As WeWork heads toward an initial public offering, the office-space company faces a fundamental problem: Its losses are growing as fast as its revenue.
WeWork’s parent company, We Co., whose main business is renting and remodeling offices to sublease to other companies, disclosed in its IPO filing on Wednesday operating losses that ballooned 102% to $1.37 billion for the first six months, compared with a year earlier.
Large losses are hardly anomalous among recent IPOs. Ride-hailing firm
posted a $1.8 billion operating loss for the last six months of 2018 leading up to its May IPO. But Uber had still trimmed its losses by 23% from a year earlier.
We’s losses, however, are also doubling along with its revenue, which suggests the nine-year-old company isn’t wringing out enough cost savings as it gets bigger. The lack of scaling is a potentially troubling sign for a company that has commanded a valuation more akin to a tech company than a real-estate firm.
“If [the losses] keep going up, it’s a problem,” said
managing partner of emerging markets at financial-advisory firm CohnReznick. “At the end of the day, they need to move toward profitability.”
Much of We’s costs go toward leasing and renovating office space and outfitting it with furniture. As it grows, the company expects to gain economies of scale—a phrase We mentions nine times in its IPO filing, and something one of its executives has long promised.
While software companies can cut the cost of adding and retaining new users as they grow, We, which has a lot of physical assets, doesn’t enjoy this type of scale. With each new office, We has certain fixed costs, such as putting in desks and building conference rooms.
With growth, We has brought down the cost of building out and designing new workspaces by streamlining its construction and design operations, leading to some savings. The amount it spends for a new desk has come down by half from 2014. The company also says it is trying to find more landlords willing to join with WeWork and pay for renovations in exchange for some revenue or profits from the space. That would lower lease costs.
But other costs are escalating. It is spending more on sales and marketing to find the next person or company to rent a desk or floor. Those costs more than doubled in the first half and now make up about 21% of revenue, up from about 10% in 2016.
Only 30% of WeWork locations have been open for more than two years—the time at which offices reach stable occupancy and generate steady revenue, the company says. The newer offices require marketing and other costs.
We’s growing losses suggest the company will need large sums of cash for years as it builds out offices, which could affect its valuation. The company was last valued in a funding round from
at $47 billion, making it the most highly valued, venture-backed company in the U.S.
Analysts at Sanford C. Bernstein & Co. in a January note to clients estimated that We would need $19.7 billion of financing through 2026 and called its valuation “very hard to swallow.”
The company has long tried to make a significant dent in its losses. As far back as 2015, co-founder and Chief Executive
said in an interview he didn’t expect WeWork to raise any more money before an IPO and yet he has raised more than $9 billion since. A 2014 financial plan predicted the company would be highly profitable by now.
We’s operating losses jumped 135% in 2017, and an additional 81% to $1.69 billion last year. Its revenue followed a similar trajectory, growing by 103% in 2017 and 106% to $1.82 billion last year.
For the first half We’s revenue grew by 101% to $1.54 billion, nearly matching its widening rate of losses for the period.
That We can double its revenue nine years after its founding gives the company some wiggle room for losses, say IPO researchers. But Mr. Neumann will have to convince public-market investors that the company can grow at that pace for the foreseeable future.
“It all depends on whether or not this is a growth story,” said David Wessels, adjunct professor of finance at the University of Pennsylvania’s Wharton School. “If they still have a lot of room…they can show substantial growth for a period of time.” In turn, investors will be more tolerant of mounting losses, at least for the near term.
We’s core business of leasing office space provides a consistent source of revenue growth, but it has yet to find other breakout hits, which will be essential for long-term growth. Mr. Neumann in the past has called the company a platform from which it can sell other services such as insurance or software.
Sales of business services purchased by its members, such as providing conference rooms, printing and parking, made up 5% of its revenue this year. Another 12% of revenue comes from ancillary businesses, such as a custom office-design and construction service it calls Powered by We.
Its upscale dormlike housing business, WeLive, still hasn’t expanded beyond two locations despite Mr. Neumann’s hope years ago that it would make up one-fifth of the business. The economics on the initial locations didn’t justify expansion beyond the occasional project like one in Seattle soon to open, said former employees familiar with the numbers.
Write to Eliot Brown at email@example.com
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