Block (ASX:XYZ) Up 28% as a 40% Headcount Cut Rewrites the Earnings Outlook

Jack Dorsey Goes Lean, The Market Pays Up

Block shares surged 28% following the announcement that the company intends to reduce staff by up to 40%.

While Block broadly met consensus in its fourth-quarter earnings, the real upside catalyst was the guidance. That was the key driver behind the market’s reaction, because investors were not just looking at the quarter that was, they were repricing what future earnings could now look like.

The scale of the planned workforce reduction is significant. Block is looking to bring headcount down to just under 6,000, from more than 10,000 currently.

In his letter to shareholders, Jack Dorsey framed the move around a much bigger structural shift:

“Intelligence tools have changed what it means to build and run a company. We’re already seeing it internally. A significantly smaller team, using the tools we’re building, can do more and do it better. And intelligence tool capabilities are compounding faster every week.”

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The AI Cost Out Trade Moves Beyond Hyperscalers

For investors, this fits into a much broader trend that has already been playing out across the market.

We have seen similar moves from larger technology companies over the past year, including hyperscalers such as Google, Amazon, and Meta. These businesses spent heavily during the previous growth cycle, but as AI tools have become more capable, companies have started to realise they can build, iterate, and improve products with leaner teams.

AI is increasingly able to assist with foundational coding, streamline software development, and improve productivity across existing platforms. That does not eliminate the need for strong engineers, but it does mean businesses can operate with fewer people while still maintaining, and in some cases improving, output.

What we are now seeing is that this dynamic is no longer limited to the hyperscalers. It is moving further down the market cap spectrum into mid-cap and larger-cap software businesses as well.

That is why the market reacted so strongly to Block’s announcement.

This is not just a cost-cutting story. It is an earnings story.

If Block can materially reduce its cost base through lower headcount, the market immediately starts to look at a business with potentially higher future operating margins, stronger earnings leverage, and improved cash generation. And when the earnings outlook improves, the market is usually willing to re-rate the stock accordingly.

The Real Catalyst Was FY26 Guidance, Not Q4 EPS

When we look at Block’s fourth-quarter report, the headline numbers were broadly solid, but not dramatically ahead of what the market was already expecting.

EPS came in at $0.65, which was in line with consensus, while gross profit reached $2.87 billion, comfortably ahead of the Visible Alpha consensus of $2.74 billion.

Within that, Cash App gross profit rose to $1.83 billion, up 33%, while Square gross profit came in at $993 million, up 7%. That tells us the stronger growth is still being driven by the Cash App side of the business, with Square growing at a much slower pace.

Adjusted EBITDA for Q4 was $930 million, which was also broadly around expectations and slightly ahead of the Visible Alpha estimate of $917 million.

So while much of the near-term earnings result was broadly in line with what the market had priced in, the bigger re-rate is really about what investors are now expecting over the next few years.

What does FY26 entail for block

That is where the outlook becomes more important than the quarter itself.

Looking ahead to FY26, Block is guiding to $12.2 billion in gross profit, which is ahead of the $11.9 billion consensus estimate. On top of that, the company is guiding to $3.0 billion in adjusted operating income, also above the Visible Alpha consensus of $2.70 billion.

That stronger outlook is what really matters. The quarter itself was fine, but the guidance tells the market that earnings power could be better than previously expected, and that is what is driving the stronger re-rating in the stock.

Earnings Power Upgrades, The Stock Follows

The key takeaway for Block is that while the business now appears to be moving through a more mature phase of top-line growth, the more important part of the story is the earnings uplift.

At this stage, the main re-rating driver is no longer just revenue growth. It is the company’s ability to improve profitability as operating leverage starts to come through more clearly.

We are already seeing signs of that within the Cash App business, where scale is helping support stronger margin dynamics. When you combine that with the planned reduction in headcount, it becomes much easier to see how Block’s earnings profile could improve materially over the next two years.