It wasn’t the year-over-year numbers for WeWork’s FY 2022 earnings announcement that spooked markets. After all, fourth quarter revenue was up 18% year over year. Memberships and occupancy were up.
No, it was the look ahead, in such close proximity to major tech layoffs, that caused concern.
“The Company expects its first quarter 2023 revenue to be $830 million to $855 million and Adjusted EBITDA to be $(25 million) to breakeven,” was the official word.
The “lower-than-expected revenue for the current quarter, signaling that its business of providing flexible workspace was feeling the heat of mass layoffs in the technology sector,” Reuters reported. “Shares of WeWork fell 5.5% in morning trade, after the company forecast current-quarter revenue of $830 million to $855 million, below analysts’ expectations of $918.4 million.” Shares have been below $1.60 since the announcement.
The projection, like the news that Walmart was tightening the reins on its IT employees and would be closing three of its US technology sites, raises the question of the near future for flex space. A required shift back to in-office work for the tech sector, an obvious target for hybrid and work-from-home, that would potentially spread beyond Silicon Valley giants to other industries could have serious effects on the flex space industry.
One analyst on the earnings call, Mizuho’s Vikram Malhotra, asked Sandeep Mathrani, WeWork CEO and chair, whether tech layoffs and churn could affect the visibility the company could have into committed revenue and companies that might drop their use.
Mathrani referred to its first quarter for 2023 being “slightly ahead from a year ago,” although that doesn’t address why guidance was significantly lower than analysts had expected. He also said that the guidance included closures of 40 locations announced in Q4 FY 2022, and said “and as you are aware that we do transfer about 70% to 80% of the revenue from the closed location to alternate locations.”
On additional questioning, Mathrani noted that tech companies “went on a hiring spree during the pandemic and today still employ more than before the pandemic” and while the company has been “impacted in certain locations” and higher churn in Q3, “we do have a pipeline to replace them.”
“For example, it made news that one of our leading tech companies had vacated our Mountain View California location comprising of 400,000 square feet,” he said. “We have already backfilled the space with three new enterprise members. Interestingly, all three enterprise members are technology companies, and one of those enterprise members used our space for their corporate headquarters.”
However, there is a significant difference between having one company occupy 400,000 square feet and then needing three others to absorb the vacated space. At that rate, WeWork would need extensive increased pipeline at a time when that might be more difficult than before.
And as the Wall Street Journal noted in December 2022, WeWork has burned through a lot of cash. A review of data from S&P Global Market Intelligence shows that cash and cash equivalents have dropped from $923.7 million at the end of 2021 to $287.0 million in the most recent financial statements.
“In November, WeWork said it would close 40 money-losing U.S. locations, and Mr. Mathrani said he can close more to preserve cash,” the Journal wrote. But closing more locations eventually means losing revenue, unless some buildings have significantly lower occupancy rates — in the earnings call, CFO Andre Fernandez said the company had “reached 83% occupancy” — there may not be space to soak up the lost leases.