
We previously initiated coverage on Block’s bonds earlier this year: Idea of the Week: The missing Block for your US Fixed-Income portfolio
Since then, Block has released its first-quarter results for the period ending 31 March 2026 (Q1FY2026). In this article, we examine the group’s latest earnings and provide our updated view on their bonds.
1. Accelerating core profitability and operating efficiency
• We view the first quarter ending 31 March 2026 (Q1FY2026) as a definitive validation of the core business momentum we identified in our initiation coverage (see article above). While total net revenue growth appeared flat at +5% YoY to USD $6.1b, we highlight that revenue (excluding Bitcoin revenue) actually surged 23.8% YoY to USD $4.3b. We think this spotlights the powerful underlying growth of the commerce / financial solutions ecosystem, as the low-margin, volatile, Bitcoin segment (which yields a negligible 1-2% earnings margin) drags on the headline top-line figure.
• We note the sharp 57.2% YoY increase in operating expenses to USD $3.1b. However, we do not view this as a sign of structural credit deterioration. This increase is mainly due to the one-time USD $746+m restructuring costs related to severance and office space disposals. We also highlight that the steep pick up in loss provisions, amounting to USD $500.1m (compared to USD $169.7m for Q1FY2025), largely reflects a surge in lending originations and the GAAP accounting requirement to book upfront reserves. These provisions are non-cash in nature and do not directly reduce the group’s cash balance.
• Stripping out the accounting noise, the underlying credit story remains constructive. For Q1FY2026, Block delivered record profitability across its high-margin segments (financial products / commercial solutions), with gross margins improving from 39.7% in Q1FY2025 to 48.0% for Q1FY2026. Notably, our preferred metric for core profitability (adjusted EBITDA) rose 24.2% YoY to USD $1.0 billion. Adjusted EBITDA margin, likewise, rose from 14.1% in Q1FY2025 to 16.7% in Q1FY2026. Looking ahead, management’s raised FY2026 guidance strengthens our confidence that the operating leverage story is playing out nicely. In our view, the restructuring heavy lifting is now behind the group, while the group’s core operating engines of commerce / financial solutions are firing on all cylinders.
• Finally, on the point of net income swinging to a loss of USD $308.7m (1QFY2025: USD $189.8m), we highlight that this is due to temporary accounting and restructuring noise rather than operational weakness. The loss was distorted by restructuring charges and an increase in credit provisions (driven by rapid lending growth and required by GAAP accounting), rather than deteriorating credit. For bondholders, the key takeaway is that the headline increases in operating expenses and net loss mask the core operating performance of Block.
2. Deepening ecosystem monetisation and strategic resilience
• Cash App gross profit rose 38% YoY to USD $1.9b. We highlight that Monthly Transacting Actives (MTAs) stayed steady at 59m, while primary banking actives grew 18% YoY to 9.7m, pointing to deeper customer engagement. Do note that primary banking actives typically spend 6x more and generate 10x the gross profit compared to only peer-to-peer-only users. Consumer lending originations (loans underwritten) surged 82% YoY to USD $17.6b, supported by Cash App Borrow. We view lending growth as positive for monetisation, while being watchful of default rates, which have remained stable since our last update.
• Square gross profit increased by 9% YoY to USD $982m, or 11% YoY excluding hardware. Gross payment volume (GPV) accelerated to +13% YoY to USD $61.2b. More importantly, this volume growth is met with improving monetisation; financial solutions monetisation improved to 0.45% (representing the highest level in 5 quarters), supported by Square Loans. We view Square’s ability to monetise increasing GPV as a key credit positive, which strengthens its earnings. Commerce enablement monetisation remained stable at 1.22%, suggesting resilient unit economics.
• Looking forward, management’s increased guidance lends credence to the increasing profitability story across Block’s ecosystem. That said, we are mindful of the potential inflationary effects brought on by the Middle East conflict, which could disproportionately pressure Block’s client base (which still has a significant mix among the low-earning cash app users and small businesses). Nevertheless, we believe Block’s ample liquidity position provides sufficient buffer for its debt-servicing capacity.
