News broke today that WeWork will pursue hundreds of millions of dollars in debt as the coworking unicorn continues to grow.
According to the Financial Times, the debt “drew junk labels from the leading US credit rating agencies, underlining the risk of investing in the debt.” And we all know more risk brings higher debt costs.
The new capital, widely reported to be around the $500 million mark, comes after WeWork raised a staggering $4.4 billion from SoftBank’s Vision Fund in 2017. Per Crunchbase, the firm has raised a total of $6.9 billion before the debt sale.
Notably, the debt offering has helped put WeWork’s operating results into sharper focus through associated disclosure. (Prior reporting on the firm’s finances were directionally accurate and close but not precise.) That means that we can quickly explore the firm’s 2017 performance and take another quick check on the firm’s pertinent financial multiples.
Revenue, Losses, Etc.
- 2017 revenue: $886 million (12-month metric, not run-rate).
- 2017 loss: $884 million (unclear if GAAP or adjusted).
- Update: Per a separate article, the company’s net loss came to $934 million in 2017.
- Operating cash flow, 2017: +$244 million.
- Investing cash flow, 2017: -$1.5 billion (implied).
On the growth side of things, the FT notes the firm “more than doubled” its top line in 2017 and has reached an annualized run rate between $1.4 billion and $1.5 billion.
However, hold the run rate loosely in hand, as the firm has said similar things in the past that might have been gently exaggerated. In June of 2017, WeWork stated that it had reached a $1 billion annual run rate. It closed the year with, as we have seen, $886 million in revenue, which makes the $1 billion claim a possible exaggeration—or indicative of a firm that saw rapid expansion in the middle of last year followed by slowing growth. (Not that I am cross about this. Rounding up generously is hardly a sin among quick-growth startups; we’ve come to expect it.)
But what is clear from the above is that the quickly growing company is paying for expansion, and its incredibly negative free cash flow and aggregate losses are quite high. Indeed, a Rule of 40 test substituting free cash flow for net income flunks the company; the same goes for using net loss as a measuring stick.
And now, moving forward, WeWork will have an expensive debt to service.
All this goes to say that WeWork’s high-growth, capital-intensive process continues apace and that the firm is showing few signs of slowing down.
We’ve written about the company’s work to limit its costs, and how it is using acquisitions to expand into everything from software to coding bootcamps. Perhaps cash generated from acquisitions and cost control will help get WeWork on a ramp towards profitability. You can’t lock up nearly $7 billion in equity financing without an exit, after all. But one way to put off that eventual liquidity event is to take on debt.
Quick Word On Valuation
Something that we do know is that WeWork was worth about $20 billion in 2017. And since we now have a more precise figure for its revenue, we can quickly calculate that the firm’s 2017 end-of-year revenue multiple came to 22.6.
That’s a steep multiple, and it’s far from revenue multiples that SaaS companies can command. Even if WeWork doubles its revenue in 2018 and keeps its valuation flat, the company will still be worth a sharp premium to most high-margin, already-public, and modern software companies.
If that is a reasonable situation is a question that the market will answer. WeWork’s expensive growth is about to get a bit more expensive through the use of debt, but the firm’s growth pace might just be its golden ticket.
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