🏢 Is WeWork Heading Towards Profitability?

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🏢 WeWork: Is It Working?

Co-working space provider WeWork Inc. (WE) is looking to move past the controversies of co-founder Adam Neumann. Its revenues are improving, and losses are narrowing. Will investors manage to see the company in the black soon?

Cut To Size

WeWork is known as the pioneer in the co-working space market. It signs long-term lease agreements, renovates and furnishes properties, and provides flexible leasing options to tenants.

Office space demand in the US rose 20% in March after five months of stagnation. It dropped 1.5% between March and April. The drop came as a surprise as April is a seasonally strong month. Demand for office space is currently two-thirds of normal.

The pandemic hit co-working spaces as employees worked from home. With things normalizing, companies have chosen to cut costs by opting for hybrid working models, thereby opting for smaller workplaces. The move has benefited co-working spaces, which aimed for a recovery from the pandemic blushes.

The concept has gained immense popularity in markets like India. Demand for co-working spaces in the country jumped 2x in FY22 from FY21. India is now home to 3K+ co-working facilities across just tier-1 and tier-2 cities. Managed office spaces accounted for 62% of the flexible seats sold in FY22 from 52% in FY21.

WeWork went public in October last year after merging with a Special Purpose Acquisition Company (SPAC). The company planned an IPO in 2019 at a valuation of $40B and abandoned those plans after co-founder Adam Neumann’s run-ins with controversies.

Neumann was in the news for not attending board meetings, being deboarded from a private plane for carrying “too much marijuana,” and organizing a concert the day his company laid off 7% of the workforce. WeWork came to be known for everything other than work. The much-hyped IPO was delayed, and then came the pandemic.

The issues at WeWork turned out to be a headache for its majority shareholder SoftBank. It had invested over $17B in the company through convertible loans, share purchases, warrants, tender offers, and letters of credit. Analysts have questioned whether SoftBank will ever recover its investments in the company, let alone fetch a profit on them. SoftBank held a 56% stake in WeWork when it went public in October last year.

Improving Financials?

In May 2021, WeWork disclosed a quarterly loss of $2.1B. The company appointed Sandeep Mathrani as CEO after cutting ties with Neumann. Mathrani has closed locations, renegotiated leases, and slashed thousands of jobs after taking charge as part of an intense cost-restructuring exercise.

It has been three quarters since WeWork went public. The company remains in the red, but the losses are narrowing. WeWork reported a net loss of $504M in Q1 2022, improving from the loss of $844M it reported during Q3 2021. Operating losses have also narrowed to $212M from $356M in Q3 last year.

On the flip side, WeWork is focusing on growing its topline. Revenue in Q1 was $765M, up 28% year-on-year. It sold 166K desks during the quarter, the highest since Q1 2020. Average Revenue per Physical Member (ARPM) was unchanged at $484. Physical memberships crossed 600K while occupancy rates have improved to 67% in Q3 from 50% last year.

WeWork launched an “all-access” membership in 2020 through which a member can choose to work at any location and use all the available amenities. Free for the first month, the all-access membership costs $300 per month from the second month onwards. The all-access memberships increased to 55K in Q1, up 22% from Q4. As of March, the all-access membership yielded an annual revenue run rate of $155M.

The company guided to earn $800M to $825M in revenue during the current quarter, higher than its previous guidance of $775M to $800M. Full-year revenue guidance was ~$3.45B. WeWork had $519M in cash during Q1, while overall cash commitments were $1.6B. Long-term debt is unchanged at $6.6B.

The “intense cost-restructuring” exercise was referred to by an analyst who initiated coverage on WeWork on Thursday. The “buy” recommendation came with a price target of $11, lower than the company’s 52-week high of $14 but double Thursday’s closing price. WeWork is well-positioned to take advantage of the structural demand drivers, according to the analyst, who also expects it to return to positive free cash flow generation by next year.

WeWork continues to see churn within its top brass. It hired Andre Fernandez as its CFO last month, the third since March 2020. Outgoing CFO Benjamin Dunham served 18 months in the role.

The stock rose 16% on Thursday, post the analyst report. However, it remains well below the SPAC break-even point of $10. The stock is down 32% for the year, even after Thursday’s spike. Investors would only hope that things begin to fall into place soon and that the company makes it to the news for reasons beyond just the wrong ones!

Market Reaction
WE ended at $6.27, up 15.68%.

Company Snapshot 📈

WE 6.27 +0.85 (15.68%)

Newsworthy 📰

Going Private: Zendesk to be acquired by investor group led by Hellman & Friedman and Permira for $10.2B (ZEN +29.85%) (Premarket)

Delivering: FedEx stock pops on stronger-than-expected 2023 outlook after narrow Q4 miss (FDX +3.01%) (Premarket)

Sector Woes: Lending Tree stock falls after decline in mortgage activity leads to guidance cut (TREE -7.98%) (Premarket)

Later Today 🕒

  • CarMax Inc. Earnings (KMX)
  • Carnival Corporation Plc. Earnings (CCL)
  • 7:30 PM IST: New Home Sales

Today’s Fun Fact

The shareholders of Berkshire Hathaway have received only one dividend payout since 1965

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