3. Adequate Liquidity with little refinancing risk
• Block maintains a solid liquidity profile to support its growth initiatives and debt obligations. As of 31 March 2026, the group held a cash position of USD $6.9b. Combined with short-term government investments amounting to USD $310.5m and an undrawn committed credit facility amounting to USD $900m, total available liquidity amounts to USD $8.1b. We note this figure comfortably covers Block’s outstanding gross debt of USD $7.3b.
• Operating cash generation has also improved significantly, with net operating cash flow coming in at USD $965.6m (Q1FY2025: USD $133.3m). This strong cash generation provides a substantial buffer for the group to service its debt while meeting its reinvestment needs. Free cash flow, likewise, is strong at USD $965.6m, compared to Q1FY2025 USD $101.5m.
4. Decent credit profile supported by deleveraging, accompanied by comfortable interest coverage
• Block maintains its decent credit profile. As of 31 March 2026, its Net Debt / TTM EBITDA stands at 0.03x, improving from the 0.06x recorded as of 31 December 2025. Looking ahead, given management’s expectation of a stronger FY2026 performance, we do not expect a material weakening of this metric as Adjusted EBITDA continues to improve.
• Block’s TTM interest coverage ratio (TTM EBITDA / TTM gross interest expense) remains strong at 22.8x. In general, we expect this metric to stay stable, with scope for improvement given Block’s increasing EBITDA generation.
Recommendations
• Overall, we think Block’s credit profile has improved and remains stable, given strong operating performance, lower leverage and strong coverage. We continue to emphasise our initial view (see the article linked above) that adjusted EBITDA and operating cash flows should continue to trend higher, given the deepening integration of both the Cash App and the Square ecosystem. Likewise, free cash flow should continue compounding at a decent clip. Again, we stress that our analysis does not account for the negative inflationary impact due to the Middle East situation. That said, should the worst occur, we do not expect any material worsening, and we remain comfortable with Block’s credit profile, supported by its ample liquidity.
• Block's outstanding bonds trade at a yield to worst range of 5.4% to 6.5%, with expected tenors ranging from 1.02 years to 4.82 years. Against comparable US treasuries, these issues provide an attractive 100+ to 200+ bps yield spread. When compared to close industry peers like Fiserv and PayPal, Block’s bonds provide a decent yield pickup of 100+ bps for similar tenors. Note: Both PayPal (A- by S&P) and Fiserv (BBB) have higher credit ratings than Block.
• Investors looking for higher yields from an issuer that is displaying an improvement in credit profile can consider these bonds from Block.
Table 1: Peer Comparison:
|
Issue |
Issuer |
Ask Price |
Yield to Worst (%) / Yield to next call (%) |
Expected Tenor (Years) |
Credit Rating (S&P / Fitch / Moody’s) |
|
Block Inc. |
99.99 |
5.44% / NA |
4.82 |
BB+ / BBB- / Ba1 |
|
|
Block Inc. |
99.99 |
6.50% / 9.65% |
1.02 |
BB+ / BBB- / Ba1 |
|
|
Block Inc. |
99.90 |
6.01% / 7.29% |
2.27 |
BB+ / BBB- / Ba1 |
|
|
FISV 5.350% 15Mar2031 Corp (USD) |
FISERV |
101.12 |
5.08% / NA |
4.85 |
BBB / - / Baa2 |
|
FISV 5.600% 02Feb2033 Corp (USD) |
FISERV |
101.26 |
5.37% / NA |
6.74 |
BBB / - / Baa2 |
|
PYPL 4.400% 1Jun2032 Corp (USD) |
Paypal |
98.01 |
4.78% / 4.80% |
5.98 |
A- / A- / A3 |
|
PYPL 5.150% 1Jun2034 Corp (USD) |
Paypal |
99.35 |
5.25% / 5.25% |
7.98 |
A- / A- / A3 |
|
NA: Bonds do not have call dates Data as of 08 May 2026 Source: Bloomberg, Bondsupermart, iFAST Compilations. |
|||||
