Super Late Notes On The WeWork Q1 Results

Morning Markets: A week late, but let’s talk about WeWork’s latest results for a moment.

Last week WeWork detailed a number of its financial results from the first quarter. As you expected, the firm is growing quickly and losing lots of money. By now the model should be familiar.

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Since we are so late to this story, let’s get the numbers in front of us and then quickly dig through our questions. Recall that WeWork has recently updated its S-1 filing, meaning that it really does, maybe, want to go public.

Here’s what we learned recently:

Q1 2019 revenue: $728.4 million.
Q1 2019 net loss: $264 million.
“Membership rose from 220K to 466K in the past year,” per SeekingAlpha.
“‘Community-adjusted EBITDA’ […] rose by 78% year-over-year to $169.5 million,” per Axios.

The revenue figure was up 113 percent on a year-over-year basis. That’s a damn impressive result at WeWork’s scale. Of course, WeWork lost $1.9 billion last year on $1.8 billion in revenue, so the company has certainly spent to achieve its growth result.

The firm’s net loss was a $10 million improvement on its year-ago result. Given that its revenue more than doubled over the same period, WeWork’s net margin rose tidily over the last four quarters, though it remains negative.

Axios notes that WeWork’s adjusted EBITDA—the rogue’s profit metric—got consistently worse at the firm as it scaled, until, critically, its most recent quarterly period. That means that WeWork managed sequential improvement in its (negative) adjusted EBITDA and year-over-year improvement in its net income (loss).

That’s good, really, even if the commercial real estate player is still starkly unprofitable.

WeWork membership grew 111.8 percent in the last year, a hair under the firm’s percent-revenue-growth result. (So, we can infer that WeWork’s non-membership revenue efforts are slim, or that the firm saw a decline in per-member revenue over the year.) Either way, growing membership over 100 percent in a year at WeWork’s scale is commendable, even with our usual caveats concerning how much money it spent to achieve the result.

Math, And More

Update: Axios updated its quote to read “the $1 billion over the next 15 years will generate $24 billion in revenue and $7 billion in contribution margin.” This makes our prior confusion understandable. The math now kinda checks out, even if we are still getting slightly smaller numbers than what the CEO indicated.

Moving on, there’s something that we need to examine. Axios interviewed WeWork’s chief about profitability. Here’s part of his response:

“Every $1 billion we spend creates 236,000 desks at an average of $6,000 and a contribution margin of 27%. What that means is the $1 billion over the next 15 years will generate $24.7 billion in contribution margin.”

Here the quote implies that WeWork spends $4,237 per desk it puts into place. It then collects (presuming 100 percent utilization), $6,000 per year in revenue from the same desk. Next, WeWork notes that the desk has a contribution margin of 27 percent. It’s unclear what that means, or how tightly the metric is calculated, but let’s run with the calculation.

Running the math, 236,000 desks multiplied by $6,000 in yearly revenue, multiplied by 27 percent contribution margin, multiplied by 15 years comes to $5.735 billion in contribution. That’s a bit afield from $24.7 billion.

So, in theory, the firm can turn $1 billion into $5.735 billion in contribution margin over 15 years provided that the 27 percent contribution margin holds up (no price competition), utilization remains high (demand remains rock solid), and the firm incurs no more costs for that desk over the 15-year period (presuming little to no competition on the supply side of its equation).

None of that sounds completely likely, so the expected contribution margin result is optimistic. Cut utilization by 20 percent and contribution to 20 percent, for example, and WeWork’s resulting contribution is a leaner $3.4 billion from the $1 billion outlay.

That’s still good, right? Well, maybe. It’s a 15-year number aggregate. Under our constrained scenario, WeWork is pulling down less than a quarter-billion in contribution each year from that desk-only $1 billion outlay. That’s a greater-than-four-year payback period for the $1 billion, presuming no cost of money (WeWork issues debt) and no time-value of money (this is fine, after all, we’re doing Silicon Valley math).

Yes, But

However, I suspect the math here is more typo than forecast. Indeed, if you strip out the margin point from the quote, the resulting revenue figure is somewhat close to $24.7 billion, totaling $21.2 billion. I’ve emailed the company for a comment on the matter and will update this post if they send one.

Summing, WeWork’s desk-renting model does have potentially attractive economics in some circumstances, but they are not as rosy a job as some coverage of the company might imply.

This is probably why the firm’s community-adjusted EBITDA—a metric that strips out “not only interest, taxes, depreciation and amortization, but also basic expenses like marketing, general and administrative, and development and design costs”—came to a modest $170 million in the first quarter of 2019 against $728.4 in revenue.