Block (ASX: XYZ) $116.31

XYX +6.016%: rallied strongly after delivering a better-than-expected 3Q result and lifting full-year guidance, with the standout being the combination of strong gross profit growth and a sharp improvement in margins.

Key 3Q highlights:

• Revenue: US$6.72bn, up 9.9% YoY vs US$6.59bn expected.
• Gross profit: US$3.24bn, up 22% YoY vs US$3.11bn expected.
• Adjusted EPS: US$1.13 vs US$1.02 expected.
• Cash App gross profit: US$2.07bn vs US$1.97bn expected.
• Gross payment volume: US$78.2bn, up 13% YoY.
• Cash App monthly actives: 60m, ahead of expectations.

The important point is that Block is showing much better operating leverage. Gross profit grew 22%, but adjusted operating income and earnings grew far faster as the benefits of the company’s major cost reset continue to flow through.

Cash App remains the key growth engine, with gross profit of US$2.07bn and monthly transacting actives reaching 60m. Square was also solid, with GPV growing 14% YoY, while management highlighted continued traction from newer initiatives including lending, Neighborhoods and AI-related products.

Guidance was also strong. Block lifted FY26 gross profit expectations to US$12.63bn from US$12.51bn and adjusted operating income to US$3.52bn from US$3.47bn. For 2027, management is preliminarily targeting gross profit of US$14.52bn, adjusted operating income of US$4.58bn and an operating margin of 32%.

That margin trajectory is probably the most important part of the update. Block spent several years being criticised for growing revenue without enough discipline around costs and profitability. The current numbers suggest that criticism is becoming less relevant, with the business now delivering stronger earnings growth from a much leaner cost base.

There are still areas to watch. Bitcoin-related gross profit fell sharply as Block reduced fees on certain transactions, while management plans to ramp investment again in 2027 across lending, AI and other long-term growth initiatives. The key will be ensuring those investments do not dilute the margin progress achieved over the past 18 months.

MM’s view: A strong result. Revenue was solid, Cash App and Square both delivered, margins expanded materially and guidance moved higher.