- Sales, profit forecasts revised lower in April review document
- CEO says WeWork needs to do better ‘managing the nickel’
WeWork Cos., one of the most valuable venture-backed private companies, cut forecasts earlier this year and told employees it has to change its “spending culture” to continue to thrive, according to a company document and video recordings obtained by Bloomberg.
The document and comments by WeWork Chief Executive Officer Adam Neumann paint a picture of a ballooning startup trying to adjust some inflated expectations, though the company said this week its business is stronger than ever.
Founded in 2010 in New York, WeWork has raised more than $1.4 billion to build and run a network of co-working offices that spans 23 cities in seven countries. After securing more than $400 million at a $16 billion valuation in its most recent financing in March, WeWork produced in late April an internal financial review document that slashed a 2016 profit forecast by 78 percent, cut its revenue estimate by 14 percent and disclosed a 63 percent surge in projected negative cash flow.
The lower revenue projection was due to building openings that were delayed, some by more than six months, according to the document. The review also cited higher spending on construction and lower-than-expected remodeling subsidies from landlords, particularly outside the U.S.
Neumann said in all-hands meetings on May 9 and May 23 that the company had to rein in costs and get its finances in line. He mentioned other highly valued startups that have been cutting employees or closing down due to uncontrolled expenses.
“Our business is performing incredibly well and is stronger than ever,” WeWork said in a statement e-mailed to Bloomberg on Thursday. The April document “was prepared months ago for scenario planning purposes and does not reflect our robust operating momentum. We achieved our best sales month ever in June with over 7,000 desks sold, and in August we will open over 10,000 desks, the most in the company’s history. Occupancy levels for buildings open more than 12 months average 97%. WeWork has an entrepreneurial spirit and consequently, we want to operate as efficiently as possible while always striving for the best possible member experience.”
The company also said the financial review document given to Bloomberg was stolen and that it has “referred this corporate theft to the U.S. Attorney’s office,” according to the statement.
In his remarks at the May 9 all-hands meeting, Neumann described a company that has shifted from being cost-conscious at the outset to one that “definitely does have a spending culture,” according to a company video recording viewed by Bloomberg.
“We did not use to be this way,” he said in the video while pacing across the front of a room packed with employees. “We used to fight for every dollar. We did not spend.”
Neumann told employees they needed to find ways to cut costs, even small ones, a process he called “managing the nickel.” He said he canceled a breakfast of salmon, eggs, bagels and yogurt provided at Monday morning executive meetings, which he estimated cost $350 a week. Staffers should check whether lights are on in WeWork buildings at 2 a.m., he suggested in the video.
He described feedback he wanted from employees: “I want to start receiving notes: ‘Lights are on at 2 o’clock. This is wasting money. This is wasting money. This is not smart. I don’t accept this. This is my company. I have equity here. I don’t want to be wasteful.’”
In the May 23 talk, Neumann said, “The universe does not allow waste,” according to a second company video viewed by Bloomberg. In June, Bloomberg reported the company planned to cut 7 percent of staff.
WeWork has already started to reduce what it spends setting up work spaces in the U.S., the company said this week. It’s doing this, in part, by negotiating lower prices for things like electrical work, drywall, appliances and plumbing fixtures such as toilets, according to the April document.
The financial projections in the document show a company that is growing rapidly but had been too optimistic. WeWork initially expected to bring in $620 million in revenue for 2016; it revised that number to $532 million. For adjusted earnings, before interest, tax, depreciation and amortization, the company cut an original projection of $65 million for the year to $14 million.
The document said $90 million of lost revenue came from “desk slippage,” which refers to desks becoming available later than expected due to building opening delays. For WeWork, which charges customers fees to rent shared office space that it leases, delays are costly. The company told Bloomberg this week that delays are often related to when WeWork takes possession of a building, rather than construction issues once it begins remodeling.
Delays hurt revenue in the first half of 2016, but as those buildings open later in the year, the company said it expects to catch up. It lowered its expected desk openings for the second quarter but raised them for the third and fourth, the document shows. It also expects its run-rate revenue by December to be $882 million, close to its previously budgeted $900 million, according to the document.
The document also said the company spent more than expected on construction and collected less than expected in remodeling subsidies from landlords, especially in new international markets like Seoul, Shanghai, and Mexico City. WeWork told Bloomberg this week that it often has low subsidies in new markets and expects them to increase over time. Low subsidies also affected WeWork’s other markets: The company projected in its April review document that 54 percent of capital-expenditure for office-rental spaces opening this year would be covered by landlords, down from a previous expectation of 75 percent. It raised its expected rate for 2017 from 75 percent to 80 percent.
The document said its buildings that are open at least six months have 33 percent EBITDA margins. Also in the document, the company projected it will have more than 100,000 members by the end of the year, more than twice what it had last December.
Neumann spoke about WeWork’s growth and financial potential at the Fortune Brainstorm Tech conference in Aspen, Colorado, on July 11, saying the company could attract a million members in five major U.S. cities. “At that number we would do about $12 billion in sales and about $4 billion in EBITDA,” he said, while also forecasting a revenue run-rate of $1 billion next year, according to a YouTube video of the talk.
In the April document, the company projected that it will have $385 million in negative free cash flow this year, more than the $236 million cash flow loss it had predicted earlier. That was partly due to capital spending coming in about $100 million over budget, it said in the document.
WeWork expects to end 2016 with $15 million in cash on hand, in addition to all of its cash from its most recent fundraising round and $152 million in security deposits from WeWork members, according to the document. A person close to the company said this week that it has more than $650 million in cash on hand currently.
When Bloomberg reported the planned job cuts last month, a company spokeswoman said the reductions would be followed by the hiring of 500 new people by the end of the year. WeWork has 1,500 employees, a spokeswoman said on Wednesday. In Aspen this week, Neumann confirmed the staff reductions.
Before WeWork cut staff, Neumann discussed with employees a “re-casting” -- a term he said was coined by Walt Disney to mean re-assigning workers to new roles -- but said they shouldn’t be worried, according to the May 9 video.
“Re-casting doesn’t mean you’re losing your job,” he said. “It doesn’t mean you’re losing your equity position, doesn’t mean that your pay is changing. Nothing’s changing. All that’s changing is maybe you did this until today, and now you need to do this.”
Neumann remains ambitious, the videos show. He told employees at the May 9 meeting that he’d be “very surprised” if the company was at 5 percent of its potential in terms of “what we can do and probably also from a valuation point of view.” But he said WeWork staff needed to make changes quickly.
“If we don’t take care right now of our bottom line, in opex and in capex, and of our top line in sales and community management, over our churn, over our member experience, and every other person here, if we don’t take care of the basics, as a group, we’re not going to get to enjoy as much -- we’ll still -- I promise everyone we’re still going to do well, but not as well as we could,” Neumann said at the same meeting. “What scares me is in 10 years to look back and say we could have done more. We could have made a bigger difference. Because that’s painful. ‘Cause time is the only thing you don’t get back.”