who can write code. And do magical things with lasers. Naturally, we got to chatting about AI and its current capacity level. He was a bit negative on the current abilities of AI, saying that even in a coding context it makes silly mistakes.
While he has a point — current AI coding tools are far from perfect, despite rapid progress — I told him that he’s missing the point. Companies are not investing in AI software development tooling in hopes of replicating 100% of their current quality level at a 20% discount. Instead, they want 75% of the current quality produced by their humans, at 10% the cost.
At that price differential, you are willing to take on more technical debt.
Speaking of which, I’ve heard from devs on forums for my entire life that every new company they join is a mess of undocumented code, technical debt, and bugs accreted over time rendering the entire code base wonky. The same forums argue that AI tooling can’t generate well-documented, debt-free, and bug-light code. Well, humans can’t either, it seems.
The good news is that we’re learning to apply AI to AI-derived issues in the realm of software development. We touched on this back when we discussed a cohort of startups busy using AI to sort out security issues and other problems that AI-written code may feature. It’s a growing space.
And one that the titans are now showing up inside of. Here’s The Verge:
GitHub is launching an AI coding agent that can do things like fix bugs, add features, and improve documentation — all on a developer’s behalf. The agent is embedded directly into GitHub Copilot, and it will start working once a user assigns it a task, according to an announcement at Microsoft Build.
That means Lightrun and Ox Security and Endor Labs and Unblocked and Redmond are all champing at the same bit. And I would bet you $10 that they are going to resolve a good chunk of the AI coding problems with AI coding tools.
Are the kids wrong?
Data from venture firm SignalFire indicates that “2024 Big Tech employment declined 1.6% in Austin, and startup employment fell 4.9%” while tech gigs in “Dallas and Houston also declined, along with cities like Denver and Toronto” while it expanded in New York and San Francisco last year, the Journal writes.
Despite some tech luminaries arguing that Texas and Florida are the new homes of American technology, the same folks’ argument that RTO is the only way forward appears to have backfired a bit. RTO is not just return to a office, I’d argue. Instead, it’s probably a HQ-centric argument, at least implicitly.
For kids though, the new grad bloodline of the technology industry, seeing regional hubs lose primacy to the traditional beating hearts of tech is a disappointment; now instead of MCOL and HCOL areas to live and work, they are facing down the apartment fight in VHCOL regions. That means, probably, lower savings rates and fewer kiddos born. (Spend your 20s in San Francisco and you’ll watch people turn 30, and effectively age out of the city and head elsewhere to raise a family, or simply decide to not have children at all.)
But the move from smaller offices to investments in corporate homes regarding employment is not the only issue at play in Austin and company losing tech jobs. To wit:
Microsoft Layoffs Hit Coders Hardest With AI Costs on the Rise
“For many companies, AI-driven productivity improvements seem more appealing right now than hiring.”
And NYFed data indicates that computer engineering major post-college unemployment rates are the third highest by degree topic as of February of this year.
Reading through the top posts over on /r/csmajors is an exercise in watching hope and optimism run into a very changed employment market. Really, it’s brutal. Like, bad. Or maybe just sad.
There was always going to be a developer cost correction. The number of CS grads has exploded in recent years. Here’s the National Student Clearinghouse:
The number of students earning a bachelor’s degree in computer and information sciences has more than doubled over the last decade, from 51,696 in the 2013-2014 academic year to 112,720 in the 2022-2023 academic year.
And here’s The Atlantic:
Last year, 18 percent of Stanford University seniors graduated with a degree in computer science, more than double the proportion of just a decade earlier. Over the same period at MIT, that rate went up from 23 percent to 42 percent.
You really have to feel for the students. Told that learning anything other than something directly applicable to the job market was a waste, they learned to code. And now they are stuck in job market that has its pick of the crop, leaving many a young mind fallow. And that’s before we get into tech’s underdiscussed ageism problem.
Solutions? I have none. Lots of new grads will still get jobs at tech shops. Many an older dev will do just fine. But I think that for the just fine folks, their CS hopes and dreams aren’t going to come to fruition.
The siler lining here for startups is that their effective staff tenure lengths should lengthen, while overall comp growth should slow.
They’re making an end-run around local AI rules
And to close out today, I am watching something that could happen. Here’s CNN with the lay of the land:
Tucked into President Donald Trump’s “one big, beautiful” agenda bill is a rule that, if passed, would prohibit states from enforcing “any law or regulation regulating artificial intelligence models, artificial intelligence systems, or automated decision systems” for 10 years.
In terms of industry giveaway this is a doozy. You can consider it something akin to an anti-EU move, so we should consider it from the perspective of is this actually a good thing. And the answer is a firm maybe.
It could be good for the domestic tech industry to have a single set of rules to follow, regarding things like protecting kids, respecting copyright, and ensuring that AI systems don’t discriminate illegally. On the other hand, if national rules — or a lack thereof — do not protect kids, respect copyright, or ensure that AI system’s don’t discriminate illegally, then there will be little to no effective recourse apart from waiting for the next set of elections and a decline in the efficacy of technology dollars.
I wonder.
p.s. Yes, tomorrow we’re diving into Perplexity’s numbers!
how does Klarna post $700M in net revenue, $267M of opex, and a $100M net loss? are they only taking $167M in gross profit from that $700M in net rev?