WeWork lays out its path to profitability - and most of its options involve slowing its breakneck growth
- WeWork unveiled its filing to go public on Wednesday, publishing a 383-page document that sheds light into the flexible office giant's financials. The company is the first of a new generation of flexible office providers to prepare to go public.
- The company noted in the filing that it may not be able to achieve profitability for the foreseeable future, and that it believes its net loss as a percentage of revenue may rise.
- Its roadmap shows a huge potential market - the company estimates its business could be $1.6 trillion - but in the first half of the year, WeWork had a loss of $690 million on $1.5 billion in revenue.
- The "levers" WeWork says it can pull to turn a profit include slowing expansion, selling more services to existing members, and doing design work for other companies.
- Read all of BI's WeWork coverage here.
- Join Business Insider senior tech correspondent Troy Wolverton and senior asset management reporter Meghan Morris as they break down the WeWork S-1 at 1p.m. EST.
WeWork does not have a problem with tall ambitions.
The We Companies, which owns WeWork, filed paperwork with the Securities and Exchange Commission on Wednesday ahead of its planned initial public offering. Its S-1 filing shows how big WeWork thinks it can get, and gives a sense of the high costs of getting there.
What we don't yet know is when WeWork could be profitable, an open question for a host of unicorns going public this year, including Uber. The company noted in the filing that it may not be able hit profitability for the foreseeable future, and that it believes its loss as a percentage of revenue may rise in the near term.
Nine-year-old WeWork's average revenue per membership has declined, and the company said it is expected to keep falling as it expands to lower-priced overseas areas. But the WeWork says it will continue to spend on growth - and that the timing of any future profitability depends on "levers" it has control over - most of which involve slowing expansion.
Founded in 2010, WeWork has exploded from a single outpost in New York to 528 locations in 111 cities. Its business focus has matured along the way. Previously known for loud, open rooms with communal desks for millennial entrepreneurs, the company now does about 40% of its business with companies with over 500 employees, offering corporate build-outs and private floors for the likes of BlackRock and Microsoft.
The company has over a half million members, and if it just stayed in its current cities, WeWork estimates there are 149 million potential members, representing a $945 billion market. But if the company could reach its 280 target cities, that potential membership number jumps to 255 million people - more than the population of Brazil - and the market could be $1.6 trillion.
The company has lined up some of the capital it needs to continue expanding. It inked what's thought to be the largest pre-IPO debt deal, lining up $6 billion for a multi-year debt facility from a group of banks. The deal is tied to its buildings' profitability.
But WeWork now must sell that vision to more investors as it prepares for a multi-city roadshow. Top of mind for investors is sure to be the numbers supporting WeWork's expansion to date. In the first half of 2019, WeWork had a loss of $690 million on $1.5 billion in revenue.
The company says it has 1.9 million workstations in its pipeline, with 180,000 of those being run now - the rest are in the process of being scouted, set up, and filled, and it takes about two years for a location to stabilize. Once locations are stabilized, WeWork says they're typically about 90% occupied. The publicly traded workspace provider IWG had about 74% occupancy across its similarly mature locations last year, according to its annual report.
Read more: WeWork's 'entirely new, nonsense' way of evaluating its profits is eerily similar to the tech bubble
WeWork highlighted that one possible route to profitability is slowing its physical growth in new places - saying that by focusing on its existing locations it could curb spending and costs to lure members at new sites.
It also noted that slowing growth in new cities helps boost occupancy, citing the example of London, where it dialed back growth following the Brexit referendum and boosted occupancy there by 10 percentage points.
WeWork said it is also looking to add new, higher-margin products and services to sell to existing members. And it flagged its "Powered by We" business -where it helps other companies design office spaces - as another path to profitability.
"By focusing on our existing pipeline of locations, we would increase the percentage of our location pipeline comprised of mature locations. A larger percentage of mature locations allows us to avoid incurring future capital investments to build out new spaces or the initial expenses associated with driving member acquisition at new locations," it said in the filing.
WeWork's revenue is driven by membership base growth, which necessitates significant spend. Unlike a software company adding more users for minimal cost, WeWork's physical costs don't decrease much as it adds more members. The company had negative operating cash flow - revenues from members minus rent, taxes, and overhead like advertising and maintenance - of nearly $200 million in the first half of the year, up from negative $84 million in the first half of 2018.
And it has spent heavily on expanding, with its cash used to invest in growth jumping $1.5 billion to $2.4 billion for the six months ending in June from a year earlier. That spend went to things like equipment and improving leased locations, as well as property - including $838.9 million for the NYC Lord & Taylor flagship building through its 424 Fifth Venture.
All of this expansion has happened in a bull market - WeWork hasn't been around long enough to see a global downturn, though it has weathered local corrections. CEO Adam Neumann has said the company could do better in a recession, but executives who have been through dips told Business Insider this spring that it isn't convinced.
WeWork's average lease length in the US is 15 years, and its future lease payments were $47 billion as of June 30, per the S-1. The company noted the leases as a risk, saying "we currently lease a significant majority of our locations under long-term leases that, with very limited exceptions, do not contain early termination provisions."
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