GM. This is Milk Road PRO, explaining why Wall Street was modeling the wrong company when Klarna printed Q1.

​Today's edition features our latest PRO report breaking down Klarna's surprise Q1 results, why analysts had the wrong model on the company, and whether the 13% pop is the start of a real turn or just a one-quarter beat. You'll get the opening below, with the rest on the site.

​Here’s what we’ve got for you today:

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ANALYSTS MODELED THE WRONG COMPANY

Analysts expected Klarna to post a Q1 loss of 20 cents per share.

Instead, Klarna reported a loss of just 1 cent per share.

A miss that large means the street was modeling the wrong company. Going in, KLAR was down 45% YTD. 

Two major banks had just initiated coverage at Hold. Consensus was bracing for another rough quarter.

Then the print landed: 

So here's the question this report answers: was Q1 a real turn for Klarna, or a one-quarter beat that fades when comps get harder?

My thesis: This is the start of something bigger. 

Klarna spent five years building a network of merchants, consumers, and distribution partners. Q1 is the quarter where that build finally started to pay off.

HOW KLARNA ACTUALLY WORKS

Most people know Klarna as the pink button at online checkout that lets you split a purchase into four payments. 

But there's more underneath.

Klarna runs three products on the same network.

1. Pay Now is the basic option. You check out, you pay in full, like a debit card. No interest, no installments. About half of Klarna's transactions sit here, and this is the part growing fastest.

2. Pay Later is the original BNPL (buy now, pay later) product. This is what you see in the picture above. You split a small or mid-size purchase into four interest-free installments over six weeks. The merchant pays Klarna a fee (typically 3-5% of the basket). The consumer pays nothing as long as they don't miss a payment.

3. Fair Financing is for bigger purchases. Think a $1,500 mattress or a $3,000 e-bike, paid off over 6, 12, or 24 months with interest. This is the part of the business that looks most like a traditional bank loan.

On the other side of the network are the merchants. 

Klarna has 1.07M of them integrated at checkout, including Sephora, Macy's, Nike, Uber, H&M, and Airbnb. 

They pay Klarna to be at checkout because it reliably lifts conversion and average basket size.

Both sides of the network have been growing for years.

Customers grew from 79M to 119M between 2022 and Q1 2026. Merchants grew from 394K to 1.1M. And the take-rate (revenue per dollar of GMV) expanded from 2.30% to 2.80%. The network is getting bigger and more efficient at the same time.

What makes Klarna different from Affirm or Afterpay is the funding side. 

Klarna is a licensed bank in the EU, with $12.3B of consumer deposits sitting on its balance sheet. It funds the loans it makes with those deposits, the way any bank does. 

Affirm and Afterpay borrow in wholesale markets, which gets expensive when rates rise.

The CEO frames the whole business as "spend-centric, not lend-centric." 

Translation: Klarna wants to be the payments network at checkout (closer to Visa), not the credit company behind the loan (closer to Affirm). 

The Q1 print is the first quarter that framing produced numbers to back it up.

INSIDE THE Q1 PRINT

Revenue came in at $1.012B against a $944M consensus. Adjusted operating profit went from $3M a year ago to $68M this quarter. 

Those are the numbers that moved the stock.

Underneath the headline, four things stood out. 

Revenue grew across every product line. Klarna's total revenue rose 44% year-over-year, and the contributions were distributed. 

Operating costs grew slower than revenue. 

Transaction costs (what Klarna pays to process payments, fund loans, and reserve for losses) grew 45%, in line with revenue. 

But non-transaction operating expenses (staff, technology, overhead) grew only 3%. Revenue per employee reached $1.4M, four times the 2022 level.

The funding side held up. 

Net income was $1M. 

Tiny in absolute terms, but a $100M swing from the prior-year period and Klarna's first GAAP profit as a public company.

WILL IT KEEP GROWING

Klarna's growth case rests on three things, all firing in Q1. The question is whether they keep firing.

Distribution

For most of Klarna's history, getting in front of a new merchant required direct integration: Klarna's sales team selling to the merchant, the merchant's developers wiring up the checkout, a long sales cycle for each name.

That model works, but it scales linearly with headcount.

The new model is to live inside the payment service providers (PSPs) that merchants already use. 

If you're a merchant on Stripe, Klarna shows up automatically as a checkout option - no separate integration required. 

Stripe alone processes around $1.4T in annual payment volume. Even if Klarna captures a small fraction of that as eligible BNPL transactions, the absolute dollar uplift exceeds what direct sales can deliver.

There's also the Google Pay integration. 

Klarna announced this month that its flexible payments will appear in Google Search results and inside the Gemini app, through Google Pay in the U.S. 

That puts Klarna in front of several hundred million additional U.S. users who don't necessarily visit merchant checkouts but do search and chat with AI.

The U.S. runway is the size of the opportunity. 

Klarna launched in Sweden in 2005, and 20 years later, it reaches over 85% of Swedish consumers and 41% of Swedish e-commerce. Newer markets are climbing the same curve.

Klarna launched in the U.S. in 2019. 

It's at 11% consumer penetration and 1% of U.S. e-commerce. If the U.S. tracks Germany (launched 2010, now at 35% consumer penetration) or the UK (2014, at 24%), the U.S. business is somewhere between a quarter and a third of what the playbook says it can become. 

The PSP rollout is the mechanism that closes that gap faster than direct sales ever could.

Product flywheel

Pay Now (the basic checkout option) gives Klarna a daily-spend habit. Pay Later (four interest-free installments) is the awareness-building product. Fair Financing (longer installments with interest) is what generates the dollars and the margin.

Each product feeds the next. A user who pays now becomes a candidate for pay-later, then graduates to financing for bigger purchases.

Fair Financing grew 138% in Q1 because the average user is moving through that funnel. 

Management expects Fair Financing volume to keep growing through 2026, with the growth rate moderating as comps normalize, but the absolute dollar contribution increasing as earlier loans mature into recurring interest income.

That's what the CEO calls "spend-centric." Growth comes from wallet share across the three products, with each one reinforcing the others.

Operating leverage

The 3% growth in non-transaction operating expenses is the line that decides whether Q1 was a real profit or a fluke.

Klarna has been aggressive about replacing roles with AI tooling. By the CEO's own framing, the company hasn't backfilled most of the staff who left during the 2023-2024 reorganization. 

The result is revenue per employee at $1.4M, four times the 2022 level.

The next question is how much further this runs. 

Management has guided to an adjusted operating margin (operating profit as a share of revenue) above 6.9% for full-year 2026, with a medium-term target of around 25%. 

For reference, Q1 came in at 6.7%, so the full-year guide is essentially the current run rate. 

Hitting 25% would mean compounding the kind of cost discipline Q1 showed over several more years. The Q1 print is the first hard data point that says it's possible.

Funding and credit

A new $2B forward-flow facility this quarter lets Klarna pre-sell newly originated U.S. loans to outside investors. Because the loans are short-duration (six weeks for Pay Later, monthly amortization on Fair Financing), the same $2B keeps recycling. Klarna says that translates into roughly $17B of U.S. financing capacity per year, enough to fund several quarters of Fair Financing growth without raising new capital.

The EU side runs on $12.3B of consumer deposits, cheaper funding than anything Affirm or Afterpay can access.

The growth came without credit damage. Provisions for credit losses ran at 0.55% of GMV in Q1 versus 0.54% a year ago, even as Fair Financing volume rose 138%. If credit were deteriorating, Klarna would have to choose between slowing the growth or accepting worse unit economics. Q1 says it doesn't.

The question for the rest of the year is whether they keep showing up together.

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