Block's Adjusted Profit Jumps as Losses Climb: Rapid Earnings Reaction

Block's adjusted profit surged in the third quarter as losses increased, reflecting the company's rapid earnings reaction. The growth in gross profit by 22% exceeded the company's own expectations, leading to a full-year outlook revision. As a result, Block's shares surged by approximately 8% in the initial after-hours trading.

Despite a smaller workforce, Block has transitioned growth into profit. However, the Generally Accepted Accounting Principles (GAAP) results reveal two costs that are not included in the adjusted figures: loan losses and a third consecutive quarter of substantial legal charges. The company's growth is indeed real and accelerating.

U.S. payment volume growth reached 10%, and gross profit expanded in tandem with this volume as field sales representatives and reseller partners secured sales from customers still using older systems.

The jump in adjusted profit is primarily due to staff reductions in February, which decreased product expenditure while gross profit continued to rise. The caveat lies in what the adjusted results omit: $435 million in contingency, restructuring, and other costs, primarily consisting of accrued legal expenses following similar charges in the previous two quarters.

The legal matter is not named in the report. The company's credit situation is also a significant factor, with transaction and loan losses rising by 66%, three times faster than gross profit, as Cash App Borrow and Afterpay lending expanded. Loan fees are included in gross profit, while the losses are recorded as operating expenses.

Management asserts that lending margins remain consistent with the previous year. Investors should monitor whether the growth in losses eases in the fourth quarter, as Block anticipates, once Borrow limits begin to rise again. Block has also forecasted a deceleration in gross profit growth to 15% in the coming quarter.