Inside Block’s 40% Layoffs

Key Takeaways

Darren, I want to start with you. What did you make of this decision? Look, I think for some time we've been saying this company was uh was operating a little bit more inefficiently than they should have been. We actually published an open letter to the board back in May of 20 of 2025, so almost a year ago already, saying there's a lot of areas they're overspending. If you look at how much on R&D, for example, uh they're about 11 percentage points higher than the industry in how much they spend on R&D as a percentage of gross profit. And so, from our perspective, there was an overdue cut needed. Um you know, we'll talk more about this and I'm sure and I'm sure Marcelo has similar views to share, but considering the amount of heads they're cutting, a normal trajectory would have allowed them to be about 7 to 8,000 FTEs right now, maybe 7,000 by the end of '25. They're cutting down from 10,000 to 6,000. We estimate most of that is coming from just overall bloat and expense that was mismanaged. And now they're catching up with another maybe 1,000 being AI-driven. Marcelo, what are your thoughts here? Yeah, I agree with Darren. I've been following this company for many years and had been communicating with the management team in 2022, 2023, and 2024 that their margins were were way too low. So, you know, if you look at global comps and how much they generate in in gross profits and how much they generate how much of that drops down to the operating margin line, it's uh Block is still very much underperforming, even after this reduction in force and their guidance for 2026. What was the response from management, Marcelo, when you when you tried communicating with them? You were shareholders, you sold your shares. What was the answer that they gave you? Mostly crickets, unfortunately. So, very very little engagement and uh seems to me, you know, Jack is a brilliant product guy, obviously visionary, but the who have been following this company know that it was and and Twitter, frankly, was not really run for the benefit of shareholders. Talk more about that. What do you mean? Well, as you know, Elon came and laid off 80% of Twitter's staff and found a bunch of things like the food the catering in San Francisco was $400 a plate because nobody showed up. They had furniture stored in class A office buildings. There was a number of stories of SAS products that they had signed up for and never actually even logged into. So, they were paying for all this software they weren't using. And I think there was a party at Block now recently. That was what? $68 million or something like that. So, Jack in effect threw a party for his staff and then fired 40% of it. So, >> job in a car. Yeah, Darren, go ahead. I'll I'll just add on to that. You know, we when we published that open letter to the board and to Jack basically saying there's there's areas of inefficiency you can find, uh their response to us was, "Look, we have engineers that are more expensive than the average company." We put a chart together which is in a note we published that shows that of all of the names in fintech and payments that at least we cover, they're the second highest spender on an OpEx per employee basis. They spend over $550,000 on an average per employee, um which is somewhere around two times the median for the space. And their response was, "They're expensive employees, they're engineers." Uh but, you know, there's a lot of ways to handle high cost headcount, specifically offshoring and maybe nowadays as well. So, Darren, let's talk about the AI element here. I mean, a lot this is the debate. Was it AI? Was it bloat? Is it both? And you know, I think I sort of land somewhere in the middle where maybe there AI could have gotten you somewhere, but there was all this over hiring. But, you know, maybe this goes back to what you were saying, the normal trajectory if the company was going along this you know, what would an AI cut have looked like? How much savings could that have been for the company? I mean, he's putting out this figure Jack in his tweet saying we're targeting $2 million per person in gross profit. That's the target we're going towards. You know, was AI going to get them there? What do you think? I think that I did touch on this a little bit before, but I do think that the trajectory of their head count growth in a normal mature company manner would have gotten them to around somewhere in the ballpark of around 7,000 FTEs by today. Um instead of the 10,000 that they have now, suggesting that let's call it three of the 4,000 cuts really were because the company should have been more efficient um as Marcelo was alluding to all you know, as well. Uh and I think that the final 1,000, the incremental 1,000 above that getting them to the 4,000 they're cutting probably is related to some inefficient I'm sorry, some efficiencies they're now finding using AI. Uh we'll see how how this is impacts the business. They've been testing this now, whether it's their own goose products or programs or it's, you know, autobot or bots they're working on right now internally >> [snorts]>> um to help, but when it comes down to it, I think there was a it was probably two-thirds or three-quarters related to over overselling. Marcelo, do you think this sets any kind of a precedent for other companies to make similar cuts of this size and and and by that I mean so Daren just walked us through his numbers, right? And I you so I mean, there is the truth of the matter, but then there's the narrative, right? Is that companies can do these cuts. Marcelo, do you think other companies will latch onto this narrative? I