SQ, the 'US Alipay': growth via credit, profits via layoffs?

The 'US Alipay' — $Block(XYZ.US) (XYZ.US) released Q1 FY26 results after-hours on May 8. The quarter was solid, with both revenue and profit beating estimates and trends improving. Guidance for next quarter also looks good; details below.

1) Growth and profit both solid: Total revenue rose about 5% YoY, pressured by a sharp decline in bitcoin revenue. Ex-BTC, core revenue was approx. $4.26bn, up nearly 23% YoY and accelerating by ~100bps vs. last quarter, comfortably ahead of Bloomberg consensus.

The revenue re-acceleration continued, but the pace has clearly narrowed, and FX was a notable tailwind this quarter.

On earnings, the core metric — Adj. OP was about $730mn, +56% YoY, well above the prior $600mn guide. Adj. OPM (OP/GP) reached 25%, up sharply from 20.5% QoQ, reflecting healthy operating leverage.

2) Square improved but remains soft: By segment, Square still did not perform particularly well. Core Square GPV grew 11% YoY ex-FX, a modest +1ppt acceleration QoQ but still not high. In the U.S., GPV rose about 8%, while Intl (22% of mix) grew 26% cc, remaining the growth driver.

With slightly better GPV growth and higher payment take rate and amount-based lending monetization this quarter, segment revenue growth improved by 3ppts to 14%. Less positively, Square GP rose only 9% YoY, a touch faster QoQ but below revenue growth, and GPM of 46.5% fell YoY and missed Bloomberg consensus of 48%.

Specifically, the drag came from lower gross margin in payment-related revenue, while lending GP growth was a strong 25%.

3) Lending turbocharges Cash App: Group strength was again led by Cash App. Ex-BTC, core revenue grew ~35%, and GP rose 38%, both accelerating from already solid levels.

Although Cash App MAUs were flat QoQ at 59mn, the main driver was stronger engagement. In-app transactions rose 18% YoY this quarter.

The key boost to segment revenue was fast-growing lending, with originations reaching about $17.6bn, +82% YoY. Correspondingly, Cash App's 38% GP growth was also largely driven by lending. Lending contributed roughly $960mn of GP (over 50% of segment GP) and grew 66% YoY.

4) $850mn restructuring charge; ex-charge profit still solid: A higher mix of the high-margin Cash App plus margin gains across segments lifted total company GP to $2.9bn, +27% YoY, outpacing revenue. GPM was 48%, up ~200bps QoQ and roughly +800bps YoY.

The issue: total opex jumped 57% YoY to $3.08bn, driving GAAP OP into the red. This was mainly due to about $850mn of one-off restructuring costs, tied to the 40% workforce reduction announced last quarter. Ex-charge, Adj. OP was $730mn vs. $600mn guided, and Adj. OPM (vs. GP) was 25%, up from 20.5%, indicating stronger underlying leverage.

Dolphin Research View:

1) Last quarter the company said it would change reporting classifications starting in FY26. In short, the segment structure remains the same: Square (merchant) / Cash App (consumer) / Other.

Revenue types are shifting from four buckets — transaction/service/hardware/crypto — to three: commerce-related/financial-related/bitcoin-related. The new categorization is meant to better reflect business drivers.

The primary goal is to carve out financial and lending revenue from the old, broad 'services' bucket for standalone disclosure, so the market can track this key growth vector more clearly. (The chart below shows the new taxonomy for reference.)

2) In summary, Block delivered another solid quarter. While Square still lacks punch, Cash App continues to drive both revenue growth and profit, and momentum is building. Even after a 40% headcount cut, performance is trending up, suggesting the AI-enabled efficiency story is credible.

With the new disclosures separating financial lending, it is now clear that lending (especially Cash App Lending) is the core driver behind the recent improvement. However, this shifts the model from an asset-light, take-rate approach to a balance-sheet/credit-risk model, requiring close monitoring of credit performance.

3) For guidance, the company expects next-quarter GP of $3.04bn, implying only a modest QoQ increase and some YoY deceleration. We will watch whether the slowdown is a temporary impact from layoffs or simply tougher comps, and note that this is roughly in line with the Street at ~$3.0bn.

Adj. OP guidance is $740mn, above the Street's $720mn, implying Adj. OPM (vs. GP) near 24%, slightly below this quarter's 25%. As the implied gross margin expansion is limited, the upside seems mainly driven by lower opex following the large layoffs.

On the long-term outlook, FY26 guidance was nudged higher. GP growth is raised from 18% to 19% to $12.3bn. Adj. OP goes from $3.2bn to $3.34bn, implying a 27% margin and suggesting 2H margins will exceed the ~25% in 1H.

3) Overall, the trajectory looks strong. Lending is growing quickly, pushing revenue and GP into the fastest growth phase in years. The 40% workforce reduction both drew investor attention and created room for cost discipline and profit release — the thesis holds up.

On valuation, based on the latest FY26 Adj. OP guide (Approx. $3.5bn), the after-hours market cap implies about 12x–13x after-tax P/E. That is reasonable-to-low for a financials-like business and looks relatively cheap for a tech-oriented company.

If the current momentum holds, revenue growth of ~10% and profit growth of ~15% beyond FY26 look achievable, making the current price offer some upside.

Key charts below:

I. Square