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While softening consumer spending in the retail vertical weighed on Block's (SQ) more traditional payment and commerce offerings for restaurants and businesses, continuing momentum for its Cash App and buy now pay later (BNPL) products more than offset that weakness. Alongside SQ's cost containment efforts, particularly as it relates to hiring, the strength in those two businesses fueled a strong beat-and-raise Q1 earnings report that has shares trading higher.

• Following an increase of 31% in Q4, Cash App revenue grew by 23% yr/yr to $4.17 bln as total inflows increased by 17% to $71 bln. Cash App, which offers person-to-person payments like PayPay's (PYPL) Venmo, has added products and tools to its platform over the years, bolstering its growth.
• For instance, in 2017, the company launched the Cash App Card, a customizable debit card that's connected to a customer's Cash App balance. It's been a very successful product for SQ, as illustrated by the 16% yr/yr growth in monthly actives to 24.0 mln in Q1. Furthermore, in Q1, Cash App Card transaction fees exceeded instant deposit as Cash App's largest contributor to gross profit, which grew by 25% yr/yr to $1.26 bln.
• Now, SQ is working on integrating its BNPL business, Afterpay, into the Cash App Card. Over the past few months, the company has tested an Afterpay installment product using Cash App Card, allowing customers to convert purchases into short term loans. By bundling these products together, the revenue opportunity is enhanced as customers increase their usage of SQ's offerings.
• When SQ completed its $29 bln acquisition of Afterpay in February 2022, there was plenty of skepticism over that transaction due to the lofty price tag. However, given Afterpay's strong growth and positive financial contributions, it's hard to argue that the acquisition was a mistake. In Q1, Afterpay's GMV grew by 25% to nearly $7.0 bln with strong acquisition activity across customers and merchants.
• For Square, growth was modest again as weather-related impacts and pockets of same-store-growth weakness in the retail vertical weighed. Total GPV was up 9% yr/yr to $50.46 bln, representing a slight slowdown from Q4's growth of 10% and Q3's growth of 11%.
• Keeping a tight lid on expenses and workforce numbers are helping to mitigate the relative weakness in the Square business. The company remained under its 12,000-employee cap in Q1 and its operating expenses on a non-GAAP basis were up by just 3% yr/yr to $1.8 bln. SQ's cost containment efforts enabled it to generate gross profit growth of 22% to $2.09 bln and adjusted operating income of $364 mln, each of which surpassed expectations.

The main takeaway is that SQ's formula of growing its Cash App and Afterpay businesses, while keeping costs down, is generating strong profit growth which it expects to continue throughout FY24.