WeWork Misses Q2 Earnings Expectations Despite Improving Performance, Financial Stability
Despite improving performance across the board and a stable financial position, WeWork missed analysts' earnings predictions in the second quarter in a sign of its vulnerability to the worsening global economy.
WeWork reported total revenue of $815M for the second quarter in its Securities and Exchange Commission filing released Thursday, with a net loss of $635M, both year-over-year improvements of more than 30%. Its earnings per share of negative $0.76 missed consensus projections of negative $0.56 and its revenue missed projections by $9M, Seeking Alpha reports. That caused its share price to drop over 8% from the beginning of Thursday trading to $4.75 per share as of 3:15 p.m. EDT.
The company did not adjust its year-end revenue from the first quarterband is still on track to break even on earnings before interest, taxes, depreciation and amortization by the end of this year and turn a profit by the second half of next year, CEO Sandeep Mathrani said on the company’s second-quarter earnings call. If foreign currency exchange had held at the rates WeWork projected, its revenue would have been $841M.
“As the business becomes increasingly profitable on the gross margin level, we will have greater non-U.S. dollar earnings that will be subject to greater [foreign exchange] movements,” WeWork Chief Financial Officer Andre Fernandez said on the call, his first since he joined the company June 10.
Over $390M of WeWork’s quarterly losses came from non-cash items, including foreign exchange losses from moving money across borders so that non-U.S. locations can operate more easily within their local economies, Fernandez said.
If the dollar continues to gain value relative to foreign currency, especially the euro and pound sterling, it will continue to eat into WeWork’s revenue and may prompt the company to hedge its international business in some other way, though Mathrani and Fernandez declined to elaborate.
“Our European business is incredibly strong, and we think growth is coming from the international business relative to the U.S. business, so it makes more sense to invest using the local currency,” Mathrani said.
But since he took over as CEO weeks before the pandemic changed the way people work, Mathrani has focused on cutting spending wherever possible. Now, the flexible office space provider has no immediate plans to expand its footprint further, and its newest business line, an office usage management tool for companies regardless of whether they have physical WeWork memberships, launched in July, Mathrani said on the call.
At those physical locations, occupancy hit 72% overall in Q2, with WeWork’s European locations more than 80% occupied and its U.S. locations less than 70% occupied.
Enterprise-level companies account for 45% of WeWork’s membership, down from over 50% from before the pandemic through the first half of 2021, which Mathrani said comes from a recovery among small to midsized businesses. Space catering to small and midsized companies is about 65% occupied, compared to over 80% for enterprise-level space.
With $625M of cash in hand and nearly $1.7B in total liquidity, including access to a $500M credit facility that it has not drawn on, WeWork is in a more stable financial position than when it went public via a special-purpose acquisition company in October.
But during Thursday trading, its share price was worth less than half of where it started in the public markets. Part of that is WeWork sharing in the overall poor performance of the stock market in recent weeks, yet based on questions posed by analysts during the earnings call, investors may be concerned about WeWork’s remaining ability to cut costs and stay on track for profitability.
The average enterprise member signs up for a 25-month commitment, while the average small to midsized company commits for 14 months, giving WeWork’s revenue more resilience compared to the length of its lease liabilities than it did under Neumann.
“In 2017, 90% of our business was month-to-month, so we have transformed ourselves into a model closer to an apartment building,” Mathrani said.
About 95% of the revenue WeWork is projecting for Q3 is committed, as is 80% of Q4 revenue, which only leaves a potential miss of $50M to $100M in the second half of the year should all other revenue dry up. On the liability side, the company has $350M to $400M worth of leases that either expire or come up for renegotiation in the next 12 months, opening up more opportunities to negotiate rent discounts should economic conditions continue to worsen, Mathrani said on the call.
To the degree office-using companies could feel the sting of a recession, WeWork can use the fact that coworking has been gaining ground on traditional office as reason for optimism, with occupiers gravitating to increased financial and geographical flexibility.
In the second quarter, WeWork scored a much larger share of office leasing when compared to its footprint in markets like New York, Boston and Miami. WeWork accounted for 34% of all Q2 office leasing in London and 45% in Dublin, despite controlling less than 1% of leasable square footage in each of those cities.
“The smaller businesses and even the medium businesses are actually doubling down on space with us,” Mathrani said. “They’re consolidating, moving into WeWork locations and optimizing their real estate, and on a per-head basis, we’re less expensive today because of inflation issues with building out new [traditional office] spaces.”
CLARIFICATION, AUG. 4 7:45 P.M. ET: This article has been updated to clarify that WeWork has access to nearly $1.7B in total liquidity.