think they already are. I think I saw recently C3 AI and eBay doing reductions in force. I think the reality is if you listen to how economists talk about jobs, they are bundles of tasks. And so people do a number of different tasks. Some of those tasks are being automated by AI. There's no question about that. I use cloud code all day. I use cloud and Excel. It's fantastic. Really accelerates my work. But that means I can do other types of tasks that I wasn't doing before. I can accelerate some of my other tasks and and do them more efficiently. Everybody I think in the knowledge economy in the work in the white collar space has to now harness these tools and improve their productivity. Otherwise, I think companies will have a no political cover to do these types of reductions in force. Darren, what do you think? I think it depends on the types of companies that you're talking about. Truth is I think there are going to be efficiencies found. We're seeing it as Marcelo said and other names we talk about that are already calling out. Nothing to the degree of this headcount reduction, but you know, call it anywhere from low single to high single digit percentages of expenses being found where they can take it out. That said, I also think that, you know, the efficiencies that it's driving is also allowing these companies to level the playing field from a competitive standpoint with many others. Um frankly, depends on the industry though. Payments and fintech which where Block sits, it's going to benefit from saving money, but I I don't see a lot of disruption in terms of the actual category given how much regulatory money movement is required that that really can't be replaced by AI. And so the market's really kind of beaten up quite a few of the sectors all as one. Um and I think it should be a little more specific than that with some names within payments having been oversold in our view. Darren, very quickly, I mean this was the big news last night. The the the reduction in headcount. Obviously, they they obviously they released their quarterly results as well. And I just want to get a quick picture from you on how Square after paying cash up, how each of those businesses are doing. I mean if you look at their top of their their revenue, that's grow that's basically flatlined. The gross profit has been coming up. Help me understand how that's possible for a company like this. >> Yeah, you got to remember their net revenue incorporates crypto trading and there's a lot of, you know, pass-through costs. And with volume on crypto down, that's going to impact net revenue. But by the time you get to gross profit, it's the true that's really their true way we look at their top line and that's been growing well. So, well, Cash App grew over 30%. Um a lot of that has to do with Cash App borrow, they're giving more credit out, but it's still doing very well in terms of user growth. Uh and more and more people are using them and other companies like Chime for neo-banking. And the Square the merchant side, they've been adding quite a few sales people, which is where they're going to reinvest some of these AI savings or just head count savings overall into sales and go to market. That business is accelerating and it's expected to grow volume by 12% up from 10% in Q1. So, they're showing pretty good traction overall on the uh on the on the top line at least. And and any confidence on the bottom line after after this move, Daren? Listen, if you there's a lot of numbers that investors are throwing out to us right now in terms of the magnitude of upside. They effectively raised their bottom line, their operating income targets by $500 million. So, it went from $2.7 billion to $3.2 billion, about a 25% margin now, up from what was around a 20% type margin last year. The reality is there could be more upside depending on how much they're paying a lot of these heads. Um you could see numbers that are five to $600 million, even a billion dollars better than that uh by the time you get to the end of '26 and into '27. So, there really could be and should be for that reason, for pricing reasons we've talked about, and for just overall top line growth reasons. Marcelo, what would it take for you to get back into the company? Would you at all consider buying now? You know, the big question is have they really found religion and changed the their their thinking on shareholder creating shareholder value. I And then the other question is what's the terminal multiple of this of this business? I sent an email to them to almost 2 years ago to the date, which I posted on Twitter, and I was using a 25 times earnings multiple for my exit multiple, and I noticed this is what the IRR is between here and then, assuming that you deliver on these EPS numbers. Now, what they promised for 2026 is just shy of what I had outlined in my high case for 2026. I had $4 in adjusted EPS. They're delivering, I think, $3.66. There is a lot more room, as Darren said, to expand it, for sure. But then the question is does this trade at a PayPal multiple, in which case, you know, the stock could go a lot lower, or does it trade at a at a higher multiple? I think that's the big question here. And so it's a it's a What do you What do you think? Has the Is it enough to change the religion, Marcelo? What do you think? Personally, I I I have a hard time believing that the management team that has been doing this for so many years to shareholders has suddenly changed the their stripes. I I just I'm not buying it yet. Great. Well, Darren and Marcelo, I want to thank you for coming on. That is Darren from Wolf Research and Marcelo from Heller House here on TITV.